RSS
EC report on Romania 2016: The fiscal deficit is expected to more than triple as a percentage of GDP in only two years
Romania's fiscal deficit is expected to more than triple as a percentage of the Gross Domestic Product (GDP) in only two years as a result of further expansionary fiscal measures that became effective from January 2016 and some more planned for 2017, which undermines the budgetary consolidation gradually achieved over the last years, reads a country report on Romania 2016 , a European Commission staff working document released on Friday.
"Strong economic growth in 2015 was reinforced by tax cuts and public wage increases. These were decided in an ad hoc manner and approved outside the budget process without provision for their financing as laid down in national legislation. Further expansionary fiscal measures became effective from January 2016 and more are planned for 2017. The fiscal deficit is expected to more than triple as a percentage of GDP in only two years. This undermines the budgetary consolidation gradually achieved over the last years and indicates that the fiscal framework has not been applied effectively to ensure fiscal sustainability," the document shows.
The report also says that Fiscal expansion, stimulating primarily domestic consumption, in the context of an already robust economic growth without supplementary supply-side measures could lead to new internal and external imbalances.
"At the same time, potential growth is constrained by inefficient public investment planning and coordination, the lowest EU funds absorption rate, an unfavourable business environment, low research and development intensity and protracted structural reforms, including of state-owned enterprises," the report says.
On the other hand, vulnerabilities related to the external position have been reduced against the background of strong economic growth, and Romania's economy is becoming more resilient. This is borne out by the significant improvement of the net international investment position since 2012, the sustained rebalancing of the current account, and gains in export market share, the EC experts say.
"The net international investment position is set to improve further. Challenges may arise in 2016 and 2017 with the acceleration of import growth due to surging domestic demand in response to the fiscal stimulus. Even in this case, however, the current account deficit is forecast to remain contained below 3 percent of GDP."
Other crucial economic aspects analysed in the report that signal the existence of specific challenges for the Romanian economy are: the effectiveness and efficiency of the public administration are limited and the business environment has hardly improved; judicial independence and respect for court decisions continue to face challenges; access to financing for small and medium sized enterprises remains limited, whereas high tax evasion and undeclared work reduce tax revenue and distort the economy. Moreover, poverty and social exclusion are among the highest in the European Union, particularly for children and Roma ethnics, the report shows.
If passed by Parliament in its original form, the law on debt discharge may generate a systemic risk for the entire banking sector, with risks for financial sector stability and implications for the whole economy , shows a country report on Romania 2016, a European Commission staff working document released on Friday.
"The law is still in draft, as it was sent back by the President to Parliament for re-examination. If passed by Parliament in its original form again, the law on debt discharge may generate a systemic risk for the entire banking sector, with risks for financial sector stability and implications for the whole economy. (...) The retroactive application of the law on debt discharge on the existing stock of loans, as laid down in the current form of this law, may constitute a challenge for several credit institutions and lead to weaker credit activity going forward," reads the document.