Romania monthly economic review

4 Mai 2009

ERNST & YOUNG S.R.L.

 

Latest developments

Government sets principles for uniform pay system in budgetary sector

The government approved a bill stipulating the principles for reaching a uniform pay system in the budgetary sector, requested by the IMF to be enacted by the yearend and enforced within several years. Nonetheless, the principles fail to reach the sensitive issues of relative wages. Furthermore, the employees in Justice, Defence and Interior Ministries fight strongly to defend their preferential wages and pensions. As key principle, the government will reduce the ratio between the highest and lowest public wage from 70:1 to 15:1. This will be done by rising low wages and freezing high wages, the corrections being carried from Jan 2010 to 2012. The bonuses will be ceiled at 30% of the gross wage and some bonuses will be cut. This will reduce significantly the revenues of the employees in justice, Interior and Defense Ministries, which explain their resistance.

Lump sum tax to be levied in 2009

According to the Minster of Finance, the state will collect RON 350 mn from the lump sum tax in the last 7 months of this year. The purpose of introducing this tax was to replace a volatile basis on which the budget is based with a controllable one and to remove tax dodging. Based on information received from the Minister of Finance, a total amount of RON 350 mn will result from levying this tax in 2009. Data shows that 242,000 companies of the 617,000 existing ones had losses and, of the 242,000 companies, about 48% posted over EUR 2,500 a year in the average turnover. The profit making trading companies are going to pay a 16% tax but not less than the minimum limit for the annual revenue bracket they fit into. The analyses made by the Ministry of Public Finance reveal the fact that, in 2007, of the 617,525 legal taxpayers, 2,000 ensured over 85% of the public revenues.

Public budget is revised on deficit amounting to 4.6% of GDP

The Government has approved the budget revision for 2009, which provides for a budget deficit amounting to 4.6% of the GDP as against 2% initially, the public budget being based now on a 4% economic shrinkage and a GDP amounting to RON 531.25 bn, according to Minister of Public Finance, Gheorghe Pogea. After the revision the total budget revenues amount to RON 174.9 bn, accounting for 32.9% of the GDP, down by over RON 18 bn as against the initial projection, said the Minister of Public Finance. The total expenditure of the general budget is RON 199.3 bn, accounting for 37.5% of the GDP, and the budget deficit was projected at RON 24.3 bn (4.6% of the GDP). Pogea emphasized the fact that the revised budget gave the largest share to the investment expenses, which will top RON 38 bn in 2009 and will account for 19-20 % of the total expenses or 7% of the GDP. According to the official of the Ministry of Public Finance, the revised budget goes on ensuring the expenses for social protection whereas the staff expenditure dropped to RON 41.5 bn or 7.8% of the GDP, the expenses for goods and services were diminished to RON 27 bn (5% of the GDP) and the expenses on interests increased by over RON 1.8 bn to 1.58% of the GDP because of the development of the market conditions. To fit into the budget deficit of 4.6% of the GDP it was necessary to make an adjustment amounting to 1.1% of the GDP, of which 0.85% by reducing expenditure and 0.25% by increasing revenues, from introducing the lump sum tax (RON 350 mn) and by measures referring to the VAT deductibility in buying cars. The revenues of the general budget were diminished by RON 18.797 bn and the budget expenditure by RON 6.22 bn. The revenues of the state  budget were reduced by RON 12.073 bn and the ones of the local budgets by RON 2.358 bn whereas the collection to the state social security budget is scheduled to decrease by RON 234.9 mn, the unemployment insurance budget, by RON 131.1 mn, and the single national fund of social health insurance, by RON 594.5 mn. As for budget expenditure, it dropped by RON 1.827 bn with the state budget, by RON 1.546 bn with the local budgets, by RON 4.1 mn with the state social security budget, by RON 8.9 mn with the single national fund for social health insurance, whereas the expenditure with the budget of unemployment insurance increased by RON 328 mn.

IMF: Romania must hold its budget deficit below RON 14.5 bn by the end of June

International Monetary Fund (IMF) urged Romania in a memorandum attached to the letter sent to Romanian authorities, to keep the budget deficit under RON 14.5 bn at the end of first half of 2009, namely 2.73% of GDP. Sources in the Government said the IMF had attached a memorandum to the letter sent yesterday which includes technical details, such as to meet the quarterly limits on budget deficit. In the event of a failure of the state to meet quarterly limits on budget deficit set at EUR 14.5 bn, experts from IMF and European Commission may request the Government to proceed with another revision of the budget, with the occasion of a first review of conditions attached to the external loan scheduled for July, officials said. The State Secretary of the Ministry of Finance said that the experts from IMF and EC are expected to arrive in Romania on 10 July for an assessment of Romanian economy, and if the revenues are short of projections, a new budget revision will be made in Q3. If the annual state revenues will prove to be short of expectations, it will be made an additional letter together with the representatives of European Commission and the IMF, when it is very likely to resort to new measures to meet the budget deficit projected at 4.6% of GDP.

Current Account shrinks by 75% y/y to EUR 614 mn in January- February

The Current Account shrunk by 75% y/y to EUR 614 mn in Jan-Feb, or 0.5% of the projected full-year GDP (EUR 123.5 bn) compared to 1.8% of GDP one year earlier, according to the Central Bank of Romania (BNR). Judging from unrevised January CA data, the CA must have narrowed dramatically by 93% y/y to EUR 89 mn in February alone. The CA gap in the past 12 months ending in February decreased to EUR 15.3 bn from EUR 16.3 bn one month earlier and nearly EUR 16.9 bn 2 months earlier. The BNR projects the CA deficit to drop from last year’s 12.3% of GDP to 7-8% this year and the downward correction in the past months confirms their expectations. The balance of foreign trade with goods was the main driver of CA narrowing in January-February, given the 36% y/y drop in imports that exceeded by far the exports’ 26% y/y contraction, but the other elements of the CA also contributed to the correction particularly in February. Specifically, the inflows under Current Transfer, mainly reflecting the remittances from abroad and the inflows under the EU budget operations, increased by 32% y/y in January-February and 73% y/y in February alone. The outflows under the same Current Transfers however shrunk on an annualized base in both January and February. The balance of the Incomes’ account also contributed to the CA’s narrowing particularly as the outflows, reflecting the external debt service among others, narrowed by 23% y/y in January-February.

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