BUCHAREST — The Romanian government was forced to draft new options to cut the public deficit Friday after part of an austerity package crucial to securing a fresh disbursement of IMF funds was declared unconstitutional.
A court ruled that the centre-right government's plan to cut pensions by 15 percent in 2010 in order to reduce public spending was "unconstitutional."
The move triggered satisfaction in the ranks of the Social-Democrat and Liberal opposition parties that had sought the court ruling. About 600 protesters who gathered a few hours in front of the presidential palace welcomed the decision.
The ruling was a blow for the government of Prime Minister Emil Boc, as the measure was a key plank in an austerity package that also included slashing public salaries by 25 percent and other cuts in social allowances.
The plan, agreed with International Monetary Fund and the European Commission, aimed at narrowing a public deficit from 7.2 percent of output to 6.8 percent.
The court decision came just days before a meeting of the IMF board during which a new tranche of about 900 million euros (1.1 billion dollars) was expected to be released.
But the head of IMF evaluation mission in Romania, Jeffrey Franks, made it clear in May that the board would only approve a new disbursement when "the authorities have taken the promised measures."
Mired in recession for more than a year, Romania is benefiting from a global 20-billion-euro rescue deal signed last year with the IMF, the European Union and the World Bank.
"It is quite certain that we will not get the new disbursement as fast as planned," economist Aurelian Dochia, a member of the BRD Bank board told AFP.
"The IMF disbursement is to be delayed," chief economist at ING Bank Romania Nicolae Chidesciuc said.
The Romanian leu (RON) lost ground just after the court decision, trading at at 4.2860 RON for one euro. At the close of the exchanges, the rate was 4.2750 for one euro.
"The government has a series of alternative measures to reduce the public deficit, which are negotiated with our partners from the European Commission, the International Monetary Fund and the World Bank," Prime Minister Boc said in a short address to the press, refusing to comment on a possible delay of the new tranche of IMF money.
"Our objective is to maintain the agreement with the IMF and to respect the deadlines the Fund would set up," he explained.
The IMF here made no comment following the Constitutional Court ruling.
The planned new measures "will ensure the necessary money to finance a deficit of 6.8 percent," Boc insisted, without releasing details on the proposed options.
But Deputy Prime minister Marko Bela, from the Hungarian minority party, hinted at tax hikes.
"I do not want to anticipate any decision but I do not see anything else other than raising the flat tax rate and VAT to get new important sources of financing," he said.
Romania's flat tax rate is currently 16 percent and VAT 19 percent.
Boc's government as well as Romanian president Traian Basescu have repeatedly rejected such a move.
"An increase in taxation has become more likely, which will be bad for consumption," Chidesciuc told AFP.
"The easier course would be to raise VAT but it will be bad for internal consumption and it will reduce the purchasing power of all Romanians," Dochia added.
"One thing is sure, adjustments are needed to keep the public deficit in line," he added.
After years of steady growth, the Balkan country slipped into recession in 2009, when gross domestic product shrank by 7.2 percent.
In 2010, a further contraction of 0.5 percent is expected.
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