IMF: Romania’s Planned Spending Slashes Not Without Risk

„Several of the authorities’ proposed fiscal remedies-such as cuts in public employment and tighter controls on current spending in both central government and decentralized entities-may prove politically difficult,” the IMF said in the staff report for the second and third reviews of Romania’s performance under a EUR13 billion standby agreement.

It said the sluggish output recovery in Romania and rising unemployment could also increase social strains, raising the risk of a populist backlash to fiscal adjustment.

In addition, the country’s banking sector remains vulnerable, due to increasing non-performing loans that put pressure on capital and liquidity and discourage banks from resuming lending, IMF said.

„Finally, while progress has been made with structural reforms, the authorities still need to address remaining weaknesses in the unitary wage law through a follow-up implementing legislation and closely oversee the passage of the fiscal responsibility law and pension reform,” it noted.

In order to reach its 2010 budget deficit target of 5.9% of the gross domestic product, Romania will try to reduce costs by 2.5% of GDP, including wage and pension freezing in the public sector and layoffs.