Romania’s growth is expected to remain above potential in 2016 and 2017, supported by the expansionary fiscal policy and improvements in the labor market. The fiscal relaxation measures implemented in 2016, coupled with the wage increases in the public sector, will further boost private consumption. Low inflation and accommodative monetary conditions will help improve credit and may positively impact private investment. These are the conclusions of the latest World Bank’s Economic Report.
„We project a further acceleration of growth to 4 percent in 2016. Acceleration of consumption is also expected to widen external imbalances, but the current account deficit will remain manageable. Inflation will stay in negative territory until June 2016, when the effect of the VAT cut for food fades out, and it is likely it will gradually increase towards 1.4 percent at end-2016, in line with National Bank of Romania (BNR) projections. Following the tax cuts and public sector wage increases, the budget deficit will widen significantly in 2016 and 2017. In line with the 2016 budget and the Medium-Term Fiscal Framework, the consolidated budget deficit is projected to widen towards 3 percent of GDP in both 2016 and 2017,” WB notes
According to the international financial institution, in the absence of tax policy changes, which seem unlikely in an election year, the government will need to rely on the containment of current spending, cuts in capital spending and improvements in tax efficiency to avoid reentering the Excessive Deficit Procedure (EDP) and stay within the deficit 3 percent boundary of the EU Growth and Stability Pact.
Continued strong private consumption aided by a lower VAT and growth in employment and real wages, should boost real incomes and lead to further declines in poverty incidence. The planned introduction of a minimum social inclusion income program is expected to improve targeting and increase the level of benefits for the most vulnerable.
The USD 5.00/day 2005 PPP poverty rate is projected to decline to 25.6 percent in 2016 and to 24 percent in 2017.
„Risks to this outlook are important. The short term fiscal risks, in particular, need to be carefully managed in the context of the uncertain external environment and of the approaching general elections, scheduled for the autumn of 2016. The revision of the unitary public wage legislation, currently underway, may increase spending pressures and amplify the risk of reentering into the EDP,” WB report reads.
Over the medium term, the focus of fiscal policy should be rebalanced from boosting consumption to supporting long term sustainable growth. A return to the stop-and-go approach to the unfinished structural reforms agenda, characteristic of the past, entails risks for the sustainability of the economic recovery.
WB recommends the structural reforms to focus on energy, SOEs, and on enhancing the quality of public spending. Renewed efforts are needed to improve labor participation and generate broad-based employment, as unemployment remains high among the youth and low-skilled.