November 13 (SeeNews) - Romania risks missing its budget deficit target for 2018 and therefore it should reassess hikes in public wages and pensions, the head of the International Monetary Fund (IMF) mission that visited Bucharest during November 6-12 said.
"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," Jaewoo Lee said in a statement on Monday evening after the IMF staff team concluded its visit.
The 2019 budget and medium-term fiscal framework need to target smaller deficits in line with European Union commitments and keep public debt-to-GDP ratio on a downward trend, the IMF mission leader added.
Fiscal consolidation would enhance room for fiscal policy maneuver, thereby reducing the economy’s vulnerability to domestic and external shocks, Lee stressed.
Romania targets a consolidated budget gap equivalent to 2.96% of GDP on a cash basis in 2018, below the 3% EU ceiling.
The IMF mission recommended to Romania to improve public spending efficiency, modernize the revenue administration and reassess public wage hikes and planned changes to pension benefits for their negative implications for fiscal sustainability and long-term growth.
"Well-targeted structural reforms and strong governance are needed 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," Lee said.
The head of the IMF mission noted that 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.
"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," Lee added.
The IMF mission visited Romania with the aim of evaluating the state of the country's economy. Currently, Romania has no funding arrangement with the IMF.
Romania's real gross domestic product (GDP) growth is projected to reach 4.0% in 2018 before decelerating to 3.4% in 2019, the IMF said in the October edition of its World Economic Outlook report.