VZCZCXRO2261
PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHBM #0261 1070803
ZNR UUUUU ZZH
P 170803Z APR 09
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 9437
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY

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