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Romania's bleak midwinter - Doing Business | DOINGBUSINESS.RO

  |  08.11.2012

Romania's bleak midwinter

The failure of the July 29th referendum on the impeachment of the president, Traian Basescu, has brought no respite from the political turmoil that has rocked Romania since the formation in May of the Social Liberal Union (USL) government.

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The government has confirmed its intention to implement the precautionary two-year stand-by agreement concluded with the IMF in March 2011. On July 31st a joint mission of the IMF, the World Bank and the EU arrived in Bucharest, the capital, for talks on the sixth review of the stand-by agreement and fiscal plans for 2012-13. The Fund expressed concern at the impact of the current political situation on the economy and, in the context of the negative external environment, emphasised the need to maintain strict spending discipline, and to intensify efforts to reduce state-sector arrears, and accelerate the reform and privatisation of state-owned enterprises (SOEs) that are a drain on the budget.

The main task confronting the government is the introduction of private management in SOEs and their partial privatisation, either through stockmarket listings or through the sale of controlling stakes. The government has committed to the sale of minority stakes in energy companies over the next 12 months, and will implement proposals for the liberalisation of energy prices. It will bring the energy regulator, ANRE, under parliamentary control. It also plans to reform the system of excise duties on energy and natural resources, but will take a tougher line on the development of natural resources by foreign companies. Proposals to develop shale gas by fracking will be delayed until the environmental impact has been analyzed. The government will also review the controversial Rosia Montana gold mining project.



To allow some counter-cyclical spending, the IMF agreed to increase the budget deficit target from 1.9% of GDP in 2012 on a cash basis—equivalent to 2.3% of GDP on the EU's European System of Accounts (ESA 95) methodology—to 2.2% (2.8% ESA 95). This will enable the government to restore public-sector wages to pre-austerity levels, starting with an 8% increase on June 1st and a further payment up to a total of 15% in December if economic conditions allow. The repayment of illegally collected health payments to pensioners began in June.

The consolidated government budget posted a deficit of Lei6.79bn (US$ 2bn) in January-June 2012, equivalent to 1.12% of projected annual GDP, which is within the IMF's six-month target of Lei 7bn-8.8bn and in line with the full-year target. The six-month deficit narrowed by 39.4% year on year, and compared with a deficit of 1.94% of GDP in January-June 2011, and a deficit of Lei7.2bn or 1.19% of projected annual GDP in January-May. Despite the improvement, the government has little room for fiscal largesse, given that spending usually rises in the final quarter. The USL also proposes to reduce value-added tax (VAT) on agricultural products, which would reduce tax revenue. Given the likelihood that growth will be below official projections, we expect the 2.2% budget deficit target to be exceeded. However, in line with the six month improvement, we have narrowed our budget deficit forecast.


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