* IMF agrees to Romanian budget gap of 7.3 pct/GDP in 2009
* Romanian GDP seen contracting by 8-8.5 pct in 2009
(Releads with European Commission, adds details)
By Luiza Ilie and Marius Zaharia
BUCHAREST, Aug 10 (Reuters) - The International Monetary Fund and the European Commission have allowed Romania to raise its budget deficit target this year and next to prevent further deepening recession through fiscal austerity.
Following its first review of Romania's performance under a 20 billion euro aid deal it led in March, the IMF also doubled its forecast for economic contraction this year to more than 8 percent, from the 4.1 percent it had expected in March.
The changes underscored deepening economic woes in Romania, where the global credit slump has decimated domestic consumption, a key driver of the economy in recent years.
"We do not want to make the economic situation worse by overly tightening fiscal policy," mission chief Jeffrey Franks told a news conference on Monday.
Pending approval from the IMF's board in coming weeks, Romania will be able to run a deficit of 7.3 percent of gross domestic product (GDP) from the original plan of 4.6 percent. Next year, it has to bring it down to less than 6 percent.
Under EU accounting rules the deficit will amount to 7.8 percent this year.
The increase follows a similar agreement with Hungary which has sought leniency from the Fund to avoid further austerity measures.
Bucharest will still have to cut spending by an additional 0.8 percent of gross domestic product to meet the new goal, but analysts said the target is broadly realistic.
It also has to overhaul public finances to make spending more transparent and, in the long term, lower, particularly on administration salaries.
Additional requirements attached to the loan package along with the deficit increase include measures to strengthen fiscal discipline in local governments, decentralised entities and state-owned enterprises, said the European Commission, the EU's executive arm.
However, analysts warned lenders may be too optimistic in expectations of future fiscal reforms in Romania, where the ruling coalition is riven by policy differences ahead of a presidential election later this year.
WISHFUL THINKING?
IMF mission chief Franks said the Fund was still "ambitious", not "lenient," taking into account Romania's plummeting economy and that he saw broad support for fiscal reforms among political parties.
His comments came in stark contrast with government coalition quarrels over the weekend when the ruling coalition's Social Democrats accused the Democrat-Liberal Prime Minister of trying to bypass public debates over fiscal reforms.
"The IMF seems to be quite purposefully naive about political support in the receiving countries for budget cuts, that goes for Latvia as well as Romania," said Lars Christensen of Danske Bank in Copenhagen.
Following the disbursement of the second loan tranche in September, Romania has to show significant progress in simplifying public pay policies, a difficult issue ahead of the presidential poll.
The public sector employs a third of Romania's workforce and has seen massive pay hikes over the last four years.
"There is always electoral risk," said David Oxley, emerging Europe economist at Capital Economics in London.
The Fund said expectations for more severe contraction this year reflected worse than expected performance in the first quarter rather than expectations of further deepening in the second half. It forecast the economy turning to modest growth in 2010. (Additional reporting by Jan Strupczewski in Brussels) (Writing by Justyna Pawlak; editing by Ron Askew)