Overview 2010: Romania shifts gears to face new realities - part I

Romania started 2010 under the shadow of the International Monetary Fund (IMF), which, together with the European Commission and the World Bank, gave the country a EUR 20 billion loan in 2009 to weather its economic storm. Initially set out as a safety net loan, the money proved to be life saving. But, as with any loans, this came with a set of strict conditions and paved the way for another loan, expected for 2011. By Corina Saceanu VAT hike and public system layoffs; more insolvency recorded The country had to reduce its public spending to meet the IMF budget deficit targets of 6.8% of GDP. To do so, Romania increased the VAT mid-year, from 19 to 24%, placing it amongst the highest in the EU. The increase was made with remarkable speed, forcing retailers to change prices nearly overnight to comply. Despite analysts’ warnings that the increase will lead to an inflation hike, the Government’s measure assures budgetary funds. Another unpopular measure was a 25% cut in state clerks’ salaries, in addition to layoffs in the public sector. With some 27,000 lay-offs already, the Government has committed to an additional 74,000 by years’ end. An attempt to decrease state pensions ended in failure after the Romanian Constitutional Court ruled the measure unconstitutional. It would have meant disaster for some of the 5.5 million pensioners in the country. Still, the measure was an IMF condition, and its failure meant Romania was close to losing one of its loan installments. The measures came during a worsening situation in the private sector, with some 30,000 insolvencies expected by years’ end; and most remaining companies posted declines in the first part of the year, including the large private companies that used to fuel economic growth. Fewer foreign investments, Fiscal Code changes Meanwhile, foreign investors looked elsewhere on the world map, as the volume of foreign direct investments (FDI) dropped massively. FDI barely reached EUR 1.8 billion in the first half of the year, covering just half of the country’s current account deficit. The year before, Romania had EUR 4.8 billion in FDI, which at the time was just half of the amount in the peak year 2008. Companies were hit by yet another change in 2010. The Government changed the Fiscal Code midyear, expanding the tax base, in an attempt to further increase budget revenues while fighting tax evasion. Property taxes rose, setting different tax levels for those who own more than one property; and Romanians now pay taxes on meal, gift and holiday vouchers, as well as on bank deposits- including interest on their current accounts.

Unemployment and indebtedness up; Central Bank cuts key interest rate

These all spelled trouble for Romanian workers. Unemployment grew to 7.44 percent mid-year (700,000 people), 1.44 percentage points higher than the same period last year. Shortly after announcements of the unpopular measures, Romanians went to organizing street protests, but state employee strikes in the first part of the year were too small to have any real impact. Disparate