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The World Bank has significantly improved its estimates for Romania's economy advance this year to 5.1 percent from 4 percent, as estimated in June, according to the Europe and Central Asia Economic Update released by the international financial institution on Tuesday.
The World Bank however cautions that the 5.1 percent leap in the Romanian economy this year, after a 3.8 percent advance last year, will be followed in 2017 by a slow-down of the increase to 3.8 percent, which will decline even further in 2018 to 3.4 percent.
"Growth is expected to remain solid in 2017 as additional fiscal relaxation measures will be implemented, including a further VAT cut to 19 percent, the elimination of the special construction tax and a reduction of the excise rate for fuel," the World Bank report shows. "However, the adoption of the debt discharge law has introduced uncertainty into the legal framework of the financial sector with potentially negative effects on financial inclusion, bank balance sheets and the construction sector, and will likely lead to legal challenges by the banks," the World Bank added.
The consolidated budget deficit would widen towards 3 percent of the GDP, both in 2016 and in 2017, from 1.5 percent of the GDP in 2015, which will take public debt to 40.3 percent of the GDP in 2017, from 39.8 percent of the GDP in 2015. "The government will need to contain current spending pressures and improve tax efficiency to avoid entering the Excessive Deficit Procedure," the World Bank warns.
Moreover, the WB draws the attention on the risks that could worsen outlooks. "The approaching December 2016 general elections increase the risk of further ad-hoc spending and slow-down in the implementation of structural reforms. Externally, increased uncertainty about global economic growth and financial sector volatility have increased the probability of a reversal in investor sentiment in emerging market economies, which in turn could trigger pressures on the currency and an increase in external debt," the World Bank warns.
"Over the medium term, the focus of fiscal policy needs to be rebalanced from boosting consumption to supporting a sustainable growth path that would put Romania on a trajectory to becoming a high-income country. Structural reforms that will help enhance the productive capacity of the economy include measures to combat corruption, enhance the quality of spending, strengthen the public administration and SOEs, and simplify the regulatory environment. Renewed efforts are needed to improve labor participation and generate broad-based employment, as unemployment remains high among the youth and the low-skilled, and to ensure that all Romanians get access to high quality public services."
The International Monetary Fund (IMF) has recently estimated that Romania will register this year the highest economic growth in Europe, 5 percent, followed by Ireland with 4.9 percent.
In early November, the European Commission revised upwards by one percentage point, to 5.2 percent, the estimates for the Romanian economy growth this year.
