04BUCHAREST3414 / 2004-12-10 15:54:00
Embassy Bucharest
                UNCLAS SECTION 01 OF 02 BUCHAREST 003414 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EUR/NCE - WSILKWORTH, EB/IFD 
STATE PASS USTR - LISA ERRION 
TREASURY FOR STUART 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/CEEB/BURGESS/KIMBALL 
STATE PASS USAID 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, EIND, EFIN, RO 
SUBJECT:  ROMANIA'S PARLIAMENT PASSES 2005 BUDGET 
 
 
This cable is sensitive but unclassified.  Handle 
accordingly 
 
Summary 
------- 
1.  (U) In anticipation of the November 28 general 
elections, Romania's Parliament rushed to pass the budget 
this year, bypassing substantive debate.  Both the 2005 
state budget and social assistance budget laws, passed by 
both legislative chambers on November 10, and ratified by 
President Iliescu on November 22, changed little from the 
draft budget laws reviewed by the IMF and submitted to the 
Parliament in October.  The budget anticipates a deficit of 
1.5 percent of projected GDP.  End Summary. 
 
Parliament passed the 2005 budget with record speed 
--------------------------------------------- ------ 
2.  (SBU) In an unprecedented move, the Senate and Chamber 
of Deputies gathered in a joint session to debate the budget 
provisions expeditiously.  Several members of Parliament 
were absent for the budget vote due to election campaign 
obligations. A few also used their absence as a protest 
against the superficial nature of the budget debates and the 
scant attention given to opposition proposals.  The ruling 
Social Democratic (PSD) party expressed its satisfaction 
with the efficiency of the debates that lasted only two 
weeks, rather than the typical one to two months.  The 
president ratified the legislative package on November 22, 
six days before the elections. 
 
3. (SBU) Although the Parliament followed all constitutional 
steps in its debate and passage of the budget, many analysts 
felt that the process was on the edge of the law.  Due to 
the incumbent party's desire to have the budget passed prior 
to elections, the debate and drafting was superficial and 
rushed. 
 
Everyone gains in 2005 
----------------------- 
4.  (SBU) The budget shows overall increases in every area, 
although certain ministries benefit to a greater extent than 
others.  The Ministry of Education and research gains 
approximately 29 percent in the new budget, giving it the 
largest overall increase.  The Ministry of Administration 
and Interior was granted the second largest gain, with 28 
percent, followed by the National Defense Ministry, with 21 
percent more funds next year.  With military spending pegged 
to a strict 2.38 percent of GDP until 2008, this gain is 
primarily a result of projected GDP expansion.  Although 
everyone wins to a certain extent in this optimistic budget, 
lower gains are slated for the Ministry of Justice, with 
only a 1.4 percent increase and the Ministry of Labor, 
Social Security and Family, with a 5.3 percent increase. 
 
Note:  Dollar amounts and percentages have been calculated 
using the average forex rate for 2004 compared with the 
current exchange rate.  The Ministry of Finance's projected 
2005 average exchange rate of ROL 35,150 for one USD now 
seems implausible due to current market conditions.  The ROL 
has been on a solid appreciation trend since the central 
bank switched to a managed float policy at the end of 
October.  Today the ROL trades at 28,780 to one USD, a 
difference of 22.1 percent with the Ministry of Finance's 
prediction for 2005. 
 
Revenue Projections Overly Optimistic 
------------------------------------- 
 
5. (SBU) The Parliament based the 2005 state budget on the 
following leading indicators, which the IMF reviewed and 
sanctioned: 
- Consolidated budget deficit of 1.5 percent of GDP, a 
decrease from 2004's 1.65 percent deficit target; 
- Inflation rate of seven percent, in comparison with 2004's 
nine percent; 
- Economic growth of 5.3 percent, much lower than the 8.1 
percent annualized growth announced for the first nine 
months of 2004; and 
-Current account deficit not exceeding 5.4 percent of 
targeted GDP. 
 
