ROMANIA: GOVERNMENT ACTS ON IMF ACCORD, SLASHES

UNCLAS BUCHAREST 000261 SENSITIVE SIPDIS STATE FOR EUR/CE ASCHEIBE AND EEB TREASURY FOR LKOHLER AND JBAKER E.O. 12958: N/A TAGS: ECON EFIN ELAB PGOV IMF EUN RO SUBJECT: ROMANIA: GOVERNMENT ACTS ON IMF ACCORD, SLASHES BUDGET REF: BUCHAREST 237 Sensitive But Unclassified; not for Internet distribution. ¶1. (U) Although the Government of Romania's (GOR) new agreement (reftel) with the International Monetary Fund (IMF) still awaits final IMF Board approval, the Cabinet of Prime Minister Emil Boc moved on April 11 to begin implementation by slashing funding for government ministries. The formal "budget rectification" trimmed over 4.9 billion RON (about USD 1.6 billion) from the 2009 amounts approved by Parliament in January. The biggest losers in percentage terms were the Ministries of Agriculture (23.7 percent cut),Tourism (10.1 percent),and Defense (9.1 percent). Health (0.5 percent) and Transport (1.9 percent) were trimmed the least, while Labor was the only ministry getting a modest increase in order to continue meeting pension payments. Budget cuts extended to the intelligence services, General Prosecutor's Office, courts, and the Parliament. ¶2. (SBU) The spending cuts track with IMF projections that GDP will contract by four percent in 2009, with a resulting catastrophic drop in tax receipts. While the GOR still believes the IMF's projections are too pessimistic, the budget ordinance also imposes a new minimum tax on businesses in order to boost revenues. The measure, which mandates minimum tax amounts based on gross income regardless of whether net income is a profit or loss, has drawn howls of protest from business associations across the spectrum (including the American Chamber of Commerce). Critics contend that the measure may actually depress revenues by encouraging tax evasion or by simply forcing many struggling SMEs out of business. Chambers have also contended that, by enacting the measure immediately via emergency ordinance, the GOR is in violation of its own Fiscal Code, which stipulates that major revisions to tax law will not enter into force until January 1 of the year following their enactment. (Comment: Laws on the books have never prevented the GOR from basically making whatever changes it wishes via emergency ordinance; this is merely the latest in a long list of examples. Parliament is eventually supposed to ratify or reject such ordinances, but there is no constitutional timeline mandated for doing so. End comment.) ¶3. (U) Meanwhile, current economic data paint a mixed picture. Romania's current account deficit declined substantially in the first two months of 2009 compared to the same period a year earlier. While good news for the Central Bank, the drop reflects slumping consumer demand for imports since January. New car sales totaled only 21,000 vehicles nationwide in the first quarter of 2009, 60 percent less than the 74,000 vehicles sold in the same period of 2008. At the same time, used car sales soared more than 80 percent to 76,800 vehicles in Q quarter, evidence that RQnians are still buying but are switching in droves to cheaper alternatives. Meanwhile, Romania's construction boom gone bust continues to reverberate in the real estate market. With a glut of available homes and apartments in Bucharest, average rents are back down to early 2006 levels and continue to decline. ¶4. (SBU) Comment: GOR ministries have considerable leeway in how to apportion the stipulated budget cuts among personnel and programs, so the full effect on public sector employment and compensation is unclear. Public sector unions, especially those representing workers in education, have repeatedly threatened to strike if demands for holding the line on pay, bonuses, and layoffs are not met. However, they have yet to deliver on these threats, and the GOR's ability to play various unions against each other by allowing ministries to vary their own reduced budget allocations is having an effect. If workers needed one more thing to be upset about, though, the GOR delivered this week by approving an emergency ordinance to boost the pay of Romanian Orthodox priests by 15 percent. Even in tough times, there are some constituencies everyone remains eager to please. End comment. BONNER