IMF says aid to Romania unlocked if no slack in reforms

(BUCHAREST) - Recession-hit Romania is on track to be granted the latest tranche of a 20-billion-euro aid package after government moves to curb the deficit, the International Monetary Fund said Wednesday.

"The IMF mission has noted good performance by the end of June and policies are on track for the targets set to be attained," IMF representative Jeffrey Franks told a press conference in Bucharest.

"Once the Romanian authorities have fulfilled the preconditions, the board will meet and give its go-ahead to the disbursement of a new installment" of the IMF loan, Franks added.

The IMF board is tentatively scheduled to meet in late September.

Stressing that "performance criteria have been observed," Franks said the IMF expected Romania to carry on with the "extremely tough measures" adopted in June, including slashing public wages by 25 percent and raising the sales tax on goods and services from 19 percent to 24 percent.

"If we hold on to these measures, there will be no need for any additional tax hikes or cuts" in wages or pensions, he said.

The plan adopted in June should help authorities bring down the public deficit to 6.8 percent of Gross Domestic Product from 7.2 percent in 2009.

The deficit target for 2011 has been set at 4.4 percent of GDP, implying further savings of some three billion euros need to be made.

Analysts warn that the impact of such cost cutting on every-day life could be very severe in a country where the average monthly wage barely tops 350 euros (460 dollars), while state pensions stand at around 175 euros.

Among the steps still needed, Franks cited a "crucial pension reform" to eliminate privileges enjoyed by certain categories such as retired military personnel and magistrates; the reduction of the public sector's arrears, as well as social assistance programmes and labour market reforms.

The European Commission mission to Romania shared the IMF view.

"Conditions for the third disbursement of the EU Balance of Payments assistance programme worth 1.2 billion euros were met," said Laurent Moulin, the EU representative.

"The ambitious fiscal consolidation measures agreed with the authorities in May and June were implemented as planned," he said, adding that "these measures appeared sufficient to reach the agreed budget deficit targets."

The IMF representative also urged Romanian authorities to "accelerate the absorption of European funds as the single best way to generate economic growth."

Romania can access up to 31 billion euros in EU funding through to 2013 but a lack of local counter-party resources, combined with corruption and bureaucratic redtape have so far prevented it from taking full advantage.

After a 7.2-percent slump last year, the economy is expected to shrink by an additional 1.9 percent in 2010, Moulin said.

Next year, however, it should return to growth of between 1.5 and 2.0 percent, according to the IMF.

The crisis-hit Balkan country obtained in May 2009 a 20-billion-euro (26.4-billion-dollar) rescue package from the IMF, the European Union and the World Bank in exchange for austerity measures aimed at taming the deficit.

The IMF said last month that the sixth disbursement of its loan, worth 900 million euros, could become available as soon as its board completed the review of the reforms.

Meanwhile, the Romanian central bank (BNR) said it kept its benchmark interest rate unchanged at 6.25 percent, having cut four times so far this year from 8.0 percent at the beginning of 2010.

The BNR said it had previously cut interest rates as inflation eased but the hike in sales tax raised the prospect of higher prices.