6. (U) Embassy notes that many analysts consider the 2004 
growth rate to be at least somewhat exaggerated and 
unsustainable, as high agricultural gains due to favorable 
weather can be regarded as atypical for the climate patterns 
of recent years.  The GOR is probably counting on revenue 
growth that will not materialize.  The GOR may, therefore, 
need to increase import duties or issue additional 
Eurobonds, as well as raise taxes, to make up revenue 
shortfalls. 
 
7. (U) As the basis for its tight budget policy, the ruling 
PSD party is counting on a projected 5.3 percent economic 
growth, a 10.3 percent increase in investments, lower tax 
evasion and higher excise taxes.  Year 2005 revenues are 
projected at $28.3 billion (31.2 percent of the GDP), while 
expenditures are programmed as US$ 29.7 billion (32.7 
percent of the GDP).  These figures are based on a 2005 GDP 
projected to reach US$ 90.8 billion.  The state budget will 
distribute funds amounting to 6.6 percent of GDP to counties 
and municipalities.  This is an increase of approximately 
12.4 percent over 2004. 
 
Intra-Ministerial Budget Gymnastics 
----------------------------------- 
8.  (SBU) Although the budget law itself is indistinct and 
thus does not specify individual projects or programs for 
which money will be used, it includes an annex describing 
specific projects.  This annex presents a more detailed 
level of information, often listing the budget indicators 
used to arrive at allocation decisions.  The budget law 
strictly disallows transfers of money between departments or 
projects; when needs arise for intra-ministerial money 
shifting, a bizarre mechanism is used for reallocation. 
Departments in need of cash declare an official emergency, 
and then team up with other departments who officially 
declare a surplus.  Only after these official statements 
occur can money be shifted from one area to another.  In 
practice, intra-department shifts due to emergency 
declarations occur frequently.  However, inter-ministerial 
shifts are much more rare and are approved only under 
official ordinance, only three of which occurred so far this 
year. 
 
Future Budget Changes Likely Ahead 
----------------------------------- 
9.  (U) PSD MPs and Minister of Finance Mihai Tanasescu 
presented the 2005 budget as an instrument of social 
welfare.  Social spending will reach approximately 30 
percent of the total budget expenditures or 9.8 percent of 
GDP.  Minimum wage is set to increase 11 percent from 2004, 
reaching the net equivalent of $108 per month.  State sector 
wages will increase 12 percent in comparison with 2004.  The 
new law also stipulates that the GOR will adjust pensions 
for inflation on a monthly basis, and that high payroll 
taxes will decrease two percentage points from the current 
49.5 percent in an almost invisible attempt to discourage 
tax evasion. 
 
10. (U) Opposition MPs criticized the majority party's quick 
passage of the budget as a means to bolster its election 
campaign.  National Liberal (PNL) MPs declared that the 
economy's growth is a charade, propped up by debt and 
foreign remittances.  Democratic Party (PD) MPs stated that 
the 2005 budget laws passed by the PSD-dominated Parliament 
legalize the discretionary allocation of funds based on 
waste and populist measures.  The political opposition vowed 
to enact revised budget laws if successful in winning the 
legislative elections. 
 
Comment 
------- 
11.  (SBU) The budget reflects the GOR agreement to the 
tight 2005 deficit target proposed by the IMF.  However, the 
estimated 5.3 percent economic growth is an optimistic 
target. In 2004, the unusually high economic growth rate was 
due primarily to a surge in agricultural output, a volatile 
sector susceptible to unpredictable weather patterns.  The 
GOR's goal of decreasing inflation to seven percent will 
also be a challenge, given rising international energy 
prices and increasing wages.  The change in the Romanian 
leu's (ROL) denomination in the third quarter of 2005 may 
also have an effect as the new "heavy" ROL prices (dropping 
4 zeros from the currency) are rounded up. In any case, this 
is a temporary document, with a new parliament and executive 
expected to make substantial amendments once the pressure 
and attention of the election season have passed. 
 
Crouch 

            
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