IMF: Romanian government should think twice before increasing salaries and pensions

Anca Alexe 13/11/2018 | 08:46

The International Monetary Fund (IMF) warns that Romania continues to risk not achieving its deficit target and advises the government to re-evaluate the increases it plans for salaries and pensions.

An IMF team led by Jaewoo Lee visited Romania between November 6 and 12 to discuss the recent macroeconomic and political developments.

“Romania’s economic activity remains strong, with a low unemployment rate. Concerns on overheating have decreased, thanks to the recent slowdown of pace, and the inflation pressures seem to have passed their peak this year. The Romanian National Bank has toughened the monetary policy and its liquidity management, contributing to limiting inflation pressure. The policy should continue to be tightened, in order to tamper inflation expectations and counter external risks. The health of the financial system has improved, and the cap on debt to a certain percentage of income for loans given out to the population should contribute to maintaining financial stability,” said Jaewoo Lee at the end of the IMF’s mission.

According to Lee, despite several years of strong growth, Romania’s budget deficit has grown, although it should have shrunk during favourable periods, and the achievement of the 2018 target of 3 percent continues to be unlikely unless extra measures are taken.

At the same time, the spending is leaning more and more towards rigid elements, to the detriment of public investments. The 2019 budget and the medium-term fiscal framework should aim for smaller deficits, according to the commitments made to the European Union, and the public debt as a percentage of GDP should continue rising.

The IMF says Romania needs “high quality measures”, including the current initiatives to make public spending and centralized acquisitions more efficient. Modernizing fiscal administration is also essential.

“Furthermore, increasing salaries in the public sector and the changes planned for the pensions system should be re-evaluated in terms of their negative implications on fiscal sustainability and on long-term growth,” said Lee.

He added that the country requires well-directed structural reform and a strong government in order to increase its growth potential. “Consolidating institutions that work on investments remains a priority in order to contribute to approaching Romania’s important infrastructure deficit, including by facilitating a higher absorption of EU funds. Corporate governance for state enterprises can be improved, and exemptions from law 111/2016 should be avoided. The planned sovereign investment fund should follow the best international practices. Romania should continue its fight against corruption, because reducing corruption contributes to improving governmental revenues, spending efficiency and competitiveness. Several recent legislative initiatives have created uncertainties, generating concern regarding good governance and the financial system, which is a basis for a sustainable long-term growth,” he concluded.

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