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Viewing cable 08BUCHAREST574, ROMANIA: POLICYMAKERS ATTUNED TO INFLATION AS ELECTION

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Reference ID Created Released Classification Origin
08BUCHAREST574 2008-07-21 08:48 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Bucharest
VZCZCXYZ0003
PP RUEHWEB

DE RUEHBM #0574/01 2030848
ZNR UUUUU ZZH
P 210848Z JUL 08
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 8496
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
UNCLAS BUCHAREST 000574 
 
STATE FOR EUR/NCE KSOLERA, EB/IFD 
TREASURY FOR LKOHLER 
COMMERCE FOR KNAJDI 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN ETRD ECON PGOV RO
SUBJECT:  ROMANIA: POLICYMAKERS ATTUNED TO INFLATION AS ELECTION 
SEASON APPROACHES 
 
REF: A) Bucharest 562 
 
Sensitive but Unclassified; not for Internet distribution. 
 
1.  (SBU) Summary:  Rising inflation is capturing the attention of 
Romanian policymakers and is likely to play a significant role in 
the upcoming election season.  Annualized inflation (June 2007 to 
June 2008) is up to 8.61 percent, with price increases in consumer 
staples acutely affecting consumers across the board.  As is the 
case elsewhere in the world, energy and food prices are outpacing 
increases in other sectors and helping to drive up the overall 
inflation rate.  The openness of the Romanian economy to world 
market forces has limited the tools available to the Government of 
Romania (GOR) to respond effectively to these increases.  At the 
same time, pre-election politics appear to be keeping the GOR from 
exercising the few fiscal policy levers it does have to control 
inflation.  The National Bank of Romania's (BNR) efforts to rein in 
prices through tighter monetary policy have so far met with little 
success.  End Summary. 
 
2.  (U) In the last 12 months (June 2007 to June 2008), foodstuffs 
in Romania have shown dramatic price increases, rising at an 
annualized rate of 11.77 percent.  Last year's poor, drought-damaged 
harvest, combined with rising domestic consumption and global 
commodity price increases, are to blame.  Further increases are 
expected later in the year, with some business leaders forecasting a 
10 percent rise in the price of bread, 10 to 15 percent in sugar, 
and 3 to 4 percent in dairy products just by September.  The hope is 
that a good agricultural season this year will mitigate some of the 
price increases, especially in the productive summer months, but 
high energy prices will likely act as a brake on any significant 
price reductions.  (Comment:  Market survey data on agricultural 
output and prices for June and July are not yet available, but local 
seasonal produce is currently plentiful and reasonably priced in 
Bucharest.  This is likely a temporary effect, and prices should 
start to tick back up again in the fall as local produce goes out of 
season.  End Comment.) 
 
3.  (U) Increasing energy prices are also of major concern, even 
though Romania produces a substantial portion of the natural gas and 
oil consumed domestically.  The natural gas distribution companies 
have lobbied the government for significant price increases to cover 
higher production costs, and although the GOR regulator only just 
approved a 12.5 percent increase in gas prices as of July 1, 
pressure is building for another round of rate increases later this 
year.  Electricity rates show a similar trend, with the regulated 
price rising 4.4 percent on July 1.  The present national average 
price for gasoline of approximately 4.58 Lei per liter (the 
equivalent of USD 7.95 per gallon at current exchange rates), up 12 
percent so far this year, is a further drain on the Romanian 
consumer.  Diesel fuel is up 17 percent, which in turn makes all 
manner of goods and services much more expensive. 
 
4.  (SBU) The policy responses on the part of the Government and the 
BNR have been mixed.  The BNR recently raised the Romanian Lei 
benchmark nominal interest rate to 10 percent in an effort to curb 
inflation.  However, as reported reftel, other factors limit the 
BNR's flexibility to boost rates further.  (It is also worth noting 
that, with inflation at over 8.6 percent, the real interest rate is 
only about 1.4 percent, making the actual dampening effect minimal.) 
 This places additional burdens on the GOR to avoid aggravating 
inflation through expansionary fiscal policies, tough to do in an 
election year.  So far the only significant efforts in this regard 
have been to postpone until October 1 the scheduled increase in the 
monthly minimum wage (from 500 to 540 Lei), and to hold the line on 
some public sector wage increases.  On the other hand, the GOR just 
announced a budget "rectification" of over 600 million euros in 
additional spending, mostly for infrastructure projects. 
 
5.  (SBU) In addition to these limited fiscal restraints, the GOR 
has announced several initiatives aimed at mitigating the effects of 
higher prices.  These include lobbying the European Commission for a 
reduction in the recently increased tax on diesel fuel for 
agriculture; increasing (modestly) the amount spent on bread and 
dairy subsidies for primary school students; providing a heating 
subsidy for low-income households; cutting employee payroll taxes; 
and putting together a "solidarity fund" to distribute 160 million 
Romanian Lei (approximately USD 71 million) to households earning 
less than 615 Lei (approximately USD 275) per month. 
 
6.  (SBU) Comment.  The approaching national election season, not 
economic fundamentals, appears to be driving the political response 
to inflation this time around.  Rather than focusing on tightening 
its belt, the GOR is instead trying to treat the symptoms by 
lessening the pain of higher prices.  Despite the BNR's assertion 
 
that its maneuvering room for further interest rate hikes is 
limited, the lack of tighter fiscal policies will put additional 
pressure on the Bank to continue raising rates before higher 
inflationary expectations become more firmly entrenched.  If high 
inflation continues, not only will it dampen economic growth, in 
part by removing the Romanian competitive advantage of inexpensive 
skilled labor, but it will also make Romania's long-term goal of 
entering the Euro zone an increasingly distant one.  End Comment. 
 
TAUBMAN