Romania Urged to Replace Consumer-Led Economic Growth Model

(Bloomberg) -- Romania must adopt a different economic model if it’s to avoid a crisis stemming from the consumer-led boom it’s currently undergoing, according to the European Bank for Reconstruction and Development.

Having supercharged growth by cutting taxes and boosting public-sector pay, the government should now set it on a more sustainable path, said Matteo Patrone, a regional director at the London-based lender. Officials can do this by boosting infrastructure investments and improving the rate at which European Union development cash is absorbed, he said.

“The authorities seem to fully understand the need to change the growth model,” Patrone said in an interview. “This will be put into practice, hopefully sooner rather than later.”

The Black Sea country boasted the EU’s fastest economic growth in the third quarter of 2017, when gross domestic product surged an annual 8.8 percent. But political turmoil -- including three governments in the space of a year -- has discouraged investment, with Eurostat ranking Romania’s roads and health service the bloc’s worst. Complicating matters, the budget deficit is pushing up against the EU’s limit of 3 percent of economic output.

New Prime Minister Viorica Dancila says her main priorities will be to increase the government’s “European dimension” and use money from Brussels to fund large investments. In her first speech to parliament, she said she wants to open at least 350 kilometers (220 miles) of new highways by 2020, 250 kilometers of new railways and more schools, kindergartens and hospitals.

Infrastructure Gap

“The infrastructure gap in the country has become a serious impediment to the convergence process and action needs to be taken,” Patrone said. There’s dialogue now among international finance institutions and the European Commission about the need to develop the infrastructure in Romania, he said.

Economic growth is poised to slow this year as consumption looses steam and room for more fiscal stimulus is limited. The EBRD, one of the biggest investors in Romania with a current portfolio of about 1.7 billion euros ($2.1 billion), has mostly funded projects in the private sector in recent years. It financed 29 in 2017, totaling about 500 million euros.

To contact the reporter on this story: Andra Timu in Bucharest at atimu@bloomberg.net.

To contact the editors responsible for this story: Andrea Dudik at adudik@bloomberg.net, Andrew Langley, Andras Gergely

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