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Valentin Lazea: Absorption of EU funds could lead to a 4.5% increase of potential GDP

de Victor Bratu 19.3.2017

The International Monetary Fund (IMF) told the officials of the National Bank of Romania (BNR) that a 95% absorption of the European funds would lead to increasing the potential GDP to 4.5%, said Wednesday Valentin Lazea, Chief economist of the National Bank of Romania, at the launch of the “2017 Economic Report for Romania”.

The IMF, which is now in Romania, made a presentation at the National Bank and said that if the European funds could be attracted much better than now and reach 95%, which is a dream, and if this absorption rate would translate into investments where needed, potential GDP, based only on these two elements could be 4.5%. So, potential growth by attracting financing and investments, aside from all other things, demography, health, could be 4.5%. That is not a story I invented,” said Valentin Lazea, according to Agerpres.

He also mentioned Wednesday that Romania reached an excess of demand in the first quarter of 2016.

Between 2010 – 2015, there was a deficit of demand in Romania, which means that expansionary monetary or tax policies would have been justified during that period. When you have a shortage of demand you can afford a tax and/or money relief. Starting with the first quarter of last year, we have a surplus of demand, meaning a positive output and throwing coals on fire now is no longer appropriate. The expansionary tax policy during the excess demand only serves to worsen the blaze right when it should not,” said the BNR official.

According to him, policies should be counter-cyclical.

How we reached from the demand deficit to a surplus? Because the GDP increased year after year faster than the potential GDP. A normal increase that does not have a negative impact is around 3% per year. This is the potential of the current given factors. This potential GDP can be increased by measures of structural reform. The fact that we grew above the potential GDP was OK when we had a demand deficit, but now, the fact that we grow above the potential when we already have an excess of demand becomes a problem because sooner or later that will lead to inflationary pressures and other types of pressures on the public debt and its financing“, added the Chief economist of BNR.

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