By Jerom Bolt
Romania's economy is projected to grow above its potential in 2017 and 2018, the World Bank said in its latest Regional Economic Update, Migration and Mobility in Europe and Central Asia released on Thursday.
'GDP will likely expand by around 5.5 percent in 2017, driven by the fiscal stimulus and aided by improvements in the European economy. 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. The National Bank of Romania anticipates a gradual increase in inflation towards 2 percent at the end of 2017,' the WB report reveals.
According to World Bank outlooks, Romania's GDP growth at constant market prices will be 4.1 percent in 2018 and 3.6 percent in 2019, while the current account balance is expected to reach 3.5 percent in 2018 and 3.8 percent in 2019.
The international financial institution cautions that the accumulating fiscal pressures and excess domestic demand limit the policy-makers' maneuver space in 2017 and beyond. The fiscal and current account deficits are on the rise, and public debt dynamics have not been stabilized, the report notes.
These developments leave the Romanian economy increasingly vulnerable to exogenous shocks. 'The authorities should consider additional fiscal measures if the budget deficit risks exceeding 3 percent of GDP in 2017 and 2018,' the WB remarks.
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, the WB said.
It goes on to state that increasing Romania'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.
Not in the last place, renewed efforts are needed to improve labor participation and generate broad-based employment, as unemployment remains high among youth and the low-skilled, 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 WB considers.
This May the WB was estimating that Romania economy will grow 4.4 percent this year, in an upgrade from the 3.7 pct projection made in January. The international financial institution also revised 0.3 pct upwards its GDP growth estimates for 2018 and 2019, when Romania economy is seen growing 3.7 percent and 3.5 percent, respectively.
According to forecasts for Europe and Central Asia, the annual GDP growth for this region will be 2.2 percent in 2017, the most significant advance since 2011.