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.
Modest Growth in Europe and Central Asia Amidst Growing Polarization, says World Bank Report
There will be a modest increase in GDP growth in 2016 for countries in the Europe and Central Asia (ECA) region. Low oil and other commodity prices in the eastern part of the region, a decline in investment rates in the European Union, and ongoing structural challenges in all countries are hampering growth in the region and contributing to an increase in populism and polarization, says the latest World Bank ECA Economic Update.
According to the report, launched on Tuesday in Bucharest, the region is expected to grow a modest 1.6 percent in 2016 – up slightly from 1.4 percent in 2015 – but declines in both incomes and consumption will likely mitigate this modest growth. This trend is projected to continue into 2017 and 2018, with growth forecast at 1.5 percent and 1.8 percent, respectively.
Growth is forecast to remain positive in Eastern Europe and Central Asia, with GDP growth of 0.7 percent in 2016, 2.3 percent in 2017 and 2.6 in 2018. Meanwhile, growth in the European Union is expected to decline slightly, while growth in the Western Balkans is forecast to grow, from an expected 2.7 percent in 2016 to 3.2 percent in 2017 and 3.5 percent in 2018.
“The Brexit vote and the refugee crisis are testing European cooperation, while the eastern half of the region is still grappling to adjust to lower oil prices,” says Hans Timmer, World Bank Chief Economist for ECA. “Failure in the whole region to unleash new sources of growth is contributing to an increase in populism and polarization, as well as mistrust in institutions.”
Surveys from the report show that concerns about a changing economic landscape and, in particular, a lack of job security are adding to a rise of political polarization in countries in ECA. A rapid increase in temporary and part-time work, and shifts in the demand for skills, driven by new digital technologies, are contributing to an increase in concerns among people in the region and a slight shift in support away from the middle of the political spectrum.
In the absence of strong policy responses, the ongoing structural challenges hampering the economies in the region threaten to impair growth and poverty reduction over the long term, the report argues. To meet these challenges, governments and societies need to provide new perspectives in a new economic era without falling back on fixes that worked in the past under very different circumstances.
“The modest growth we are seeing is a step in the right direction, but not enough to ease concerns of people in the region worried about their economic prospects,” says Cyril Muller, World Bank Vice President for the ECA region. “Governments can act now to help. For example, they can promote more life-long learning to help people find and keep good jobs. They can also provide child and elder care to facilitate more flexible employment choices. These actions can ensure equality of opportunity and boost overall growth.”
Other policy options include support for firms in exploiting new export opportunities offered by a more competitive environment for manufactures, cutting the cost and time needed to establish new businesses and enter new markets, and reducing limits on the movement of labor to new activities. These actions should also ensure that essential labor and social protections are provided or maintained to prevent suffering and the erosion of social cohesion especially for vulnerable groups, notes the report.
The report also calls for improved research and data on inequality, including indicators of people’s perception of changes in inequality. Further evidence of the links between demand for skills and changes in life satisfaction can also help guide policy changes necessary to adjust to important economic changes and reduce social and political anxiety.