February 10, 2005

ROMANIA : Government Closed Agreement with IMF

Romania and the IMF have agreed to allow foreigners access to leu currency deposits by June (therefore later than the initial April deadline) and to cut this year's budget gap to 0.4-0.5 percent of the GDP from 1.2 percent in 2004, government sources said yesterday.

IMF said a tighter budget deficit would help avoid a pickup in inflation from growing domestic consumption following the introduction of the flat tax, the lowest in Eastern Europe .

The IMF has asked Romania to cut its budget deficit to ensure it would keep on the disinflation path after the country introduced a flat 16 percent tax this year, replacing a 25 percent corporate tax and an 18 to 40 percent income scale.

The Romanian authorities also accepted the suggestion of the IMF to outrun the calendar established for tariffs increase on natural gas, the new prices being introduced gradually, 3 months earlier than the term stipulated in last year's agreement.

According to the calendar agreed with IMF, the price for natural gas will increase on April 1 this year to $95/1,000 cubic meters and will subsequently be increased, in two other stages, to $105 on July 1 and to $110 on October 1.

Officials said yesterday that Romania will sign a supplementary memorandum with the IMF in March, amending the previous stand-by deal signed in July 2003 and setting current-year macroeconomic targets.

Under the amended deal, Romania will strive to post an economic growth of 5.5 percent and to cut inflation to 7 percent by yearend from 9.3 percent in 2004 and 14.1 percent in 2003 and to slash the current account deficit to 6.9 percent of the GDP.