The IMF notes that the stand-by agreement concluded with Romania between 2009 and 2011 has reached its objectives, contributing to economic stability and the solidity of the financial system.
“For 2010, the government introduced radical fiscal measures to offset the effects of the deeper downturn, which may have contributed to greater output loss. (…) The measures led to a sharply procyclical stance, effectively delaying the economic recovery. With the benefit of hindsight, one might argue that the adjustment could have been more gradual, particularly in light of Romania’s low public debt level”, the report notes.
The IMF added that, at that time, the program fiscal targets were already “substantially relaxed to accommodate the deeper-than-expected downturn”, and the monetary policy was supportive of recovery.
The document has been written by specialists and it does not necessarily reflect the opinions of the IMF or the Romanian Government, the report says.
The report also notes that the budget deficit targets for 2009 and 2010 were raised in the first and fourth evaluations of the stand-by agreement, because of the sharp economic decline. However, fears regarding the short-term fiscal situation were appeased by the solidity of the medium-term program, which confirmed fiscal sustainability.
“More specifically, fiscal adjustment in 2009 was roiled by the deeper-than-expected downturn, implementation delays, and political uncertainty,” the document reads.
The government managed to achieve the revised target deficit for 2009 through cuts in capital spending, lower interest payments, and some late revenue recovery.
After the pay cuts in 2010, public sector employees received a pay hike of 15% in 2011, and a full restoration of salaries would require an additional hike of 16%.
Romanian President Traian Basescu recently said in an address to Parliament two weeks ago the ruling coalition and Government have the duty to restore public wages to the level before austerity cuts, as of June 1.
Two days prior, the prime minister said the government is looking at ways to reduce social security contributions by 3% to 5%, should the economic situation allow it.
After a 25% reduction of salaries in 2010, public sector employees received a 15% pay increase last year. Right now, public sector wages would need another 16% increase to return to initial levels.
Finance Minister Bogdan Dragoi said recently a 16% increase in public sector wages starting June would have an impact of 2 billion lei (EUR457 million) per year.
In addition, according to Dragoi, a five percentage point reduction in the social security contributions would mean a budget effort of RON2.3 billion in the last seven months of the year. With the world economic crisis in the backdrop, Romania signed a two-year stand-by agreement with the IMF in 2009, for the equivalent of EUR13 billion, added with supplementary funding from the European Commission and the World Bank. This amounted to a total assistance package worth EUR20 billion.
Then, in 2011, Romania concluded a preventive EUR3.6 billion agreement with the IMF, added with EUR1.4 billion from the European Commission and EUR400 million from the World Bank.
The IMF report shows that all quarterly evaluations in the programs agreed with Romania were concluded in success, with the achievement of most objectives.