Romania Unlikely To Reach 2011 Budget Deficit Target - BRD

05.11.2011 By Florentina Dragu

Romania’s recently adopted laws which aim at structural reforms are likely to improve long-term sustainability of public finances, but their short-term effect will probably be insufficient to lower the budget deficit to 4.4% of gross domestic product in 2011, lender BRD said in a report Wednesday.

"The government will continue focusing on reducing personnel and capital expenses, but we believe improving tax collection and reducing fiscal evasion are absolutely mandatory to achieve medium-term sustainability," BRD said in its spring economic outlook report.

It said unpopular measures, including a 25% pay cut in the public sector and a higher tax sales, has helped the government achieve its budget deficit target of 6.5% in 2010.

However, the results "could have been even better," BRD said.

The bank estimates Romanian economy will grow by 1.5% in 2011, from a contraction of 1.3% in 2010. For 2012, economic growth is estimated at 3%.

Romanian annual inflation is expected to come in at 4.9% in December, slightly below the central bank's forecast of 5.1%.

"We currently expect the inflation surge to have a temporary nature and hover above 8.0% in the first half of the year, but decline significantly in the second half once the unfavorable base effect from the VAT rate hike exits calculations," the report noted.

BRD analysts estimate the leu will depreciate slightly against the euro in the coming period, followed by a recovery toward the year-end, provided the economy recovers and fiscal consolidation continues.

The lender forecasts an exchange rate of 4.15 per euro in the coming months and of 4.05 per euro by the end of 2011.

Romania's currency has gained 4.5% on average versus the euro since December last year to 4.0884 units Wednesday.