IMF recommends Romania new analysis on the teachers' 50% wage growth measure

The International Monetary Fund recommends Romania to analyze once again the law for the 50% raise for teachers, arguing that the effects of the law, along with the global financial crisis effects, may severely affects the Romanian economic competitiveness and its macroeconomic stability.

The full IMF release:

„We are aware of references in The Economist last week to countries, including Romania, that are supposedly in talks with the IMF about financial support. We do not have discussions about such financial support underway with Romania, but we maintain a close policy dialogue with the Romanian authorities.

As with several other Fund members, we have been assessing with the Romanian authorities the possible effects of global financial markets turmoil. The current external environment for Romania is very difficult: there is a process of de-leveraging taking place in developed countries, which has had profound implications for emerging markets. Yesterday’s S&P downgrade of Romania’s sovereign foreign currency credit rating to below investment grade is likely to further undercut confidence.

In this difficult environment, the bar for policies is set high. Decision-makers need to send a clear signal to the markets with wage and fiscal policies that are realistically attuned to a very difficult external environment.

In this setting, the initiative to increase teachers’ wages by 50 percent may need to be reconsidered. We estimate that the impact on the budget would be modest in 2008 but reach over ¾ of a percent of GDP in 2009. In addition, if the increase were extended to other public sector employees, the impact could reach over 4 percent of GDP in 2009. This would send a wrong signal to financial markets. Even before this salary increase became known, public and private financing sources were drying up, the RON was under pressure, Romania’s sovereign risk premium had increased to record historical levels, and domestic interest rates had increased substantially. And given that average public sector salaries are already higher than private sector salaries, a salary increase of this magnitude would trigger similar wage demands in the private sector, damaging Romania’s competitiveness, and leading to inflation levels that Romania has not seen for a long time.

In sum, strong wage and fiscal policies are required to defend the interests of all Romanians, especially the most vulnerable. We remain ready to assist the Romanian authorities in their endeavors to achieve macroeconomic stability and improve investor confidence.”