IMF Could Halt Tranche If Romania Unable To Make Fiscal Adjustments – RBS

Romanian Constitutional Court rejected as unconstitutional part of the government’s austerity plan to cut spending and lower the budget deficit, a key element in receiving further cash from the IMF.

According to Ash, the IMF is unlikely to terminate its agreement with Romania at this time, but „ultimately the government will have to deliver something.”

„I cannot see the IMF disbursing credits without resolution of this issue,” he added.

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Following the court’s ruling, the authorities in Bucharest are likely to look at tax increases, a move that will further dampen efforts for economic recovery.

Prime Minister Emil Boc said earlier Friday that the government has already prepared alternative measures that should offset the court’s decision and slash expenditure by over 1.3% of GDP by year-end, but wouldn’t comment on whether the new steps include tax hikes.

„Tax increases will obviously not be good news for economic recovery,” Ash said. „I think the region as a whole will be getting much less foreign direct investments in general, so this will make it that much more difficult for Romania to compete.”

The RBS official expects Romania to remain in recession in 2010, adding that the outlook on 2011 doesn’t appear much better either.