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A pay raise for teachers has become a key policy issue in the parliamentary election campaign, raising concerns about state spending at a time when many say Romania should be taking steps to adopt fiscally responsible measures to protect its economy from the global financial crisis.
The Chamber of Deputies had agreed upon a 50% wage increase at the start of October, but it was rejected by Prime Minister Calin Popescu-Tariceanu, who declared that its implementation was not affordable and could fuel inflation. The ensuing debate escalated to such heights that on November 10, 170,000 teachers affiliated with the Federation of the Free Unions from Education (FSLI) went on a two-hour strike, threatening to continue for an indefinite period.
On the same day, Tariceanu, in an effort to meet the unions' demands, proposed a 28% pay raise. However, the unions rejected his offer, and all parties are now waiting for the outcome of the general elections scheduled for November 30.
In a statement to the local media, Juan Jose Fernandez-Ansola, the International Monetary Fund's (IMF) senior representative for Romania and Bulgaria, said, "The initiative to increase teachers' wages by 50% may need to be reconsidered. We estimate the impact on the budget would be modest in 2008, but would reach over 0.75% of GDP in 2009. In addition, if the increase were extended to other public sector employees, the impact could reach over 4% of GDP in 2009. This would send a wrong signal to financial markets."
He went on to say that "strong wage and fiscal policies are required to defend the interests of all Romanians, especially the most vulnerable."
International criticism of the country's fiscal policy has been building up over recent weeks. At the end of October, Standard & Poor's changed its outlook for the country from stable to negative. Similarly, on November 10, Fitch moved Romania from its "investment grade" to its "speculative grade" class, which has a high investment risk. Romania is the first country in the EU to be downgraded to such a category by both institutions.
A loose budgetary policy, high public spending and increasing pressures for depreciation of the RON - which could potentially lead to a currency crisis - were both institutions' main reasons for the downgrade.
"Romania's evaluation was based on recent fiscal policies, expenditures made during an election year", stated Andrew Colquhoun, chief analyst for Romania and manager of the Fitch Sovereign Rating Division. Fitch estimates a budget deficit of 3% of GDP in 2008 and 4% in 2009.
Colquhoun added that if current trends do not change, Romania will face a high risk of a financial and foreign currency crisis. Although attempts have been made by the National Bank of Romania to prevent excessive volatility of the RON, Colquhoun believes that the foreign currency reserves may not be sufficient to overcome pressures for its depreciation.
But leading economists and monetary policymakers in Romania have strongly objected to the views of the credit rating agencies.
"The decisions to downgrade were made by people who sit in offices, and who are unaware of Romania's reality," said Radu Gratian Ghetea, chairman of the Romanian Banking Association.
According to Cristian Popa, deputy governor of the central bank, the Romanian economy is on equal, if not more stable footing, compared to some of its neighbours. Whereas Hungary and Ukraine are receiving rescue packages from a combined effort of the IMF and the World Bank, Romania's financial system has thus far managed without the help of these institutions.
Popa said the decision by the credit rating agencies neglects vital elements, such as the country's solvability. "We estimate Romania's public debt at 12% of GDP until the end of the year, which is lower than last year," he said.
In terms of private foreign debt, Popa went on to say that the trend has slowed significantly from 60% last year to 30% for long term financing, and that the national bank's reserves cover 92.4% of the debt stock.
Additionally, Claudiu Cercel, deputy CEO of BRD, the country's second largest bank, recently declared that investors' confidence need not be disturbed, as the central bank's high reserves could be used as necessary to boost the economy.
Although conflicting views exist about the country's macro-economic stability, Romania has been made aware of the need to get its monetary and fiscal policy in line to guarantee inflows of long-term foreign capital. Given the coming general elections, the discussion of cost-cutting measures is off the table, but international investors are keen to see the new government's ideas on how to get the country back in the credit ratings clear zone.