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Monday, November 22, 2004

The main budget risks

The main short-term risks hanging over the budget are related to the widening of the current account deficit and to the arrears trend.

The pension system and the ability to absorb EU funds also pose problems for the budget, according to Romania's Pre-Accession Economic Program for 2004.

The current account deficit, even if it does not have a deep structural imbalance, can be troublesome in the medium term in terms of the foreign sustainability, the report said.

Exports - chiefly orientated towards the European Union - grew at a faster pace than imports, which were chiefly of consumer goods.
The gap between the level imports and exports remains at a worryingly large level.
Strong aggregated demand is supported by the increase in lower-to-average wage levels in the economy and the credit and the investments boom.

Foreign direct investments (FDI) went up by 44% in the first half of 2004 as compared to the year-ago period and accounted for 1.164 billion euros, while the estimates for the whole 2004 forecast FDI to exceed 2 billion euros, the highest level in 15 years.

Higher international oil prices are an additional driver that could have a negative impact on the current account deficit due to their influence on energy imports.

Arrears remain a major problem for the Romanian economy, although they fell several percentage points of GDP over the last couple of years.
Thus, the arrears fell from 38.3% of GDP in 2002 to 33.6% in 2003.
The general consolidated budget saw this index lose weight in the state and mixed owned companies, following reorganization measures, privatizations and reforms in the power sector, the report reveals.
In the overall economy, companies' debts to each other fell from 17.2% of GDP in 2002 to 14.9% in 2003.
Meanwhile, arrears in the general consolidated budget dropped from 13.5% to 12% of GDP.
The social insurance budget had to recover less money in 2003, and therefore its weighting in GDP fell from 5.8% in 2002 to 5.2% last year.
During 2004, local authorities strengthened bankruptcy regulations for indebted companies.
However, the report said that slowing the implementation of these measures would only turn arrears in to a major risk for the Romanian economy, as they would constantly put pressure aggregate demand, inflation and the current account.

Another major risk facing Romania's budget is the financial situation of state pensions in the public sector, currently paid to some 6.1 million pensioners.
The pension system amounted to an average of 7.2% of GDP between 1995 and 2003. One of the main reasons for the increase in the pension system deficits was the rapid rise in the number of beneficiaries after 1990.
Between 1990 and 2002, the number of pensioners in Romania jumped from 3.4 million to 6.2 million.
The number is expected to drop slightly to 6.1 million pensioners this year.

The report also covers measures initiated by authorities this year concerning pensions. In 2004, the Parliament passed the law concerning the private pension system, but the bill will not become effective until 2006.

Posted by Iulia Rasoiu : 11/22/2004 11:09:00 am