Identifier
Created
Classification
Origin
05BUCHAREST1349
2005-06-13 11:08:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Bucharest
Cable title:  

IMF'S VIEW OF THE ROMANIAN ECONOMY: THE GLASS IS

Tags:  ECON ETRD EIND EFIN RO 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 02 BUCHAREST 001349 

SIPDIS

STATE FOR EUR/NCE - WSILKWORTH, EB/IFD
STATE PASS USTR
USTR FOR LERRION
TREASURY FOR STUART
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/CEEB/BURGESS/KIMBALL
STATE PASS USAID

SENSITIVE

E.O. 12958: N/A
TAGS: ECON ETRD EIND EFIN RO
SUBJECT: IMF'S VIEW OF THE ROMANIAN ECONOMY: THE GLASS IS
HALF EMPTY AND LEAKING

REF: A) BUCHAREST 0189, B) BUCHAREST 1205

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION

SUMMARY
-------
UNCLAS SECTION 01 OF 02 BUCHAREST 001349

SIPDIS

STATE FOR EUR/NCE - WSILKWORTH, EB/IFD
STATE PASS USTR
USTR FOR LERRION
TREASURY FOR STUART
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/CEEB/BURGESS/KIMBALL
STATE PASS USAID

SENSITIVE

E.O. 12958: N/A
TAGS: ECON ETRD EIND EFIN RO
SUBJECT: IMF'S VIEW OF THE ROMANIAN ECONOMY: THE GLASS IS
HALF EMPTY AND LEAKING

REF: A) BUCHAREST 0189, B) BUCHAREST 1205

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION

SUMMARY
--------------

1. (SBU) According to the IMF's Resident Representative in
Romania, the Romanian economy shows signs of overheating
this year and Romania's economic situation weakened in 2005.
Inflation and the current account deficit are two leading
indicators that will likely fail to meet targets by year's
end. The IMF will likely continue to press the GOR to
implement unpopular tax increases, including Value Added Tax
(VAT) raises. IMF pessimism extends to the GOR's proposed
Property Investment Fund project, as well as to the
management and organization of the GOR and Ministry of
Finance. END SUMMARRY.

IMF STILL NEGATIVE ON ROMANIAN ECONOMIC PERFORMANCE
-------------- --------------

2. (SBU) Econoffs on June 9 met with IMF Resident
Representative Graeme Justice for his perspective on
Romania's economic prospects prior to the IMF technical
assessment team's arrival June 14. He continues to be
pessimistic about the overall health of the Romanian economy
(see Ref. A for a report on our last meeting with him) and
sees strong signs of over-heating in the Romanian economy.
In particular, he points to the 12.1 percent higher
household consumption posted in the first quarter. Justice
also predicts annual inflation of approximately ten percent
this year, compared with the GOR's seven percent target.
Justice's projections are based on the relatively high
inflation numbers posted in March and April, as well as the
strong growth in business and consumer credit.
Additionally, Justice worries about the current account
deficit which he expects to reach 8 percent of GDP by year's
end, compared with the official target range of 6.5 to 7.0
percent. He bases this revised projection on the current
account deficit's unexpected growth in the first quarter (up
96.2% in USD compared with 1Q04). In spite of this bad news,
Justice admitted that revenue numbers were strong for the

first four months of 2005, up six percent from last year,
although May's numbers were a little weak. These strong
revenue figures give the GOR additional budget maneuvering
room.


3. (SBU) Other big budget items that concern Justice include
arrears owed by Romania to the health care sector, the
upward adjustment in pensions, public sector wage increases
promised by the former government and unexpected emergency
aid costs for flood victims. Preliminary flood cost
estimates approximate ROL four trillion ($135.44 million),
although only one trillion has been requested to date.
Medical arrears top the ROL seven trillion mark($237
million),and could increase. Possible demands for
compensation for damages related to the Resita steel plant
failed privatization (Noble Ventures case now in
adjudication at the ICSID) would also represent another
large liability for the GOR.


