Romanian economy booms in 2004

January 19, 2005

Romania's National Institute for Statistics has announced a record growth of 8.3% in gross domestic product for the year of 2004, the highest growth since the fall of communism in 1989. This growth is surprising, seeing as most analysts predicted that GDP would grow by only 5-6% in 2004. Growth was driven mainly by domestic consumption, as well as by increased foreign investment and a good agricultural yield. The growth of 8.3% was also one of the highest in Europe, exceeding by far that of Romania's neighbours Bulgaria, Hungary and Poland.

Despite the introduction of a new 16% flat tax for personal income and company profit, which will boost foreign investment, economic growth is expected to ease in 2005 to around 5.5%. However, on the back of projected economic reforms, growth is expected to break the 8% barrier again in 2006.

Romania, for a long time lagging behind its neighbours in terms of economic growth and per-capita GDP, has posted strong growth since 2001. However, while having one of the highest standards of living in southeastern Europe, Romania continued to lag behind Central Europe in terms of per-capita GDP, which is now about half that of Romania's neighbour Hungary and around one-third of the European Union average.

While some analysts predict that the current high rate of growth is due to a long time of GDP decline in the 1990s, others say that Romania is entering a cycle of boom which will continue for many years to come. Many of the new EU member states, as well as candidate countries such as Romania, have recorded solid growth in the last few years and are aspiring to emulate Ireland, whose Celtic Tiger era of growth resulted in it transforming itself from one of the poorest countries in Western Europe to one of the wealthiest. The new 16% flat tax rate, as well as Romania's relatively low wages, are expected to boost foreign investment, which drove Ireland's economic boom and is also expected to play a major part in Romania's economic transformation.

The HVB Group mentioned in its recent report about the transition economies of Central and Eastern Europe that, by 2010, Romania will be a highly attractive destination for foreign investors and will continue growing economically at a solid rate. Romania's 2007 entry into the European Union is expected to further improve its reputation in the business world. However, although having a liberal fiscal policy, Romania must work in cutting red tape and discouraging corruption, which remain obstacles to further growth.

Inflation
Romania's inflationary statistics also suggested a positive trend, with prices growing by 9.8% between year-end 2003 and year-end 2004. While this is still one of the highest rates of inflation in the region, it compared favourably to the 22.5% inflation recorded in 2002 and the 14.5% recorded in 2003.

The Tăriceanu government's inflationary target in 2005 is 7%, even though many international analysts, including the HVB Group, suspect this will be hard to reach due to the predicted widening of the budget deficit in 2005. The budget deficit is expected to increase because of the new tax system, which will lead to lower revenues for the government. Romania has long been criticised for its high rate of inflation and has been pressured by the International Monetary Fund to reduce its budget deficit.