Wednesday, March 17, 2010

FT: Romania pushes ahead with tough reforms

By Chris Bryant in Bucharest
Published: March 15 2010

Romania will push ahead with tough reforms in order to meet its obligations to international creditors but does not want to raise taxes on business, says its prime minister.
Emil Boc told the Financial Times that public sector job cuts, wage restraint and pension reforms were essential to help narrow the budget deficit and modernise the former communist state as it battles to restore economic growth.

“I know that not all these measures are very popular. We are not here to take popular measures, we are here to take necessary measures that are good for Romania,” he said.

Twenty years after the fall of communism, Romania’s 22m inhabitants were last year exposed to the full fury of a capitalist downturn. A period of impressive economic growth and foreign investment came to a sudden halt when capital inflows dried up and one of the European Union’s poorest member states was plunged into deep recession.

Romania was forced to turn to the International Monetary Fund for a €20bn bail-out, which shone a glaring spotlight on years of profligate public spending and widespread corruption.

Investors took fright again in October when Mr Boc’s previous government collapsed. But the re-election of Traian Basescu, the president, in December, the formation of a new government and passage of the 2010 budget persuaded the IMF and EU last month to unblock €3.3bn ($4.5bn, £3bn) in loans. Citing successful budgetary reforms, Standard & Poor’s this week raised Romania’s credit ratings outlook from “negative” to “stable”.

Still, some concerns remain. Mr Boc relies on independents for a thin parliamentary majority, which could hamper his ability to implement further austerity policies if leftwing parliamentarians and trade unionists oppose them.

“We do not have a strong majority in parliament right now . . . but we have a majority,” he said. “What worse can happen to us than happened in 2009?”

The government has pledged to cut the budget deficit from 7.2 per cent to 5.9 per cent this year, by slashing up to 100,000 public sector jobs, freezing wages and scrapping thousands of “privileged pensions”. A fiscal responsibility law is going through parliament.“Respecting the IMF agreement . . . is one of Romania’s top priorities,” Mr Boc said. “If Romania were to stop these reforms, that would be a disaster  . . . We need a normal state, with normal spending, and [we’ll make] reductions where necessary.”

However, he was against raising taxes to boost government revenues, describing the 16 per cent flat tax as an incentive to foreign investment that would help create jobs. Romanian taxes are among the lowest in the EU and some economists question whether efforts to combat tax evasion will suffice as rising unemployment puts further pressure on the budget.

In a separate interview, Mugur Isarescu, Romanian central bank governor, said he was concerned not to let the leu appreciate too far, which would discourage an export-led recovery. “We do not need a spectacular recovery,” he warned, referring to projections that the economy would grow by 1.3 per cent this year.

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