Economic forecasts indicate that Romania will continue to have a growing economy. but below that of 2016.
Economic forecasts indicate that Romania will continue to have a growing economy, but below that of 2016, estimated by international financial organizations and various experts at 4.5 to 5.2%. The European Commission expects the growth in 2017 to reach 3.9% from its expectation of 5.2% in 2016, while the World Bank estimates a growth of 3.8% in 2017, the same figure issued by the International Monetary Fund. The European Bank for Reconstruction and Development expects a 3.7% growth, matching Moody's 3.7% estimation, after issuing a forecast of 4.8% for 2016. The National Forecast Commission estimated 4.8% growth for 2016, and 4.2% for 2017.
According to a Moody's report, private consumption remains Romania's main engine for growth, though to a lesser extent than in 2016, considering expectations of higher oil prices and inflation. Continuing an expanding tax policy in 2017, including scrapping a tax on special purpose buildings and an additional fuel excise, as well as a cut in the VAT, will result in a deterioration of Romania's fiscal position. The agency expects the fiscal deficit to exceed 3% of the GDP in 2017, since measures increasing it would counter solid economic growth. Moody's expects Romania's credit rating to be negatively impacted by the deterioration of its fiscal policy, along with its effect on its fiscal position.
The head of the Fiscal Council, Ionut Dumitru, talked about the slowdown in economic growth in Romania this year: “I would say it was to be expected, since we had a tax stimulus, the cut in the VAT from 24 to 20% last year, which was the main factor in the growth in consumption. As theory has it, encouraging consumption by tax incentives cannot be long term, meaning it is economic growth manifesting short term, not necessarily medium and long term.”
Ionut Dumitru says that this year Romania will have the lowest fiscal revenue in the last 20-plus years, as a result of cuts included in the new Fiscal Code: “In the projection for 2017, Romania will probably have its lowest fiscal revenue in its history of over 20 years. A state with very low revenue cannot really survive. Romania’s revenue from taxes and duties accounts for 25.4% of the GDP, compared to a European average of 40% of the GDP. The distance separating us from Europe in terms of budget resources is enormous. Even our Bulgarian neighbors have reached almost 30% of the GDP in fiscal revenue, and we are by over 4 points lower than them.”
In his turn, economic analyst Constantin Rudnitchi explains: “We also have a piece of good news from statistics, the fact that investments start taking up a bigger slice of this economic growth, therefore this is a good thing, as investment may balance out a bit better against consumption in terms of economic growth. Otherwise, the important alarm bell is that if political decision makers don't pay attention to the state budget, we may very well go over the 3% of the GDP required by the Maastricht Treaty. That is definitely not a good signal, because once again everyone in Europe is talking about budget consolidation, about decreasing the budget deficit. From this point of view, Romania is on the opposite trend, which is not good. Beyond our European commitments towards observing this threshold, there is also the signal sent to investors, who obviously understand that the Romanian economy can slip. On the short term, things seem to be fine, because we have economic growth and consumption, but most decision makers look at the medium and long term, and this may cause the Romanian economy to slip, and no one would be happy about this. We should rather aim for a conservative position, preserving macroeconomic balance, in order to start reaping the benefits in terms of investments and for the citizens, meaning that citizens, employees, as well as pensioners, should start seeing the benefits in their everyday life.”
According to European Commission forecasts, Romania's current account deficit is supposed to go up to 2.6% of the GDP in 2017, and 2.8% in 2018, compared to 2.2% last year. The inflation forecast issued by the European Commission in 2017 is 1.8%, from minus 1% in 2016. The European Commission expects inflation pressure to increase, as the effects of previous tax cuts disappear, and as a result of solid domestic demand and growing wages. Its expectation is for Romania's average inflation rate to reach 2.9% in 2018.