ROMANIA has waited more than 15 years to get daring and creative political leadership that could help drag the country out of the post-communist hangover. The first steps taken by the new government represent a long overdue attempt to act on some of the areas most in need of reform, including tax and corruption. Romania’s government has vowed to reform the tax system, reduce inflation and keep the budget deficit under control to achieve stable economic growth. But their president’s commitment to cleaning up corruption has meant that Traian Basescu is being targeted for assassination by the underworld.
The new government’s first initiative, pushed through rapidly by an emergency decree, was tax reform. The cornerstone of the restructured tax system is a flat rate of 16 per cent, replacing three personal income tax bands ranging between 18 and 40 per cent, and a corporate tax previously at 25 per cent. The changes have two main aims - to simplify the current system; and to lower the overall tax level so that tax evaders have more of an incentive to pay. Since tax evasion is almost a national sport, with the underground economy estimated at close to 50 per cent of the whole, tackling it is a major issue for government.
The shake-up also sends a message to the world that Romania is serious about competing for foreign investment. It is taking place in the context of a general regional trend towards lower flat tax rates in Eastern Europe. Romania is now joining the bandwagon at a very competitive level. Some have voiced concern about a potential shortfall in revenue, but the government maintains that lower taxes will actually increase income, since people should be less inclined to avoid paying.
Last year, Romania’s inflation rate was just above nine per cent, however, its booming growth, which was 8.1 per cent in 2004, may signal some economic overheating. This year the inflation target for Romania is seven per cent and the budget deficit target is 1.5 per cent. There are some threats to those objectives from pension and salary increases.
However, of more concern than Romania’s ostensibly positive economic performance is the situation with respect to corruption. Romania’s intelligence services have announced that mafia bosses are targeting the President because of his anti-corruption drive.
Intelligence service chief Radu Timofte had warned Basescu that gangland organisations opposed to the new president’s anti-corruption policies may be considering an assassination attempt. The criminal underworld was considering hiring foreign hit-men for a possible assassination attempt. He said he had no specific information of any imminent attack, but added that he hoped by making the information public he would deter potential threats.
Basescu scored a surprise victory in presidential elections in December. The outspoken politician won an upset victory against the ex-communist party’s candidate in presidential polls in December, vowing to fight endemic corruption in Romania. Formerly the mayor of Bucharest, he has pledged to secure the reforms necessary to bring his country into the European Union in 2007, or 2008, along with Bulgaria. Corruption is one of the EU’s main concerns about Romania. Brussels has urged wide-ranging reforms to the judicial system to stamp it out.
The EU told the Balkan country to crack down on corruption and to fight organised crime if it wants to join as planned, together with southern neighbour Bulgaria. Basescu started his term as president by telling judges, prosecutors and the police to get more involved in fighting corruption, which Romanians blame for most of their daily problems.
Romania’s new centrist prime minister, Calin Tariceanu, asked his cabinet to review all public contracts signed by the previous administration to eliminate any possible corruption. Tariceanu’s coalition government, formed after the November 28 elections, is seen as a clean break from the Balkan country’s communist past as it struggles to fight endemic corruption and join the EU in 2007. He had asked his ministers to carefully examine all contracts scheduled for 2005 to avoid waste of public money and make sure they were all awarded properly.
The ex-communist PSD party, that ruled Romania for all but four of its 15 post-communist years, had been praised by the EU for turning the economy around but criticised for dragging its feet in fighting corruption and implementing democratic reforms. The former government had prompted the wrath of EU leaders by directly assigning some major infrastructure projects without transparent tender procedures.
The centrists, who came to power on a tough anti-corruption ticket, have vowed to clean up the country and introduce pro-business measures to boost foreign investment. Tariceanu said it was important to make all possible savings in the public sector in order to finance some of the social measures promised during the election campaign, such as better pensions for the impoverished population.
In a further bid to generate revenue and stimulate Romania’s liquidity-starved capital markets, the government intends to list shares in the Greek-owned national telecom operator, Romtelecom, as well as in the national oil company Petrom, a majority stake of which was recently sold to Austria’s OMV, on the Bucharest stock exchange. BCR, Romania’s largest bank, and the CEC savings bank have also been mulled as possible candidates for a listing on the exchange.
It is refreshing to see such creativity and boldness in a country that has seen little of either since it abandoned communism more than 15 years ago. The government must also make clear its resolve to repair Romania’s reputation for corruption. It has already said it intends to review state contracts worth 3.6 billion euro, representing important infrastructure and defence-related commitments, which its predecessor negotiated under less than transparent conditions.
The new government has also moved in determined fashion against RAFO, an oil refinery seen as one of the most prominent examples of corruption and tax evasion. Nineteen executives and shareholders have been placed under investigation and their funds sequestered.
Furthermore, the government is expected to call in foreign investigators to assist Romania’s overstretched and often compromised prosecutors. The international community should welcome these measures. Romania has made an excellent start to improving its image, but these are only first steps and the country will need all the help it can get if it is to succeed.
Years of mismanagement have left Romania lagging behind its more reformist neighbours. In the run-up to EU accession, Romania has found the courage to apply many of the policies and solutions that have been successful in other post-communist countries, and now it must follow through in implementing them.
