ROMANIA: Budget Deficit Could Exceed 2010 Target, EC Says

Romania’s mid term economic growth hindered by ageing population. According to the European Commission, Romania’s budget deficit this year could exceed the target adopted by the Government because some expenditure reduction measures could be difficult to implement from a social and political point of view. EC also notes that the Convergence Program does not contain sufficient measures for 2011 and 2012, Mediafax informs. ‘In 2010 the deficit could be more unfavorable than the one projected by the program, considering that some of the measures meant to reduce expenditures, such as public sector layoffs, are difficult to implement from a social and political point of view,’ a document published yesterday and containing the European Commission’s (EC) comments on Romania’s Convergence Program for 2009-2012 points out.

At the same time, the program does not spell out sufficient public finance consolidation measures that would facilitate falling within fiscal goals assumed for 2011 and 2012.

The EC considers the program is adequate and most of it is in line with EU regulations, however the attainment of this year’s budget deficit target mainly depends on complete and rigorous implementation of the consolidation measures devised by the Government. This year the Government wants to reduce the budget deficit to 5.9 per cent of GDP at most (6.3 per cent according to European methodology). The Convergence Program that the Government filed to the European Commission no longer includes the risks taken into account, risks that among other things pointed to the possibility that the deficit might not drop to 3 per cent in 2012, the GDP growth might be lower and the state might not fully recover Rompetrol’s debt.

Romania’ mid term economic growth will be affected by such crisis effects as lower investments, credit market pressure and rising unemployment, adding to which is the impact of an ageing population and public finance sustainability, the European Commission (EC) said, according to Mediafax. It will therefore be of essence for government to step up implementing structural reforms towards ensuring an economic growth potential able to strengthen the sustainability of the public finance system, the Commission says. EC also underlines it is important for Romania to implement pension system reform, as well as the fiscal and structural reforms included in the trade balance balancing program agreed with the Commission. Further more, Romania needs to take concrete steps to speed up absorption of EU structural funds, given this would allow more investment into long term engines of economic growth without putting budget deficit targets under threat. Last year, Romania’s economy contracted 7.1%. For this year, Romanian authorities and experts with the International Monetary Fund estimate an economic growth of 1.3%, to increase to 3.7% in 2012.

EC considers that the macroeconomic scenario on which the government bases its projection for an economic growth of 1.3 per cent this year and a GDP growth of 3.7 per cent by 2012 seems to rely on ‘slightly favorable assumptions for 2010.’ Nevertheless, the growth estimates included in the government’s macroeconomic scenario ‘seem plausible’ for 2011 and 2012, and the external and fiscal imbalances that have contributed to recession’s severity in Romania will continue to lessen, the EC report shows.

Government’s projections on inflation rate in 2010, 2011 and 2012 seem optimistic when considering the evolution of salaries, energy price hikes and possible hikes of regulated prices, the EC report shows, quoted by Mediafax. On the other hand, the impact of inflationary pressures could be countered by the RON’s appreciation against the EUR.

EC also warns that an unemployment level of 7.7 per cent this year, as anticipated by the government in its Convergence Program, seems a rather optimistic target considering the early stage of economic recovery. The Convergence Program’s projections on unemployment are calculated on the basis of the International Labour Bureau’s methodology.

According to data offered by the National Labour Force Agency (ANOFM), unemployment level grew from 5.3 per cent in February 2009 and 8.1 per cent in January 2010 to 8.3 per cent in February this year. However, the ANOFM figures are calculated based on a different methodology.

Source: Nine o'Clock