Romania to Continue Austerity with IMF Backing

The IMF is to release further funds for Bucharest if it remains committed to its current package of spending cuts.

“Romania has fulfilled all performance criteria from the precautionary agreement with the International Montary Fund”, the IMF mission chief Jeffrey Franks said on Monday at the end of his evaluation mission in Bucharest.

“We have reached an agreement at the level of experts and Romania seems determined to continue its economic policies and public sector pay reforms,” he added.

As a result, the Fund is soon expected to release 475 million euro in further loans to Romania as soon as the conditions are met.

The IMF wants Bucharest to continue its harsh cuts in public spending despite the impact of cuts on growth.

The Fund recently cut Romania’s growth forecast for next year to around 2.1 per cent of GDP. The country has experienced a very slow economic recovery this year with growth estimated for this year at 1.5 per cent of GDP.

“We are not talking about radical cuts to meet the 2012 budget deficit target”, Franks said. “We are talking about holding wages at the current level and continuing the natural process of attrition to continue to bring down the size of the public sector.”

Romania and the IMF have agreed on a deficit target of 4.4 per cent of GDP in 2011 and of around 2.1 per cent of GDP in 2012.

Some analysts are deeply critical of the austerity measures, saying they will plunge Romania into recession.

“Owing to the austerity measures that the government has implemented… [only] a small growth rate will be registered,” economic analyst Ion Dumitru said.

“This will happen at the cost of reduced investments and [recued] public spending. Romania still lacks a clear strategy to reinforce the economy and get out of recession,” he added.

Romania’s new, “precautionary” agreement with the IMF came into force in April.
Under it, Romania pledged to strengthen its economy by developing key sectors, including energy and transportation. It also promised to make better use of EU funds worth some 30 billion euro until 2013.

In May 2009, crisis-hit Romania obtained a two-year 20-billion euro emergency loan from the IMF, the EU and the World Bank in exchange for key reforms aimed at slashing public spending.

Last July the government cut civil servants’ wages by 25 per cent, while thousands of state jobs were axed and VAT was increased by 5 per cent to 24 per cent.

The government says it had no other option to keep the economy afloat, but critics say that while other European countries are trying to find alternative sources to cover their deficits, Romania is relying exclusively on IMF help.