The Romanian parliament voted on Tuesday (Sep. 22) to hike all state pensions by 40%. The 40% increase was first approved last year by the then ruling Social Democratic Party (PSD), which remains parliament’s largest party.
Last month, the country’s centrist minority government led by Prime Minister Ludovic Orban issued an emergency decree enforcing a smaller increase of 14% as of September 1.
On Tuesday, however, a total of 242 MPs voted in favor of the proposal by PSD to increase pensions by 40%, and not by 14%. 147 MPs voted against and 18 abstained.
Reacting to the adoption of the new law, the liberal cabinet led by Orban said that it would refer the bill to the Constitutional Court. Foreign and Romanian investors’ associations also warned that the move by parliament to reinstate a 40% raise in pensions will have severe negative effects on the local economy.
S&P Global Ratings warned on Sep.29:
“Such a sizable increase in permanent spending, if implemented, would be detrimental to both Romania’s fiscal and external performance, and would likely prompt a disorderly budgetary correction with repercussions on the economy’s fragile rebound post-COVID-19.”
The agency added its next ratings review for Romania was on Dec.4, just two days ahead of the country’s general elections scheduled for Dec. 6. All three major credit agencies S&P, Moody’s and Fitch Ratings have Romania on their lowest investment grade, with negative outlooks.
Meanwhile, the National Bank of Romania said the 40% hike would push the budget deficit to 11% of gross domestic product next year. Romania's general consolidated budget posted a deficit of RON54.77 billion in January-August 2020, or 5.18% of the gross domestic product finance ministry data showed.
The government has estimated the Covid-19 crisis will push this year’s deficit to 8.6% of GDP, with the economy contracting by 3.8%. The Romanian gross domestic product contracted 10.5% on an annual basis in the second quarter of 2020, matching the preliminary estimates and contrasting first quarter’s 2.4% growth. This was the first contraction in the GDP since the fourth quarter 2010 and the steepest contraction since the series began in the first quarter 1996. Private consumption plummeted 13.3% annually in Q2 due to lockdown measures enacted at the end of March.
To enter into force, the pension revision must be promulgated by the country’s president Klaus Iohannis. If promulgated, the law will cut 3 billion EUR from EU funds allotted to Romania, according to Iohannis.
In currency news, the Romanian leu is constantly losing value against the Euro. So far, the EU currency is valued 4.86 RON, but analysts polled by CFA Romania estimate the leu will depreciate to an average of 4.97 to the euro in the next 12 months.