Thursday, July 31, 2008

Romania needs to avoid social tension-FinMin

BUCHAREST, July 29 (Reuters) - Romania should keeping aiming for fast economic growth to avoid social tensions and narrow a big wealth gap with most of the EU, despite the risk of overheating, Finance Minister Varujan Vosganian told Reuters.

Romania's per capita GDP is about a third of the European Union average and lags most of the bloc's other ex-communist members. But rapid growth driven by consumption has raised worries at the central bank about long-term stability.

Vosganian acknowledged in an interview these concerns but said Romania needed high growth to tackle poverty and catch up with Western living standards, although the budget deficit and inflation also had to be curbed.

"All of us are talking about overheating. Nobody has discovered another solution to reducing gaps than high levels of (GDP) increase," he said.

"It's easier to be poor outside the (European) Union than inside ... The pressures are very high because they (Romanians) need to compare themselves with neighbouring countries."
The IMF estimates per capita GDP in Romania, which joined the EU last year, will be about $12,300 this year on a purchasing power parity basis. This compares with about $19,800 in neighbouring Hungary and $25,700 in the Czech Republic.

Vosganian forecast Romania's economy would grow 7-8 percent this year, compared with 6 percent in 2007.

However, he also said he wanted to cut the government budget deficit next year to 2 percent of gross domestic product from the 2008 target ceiling of 2.3 percent, and to cap wage growth to protect the economy and keep inflation in check.

"We have to assume a higher level of (GDP) increase but at the same time we have to manage the budget deficit," he said. "You combine the necessity to meet inflation targets and at the same time to cover some structural deficits in education and health care ... It's a step towards consolidating the budget."

Vosganian said he expected annual inflation to fall to 4-5 percent by the end of next year from some 6 percent he forecasts for December 2008.

The decrease, he said, would be helped by this year's expected strong harvest and its impact on food prices, as well as statistical base effects and tighter wage policies in 2009.
"We want to increase (state) wages similar to the inflation rate ... (of) 4 percent," he said in the interview, which was conducted on Monday.

Romania's inflation has jumped to a two-year high of 8.6 percent in recent months, as strong domestic consumption added pressures to spiking global food and energy costs.

The EU's second-poorest member after Bulgaria, Romania has expanded sharply in recent years as companies and households borrowed cash to modernise and improve living standards.
But economists say fast growth is threatening long-term economic gains. It has bloated Romania's current account deficit and fanned rampant borrowing in foreign currencies which could damage the economy if the leu currency weakens sharply.

Vosganian said the government's recent decision to raise minimum wages from October, made only a few weeks after he had said high inflation made new increases unlikely, was an example of necessary compromise in economic policies.

"We need social peace because maybe if you don't have social peace you waste more resources," he said. Vosganian's Liberal Party faces a parliamentary election later this year, in which it may lose power to centrists or to the left-wing opposition.

In broader terms, Vosganian said Romania's next government should focus on raising spending on infrastructure to ensure continued inflows of foreign investment, which are needed to offset the outflow of cash for imports.

"The situation in infrastructure has become a trauma for Romanians ... We want to channel huge amounts of money for infrastructure, railways, roads, bridges," he said.

Some economists say foreign direct investment flows, which Vosganian estimates at a record 10 billion euros this year, could diminish due to global economic woes. This risk could be exacerbated, they say, if wages grow too fast and cheap labour costs no longer offset concerns about poor infrastructure.

Asked whether he agreed with the central bank's monetary tightening, which has raised interest rates by 300 basis points to 10 percent since October to fight inflation, he said:
"From the perspective of the finance ministry, of course we are interested in lower interest rates because it is stimulus for economic development."

"But it is the job of the central bank and we accept it because there is no love without sacrifice." (Writing by Justyna Pawlak; Editing by David Stamp)

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