UPDATE 2-IMF to disburse Romania funds only after cost cuts

By Marius Zaharia and Luiza Ilie BUCHAREST, May 10 (Reuters) - The International Monetary Fund will disburse the next tranche of a 20 billion euro ($26.8 billion) Romania aid deal only after the government has implemented cost-saving measures, an official said on Monday. IMF mission chief for Romania Jeffrey Franks said the recession-hit southeast European country's economy was now expected to stagnate or contract this year, though gross domestic product should rise 3.6 percent in 2011. The latest package of aid would be worth some 2.05 billion euros, including 1.15 billion euros from the EU and 900 million euros from the IMF. "It is important to keep economic policies on the right track. The package of measures proposed by the government, a tough but a necessary one, has our backing. It will help Romania get out of the crisis," Franks told a news conference after the IMF completed a review. "We want to see these measures in effect before we go to the board to request approval for the deal." Romania has so far received about 12 billion euros worth of the combined IMF, European Commission and World Bank loans which make up its rescue package. TOUGH MEASURES As part of the deal, Romania -- the European Union's second-poorest member state -- has pledged to reform its sprawling and highly-unionised public sector, which accounts for one-third of all jobs, by cutting wages and pensions. That will probably lead to the loss of 250,000 public sector jobs over a number of years, Franks said. "I see unions taking a position and probably it will not be easy to implement these measures," said Nicolaie Alexandru-Chidesciuc, chief economist at ING Bank in Bucharest. "It depends on how the government will manage to send the message that the implementation of these measures is necessary for Romania." Romania's leu rose sharply from Friday's close, boosted mainly by a European Union and IMF agreement on a rescue package to stop the Greek debt crisis from spreading and was trading at 4.154 per euro at 0757 GMT. Romania and the visiting IMF mission have agreed to a wider fiscal deficit target of 6.8 percent of gross domestic product this year against a previous 5.9 percent. Franks said they have also agreed a ceiling of 4.4 percent of GDP for Romania's budget deficit in 2011. Median forecasts for Romanian GDP in a May 4-7 Reuters poll of banks were for a year-on-year contraction of 2.8 percent in the first quarter of this year but for 0.5 percent growth for 2010 as a whole. Speaking at the same news conference, the European Commission's Fabienne Ilzkovitz said it was crucial for the government to stick to the new budget deficit target this year. (Additional reporting by Ioana Patran and Radu Marinas; Writing by Sam Cage) ($1=.7453 Euro) Keywords: ROMANIA IMF/ (luiza.ilie@reuters.com ; +40 21 315 8320; Reuters Messaging: luiza.ilie.reuters.com@reuters.net ) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.

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