VAT hike to deepen economic decline

Inflation will go up to 7% or even 8% after the VAT hike, the economy will shrink more than previously anticipated, but the RON stands chances of avoiding a significant depreciation if the agreement with the IMF remains in place.

The inflation hike to 7 or 8% by the end of the year and the deepening recession as a result of the decline in private consumer spending will be the main effects felt by the economy after the VAT raise from 19% to 24%, analysts say.

A double price increase pace would narrow the National Bank’s room to manoeuvre, and the bank could be forced to raise the key rate at least to a level that covers inflation, so that the loans for individuals and companies will become more expensive.

Economists say the intensity of the effects of such a decision will largely depend on the reaction of the people and will only be possible to gauge precisely in a few months’ time.

Laurian Lungu, managing partner of Macroanalitica says that the five-percent VAT hike is too steep compared with the difficult situation of the economy and as such will not necessarily help public finances improve.

“Hungary did the same thing last year and now is not doing that well in terms of public finance. If the projected revenues are not collected to the budget, I don’t know what the next step will be, because they surely won’t collect much by raising the flat tax,” Lungu adds.