IMF: Romania Should Reassess Public Sector Wage Growth and Changes to Pensions

“Economic activity in Romania remains strong with unemployment at a record low. Concerns about overheating have lessened with a recent slowdown in activity and inflation pressures for the year appear to have peaked. The National Bank of Romania has tightened monetary policy and liquidity management, helping contain inflation pressures. Going forward, a tightening bias in monetary policy should be maintained to anchor inflation expectations and contain external risks. The financial system’s health has improved, and the cap on debt service to income on household loans should help maintain financial stability,” said mission chief Jaewoo Lee.

He added fiscal consolidation would enhance room for fiscal policy maneuver, thereby reducing the economy’s vulnerability to domestic and external shocks.

“Despite several years of strong growth, the budget deficit has gone up rather than down, as it should during good times, and the 2018 target remains at risk without further measures. At the same time, spending composition is increasingly skewed towards rigid items to the detriment of public investment. The 2019 budget and medium-term fiscal framework need to target smaller deficits in line with European Union (EU) commitments and keep public debt-to-GDP ratio on a downward trend,” Lee said in a statement released Monday.

The IMf official said that while current initiatives to improve public spending efficiency—expenditure reviews and a centralized procurement—are welcome, it is also critical to modernize the revenue administration. Furthermore, increases in public wage and planned changes to pension benefits should be reassessed for their negative implications for fiscal sustainability and long-term growth.

He also said Romania needs well-targeted structural reforms and strong governance to raise growth potential. Strengthening public investment institutions remains a priority to help address Romania’s large infrastructure gap, including by facilitating higher absorption of EU funds.

“The envisaged sovereign investment fund should follow international best practices. Romania’s fight against corruption should continue, as reducing corruption helps improve government revenue, enhance spending efficiency, and strengthen competitiveness. Several recent legislative initiatives have created uncertainty, giving rise to concerns about good governance and the financial system, which are a basis for sustained long-term growth,” Lee said.

The IMF notes end-of-mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country and the views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. This mission will not result in a Board discussion, it said.

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