* IMF to extend deadline to June
* Romania brought budget gap down but slow on reforms
* IMF backing supports currency, debt (Adds IMF and analyst comment, detail on Romania)
By Luiza Ilie
BUCHAREST, Jan 29 (Reuters) - The International Monetary Fund will give Romania an extra three months to hit targets under an 5 billion euro ($6.7 billion) aid scheme, a Fund official said.
Erik de Vrijer, IMF mission chief to the European Union’s second poorest state, said on Tuesday he would ask the IMF board to allow the agreement to run past its March expiry date.
Doubts about whether Romania can sustain its IMF programme have sent the leu currency to record lows but it has recovered some ground since Prime Minister Victor Ponta won a December election and pledged to seek a new agreement.
However, Ponta’s leftist government is keen to avoid the fate of its rightist predecessor, which cut wages and raised the sales tax to stay on track with the IMF, only to be hammered at the polls.
Ponta is reversing some of the measures his predecessors made to narrow the budget gap and will need to move quickly on other IMF targets, notably privatisation, if he wants to strike a new deal.
“The government is taking corrective actions to achieve the objectives of the programme. We think we should give them the time. We certainly hope they’ll do what they say,” de Vrijer told reporters.
IMF assistance has helped put the economy on a more even keel but it is on the verge of another recession and banks are reluctant to lend, which slows development of a country where some areas lack reliable electricity or running water.
Bucharest has not used the funds from the current deal, but it acts as an important reassurance to investors of responsible economic policies and the longer-term reforms are needed if Romania is to catch up with other EU members.
Romania has cut its budget gap to 3 percent of gross domestic product but is recovering only slowly from a deep recession. It has lagged in long-term reforms such as selling inefficient state companies and overhauling healthcare.
Previous cabinets have shied away from reforming Romania’s sprawling state sector - which accounts for only 6 percent of the economy but a third of all unpaid debts - because of concern that job losses would cost it votes.
But Ponta will have to move quickly on this if it wants to strike a new IMF deal. During the extension, the government plans to list a 15 percent stake in pipeline operator Transgaz and to pick consultants for initial public offerings in power companies Nuclearelectrica, Romgaz and Compania Energetica Oltenia.
While Romania has sold more debt than planned so far in 2013 as yields have tumbled following the election, any doubts over IMF support would make it harder to raise money. The leu was a touch higher against the euro after news of the extension.
“A postponement of the final deadline could be seen positive as IMF is offering the government the possibility to prove more than just a declarative commitment, staying under the IMF umbrella,” said Catalina Molnar, chief economist at UniCredit Tiriac Bank.
“If more delays occur, the perception might change in a negative way.” ($1 = 0.7429 euros) (Editing by Sam Cage/Ruth Pitchford)