Romania Agrees With Bailout Lenders on Increasing Budget Gap

The International Monetary Fund completed a review of Romania’s loan accord and agreed to let the country widen its budget deficit to accommodate a public- sector wage increase after a third government took office this year.

The IMF and Romania reached a staff-level agreement to unlock about 475 million euros ($616 million) from its 3.6 billion-euro precautionary loan, Mission Chief Jeffrey Franks said in Bucharest today. The IMF also agreed to let Romania increase its budget-gap target to 2.2 percent of economic output from 1.9 percent.

“Romania met almost all the targets under the accord except for two of them referring to some unpaid debt to private companies,” Franks said. “There are still difficulties in restoring the economic growth because of the international crisis and the risks remain high.”

The IMF and the European Union’s fiscal flexibility toward Romania comes at a time when more European leaders are pushing for pro-growth policies after France’s first power shift to a socialist president since 1981 and Greece’s electoral rebellion against austerity busted the budget-cutting consensus that has dominated the response to the sovereign-debt crisis.

Governments Fell

Romania, which secured the loan from the IMF and the EU last year as a safeguard against the European sovereign-debt crisis, changed governments twice this year amid protests against austerity measures. Former Prime Minister Emil Boc resigned on March 6 and his successor Mihai-Razvan Ungureanu lost a no-confidence vote in Parliament on April 27, three days after the IMF review began, delaying its completion by two days.

The Social-Democrat Victor Ponta was appointed as Prime Minister on May 7. His new government signed a letter of intent needed to complete the lenders’ review yesterday and agreed on an 8 percent increase of public wages on June 1, followed by another raise in December to reverse a 25 percent cut in 2010. The Cabinet is also seeking to pay back some social contributions to pensioners.

The IMF warned Ponta’s government to keep a cap on spending before elections this year after the state’s arrears started to increase “probably because of pre-electoral pressures,” Franks said.

The Romanian leu, which slid to a record intraday low of 4.4620 on May 1 after Ungureanu’s government collapsed, weakened 0.3 percent and traded at 4.4202 against the euro at 2:20 p.m. in Bucharest trading.

Easing Monetary Policy

The country’s central bank may have “small” room to further ease monetary policy this year after the government fell and the debt crisis prompted policy makers to take a pause, Franks said in an interview in Bucharest today. He also said that the inflation rate, which fell to a record low of 2.4 percent in March, will remain within the central bank’s targeted band of between 2 percent and 4 percent.

“So far we don’t see negative effects on inflationary expectations, on the exchange rate, yes, it’s weakened a bit but not significantly, so there’s no compelling reason for a tightening of the monetary stance at this point,” Franks said. “There may be a small additional space for monetary easing, but not much.”

Romania’s economy will expand 1.5 percent this year as exports to western Europe, the country’s major trading partner, are slowing amid the sovereign-debt crisis, Franks said.

Technical Recession

Romania may enter a technical recession as the economy may post a “minor” quarterly contraction in the first quarter, central bank Deputy Governor Cristian Popa said yesterday.

The Balkan country’s Finance Ministry will continue borrowing money from domestic and international markets “on an opportunistic basis” under a 7 billion-euro medium-term note program, Franks said.

Romania should wait with a plan to sell stakes in energy companies on both internal and international markets as announced by the new Economy Minister Daniel Chitoiu as it will slow the sales timetable already agreed with the lenders, Franks said.

The country pledged to sell 15 percent stakes in natural- gas company Romgaz SA and Transgaz SA (TGN) and 10 percent stakes in hydro-power operator Hidroelectrica SA and nuclear-power generator Nuclearelectrica SA this year on the Bucharest Stock Exchange.

Transgaz, Romgaz

“While in principle that might be an interesting option, at this stage it would be technically much more complicated and it might slow down the process, so I would be much more in favor of pushing ahead the plan that we already have,” Franks said. “Additional international listings can be considered afterwards.”

The Transgaz and Romgaz stake sales will probably be the next, according to Franks.

Romania and its international lenders also agreed on a schedule to fully lift price controls of natural gas for companies starting this year and for households starting the second half of next year until the end of 2018, Franks said.

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 at jagomez@bloomberg.net

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