05BUCHAREST1349 / 2005-06-13 11:08:00
Embassy Bucharest
                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, Economic Assessment 
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 

            
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