Nick Peterson has worked for top law firms and bulge bracket investment banks. He currently leads seminars for professionals around the globe, acts as an expert on EU programmes in the region and is an investment banking consultant.
He welcomes your emailed comments:
regional_economic_compass@yahoo.co.uk
The new government’s first initiative, pushed through rapidly by an emergency decree, was tax reform. The cornerstone of the restructured tax system is a flat rate of 16 per cent, replacing three personal income tax bands ranging between 18 and 40 per cent, and a corporate tax previously at 25 per cent. The changes have two main aims - to simplify the current system; and to lower the overall tax level so that tax evaders have more of an incentive to pay. Since tax evasion is almost a national sport, with the underground economy estimated at close to 50 per cent of the whole, tackling it is a major issue for government.
The shake-up also sends a message to the world that Romania is serious about competing for foreign investment. It is taking place in the context of a general regional trend towards lower flat tax rates in Eastern Europe. Romania is now joining the bandwagon at a very competitive level. Some have voiced concern about a potential shortfall in revenue, but the government maintains that lower taxes will actually increase income, since people should be less inclined to avoid paying.
Last year, Romania’s inflation rate was just above nine per cent, however, its booming growth, which was 8.1 per cent in 2004, may signal some economic overheating. This year the inflation target for Romania is seven per cent and the budget deficit target is 1.5 per cent. There are some threats to those objectives from pension and salary increases.
However, of more concern than Romania’s ostensibly positive economic performance is the situation with respect to corruption. Romania’s intelligence services have announced that mafia bosses are targeting the President because of his anti-corruption drive.
Intelligence service chief Radu Timofte had warned Basescu that gangland organisations opposed to the new president’s anti-corruption policies may be considering an assassination attempt. The criminal underworld was considering hiring foreign hit-men for a possible assassination attempt. He said he had no specific information of any imminent attack, but added that he hoped by making the information public he would deter potential threats.
Basescu scored a surprise victory in presidential elections in December. The outspoken politician won an upset victory against the ex-communist party’s candidate in presidential polls in December, vowing to fight endemic corruption in Romania. Formerly the mayor of Bucharest, he has pledged to secure the reforms necessary to bring his country into the European Union in 2007, or 2008, along with Bulgaria. Corruption is one of the EU’s main concerns about Romania. Brussels has urged wide-ranging reforms to the judicial system to stamp it out.
The EU told the Balkan country to crack down on corruption and to fight organised crime if it wants to join as planned, together with southern neighbour Bulgaria. Basescu started his term as president by telling judges, prosecutors and the police to get more involved in fighting corruption, which Romanians blame for most of their daily problems.
Romania’s new centrist prime minister, Calin Tariceanu, asked his cabinet to review all public contracts signed by the previous administration to eliminate any possible corruption. Tariceanu’s coalition government, formed after the November 28 elections, is seen as a clean break from the Balkan country’s communist past as it struggles to fight endemic corruption and join the EU in 2007. He had asked his ministers to carefully examine all contracts scheduled for 2005 to avoid waste of public money and make sure they were all awarded properly.
The ex-communist PSD party, that ruled Romania for all but four of its 15 post-communist years, had been praised by the EU for turning the economy around but criticised for dragging its feet in fighting corruption and implementing democratic reforms. The former government had prompted the wrath of EU leaders by directly assigning some major infrastructure projects without transparent tender procedures.
The centrists, who came to power on a tough anti-corruption ticket, have vowed to clean up the country and introduce pro-business measures to boost foreign investment. Tariceanu said it was important to make all possible savings in the public sector in order to finance some of the social measures promised during the election campaign, such as better pensions for the impoverished population.
In a further bid to generate revenue and stimulate Romania’s liquidity-starved capital markets, the government intends to list shares in the Greek-owned national telecom operator, Romtelecom, as well as in the national oil company Petrom, a majority stake of which was recently sold to Austria’s OMV, on the Bucharest stock exchange. BCR, Romania’s largest bank, and the CEC savings bank have also been mulled as possible candidates for a listing on the exchange.
It is refreshing to see such creativity and boldness in a country that has seen little of either since it abandoned communism more than 15 years ago. The government must also make clear its resolve to repair Romania’s reputation for corruption. It has already said it intends to review state contracts worth 3.6 billion euro, representing important infrastructure and defence-related commitments, which its predecessor negotiated under less than transparent conditions.
The new government has also moved in determined fashion against RAFO, an oil refinery seen as one of the most prominent examples of corruption and tax evasion. Nineteen executives and shareholders have been placed under investigation and their funds sequestered.
Furthermore, the government is expected to call in foreign investigators to assist Romania’s overstretched and often compromised prosecutors. The international community should welcome these measures. Romania has made an excellent start to improving its image, but these are only first steps and the country will need all the help it can get if it is to succeed.
Years of mismanagement have left Romania lagging behind its more reformist neighbours. In the run-up to EU accession, Romania has found the courage to apply many of the policies and solutions that have been successful in other post-communist countries, and now it must follow through in implementing them.
Nick Peterson has worked for top law firms and bulge bracket investment banks. He currently leads seminars for professionals around the globe, acts as an expert on EU programmes in the region and is an investment banking consultant.
He welcomes your emailed comments:
regional_economic_compass@yahoo.co.uk
