Romania standby loan deal on track, says IMF

BUCHAREST,

Romania’s performance under a two-year IMF loan programme is on track, the International Monetary Fund said yesterday, but warned populist measures in an election year may quickly undermine its emerging credibility. 

Following similar deals by fellow EU states Hungary and Latvia, Romania has secured a ¤20bn aid package from international lenders including the IMF in a move to shield its vulnerable economy in the wake of a global cash squeeze.

A mission of IMF experts will review Romania’s progress in early August when the macroeconomic framework might also be revised, Tonny Lybek, the IMF’s regional representative told Reuters, before the Fund approves the loan’s second tranche.

Romania recorded a consolidated budget deficit of 2.7 percent of gross domestic product in January-June, meeting the quarterly target agreed under the deal, which also sets an overall 4.6 percent gap ceiling for the end of 2009.

“Preliminary data suggest that Romania remains on track, but a final assessment will only take place during the first review of the programme,” Lybek said.

As part of the aid deal, Romania has to implement sweeping public sector reforms aimed at making wage policies more transparent and state spending more efficient.

Lybek said the first quarter’s slightly worse than expected GDP contraction of 6.2 percent poses further challenges to the budget that would require a review of tax collection efficiency and further spending prioritising by the centre-left government. For the second quarter Lybek said he does not rule out “some further (GDP) deterioration” compared to what the Fund had projected and also that an adjustment of the current account deficit could be sharper than originally forecast.

The Fund forecast a 7.5 percent external gap for 2009 from around 12 percent a year before.

Lybek welcomed recent commitments by large foreign-owned banks in Vienna and Brussels to maintain their exposure to Romania that will facilitate an easing of monetary policy.

Asked if Romania could follow Hungary’s lead as the Fund agreed to allow the neighbouring country to raise its budget deficit from an earlier target by one percentage point to 3.9 percent of GDP because of plunging tax revenues, Lybek said:

“Romania and Hungary are two different countries facing different challenges … however, please note that Romania’s budget deficit is already at 4.6 percent of GDP.”

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