Thursday, November 25, 2010

Romania Approves IMF-Backed Law to Raise Wages in 2011

Nov. 24 (Bloomberg) -- Romania’s government approved an International Monetary Fund-backed draft bill envisaging a 15 percent pay increase for public workers in 2011 and will seek to fast-track its approval through parliament to qualify for payments under its international bailout package.

Prime Minister Emil Boc said the government will send the draft law to parliament as early as tomorrow for fast-track approval, which will give the opposition the option to file for a no-confidence vote against the Cabinet. The government is also waiting for parliament to set the date for a no-confidence vote already filed by the opposition against a law overhauling the education system, Boc said.

A pay increase of 15 percent compared with October “is all Romania can afford right now,” he told journalists after a government meeting in Bucharest today.

Romania, which is counting on a 20 billion-euro ($26.7 billion) bailout from the IMF and the European Union to resurrect its economy from the worst recession on record, raised a value-added tax by 5 percentage points and cut public wages 25 percent from July to trim its budget deficit and qualify for the loan. The government plans to fire as many as 74,000 public employees this year to narrow the budget deficit to the target of 6.8 percent of gross domestic product for 2010 and 4.4 percent in 2011.

Shrinking Economy

“The wage increase is possible as long as the government meets the target of 39 billion lei for total wage expenses in 2011 agreed with the IMF and the European Commission,” Ionut Dumitru, chief economist of Raiffeisen Bank Romania SA and president of the advisory Fiscal Council, said by telephone. “From the preliminary calculation, we think a 15 percent increase in wages could mean more layoffs in the public sector next year.”

Romania’s economy contracted 2.5 percent in the third quarter and is expected to shrink as much as 2 percent this year as government austerity measures damp demand and stall a recovery. It will probably return to growth of 1.5 percent in 2011, according to the IMF, which is leading the loan package.

Boc said output may grow as much 2 percent next year if the country doesn’t “abandon its reform path.” Romania’s minimum monthly wage will also rise 12 percent in 2011 to 670 lei ($208) from the current 600 lei, he said.

“We still have a correction in public wages, considering that workers’ incomes decreased in 2010 by more than 25 percent and now we are talking about a 15 percent increase,” Banca Comerciala Romana SA Chief Economist Lucian Anghel said by telephone. “This wage increase may also partially rebuild consumers’ confidence and help the country have economic growth next year. There is also a risk that these additional expenses with the increase may mean less money for investments.”

--Editor: Jennifer M. Freedman

To contact the reporter on this story: Irina Savu in Bucharest at isavu@bloomberg.net; Andra Timu in Bucharest at atimu@bloomberg.net.

To contact the editor responsible for this story: James M. Gomez in Prague at jagomez@bloomberg.net

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