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Cablegate: Romania Targets Bloated Public Sector Under Imf Accord

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PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSL RUEHSR RUEHVK
RUEHYG
DE RUEHBM #0573/01 2301316
ZNR UUUUU ZZH
P 181316Z AUG 09
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 9832
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEHC/DEPT OF LABOR WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 BUCHAREST 000573

SIPDIS

STATE FOR EUR/CE ASCHEIBE AND AMB. GITENSTEIN

SENSITIVE

E.O. 12958: N/A
TAGS: EFIN ECON PGOV EUN IMF RO
SUBJECT: ROMANIA TARGETS BLOATED PUBLIC SECTOR UNDER IMF ACCORD

REF: BUCHAREST 563

Sensitive but Unclassified; not for Internet distribution.

1. (SBU) Summary. In order to comply with the revised IMF
agreement (reftel), the Government of Romania (GOR) is being forced
to take an axe to the bloated public sector. In the last two weeks,
the GOR has announced plans for immediate furloughs as a short-term
measure, with permanent layoffs and reorganization of many
government agencies to follow. The central government is targeting
local (county and city) governments for major personnel reductions
as well. Analysts question whether these measures will cut expenses
deeply enough, and there is risk of labor unrest and some
disruptions in government services as the fall presidential election
campaign heats up. End Summary.

2. (SBU) Under the revised agreement, the IMF will allocate roughly
half of its next two loan disbursements, or about USD $1.9 billion,
to the GOR to support the burgeoning budget deficit. In return,
however, the GOR must move quickly to cut spending by 0.8 percent of
GDP, or roughly USD $2 billion, by the end of 2009. The many
temporary cost-cutting measures the GOR employed earlier this year
to stay in compliance with the original IMF agreement will no longer
be enough, and major cutbacks in public sector personnel and pension
costs -- which account for over 60 percent of GOR spending -- have
become unavoidable. In the immediate term, public sector employees
accustomed to bonuses and other non-salary compensation to
supplement their base pay will find these benefits slashed. For
instance, the Ministry of Interior suddenly announced last week that
it was eliminating long-standing housing and relocation subsidies
for police, leaving them on their own to pay mortgages and rents,
which in some cases equal half or more of their salaries. The GOR
also intends to require every government employee to accept a ten-
to fourteen-day furlough, or reduce paid work hours, or both, in the
next two months. Public sector unions have vigorously denounced
these plans as illegal violations of the government's work contracts
with employees.

3. (SBU) Such measures, while severe, will not be sufficient.
President Traian Basescu himself has criticized the GOR's furlough
plans as inadequate and called on the Government to permanently cut
staffing across the board by 20 percent. Whether ultimately the GOR
can stomach such huge cuts in personnel remains to be seen, but in
recent days it has announced plans for significant layoffs. Many
will come from state-owned companies, which the IMF flagged as a
particular drain on the budget. The Ministry of Economy, which
controls most of these companies, has announced plans to let go an
additional 5,400 employees after dismissing 5,500 earlier this year.
The Ministry of Transportation is revisiting plans, shelved earlier
this year under threat of strikes and traffic disruptions, to
eliminate several thousand positions at the National Railroad, one
of Romania's biggest money losers.

4. (SBU) With just one exception, all national ministries will shed
positions, ranging from 1,316 jobs cut at the Ministry of Labor down
to 86 at the Ministry of Foreign Affairs. Even the Ministry of
Finance will lose 477 jobs, including (as the media has caustically
observed) a number of positions in the taxation and auditing
departments which the GOR is relying on to crack down on tax
evaders. Only the new Ministry of Tourism appears to be untouched,
with Minister of Tourism Elena Udrea resisting staff cuts even as
she battles allegations of impropriety in her Ministry's financial
dealings. Anecdotal reports suggest that some of the cuts will come
from unfilled positions, or that employees will merely be
transferred from one office to another, constituting reductions only
on paper. However, real meat must be cut to meet the IMF target,
and the Minister of Labor has publicly stated that 9,200 employees
will lose their jobs.


