WB: Romania's economy to expand by 5.1pct in 2018; current account deficit to widen to 4.3pct of GDP

Romania's economy is projected to continue to grow above potential in 2018, with the country's Gross Domestic Product (GDP) likely to expand by around 5.1 percent in 2018, 4.5 percent in 2019, and 4.1 percent in 2020, and continued growth in consumption expected to widen the current account deficit to 4.3 percent in 2018, 4.7 percent next year and 4.9 percent in 2020, reads World Bank's "Macro Poverty Outlook for Europe and Central Asia" released on Tuesday.

Moreover, the fiscal deficit is projected to reach 3.3 percent of GDP in 2018, and then to decrease to 3 percent of the GDP in 2019 and 2020.

"Growth will remain solid in 2018, but medium-term risks to the outlook have increased. Pressures on the budget deficit, arising from an increase in recurrent spending, will continue in 2018. To improve the quality of growth, renewed attention should be given to public investment," the outlook shows.

The WB says the economy is projected to continue to grow above potential in 2018. GDP will likely expand by around 5.1 percent in 2018, driven by the fiscal stimulus and aided by a resurgent EU. Continued growth in consumption is expected to widen the current account deficit to 4.3 percent in 2018. Inflation is set to peak at around 5 percent in mid-2018 reflecting the excess domestic demand and the fading out of the base effect of the tax cuts. 

"The fiscal measures passed in 2017 have put pressure on the consolidated budget deficit. In the absence of corrective measures, the fiscal deficit is projected to reach 3.3 percent of GDP in 2018, which would place Romania on a trajectory to reentering the Excessive Deficit Procedure of the EU. However, the government has stated that, like in 2017, it would be ready to promote adjustment measures should the deficit threaten the 3 percent ceiling," the WB says.

Strong private consumption aided by the expansionary fiscal policy and continued growth in real wages, partly supported by minimum wage increases, should boost real incomes and lead to further declines in poverty incidence. Accumulating fiscal pressures and excess domestic demand limit the space for policy-makers to maneuver in 2018 and beyond. The current account deficit is on the rise, and inflationary pressures persist. These developments leave the Romanian economy vulnerable to exogenous shocks. 

The authorities may need to take corrective measures to keep the deficit below 3 percent of GDP in 2018 through good quality fiscal adjustment, the report shows.

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 the fiscal policy should be rebalanced away from boosting consumption towards mobilizing investment, including from the EU funds, to support a sustainable EU convergence path and social inclusion. Reforms in public administration and SOEs, increased regulatory predictability, as well as policies to address the large social and spatial discrepancies should be on the agenda of priorities of the government, the World Bank maintains.