Wednesday, December 15, 2010

Romania May Get $486 Million World Bank Payment in January, Rantrua Says

Romania may receive a 360 million- euro ($485 million) loan payment from the World Bank in January if a high court upholds changes to the pension system that include raising the retirement age, the bank’s country manager said.

The payment, already delayed three times, marks the second disbursement from the 1 billion euros the World Bank contributed to a larger bailout awarded to the Balkan country in 2009 to help shore up the budget gap. The final 340 million euros will be paid depending on progress on a wage bill, said the World Bank’s Francois Rantrua in an interview in Bucharest.

Romania, the second-poorest European Union member, is missing out on Europe’s recovery after international lenders pressed the government to raise taxes, pass cuts to pension spending and reduce state wages to stem a burgeoning deficit, sparking protests. The Parliament’s Dec. 7 approval to raise the retirement age was challenged by the opposition in the Constitutional Court. A ruling may come this week.

“Considering the political situation, which isn’t easy, I am favorably encouraged by what we have managed to do in Romania,” Rantrua said. “The prospects for growth are good. Of course they are not the best in the region and you cannot expect to enter a crisis with a bad structural situation and exit it first, but there are signs of exiting the crisis for Romania.”

The International Monetary Fund, which led a 20 billion- euro bailout package that includes the World Bank contribution, forecast gross domestic product for Romania to shrink 1.94 percent this year before expanding 1.53 percent in 2011.

Government Measures

The government was forced to raise the value-added tax rate by 5 percentage points and cut public wages by 25 percent to squeeze the budget gap to 6.8 percent of GDP this year and 4.4 percent in 2011 to qualify for the terms of the loan. The retirement age was raised to 63 for women and 65 for men.

Before a decision on the final payment is made, the World Bank is reviewing the final six budgets of 12 ministries, said Rantrua. Once that process is complete, he said, the Washington- based bank will have “an interesting proposal for the government.” He didn’t elaborate.

“It might be smart, if the government asks us, to have fresh structural measures for the third tranche,” he said.

Prime Minister Emil Boc’s cabinet will seek fast-track approval of a simplified wage law in Parliament this week. The law aims to rearrange the salaries in the public sector based on professional performance and experience and help the government contain the budget deficit over the next three years.

‘Functional Reviews’

The World Bank is also doing “functional reviews” on 12 industries in Romania, including transport and agriculture, and will present a detailed analysis with recommendations for improving performances during the next review mission from the IMF, the European Commission and the other lenders, according to Rantrua.

The next review of the country’s progress under the bailout will probably start on Jan. 20, when Romania plans to open talks to extend the current bailout with a precautionary loan, Boc said on Dec. 12.

“There are sectors that need more reform than others, that are more difficult than others, sectors where you have a lot of people, a lot of civil servants, where your money is not sufficient and where you are in competition with others,” Rantrua said. “We are going to discuss the key actions that are needed, and it’s the prerogative of the government to announce these reforms.”

Bulgarian Example

The World Bank is also working with the Finance Ministry on a project to improve tax collection after a model already implemented in Bulgaria, the EU’s poorest member, that boosted the neighboring country’s budget revenue by 5 percent of GDP.

In Bulgaria “the program lasted for six years and all the parties committed,” Catalin Pauna, the World Bank’s chief economist in Romania, said during the same interview. “I think the results will be tremendous. There is no need to raise taxes. With the same level of taxes I am convinced that we can raise more” revenue.

To contact the reporters on this story: Andra Timu in Bucharest at atimu@bloomberg.net; Irina Savu in Bucharest at isavu@bloomberg.net.

To contact the editor responsible for this story: James M. Gomez in Prague atjagomez@bloomberg.net

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