Saturday, May 2, 2009

Romania could cut investment plans to meet budget

By Luiza Ilie
BUCHAREST, April 30 (Reuters) - Even the investment plans seen as vital to Romania's efforts to reboot the beaten economy may come under the knife this year if economic prospects dive further and threaten IMF-backed budget goals, a deputy finance minister said on Thursday.

The European Union state has set aside roughly 38 billion lei ($11.8 billion) for investment this year, or 7.1 percent of gross domestic product, hoping to inject much needed cash into the economy as private investment slows down.

So far, Romania has managed to meet the first of quarterly budget deficit caps set by the International Monetary Fund, which oversees a 20-billion-euro aid package that the Black Sea state secured last month.
But as the world crisis rages on, it could see its tax receipts dwindle as output and demand slow down.
An IMF mission is expected in Bucharest in July to assess the country's budget targets, and if they lag behind, the centre-left government will have to fine-tune its plans.

"There is room left for adjustment in an area that is easy but not economically sound ... cutting some of the capital spending," Deputy Finance Minister Gheorghe Gherghina told Reuters in an interview.
"Despite the crisis, we have kept them at a higher level to compensate for a lack of investment in the private sector, to stimulate the relaunching of economic growth. But if we have no other options this is a first position where we could act."

The centre-left government has pledged to limit the cuts to current spending on goods and services and wages in its vast and inefficient public sector, but maintain investment levels.
"It is possible there might be a need to ... see what can be done on the revenues side. All possible taxes can be analysed. We are hopeful that this will not be the case," Gherghina said, adding there were no concrete plans at the moment.

Romania has the EU's lowest revenues as a percentage of GDP and with a flat tax rate of 16 percent on income and profit it also has one of the lowest taxation rates in Europe.
"Within the next 5-10 years we will have to come up with a way to bring revenues as a percentage of GDP towards 40 at least. Any tax hike is possible ... but no such raise is being taken under consideration at the moment."

Romania has turned from an investment hot spot and a fast-rising economy into one of the EU's most vulnerable states, as its large external deficit and dependence on scarce foreign cash exposed it to a potential financing crisis.

"We are hoping that the contraction in the first quarter was the bottom," Gherghina said. "At least we hope the economy will not fall further." He said the ministry had insufficient data at the moment to estimate a figure for first quarter GDP.

Official first quarter GDP data is expected in the middle of May. A Reuters poll of analysts conducted earlier this month showed a median forecast for a contraction of 2 percent on the year.

Gherghina said the cash secured from the IMF and the EU would help underpin markets and pump fresh cash in the ailing economy, which would help lending pick up. "We are hoping that the economy will start to recover in the fourth quarter, but for prudence, our calculations were made on a contraction of 4 percent," Gherghina said.

He also said consumption could switch focus on domestic products, as imports slow down due to a weaker leu. (Reporting by Luiza Ilie; Editing by Patrick Graham)

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