Romania is expected to approve the terms of an IMF-led aid package worth €20 billion ($26.9 billion) on Wednesday, in a bid to thwart a financing crisis in the poor European Union member.
After the global financial turmoil strangled funding for its cash-dependent economy, the country of 22 million people on the EU’s eastern frontier has become the third member of the bloc to be bailed out after Hungary and Latvia.
Economists say the package should calm wobbly markets and ease pressure on the domestic currency, which has been trading near record lows against the euro since the start of the year.
But while it leaves scope for public spending to bolster the economy, the loan is unlikely to prevent Romania from slipping into recession this year as the global crisis chokes off manufacturing and domestic consumption.
“This should be enough to avert a threat of losing liquidity in foreign currencies ... However, it will not be enough to avert a recession,” said Bartosz Pawlowski of TD Securities.
The International Monetary Fund (IMF) will hold a news conference at 10 a.m. local time (0800 GMT) following a two-week mission to Bucharest to discuss economic concerns and the aid package.
Later in the day, the centre-left coalition cabinet of Prime Minister Emil Boc meets to approve the loan request. A coalition source said on Tuesday that the terms had been agreed.
Romania has a weak record with the Fund. It has completed only one of seven stand-by deals since the fall of communism, meaning it has reneged on IMF-prescribed reforms before drawing all the funds.
But for Boc’s broad coalition of former foes, the deal may be a lifeline to surviving the crisis, after it swept into power in December, inheriting an overheated economy with vast external imbalances and a public wary of budget cuts and economic pain.
PATCHING UP THE ECONOMY
Over several months, Romania has moved from an attractive destination for foreign investment, as manufacturers poured in to benefit from fast rates of growth, to an economy plagued by ballooning debt and sour market sentiment.
Economists blame an unrestrained spending spree by the private sector and consumers and loose fiscal and wage policies in recent years for fanning a vast external imbalance.
Botched policies left Boc with a dilemma over how to ensure access to funding without making painful cutbacks and angering the public after making lavish election-time spending promises.
Talks with an IMF mission have been kept under wraps, with few details announced publicly so far.
This has led observers to say the coalition was concerned about sparking social unrest by announcing tough social spending cuts, which many economists said may accompany a deal.
But sources say the deal is relatively lenient, allowing for a budget deficit of 4.6% of gross domestic product (GDP), which would compare with last year’s 5.2%.
This would signal that the IMF acknowledges that the deep public sector reforms needed to cut spending significantly may be difficult at a time when global economic pain is hurting ordinary Romanians.
Economists say a large budget deficit, above the European Union’s 3%-limit, may be key to preventing a deeper recession this year by propping up the private sector.
Reaction from trade unions was mixed over the last week, as details of the talks began to seep out, with several still threatening strikes if public wages and bonuses are cut. (Reuters)