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News 26 May 17

Romanian Growth Down to Higher Consumption, Bank Warns

Romania's Central Bank in a report on Friday warned that the country’s recent high growth rates were based too much on higher consumption of imports rather than on investment.

Ana Maria Touma
BIRN
Bucharest
Romania's Central Bank. Photo: Stefan Jurca/Flikr.

Rapid consumption-based growth, lack of investment in education and innovation, unpredictable fiscal policies as well as low-skilled labour are some of the main risks facing Romania's economy, the Central Bank, BNR, warned on Friday in a report.

The report came out a day after the Ministry of Finance announced a budget surplus for the first four months of 2017 of over a 1.35 billion lei [200 million euros].

However, the report's experts warn that the surplus is misleading as it was mainly caused by wage rises that then brought in more tax revenue.

Romania has been the EU's fastest growing economy in recent years with growth rates of up to 4.8 per cent a year.

But experts say a macroeconomic imbalance is reflected in fast economic growth that is not based on investment but on consumption.

“Economic growth needs to be sustained but also sustainable in order to close the gap with developed economies,” the report said.

The BNR pointed out that Romania’s current account deficit increased in 2016 to 2.3 per cent, while its budget deficit was 3 per cent, posing risks to public sector financing and investments if future economic growth is not as high as expected.

The BNR says the government is continuing to encourage consumption by relaxing its fiscal policy and by increasing public sector pay.

The report points out that higher consumption will likely widen the trade deficit, as domestic production will not be able to keep up with demand.

The report also points out other risks that might impact the economy and urges Romania to continue structural reforms in education, the business environment, administration and justice.

It called for “a better calibration of the economic policy mix, to allow the reaching of objectives in the medium and long term, as well as Romania’s economic convergence with the euro-zone”.

The BNR notes a lack investment in innovation, both in the public and private sector. Research and development expenditure have been flat in 2015 and 2016, accounting for only 0.5 per cent of GDP. 

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