MOLDOVA'S 2010 STATE BUDGET

UNCLAS CHISINAU 000039

STATE FOR EUR/UMB, EUR/ACE, EEB/OMA

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E.O. 12958: N/A
TAGS: ECON EFIN EINV EREL ETRD MD
SUBJECT: MOLDOVA'S 2010 STATE BUDGET

Sensitive but Unclassified. Please protect
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REF: 09 Chisinau 1003


1. (SBU) SUMMARY: The new four-party Alliance for
European Integration (AIE)-led Parliament approved
the 2010 state budget for the Government of
Moldova (GOM) on December 23, 2009. The GOM
projects an increase in revenues, an increase in
expenditures, and a deficit about 11 percent less
than in the 2009 budget. The budget includes
realistic macroeconomic calculations for 2010, and
tax increases on tobacco, alcohol and luxury items
while granting relief to the agricultural sector
for capital investments. MPs from the Party of
Communists (PCRM) boycotted the budget votes. END
SUMMARY.

2010 BUDGET BIG PICTURE
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2. (U) The Parliament approved the state budget on
December 23, 2009 and the GOM made it public on
December 29, 2009. The 2010 budget forecasts
revenues of Moldovan Lei (MDL) 15,318.34 million
(roughly USD 1.22 billion). This target is 17
percent greater than 2009 revenues of MDL 13.1
billion projected in the December 3, 2009,
adjustments to the 2009 state budget (see reftel).
The GOM projects expenditures to be MDL 19,454.52
million (USD 1.55 billion),9.6 percent greater
than the final projection for 2009. The budget
deficit is projected to be MDL 4.1 billion (USD
330 million),MDL 512 million less than the 2009
deficit target.

2010 BUDGET MACRO ASSUMPTIONS
--------------


3. (U) The budget is based on the following
assumptions:

-- Real annual GDP will recover from a nine
percent decline in 2009 and grow 1.5 percent in

2010.

-- Average annual inflation will be five percent
for 2010. The previous PCRM-led GOM originally
projected inflation to be 9.5 percent in 2009.
The new GOM's revised 2009 estimate projected
inflation to be 0.5 percent for 2009. Actual
inflation for 2009 was a record low of 0.4
percent, the lowest inflation rate in Moldova
since the country declared independence in 1991.

-- The new GOM calculated the average exchange
rate to be 12.53 MDL per USD for the 2010 budget.
The previous GOM's original projection for 2009
was 9.12 MDL per USD, but the exchange rate at the
end of 2009 was 12.20 MDL per USD.

-- The new GOM budget projects that export growth
will increase by 12 percent and imports by 15
percent in 2010, resulting in a negative trade
balance of USD 2,225 million. Exports declined by
20 percent and imports over 30 percent in 2009.

-- Real annual industrial growth will be three
percent and agricultural growth two percent in

2010.

THE 2010 NATIONAL PUBLIC BUDGET
--------------


4. (U) Moldova's National Public Budget (NPB)
consists of four separate budgets: the state
budget, the state social insurance budget, the
mandatory medical insurance fund, and local
budgets. The GOM estimates an overall 2010 NPB of
MDL 25 billion (USD 2 billion) and expenditures of
MDL 29 billion (USD 2.3 billion). The state
budget revenue component represents over 61
percent of the total NPB, followed by the social
insurance budget at 23 percent of the total, local
budgets at 10 percent, and the medical fund at
around six percent.

2010 REVENUE
--------------

5. (U) In 2010, the GOM projects that 86.5 percent
of state budget revenues will come from domestic
sources and 13.5 percent from the European Union.
State revenues rely heavily on indirect taxes such
as VAT, excise taxes and customs duties. These
taxes provide approximately 72 percent of total
budget revenues. Direct taxes - income and
corporate - have never been a major source of
revenues in Moldova; their total contribution will
be less than one percent of total revenues in

2010. (Note: A new corporate tax law with a zero
rate on reinvested profit came into effect January
1, 2008, considerably reducing the revenue the GOM
collected from this source. The GOM, supposedly
in compliance with the requirements for a new IMF
agreement, has indicated plans to eliminate this
benefit to businesses in 2013. End note.)

NEW DEVELOPMENTS
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6. (U) In order to increase revenues, the GOM
introduced changes in its fiscal policy for 2010,
including tax increases, primarily in sin and
luxury taxes. The excise tax was increased on
tobacco products (cigars 35 percent, non-
filter/plain cigarettes 45 percent, filter/-tipped
cigarettes 300 percent),gasoline 50 percent,
perfume and jewelry 200 percent, beer 25 percent,
alcoholic beverages 3.1 percent and electronics
3.1 percent. The new GOM will increase VAT on
imported natural and liquefied gas from five to
six percent. The new budget narrows VAT
reimbursement for capital investments to the
extraction industry, and wholesale and retail
trade sectors. The new budget grants the
agricultural sector some VAT relief by reducing
the basic tax rate from 20 percent to eight
percent for all primary agricultural products sold
in Moldova and allowing VAT reimbursement for the
purchase of agricultural and forestry tractors.
The budget also includes increases in road taxes
and increased maximum tax rates for local taxes on
land improvements, commerce and services.

MAJOR EXPENDITURES
--------------


7. (U) Major GOM expenditures for 2010 are
transfers to local government budgets (MDL 4.16
billion or 21.4 percent of total expenditures),
social security and social assistance (MDL 3.52
billion or 18 percent),health care (MDL 2.49
billion or 12.8 percent),public education (MDL
1.90 billion or 9.8 percent),transportation and
communication (MDL 1.23 billion or 6.3 percent),
law enforcement and national security (MDL 1.03
billion or 5.3 percent),and state agencies (MDL
1.03 billion or 5.3 percent for Parliament,
Ministries, National Bureau of Statistics, etc.).
Other major expenditures include internal and
external debt servicing (4.1 percent),
agriculture, forestry and water resources (4
percent),and other smaller expenses.

ONE-SIDED DEBATE IN PARLIAMENT
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8. (U) The representatives of the four AIE
coalition parties and four independent MPs who
recently left the Communist faction voted for the
2010 State Budget Law. The PCRM opposition
boycotted both the first, and second and final
votes on the budget. The PCRM suggested a number
of changes to the budget, primarily on the
expenditure side for social programs, which the
AIE coalition did not accept. Prime Minister Vlad
Filat defended the 2010 budget, stating that is
was based on existing realities. He said that he
would like to have a better and larger budget, but
the GOM could make only those budget commitments
that it was able to fulfill.

COMMENT:
--------------


9. (SBU) Within three months of assuming office
in late September, the new GOM has reached
preliminary agreement with the IMF on a new
program, adopted substantial adjustments to the
2009 budget, and prepared and passed the 2010
budget. The ruling coalition has engaged with
donors and made hard choices in renewing its
partnership with the IMF and in preparing a
realistic budget. However, with possible
parliamentary elections in the fall, the GOM will
need to maintain discipline in the face of PCRM
efforts to stoke voter dissatisfaction.

MICHELI