Romania's public finances will face two structural challenges on the medium term: increasing the efficiency of tax collection and keeping the wage and pension growth under control, according to a report of Scope rating in response to the Romanian Government’s revision of the budget planning for this year.
In Romania, tax revenues are among the lowest in Central and Eastern Europe, at 32% of GDP, while Govt. spending has risen sharply, amid rising public sector salaries by 24% over last year. Adopting the new pension law in June, which will enter into force in September, will further increase spending, by about 0.8% of GDP. Under these conditions, the Fiscal Council forecasts an increase in the budget deficit to about 4% of GDP in 2020 and 5% in 2021, if the fiscal policies do not change.
Scope Ratings expects Romania's public debt, which currently stands at 36% of GDP, to grow to 40% by 2020. Currently, the share of debt denominated in foreign currency is 57.1% (17% of GDP), which could lead to a more pronounced increase in the debt-to-GDP ratio if the monetary policy remains an expansionary one, which would put new depreciation pressures for the Romanian leu against the euro after the economic activity will calm down.
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