Prime Minister Calin Popescu Tariceanu yesterday said the Labor Ministry will have an added €301 million in December for child allowances, pensions for the disabled and farmers.

Analysts and government representatives interviewed by Business Standard indicated that, in spite of a loan from the European Investment Bank (EIB) worth €1 billion, of which €250 million are to be allocated this year and used to cover the budget deficit, Romania might still need a further loan from the IMF, due to the international crisis.

The financial turmoil has already affected the country, as increasingly more companies go bankrupt and their staff joins the unemployed, while other companies are restructuring and laying off employees, leading to significantly lower budget revenues.

The budget deficit will amount to 3.2 percent of GDP in 2008, according to an estimate by UniCredit Tiriac Bank. “It is rather difficult to foresee by how much the budget will widen beyond 3 percent, but the 2.3 percent target will definitely be exceeded. How much over 3 percent depends on how the government handles budget spending,” said UniCredit Tiriac Bank Chief Economist, Rozalia Pal.

The budget deficit ceiling allowed by the European Union (EU) is 3 percent of GDP. Government officials recently said they would try to cover part of the deficit by issuing state bonds. Pal indicated that banks will keep acquiring state bonds, if they have sufficient liquidity.

She ruled out an IMF loan this year, as general elections are scheduled for 30 November. However, government sources said that Romania “could ask for such help in 2009, if the budget revenue situation becomes dramatic.” They added that the granting of an IMF loan for Romania could be subject to very harsh conditions, as was the case for Hungary, so other ways of covering the deficit should be found.

Experts say that there are three possible solutions to avoid IMF aid. “If the cash reserve ratio is lowered in the banking system and lenders place funds in state bonds, funds will be available to overcome the distressing financial situation,” analysts say.

A second solution would be to raise the flat tax, currently at 16 percent. “There will be serious problems next year, as a drop in consumption is foreseen for certain industries. For a country such as Romania, where a significant portion of revenues comes from VAT, this will be a problem,” analysts say. A third measure would be to persuade companies to reinvest their profits. “The state should resort to measures so that companies no longer pay taxes on reinvested profit. Many foreign companies will demand their money back, due to a lack of liquidity, but they will think twice if they are encouraged to keep their funds in the country,” analysts explained. Other possible solutions are lower budget expenses and a better absorption of EU funds.