Measures Impacting the Economy

The Romanian National Statistics Institute made public the results of its first evaluation of the Romanian economy in the last quarter of 2013.

Corina Cristea, 21.02.2014, 12:10

Data recently made public by the Romanian Statistics Institute show that the countrys GDP in the last quarter of 2013 had the highest growth in the EU. At the same time, Romania’s GDP over the entire year went up 3.5%, exceeding the most recent prognosis of 2.8%, from both the authorities and economic analysts. One of them, Aurelian Dochia, told Radio Romania that the positive evolution in 2013 may be an important moment for the country’s future economic development, even though it was partly determined by circumstantial factors, such as a very good year in farming:

Aurelian Dochia: “It’s important to know that Romania reported the highest growth figure in the EU and that is a great opportunity for the country. It draws attention, in terms of investment, mostly from the EU, and investors are always attracted to high growth rates. In my opinion, this rate may restore investor confidence, and in a second stage, consumer confidence. This could generate a cycle of medium term growth, and, of course, for us it is very important to follow through. I believe that Romania may come to be seen as Poland was, a few years ago. While the whole of Europe was in recession, Poland reported 3% growth. Maybe it is time for Romania to be seen in a different light, getting the benefit of a more favorable attitude in terms of investors and business partners.”

However, this takes some structural reforms, Aurelian Dochia says:

Aurelian Dochia: “In order to sustain such a trajectory, we have to match this moment of positive surprise announced in statistics with appropriate measures in terms of economic policies. We have to do the things that we promised in the past but have not done yet, including investments in infrastructure and European fund absorption. Unfortunately, there are some risks coming from the fact that 2014 is an election year. The experience of the last 20 years shows that election years always involve shortcomings in terms of macroeconomic policies, so we can only hope we will find the wisdom to exploit this moment.”

In parallel with economic growth, reduced inflation and better absorption of European funds seem to confirm Romania’s positive trend. At the same time, the government in Bucharest announced it plans to come up with solutions to support people with small incomes. One of these solutions is to replace the 16% flat tax with a progressive tax, in three stages, which is part of the government’s financial strategy for 2014 – 2016. Small salaries may get taxed by 8% or 12 %, maintaining the 16% flat tax for the other categories.

Another hoped for measure is the government’s plan to pass an emergency ordinance on behalf of people with bank loans. According to this ordinance, people with incomes of around 1610 lei, or 360 Euros a month, may negotiate with banks to halve their monthly payments for two years. This measure, which the IMF green lighted, is aimed at people who were never late more than 90 days in their loan payments, and who could benefit from this measure to the maximum limit of 500 lei. After the two years, they may get a maximum of 200 lei in tax incentives. Professor Dan Armeanu explains the impact of such a measure:

Dan Armeanu: “A measure such as this right now would not have much of an economic impact. Making some calculations, I estimate that the impact would be around 0.15% of the GDP, taking into account the multiplying effect in the economy. The fact is that macroeconomic stability at this point is not affected by this measure, which doesn’t does affect too much the budget deficit either. Therefore any such measure may seem welcome. Nevertheless, there are a lot of debatable aspects here. For instance, this measure is somewhat inequitable. It favors the people with small incomes, below 1,600 lei, but what about the people who earn 1,650, or 1,700, or 1,800? Because between 1,600 and 4,500 we have about 25% or so of employees.”

It is estimated that, if applied, this measure could benefit as many as 900,000 Romanians.