4. (SBU) In spite of these demands, Justice stated that the
IMF and the GOR are reaching a budget rectification
agreement which includes a deficit target of 0.744 percent
of GDP, as well as cuts in material expenditures. Justice
refers to the budget as "tight, but manageable", yet points
to the demanding schedule of natural gas price hikes, which
will raise prices by 30 percent next year, as potentially
destabilizing if the GOR bows to social pressures.

IMF PRESSES FOR FUTURE TAX HIKES
--------------

5. (SBU) Justice believes that tax hikes are the answer to
Romania's woes. The GOR will propose a new tax package next
year which will seek to recover the two percent lost by this
year's tax changes. Justice stated that the GOR must
increase the current 19 percent VAT next year unless it
wants to meddle with the heralded 16 percent flat tax, a
politically unpopular move. Although he stated that VAT
collection has been strong due to high consumption since
January, excise tax collection was weaker due to the ROL's
appreciation. He continues to lack confidence in the
ability of the flat tax to generate additional revenues, and
felt that the tax cut would affect the economy by June at
the earliest.
NOSTALGIA FOR THE PSD
--------------

6. (SBU) Justice opines that several Ministries in the
current GOR show enormous capacity constraints. He also
assesses many of the current Finance Ministry (MOF)
officials to perform less well than their predecessors in
the previous Social Democratic (PSD) government. For
example, he believes that Ministry of Finance Secretary of
State Doina Dascalu in charge of budget issues has little
authority, compared with PSD predecessor Gheorghe Gherghina.
In addition, he views MOF Secretary of State Dragos Neacsu
as a "glamour seeker" who desires to tap into the capital
markets for the exhilaration of money raising. In Justice's
opinion, Neacsu's efforts to extend maturities on Romania's
old Eurobond issues are misguided, and should be postponed.
Justice further believes that Minister of Finance Ionut
Popescu and Neacsu have developed an overall unhealthy
obsession with the capital markets. Justice cited the great
difficulty in obtaining information from the Ministry of
Finance on sensitive topics including heating subsidies as
proof of the government's disorganization.

A JAUNDICED VIEW OF THE PROPERTY INVESTMENT FUND
-------------- ---

7. (SBU) The Tariceanu Government has proposed the creation
of a real estate investment fund to address the property
restitution issue without drawing from government funds (see
Ref. B). Justice feels strongly that the proposed fund,
which would compensate owners whose property was confiscated
during Communism, would engender corruption. He views the
fund's model as providing too many opportunities for
malfeasance, as decisions such as valuations of property are
subjective and may be influenced by bribery. However,
Justice lauds the idea of the fund in itself, as it avoids a
negative budget impact while seeking a way out of a
challenging political problem. Justice remains concerned
about the GOR's haste in presenting the draft to the
Parliament and the intention of voting on it before recess
in a few weeks.

COMMENT
--------------

8. (SBU) The glass is not only half empty for the IMF in
Romania, but it is a bit leaky at this time. Post is not as
certain as the IMF that the Romanian economy is overheating
in a manner that cannot be controlled. Post will be sending
a cable on this year's first quarter macroeconomic data for
Romania via Septel.


9. (SBU) Post is frankly a bit concerned that Mr. Justice
appears to exhibit nostalgia for the previous PSD
government, which Post believes to have contained far more
corrupt officials than the current GOR. His frustration
with dealing with a chaotic new GOR may explain this. In
Post's experience, however, several of the new MOF officials
have shown themselves to be eager, innovative, pro-American
and honest.


10. (SBU) Post finally notes, that although Graeme Justice
began the most recent meeting by emphasizing the Romanian
economy's negatives, he did not indicate that there was a
"show stopper" that would prohibit the Standby Arrangement
from moving forward. He also seemed heartened by the MOF's
desire to come to the table and seriously negotiate a budget
rectification in spite of his complaints about GOR
disorganization. Justice's use of the phrase "tight, but
manageable" is an indication of the direction the review may
take. However, as noted, any sudden shock to the economy
that places substantial demands on the GOR budget could
quickly reverse this encouraging picture.

DELARE