BUCHAREST, June 26 (Reuters) – Romania will raise value added tax by 5 percentage points to 24 percent on July 1 and should receive vital IMF aid by the following day, the government said on Saturday.

The hike, which replaces planned pension cuts the top court rejected on Friday, should lead the International Monetary Fund to approve disbursement of 2 billion euros ($2.7 billion) in IMF and European Commission funds, Prime Minister Emil Boc said.

He added that the fund, which postponed a June 28 meeting to review a 20 billion euro aid package after the court ruling, was now expected to meet on Wednesday to discuss the new measure.

„The government has decided to hike VAT by 5 percentage points,” Boc told reporters after an emergency cabinet meeting.

Finance Minister Sebastian Vladescu said the IMF’s share of the combined IMF and EU funds — around 900 million euros — would be disbursed by July 2 at the latest.

While the higher tax should help Romania meet its IMF-agreed fiscal deficit of 6.8 percent of GDP, analysts said inflation would jump sharply and recession would deepen.

Cartel Alfa, one of Romania’s most powerful unions, has said the measure will lead to „huge, useless social sacrifice”, which could mean street protests will continue.

The centrist coalition cabinet had staked everything on a move to cut public sector wages by a quarter and reduce pensions by 15 percent rather than raise taxes, which has prompted unions to stage protests and some state workers to strike.

Romania urgently needs to reform its vast public sector, which employs a third of all employees and costs the state about twice as much as it should, according to economists.

But the Constitutional Court’s rejection of the pension cuts gave the unpopular cabinet little choice.

The ruling, which was largely unexpected, rattled markets, pushing down the leu currency as much as 1.1 percent to a seven-month low against the euro and hit share prices , while yields on sovereign Eurobonds jumped.

It also rekindled doubts over the fragile cabinet, which only narrowly survived a no-confidence vote earlier this month over the austerity measures.

„I cannot hide that I am deeply disappointed that today we are hiking VAT,” Finance Minister Sebastian Vladescu said.

Vladescu said the VAT hike would bring up to 4 billion lei ($1.16 billion) in additional revenue by end-2010.

„We are taking this measure because it is important to ensure our financing ability,” he said. „But we believe this (the hike) is not what is best for the Romanian economy.”

Boc said the government would also press on with its plans to cut public sector wages.

While the court did not object to them, they were included in the same bill as the pension cuts, which will be sent back to parliament. Boc said he hoped the bill would be revived next week, before the legislature’s current session ends.

The VAT hike was approved by emergency decree, which does not need immediate parliamentary approval to be imposed.

„You can raise taxes a lot faster than you can cut (pensions),” said Adrian Basaraba, political science professor at the University of Timisoara. „For one, no one will really challenge tax hikes at the Constitutional Court.”

Analysts said investors were more wary than ever over the government’s ability to enforce reforms.

„If investors have learned anything, it’s that nothing is certain in Romania,” said Nicolaie Alexandru-Chidesciuc, ING Bank’s chief economist in Bucharest.

„Government support is fragile. Markets will not calm down until the IMF clearly announces what it plans to do.”

Read the article on Interactive Investor

UPDATE 2-Romania raises VAT 5 percent to secure IMF aid

BUCHAREST, June 26 (Reuters) – Romania will raise value added tax by 5 percentage points to 24 percent on July 1 and should receive vital IMF aid by the following day, the government said on Saturday.

The hike, which replaces planned pension cuts the top court rejected on Friday, should lead the International Monetary Fund to approve disbursement of 2 billion euros ($2.7 billion) in IMF and European Commission funds, Prime Minister Emil Boc said.

He added that the fund, which postponed a June 28 meeting to review a 20 billion euro aid package after the court ruling, was now expected to meet on Wednesday to discuss the new measure.

„The government has decided to hike VAT by 5 percentage points,” Boc told reporters after an emergency cabinet meeting.

Finance Minister Sebastian Vladescu said the IMF’s share of the combined IMF and EU funds — around 900 million euros — would be disbursed by July 2 at the latest.

While the higher tax should help Romania meet its IMF-agreed fiscal deficit of 6.8 percent of GDP, analysts said inflation would jump sharply and recession would deepen.

Cartel Alfa, one of Romania’s most powerful unions, has said the measure will lead to „huge, useless social sacrifice”, which could mean street protests will continue.

The centrist coalition cabinet had staked everything on a move to cut public sector wages by a quarter and reduce pensions by 15 percent rather than raise taxes, which has prompted unions to stage protests and some state workers to strike.

Romania urgently needs to reform its vast public sector, which employs a third of all employees and costs the state about twice as much as it should, according to economists.

But the Constitutional Court’s rejection of the pension cuts gave the unpopular cabinet little choice.

The ruling, which was largely unexpected, rattled markets, pushing down the leu currency as much as 1.1 percent to a seven-month low against the euro and hit share prices , while yields on sovereign Eurobonds jumped.

It also rekindled doubts over the fragile cabinet, which only narrowly survived a no-confidence vote earlier this month over the austerity measures.

„I cannot hide that I am deeply disappointed that today we are hiking VAT,” Finance Minister Sebastian Vladescu said.

Vladescu said the VAT hike would bring up to 4 billion lei ($1.16 billion) in additional revenue by end-2010.

„We are taking this measure because it is important to ensure our financing ability,” he said. „But we believe this (the hike) is not what is best for the Romanian economy.”

Boc said the government would also press on with its plans to cut public sector wages.

While the court did not object to them, they were included in the same bill as the pension cuts, which will be sent back to parliament. Boc said he hoped the bill would be revived next week, before the legislature’s current session ends.

The VAT hike was approved by emergency decree, which does not need immediate parliamentary approval to be imposed.

„You can raise taxes a lot faster than you can cut (pensions),” said Adrian Basaraba, political science professor at the University of Timisoara. „For one, no one will really challenge tax hikes at the Constitutional Court.”

Analysts said investors were more wary than ever over the government’s ability to enforce reforms.

„If investors have learned anything, it’s that nothing is certain in Romania,” said Nicolaie Alexandru-Chidesciuc, ING Bank’s chief economist in Bucharest.

„Government support is fragile. Markets will not calm down until the IMF clearly announces what it plans to do.”

Read the article on Interactive Investor

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