Romania’s economy is growing strongly. However, the budget deficit and trade balance continue to deteriorate and structural reforms are adversely affected by the unstable political environment, European Bank for Reconstruction and Development (EBRD) points out in its Transition Report 2017-2018. ”External vulnerabilities are increasing and the fiscal position is deteriorating,” EBRD warns.
Private consumption has been the main driver of growth, supported by a pro-cyclical fiscal policy including cuts in VAT and other consumer taxes. Alongside fiscal policies, strong wage growth and low unemployment at a seasonally adjusted rate of 5.3 percent in June 2017, also influenced consumption growth. However, despite a historically low central bank policy rate of 1.75 percent supporting private investment, overall investment growth was negative in 2016 as a result of the government’s difficulties in absorbing the 2014-2020 EU funds.
”In 2018 growth is expected to slow to around 4.2 percent as policy stimulus weakens. Downside risks, including prolonged weakness in the eurozone, changes in global investor sentiment and domestic political and reform uncertainty, may hamper growth prospects in the near term. In the longer term, the diversified economy, large market size and scope for convergence within the EU (GDP per capita, purchasing power parity-adjusted, is only 59 percent of the EU average) should allow growth rates of around 4 percent to be sustained, provided structural reforms are undertaken in the areas of privatisation, infrastructure and local capital market deepening,” the reports reads.
According to the financial institution, efforts need to be made to address business environment impediments. These include the low efficiency of public administration, and the complexity of procedures and corruption, which are holding back infrastructure development. Urgent action needs to be taken to improve transport infrastructure, which constitutes one of the weakest areas of the business environment, and is vital for the country’s development. Similarly, the government needs to address the “red tape”, legal uncertainty and judicial inefficiency, which inhibit corporate investment.
Also, reforms to fight corruption should continue. However more action is needed in order to sustain the momentum and consolidate previous successes.
EBRD shows that the privatisation plans should be re-invigorated. Proposals for partial privatisations and initial public offerings of state-owned enterprise (SOEs) including Bucharest Airport, Hidroelectrica power company and Oltchim chemical company have seen some progress but are currently stalled, and the future of such privatisations is unclear in the context of the planned establishment of the Sovereign Wealth Fund for Development and Investment (FSDI).
Recent declines in foreign direct investment (FDI) mean that the deficit is no longer covered by FDI inflows, as had typically been the case previously. On the fiscal side, falling revenues and hikes in public wages and pensions caused the budget deficit to increase to 2.4 percent of GDP in 2016, and it may exceed 3 percent of GDP in 2017 on the back of continued loose fiscal policies, potentially giving rise to the European Commission (EC) introducing an Excess Deficit Procedure (EDP). On the positive side, general government debt is low by regional standards, at 37.6 percent of GDP.