Wednesday, March 28, 2007

Romania urged to rein in public spending

EU finance ministers warned Romania to do more to curb overheating as its economy rapidly grows.

EU Economic and Monetary Affairs Commissioner Joaquin Almunia said Tuesday that Romania needs to rein in public spending, echoing a similar warning from the International Monetary Fund that said the government should cut back on expenditure to lower inflation. Wages have soared in Romania as a result of labor shortages.

"We have sent a message to the Romanian authorities that the overheating of the economy requires more strict fiscal policies," Almunia said. "They have not been strict in correcting the budgetary imbalances and ... contributing to the sound policy mix that the Romanian economy requires."

He spoke after the monthly EU finance ministers meeting.

The ministers backed an EU warning to the Romanian government that deficits could run higher than its own forecasts if it overspends. The EU also recommended that more be done to pay off debt as Romania enjoys high growth.

Romania, which joined the EU on Jan. 1, has enjoyed rapid growth since 2001, after years of recessions and restructuring of heavy industries in the 1990s.

The economy expanded by 7.7 percent in 2006 compared with a year earlier, the national statistics institute has said.

The IMF has warned that GDP growth would slow to about 7 percent in 2007 and that inflation could grow to 5.5 percent unless the government tightened its spending.

Wages have been rising as the country experiences labor shortages, worsened by people leaving to find work in other, better-paid parts of Europe.

Annual inflation slowed to 4.87 percent in 2006 from 8.6 percent in 2005, and continued to slow in January to 4.01 percent.

The International Monetary Fund also urged Romania to increase its flat tax, which is now 16 percent, to reduce the budget deficit to under 1 percent. The government predicted a budget deficit of 2.8 percent of gross domestic product this year -- scraping under an EU limit of 3 percent -- but the IMF says the target could be exceeded due to higher public wages.

Associated Press

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