5. (SBU) The real story is less about the headline numbers, and
more about the accompanying restructuring among ministries and
subordinate institutions. In total, the GOR has promised to
eliminate 114 agencies, institutes, and regional offices. The
reduction will equally affect agencies reporting directly to the
Prime Minister, as well as those under the various ministries, and
includes entities under both PD-L and PSD control. The
restructuring will generally leave untouched agencies that manage EU
funds and entities with a solid track record such as the Complaint
Council.

6. (SBU) As the GOR is discovering, however, eliminating agencies
doesn't automatically translate into big personnel reductions, since
essential government functions must be preserved. For example, the
four agencies dealing with family and child protection issues will
be combined into one, and the two entities dealing with student

BUCHAREST 00000573 002 OF 002


scholarships and student loans will be bundled together. This may
reduce bureaucratic inefficiency, but probably will not result in
significant staff reductions. In one announced case, the State
Assets Resolution Agency will dismiss 18 percent of its current
staff, but will be required to reemploy personnel from the Land
Reclamation Company, which is closing. Similarly, the National
Energy Regulatory Agency has to reduce its existing staff by 33
percent but then take on part of the staff of the Energy Development
Agency, which will also cease to exist. The much-maligned Foreign
Investment Agency (PSD) will be bundled with the Trade Promotion
Agency (PD-L) into a Trade and FDI Promotion Agency, which will be
subordinated to the Ministry of Small and Medium Enterprises (PSD).

7. (SBU) Urged on by the IMF, GOR axe-wielders have also set their
sights on bloated local bureaucracies, which employ more than
320,000 people across Romania -- a number that has increased by 60
percent just since 2005. The IMF is requiring that Romania
establish guidelines for numbers of public employees each county or
municipality should have based on the population size. Localities
with 1,500 to 3,000 inhabitants, for instance, should have town
halls with no more than 14 civil servants under the GOR's proposal.
If enforced, the guidelines will lead to thousands more layoffs
nationwide, including a 60 percent reduction at Bucharest City Hall
(which would drop from 1,060 to 400 employees). The GOR lacks the
authority to dismiss local public servants directly, but is
threatening to withhold funding from non-compliant municipalities,
which financially are almost totally dependent on the central
government.

8. (SBU) Comment. While the personnel cuts proposed by the GOR
look draconian, the reality is more complex and raises many
questions. Foremost is the question of whether it will all be
enough to meet the stated budget objectives. Even if the GOR
succeeds in getting rid of all the central and local government
employees proposed so far, the projected cost savings is in the
hundreds of millions, not billions, of dollars. Public sector
employment has exploded in recent years, and it will take truly
merciless slashing to return the bureaucracy to levels of even two
or three years ago. At the same time, letting all these employees
go is not cost free, as most will be eligible for hefty severance
payments and will then transfer directly to the GOR's unemployment
benefits roster. Total net savings to the GOR are likely to be
disappointing. Add to this the parallel GOR effort, also required
by the IMF, to pass legislation aimed at harmonizing pay scales
across the government and eliminating the myriad of bonuses and
subsidies. The GOR acknowledges that the legislation will likely
result in a majority of public servants, especially those lower down
the wage scales, actually getting a significant salary increase.
The math simply doesn't add up, and everyone's fear is that Romania
will end up with a smaller but even more dysfunctional bureaucracy
which still doesn't meet the IMF agreement's budget goals.

9. (SBU) Comment continued. The other big question is whether the
PD-L/PSD coalition can take the political heat this downsizing
process will generate. Romania's fractious public sector unions so
far this year have shown little ability to carry through on threats
of serious labor protests, but that could change once large numbers
of their members actually start receiving pink slips. Restructuring
and consolidation of government agencies will disrupt the carefully
negotiated division of patronage and control between the PD-L and
PSD. At the same time, imposition of major cutbacks in local
bureaucracies will threaten the power bases of local party barons
who wield substantial influence, particularly within the PSD.
Heading into the fall presidential election campaign, it is a
volatile mix. End Comment.

GUTHRIE-CORN

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