A year ago, the Ponta Cabinet operated the first food VAT cut from 24% to 9%, which sped up consumer spending and led to growth across the entire economy. The second VAT cut, from 24% to 20% for all other products and services came on January 1, 2016.
The Romanian government is unable to curb the total debt: the decline in the foreign currency debt means an increase in the leu-denominated debt. The sharp decline in leu interest rates in the last four years from 6% to 1% or 2% a year made the government borrow more in domestic currency than in euros or dollars.
If adding the government guaranteed debt, the total debt stood at RON332 billion at the end of May, an increase of RON49 billion on the year-ago month.
The public debt as a percentage of the GDP stood at 38.5%, below the 40% threshold which would become a reason for concern. The problem is the debt will increase, especially with the budget deficit expected to reach 3% of GDP this year, compared with 1.4% in 2015.
Romania’s public finance was stable last year, according to the country report by the European commission, but is expected to deteriorate this year and next year, when debt should go to over 40% of GDP.
Romania does not have any trouble rolling over its leu, euro or dollar-denominated debt, on the contrary, its government paper in is demand on the international market because it offers positive interest rates, which are two or three times higher than what the big European countries are paying.
Germany last week sold bonds with negative interest rates, which means investors agreed to lend it money knowing they would get less not more on the due date. Romania has yet to accomplish such a feat and its central bank governor Mugur Isarescu does not want that.
Romania needs constant funding from both international and domestic market for its public and private sector. Unfortunately, the low loan demand, especially from the government for infrastructure projects, made foreign banks repay their lines of credit to their parent groups (EUR13 billion in five years) and rely on using Romanian customers’ savings for loans.
(English version by Loredana Fratila-Cristescu)