05BUCHAREST189 / 2005-01-21 12:22:00
Embassy Bucharest
                UNCLAS SECTION 01 OF 02 BUCHAREST 000189 
 
SIPDIS 
 
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, PGOV, RO 
SUBJECT: THE GLASS HALF EMPTY: INTERNATIONAL MONETARY FUND 
PERSPECTIVES ON THE NEW ROMANIAN GOVERNMENT 
 
Ref: A) 04 BUCHAREST 03446, B) BUCHAREST 00130 
 
THIS CABLE IS SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET 
DISTRIBUTION. 
 
1. (SBU) Summary:  The International Monetary Fund's (IMF) 
representative in Romania is pessimistic about the country's 
short-term future prospects for macroeconomic stability and 
progress on economic reforms.  The new government, in his 
view, is inexperienced and will lose valuable time 
understanding the levers of power, thus perhaps squandering 
some of the positive gains from last year.  Post sees this 
negative assessment as bleak, although it agrees that the 
new government faces macroeconomic challenges and a 
challenging introduction to power.  End Summary. 
 
2. (SBU) Econoffs met on January 12 with Graeme Justice, 
IMF's Resident Representative, regarding his perspectives on 
the new Romanian government's (GOR) economic policies and 
prospects.  Justice began by emphasizing the inexperience of 
the new cabinet and expressed doubt whether they have the 
ability and understanding to make necessary reforms.  The 
previous administration required a six-month learning curve 
before substantive discussions were possible according to 
Justice, who noted that a longer time period will likely be 
required for the new team.  All ministers and most state 
secretaries have been eliminated and the loss of 
 
SIPDIS 
institutional knowledge will be a burden this year.  He 
noted that mistakes have already been made during the 
administrations first twenty days, including firings of 
critical ministerial staff members and retention of weak 
players.  He fears that the GOR's honeymoon period will soon 
end and scrutiny on its actions by the press will be 
relentless. 
 
LATEST FISCAL MOVES COMPOUND WOES FROM INHERITED BILLS 
--------------------------------------------- --------- 
3. (SBU) Justice's main concerns centered on the convergence 
of election-driven salary and pension increases that the 
previous government pushed through last year and the new 
government's financial promises, including the new flat tax 
of 16 percent (Ref B). 
 
4. (SBU) Regarding the flat tax, Justice discussed the 
recent case of Slovakia, which implemented a similar flat 
tax rate as an incentive for tax evaders to join the 
legitimate economy.  Justice claimed that the Slovak flat 
tax, structurally similar to the Romanian one, resulted in 
lower government revenues and little shift of the gray 
economy to the normal, tax-paying economy.  Justice agreed 
that enforcement of tax collection is key for the Romanian 
government to meet its promises, but did not seem optimistic 
about this prospect. 
 
5. (SBU) Justice predicted that the government will, in the 
months ahead, have to begin making tough, unpopular 
decisions, including repealing the increases of government 
salaries, as the government realizes that its budget is 
unrealistic and the deficit widens.  Justice returned to the 
subject of Romania's unworkable budget several times, 
emphasizing that expenditures will far exceed revenue. 
 
6. (U) Justice also expressed concern about capital account 
liberalization.  He worries that once the government lifts 
restrictions on foreigners who wish to invest in Romanian 
lei (ROL) bank accounts, an influx of speculative investment 
will occur (Ref A).  When asked why Romanians feel pressure 
to liberalize the account at this time, Justice stated that 
account liberalization is viewed as an indication of a 
developed economy, and Romania wants to portray itself as up 
to Western economic standards. 
 
7. (SBU) Justice mentioned that the International Monetary 
Fund plans to send a group to Bucharest at the end of 
January and that they intend to meet with the 
administration.  Although the group intends to give Basescu 
encouragement as he faces difficult economic restructuring 
ahead, Justice is already pondering how to break the news in 
February that the budget is in bad shape. 
 
COMMENT: THE GLASS IS HALF FULL 
------------------------------- 
8. (SBU) Post agrees with the IMF representative's 
observations about the GOR's need to balance bold fiscal 
policy with continued attention to macroeconomic stability. 
The new GOR government will, indeed, soon face hard 
decisions about laying off workers in the loss-making mining 
sector as well as finding sources of funds to offset the 
(presumably temporary) dip in government revenue due to the 
flat tax's introduction. 
9. (SBU) Post, however, assesses that Romania's economy 
continues to be in a growth mode and revenues to the state 
coffers should also increase, helping to make the flat tax 
revenue dip less severe.  Aggressive action against 
prominent tax cheats has already occurred and additional 
steps in this direction in coming months should encourage 
more companies and individuals to pay their lawful share of 
taxes.  Finally, the local currency's (leu) increasing 
strength on the foreign exchange markets at this time will 
make imports cheaper and, at least in the short term, help 
alleviate the danger of increased inflation. 
 
DELARE 

            
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