Romania is currently on a solid economic growth path. The steep fall of GDP encountered during between 2009 and 2010 has already been surpassed. The National Commission for Prognosis, in its recently published autumn forecast, estimated that for the next five years the economy will increase around 4 per cent per annum.
And there is more good news as starting from January 2016, the VAT rate will decrease from the current 24 to 20 per cent and further to 19 per cent in 2017 — back to the rate before the 2008 crisis. In June 2015, the VAT rate for food products was sharply reduced to 9 per cent.
The Government also plans to increase the minimum salary in parallel with a sustained offensive to curve fiscal evasion which would compensate the general decrease of tax levels. There will be a new philosophy of the taxation system, with a focus on encouraging work by decreasing mandatory wage contributions to the state budget. Inflation and budget deficits are under control, there is still a current account imbalance, but exports keep rising with remittances and foreign investment compensating for the imports gap.
There are still lots of challenges ahead which if not seriously addressed may cause significant negative impact on Romania’s long term growth. One of the major threats is the obsolete transport infrastructure which continues to hamper the development of some of the country’s regions. The 2007-2013 EU programming period made it possible to finalise the East-West corridor crossing Romania from the border with Hungary to the Constanta harbour on the Black Sea (road and railway). Despite that, corruption and the lack of proper preparation of necessary works led to re-allocation of funds or loss of funds with the postponement of those projects till the end of current period, namely 2023.
The Europe 2020 strategy established some ambitious goals for all EU Member States. Romania is lagging well behind the assumed targets with respect to Research, Development and Innovation (R&D&I), school dropout and population with university education and employment.
By contrast, Romania is a champion in renewables and reduction of greenhouse gases. Unfortunately, these achievements are not an effect of positive restructuring of economy. Instead, they result from non-efficient industry closure (metal processing, machine building, refineries, chemical units, heavy machinery) or the double subsidies system (investment grants and mandatory purchase of a certain quota of green certificates by all electricity consumers) as in the case of renewables.
The closure of large industrial activities was accompanied by massive layoffs with significant masses of early retired people as a compensation for the forced shutdown of the former large state-owned enterprises. This situation is now reflected by a huge pressure on the public pension and health systems, funded by contributions and paid by a limited number of existing employees. Therefore, raising employment in the private sector is another major challenge Romania is facing.
Romanian economy is currently lacking a critical mass of companies involved in production and services, be them SMEs or large firms. Statistics indicate that the density of SMEs in Romania is below 50 per cent of the EU average. There are many reasons for this situation, as identified in public strategies such as lack of capital, limited access to financing, difficulties in accessing markets, reduced innovation. Decreasing school dropout especially in rural areas, building entrepreneurship and engineering competences are other major challenges Romania is facing on medium and long term.
The views expressed in this opinion editorial are the author’s own and do not necessarily reflect Emerging Europe’s editorial policy.