The Romanian parliament voted last month a 50% salary increase of the teachers in the country.
"[...] the initiative to increase teachers' wages by 50% may need to be reconsidered. We estimate that the impact on the budget would be modest in 2008 but reach over 3/4 of a percent of GDP in 2009. In addition, if the increase were extended to other public sector employees, the impact could reach over 4 percent of GDP in 2009," IMF said in a statement.
Additionally, given that the average public sector salaries in the country are higher than those in the private sector, a salary increase of such magnitude would trigger similar wage demands in the private sector, damaging Romania's competitiveness and leading to inflation levels that Romania has not seen for a long time, the IMF said.
The country's 2009 GDP is projected at 578.5 billion lei ($193.6 billion/155 billion euro) in a budget draft, recently presented by the government.
Romania targets a budget deficit of 2.0% of GDP next year under the government draft, below this year's target of 2.3%. Romania needs to keep its budget gap away from the 3.0% limit to be eligible for adopting the euro according to the Maastricht criteria.
"Yesterday's S&P downgrade of Romania's sovereign foreign currency credit rating to below investment grade is likely to further undercut confidence," IMF said in its release.
Global rating agency Standard & Poor's on Monday lowered its long-term and short-term foreign currency sovereign credit ratings on Romania to 'BB+/B' from 'BBB-/A-3', and its local currency long-term rating to 'BBB-' from 'BBB', setting a negative outlook, saying that the downgrade reflects the mounting risks to Romania's real economy.
"The risks for the budget deficit to increase above 3.0% of GDP by the end of the year and to advance further in 2009 are important," analysts with Raiffeisen Bank said in a release on Monday evening, following the rating announcement.
"Given that Romania is the sole country with such a low grade among the EU member countries, foreign investors might become more reluctant to invest in Romania," Raiffeisen said. Nevertheless, according to them, the long term prospects remain intact, "meaning that the foreign investors which are betting on the convergence story should be still interested to invest in Romania."
The IMF also said it was assessing with the Romanian authorities the possible effects of the global financial markets turmoil.
"[...] strong wage and fiscal policies are required to defend the interests of all Romanians, especially the most vulnerable," the statement said.
The former Communist state joined the European Union last year.
(1 euro = 3.7332 Romanian lei)
