Consumers Take Back Seat in $19 Billion Romanian GDP Revamp

  • Deputy PM Borc details growth strategy focusing on production
  • Plan envisages GDP rising an average 5% a year through 2020

Romanian consumers, the driving force behind one of Europe’s fastest-growing economies, must step aside under a new growth plan that will funnel 17 billion euros ($19 billion) into manufacturing and production, according to Deputy Prime Minister Costin Borc.

The strategy -- drawn up with the central bank and President Klaus Iohannis -- runs to 2020 and envisages gross domestic product jumping by an average of 5 percent a year, said Borc, who’s also economy minister. Targeting 16 key areas, from agriculture to education, the proposals will also improve infrastructure, he said Tuesday in an interview.

Fiscal policy in the European Union’s second-poorest economy has recently focused on pre-election tax cuts and state-wage increases, emboldening shoppers and propelling growth to one of the bloc’s fastest paces. The new plan would mark a change of tack after some officials warned the current trajectory drains resources from longer-term investments. Borc is a member of the nation’s first technocratic government since the fall of communism. It’s set to step down by year-end.

“We made a mistake by trying to stimulate consumption beyond our capacity to produce goods internally and the effect is visible in the trade imbalance,” Borc said in his office in Bucharest. “Once you have production capacity, it also warrants infrastructure -- roads or digital networks -- it warrants education, health care and cultural development.”

A new round of tax cuts, including another one percentage-point cut in the value-added tax, takes force Jan. 1. The cabinet is pondering whether such measures are warranted.

“The pressure on next year’s budget is high,” Borc said. “We should lure foreign investors with less bureaucracy and a skilled work force instead of fiscal measures that only have short-term benefits.”

While retail-sales growth reached 19.5 percent from a year earlier in March, industry and exports have lagged behind. Meanwhile, imports have surged, advancing 9 percent in the first five months of 2016. GDP rose an annual 4.3 percent in the first quarter.

Financing sources for the five-year growth strategy have been identified and can be reallocated from the budget if a political consensus is reached, according to Borc, who said the fiscal deficit won’t breach EU limits. Prime Minister Dacian Ciolos’s government is seeking to build the necessary support for the plan to continue after elections in November or December, he said.

IPO Plans

Outside the strategy proposals, Borc said politicians should continue holding initial public offerings or selling minority stakes in state-owned companies such as Hidroelectrica SA and the Constanta Port. The transactions are part of an agreement with the International Monetary Fund and are aimed at boosting efficiency.

“This current technocratic government doesn’t have a mandate for privatizations,” Borc said. “But listings of stakes, IPOs or secondary public offerings will continue.”

Before any listing, Hidroelectrica’s board should devise a hydropower-production strategy and decide whether to keep investing in such plants in Romania, buy renewable energy companies or expand regionally by purchasing similar businesses in neighboring countries, he said.

Another important government task is to boost transparency within public administration to help facilitate years of anti-corruption efforts by prosecutors to halt the drain of state funds and discourage future graft.

While Transparency International still ranks Romania among the EU’s most-corrupt countries, the effects of probes against politicians -- including former Prime Minister Victor Ponta -- are starting to pay off, Borc said.

“I dare say corruption has declined significantly -- we can no longer say we have endemic corruption,” he said. “It’s not the merit of this government but of the justice system that abuses in public administration and major acts of corruption are now very limited.”

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