Romania’s economy is projected to grow above its potential in 2017 and 2018. Moreover, GDP will likely expand by around 5.5 percent in 2017, driven by the fiscal stimulus and aided by improvements in the European economy, according to the World Bank’s latest Regional Economic Update, Migration and Mobility in Europe and Central Asia.
The pickup in consumption is expected to widen the current account deficit to 3.1 percent in 2017, from 2.4 percent in 2016. Inflation is set to rise, reflecting the excess domestic demand and the fading out of the base effect of the tax cuts.
WB notes that National Bank of Romania (BNR) anticipates a gradual increase in inflation towards 2 percent at the end of 2017.
”The pro-cyclical fiscal measures passed in 2017 have put pressure on the consolidated budget deficit. The government aims to maintain the fiscal deficit below 3 percent of GDP in 2017 through several fiscal measures, including by hiking excise duties for fuels and requiring selected SOEs to pay dividends in advance for their 2017 profits. Exceeding the deficit limit of 3 percent of GDP would place Romania into the Excessive Deficit Procedure of the EU. The widening of the fiscal deficit will push public debt to just above 49 percent of GDP by the end of 2019 from 44.6 percent in 2016,” the financial institution pointed out in the report.
However, the public debt remains one of the lowest in the EU, but it is not stabilized by the current fiscal stance. Strong private consumption growth aided by a lower VAT rate, coupled with low unemployment and continued growth in real wages, should boost real incomes and lead to further declines in poverty incidence. Moreover, the planned introduction of the Minimum Social Insertion Income program (MSII) is expected to improve targeting and increase the level of benefits for the most vulnerable.
According to WB report, the USD 5.50/day 2011 PPP poverty rate is projected to decline to 24.5 percent in 2017, to 23.3 percent in 2018, and to 22.4 percent in 2019.
Externally, a likely tapering of the quantitative easing in the Eurozone and higher global interest rates may lead to a repositioning in investor sentiment towards the emerging economies and to higher refinancing costs, further reinforcing fiscal pressures. On the upside, a better-than-projected economic performance of the Eurozone will act as a driver for growth in the broader EU, including Romania.
”Increasing Romanian’s growth potential requires attention to the structural reforms agenda. Public administration reforms and measures to combat corruption, boosting tax revenues through administrative reforms, improving the efficiency and efficacy of public spending, and implementing the new legal framework for the SOE corporate governance agenda remain reform priorities. Renewed efforts are needed to improve labor participation and generate broadbased employment, as unemployment remains high among youth and the lowskilled, and to ensure that all Romanians obtain access to high quality public services. Gradually, the focus of fiscal policy should be rebalanced away from boosting consumption towards supporting a sustainable EU convergence path,” the report concluded.
WB ECA Economic Update also notes that the economic growth for the Europe and Central Asia region will reach 2.2 percent this year. This represents the strongest growth in the region since 2011, and is 0.3 percentage points above the Bank’s previous forecast in May 2017.