Romania's economy grew 7.7% in Q4 on investment, budget deficit may exceed

Romania's economy grew 7.7% in the Q4 of last year as investment and consumption grew ahead of EU membership on January 1. Budget deficit will exceed EU limits in its first year as a member of the bloc unless it trims spending or boosts revenue, the IMF said.

Growth slowed from 8.3% in the Q3, the National Statistics Institute said today in an e-mailed statement. Q3 growth last year benefited in comparison with the year-earlier period because of floods that swamped agricultural land in Romania in 2005. "Growth is still above the potential output which would suggest inflationary pressures remain," Radu Craciun, ABN Amro Bank Romania's head of research, said in a telephone interview today. "The threat of an overheated economy is there."

Higher wages, increased lending and a stronger local currency boosted spending and growth as Romania prepared to join the EU along with neighboring Bulgaria. Retail sales last year rose 24% from 2005 and consumer lending jumped more than 50%. For the full year, GDP also grew 7.7%, faster than growth of 4.1% in 2005, the institute said. The institute said it will release more data on the GDP in a news conference on Friday. Growth was also boosted by a 75% increase in foreign direct investment in 2006 from the previous year to €9.1 billion and the government deficit widened to 1.7% of GDP from 0.8% of GDP.

The government aims to increase spending further this year and targets a budget deficit of 2.8% of GDP. The inflation rate also slowed last year to an annual 4.9% in December of last year from 8.6% a year earlier. The central bank cut its benchmark interest rate to 7.25% from 8% last month. Ion Ghizdeanu, the Romanian government chief economic forecaster, predicted in an interview on February 19 that economic growth this year will slow to 6.5% because of declining expansion of retail and industrial sales.

A team from the International Monetary Fund, which ended a visit to Romania today, predicted that the country's economy will grow as much as 7% this year. "The economy is still growing very rapidly," the IMF's Romania mission head, Emanuel van der Mensbrugghe, said in a news conference in the capital, Bucharest, today. "We have a large private sector boom and a large capital influx."

The government targets a gap of 2.8% of GDP although "revenue is overestimated and wage expenditure is under estimated," the IMF's Romania mission head, Emanuel van der Mensbrugghe, said today at a news conference in the capital, Bucharest. "Wages rose since the budget was approved. The underlying deficit is 3.8% of GDP." The EU requires member states to maintain budget discipline, with a shortfall of no more than 3% GDP per year. Romania says it needs to increase spending on infrastructure and social areas to catch up with standards in other EU nations since it joined the bloc on January 1.

The IMF estimated that public-sector wages may rise 20% this year. Van der Mensbrugghe said Romania is the only country that gives its state employees three wage increases a year. "Wage policy is quite disconcerting," van der Mensbrugghe said. "Inflation is around 4% to 5% in Romania, the exchange rate has been appreciating, it is puzzling that public sector wages are scheduled to rise on average by 20%."

Van der Mensbrugghe said government spending could also raise the annual inflation rate to as much as 5.5% at the end of this year from 4.9% at the end of 2006. Romania, which joined the EU on January 1, ended its monitoring agreement with the IMF last July amid disagreement over government spending. The IMF called last year for a balanced budget while the government said it needed to spend more on EU-related projects. T

he government's budget deficit last year widened to 1.7% of GDP from 0.8% in 2005 as it increased spending by 25%. The government said it needs to boost spending further this year on health care, highways, education, agriculture, pensioners and other areas. Van der Mensbrugghe also said Romania's current-account deficit could widen to as much as 12% of GDP this year from 10.3% last year and 8.7% in 2005 if Romania doesn't work to contain it.

"With the widening of the current-account deficit Romania is becoming more and more vulnerable to external elements," he said. "We see the need for a tightening of macroeconomic policies to achieve macroeconomic stability in 2007."  (Bloomberg)