Wednesday, July 23, 2008

Romania to speed up pension hikes-labour minister

BUCHAREST, July 22 (Reuters) - Romania plans to bring forward a planned hike in state pensions from January to November, Labour Minister Paul Pacuraru said on Tuesday, in a move that could further inflame inflationary pressures. Analysts said additional spending could give a new push to consumer price growth, which reached a two-year high of 8.6 percent in March and was back at that level in June on the back of soaring food and energy costs.

The decision follows plans by Pacuraru's centrist government last year to nearly double pensions between 2008 and 2009 which had sparked criticism from rating agencies and some economists because of their potential impact on Romania's sizzling economy.

"There is a 100 percent chance that state pensions will be raised in November. We have a surplus in the pension budget in the first six months, which we expect to double by the end of the year," Pacuraru told TV station Realitatea TV.

He did not specify the size of the announced hike.

Average monthly pensions are just over 100 euros now, roughly one-third of Romanians' average net wages.

A consumer and corporate spending spree in Romania in recent years has bloated its current account deficit and added to inflationary pressures, raising concerns about long-term economic stability in the face of global financial woes.

The central bank, which has raised interest rates by 300 basis points to 10 percent in recent months, has called on the ruling centrists to keep wage policies in check and ensure that social spending does not replace cash needed for investment.

"(The pension hike) will have a quite significant impact on inflation," said Ionut Dumitru, head of research at Raiffeisen Bank in Bucharest.

"We estimate the deficit stemming from pension payments may reach up to 2 percent of GDP next year due to the latest rises, so we will see cuts in investment spending eventually," he said.
However, the ruling centrists face pressure to loosen their purse strings ahead of parliamentary elections due later this year, which could put them out of power.

Last week, the government proposed to raise minimum wages by 8 percent from October, arguing the inflationary impact will be offset by good harvest prospects, expected to make food cheaper.

The government ran a budget deficit of 0.4 percent of GDP in the first five months of this year, compared with a full-year target of 2.3 percent.

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