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IMF praises Romanian austerity success: INTERVIEW

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(BUCHAREST) - The Romanian economy has improved markedly after three years of a painful austerity cure and authorities should now focus on sustainable growth, a top IMF official told AFP in an interview.

Leaders of the European Union, of which Romania is a member, will meet on May 23 to debate ways to generate growth amid rising opposition to austerity measures in several countries, and a new crisis in Greece.

"Romania did some very difficult things in very difficult times, with very strong, persistent commitment," International Monetary Fund mission chief Jeffrey Franks told AFP in an interview.

Hit by the global economic crisis and facing a big and rising public deficit, Romania obtained a 20-billion-euro rescue package from the IMF, the EU and the World Bank in May 2009, in exchange for drastic spending cuts.

One year later, wages in the public sector were slashed by 25 percent and the sales tax on goods and services raised by five points, to 24 percent.

These draconian measures, unprecedented in the EU, caused the popularity of the centre-right coalition in power at the time to collapse. Last month, the government was toppled and replaced by a centre-left cabinet.

"In terms of macroeconomic stability the results (of austerity) are striking: the current account deficit has gone from 15 to four percent, the public deficit from near eight percent to two percent," Franks stressed.

He also noted the dramatic decline in interest rates Romania pays to finance itself on international markets and the record-low inflation rate, under 3.0 percent.

"Plus, we have not seen massive deleveraging in Romania and not a single bank failed. That is a very considerable achievement when we look at what is going on in the rest of the world with the banking crisis," he stressed.

"But stability is not the same as growth," Franks admitted. If the key word over the past years was austerity, "now it's reform to generate growth."

Romania's economy grew by 2.5 percent in 2011 after two years of severe recession and is expected to go up by 1.5 percent this year.

"That is still better than the EU average but what Romania needs is four or five percent growth on a sustainable basis," in order to catch up with the more developed countries.

The new deal with the IMF and the EU, a precautinary-type one concluded in 2011, concentrates much more on the structural areas of sustainable growth, such as energy and transport, while preserving the effort for macroeconomic stability.

With uncertainties in the eurozone still strong, Romania can no longer rely on exports for growth, so domestic demand and a higher absorption rate of the 30 billion euros set aside by the European Union over 2007-2013 should be the new engines.

In order to stimulate consumption, the IMF has approved a rise in public wages by 8.0 percent in June and an additional 7.0 percent next January, which will restore wages to their pre-2010 levels.

This led to a modest increase in the public deficit target for 2012, to 2.2 percent of gross domestic product up from 1.9 percent previously, but Franks insisted the new government should stick to a prudent fiscal policy.

Unpopular at home, the bitter pill of austerity has boosted Romania's credibility in the eyes of foreign investors and international lenders.

"When I first went to the IMF board to discuss the programe in March 2009, some directors said 'Romania does not have a good track record of complying with commitments so why should we put 13 billion euros of our money into this country'?," Franks recalled.

"When I go to the board now, directors go out of their way to say 'we really see change in the behaviour of Romania, it's now a country that has reliably and consistently complied with agreements'."


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