“VAT hike is no doubt a measure that will lower consumption, given the 8-10% price growth as it is anticipated, so we will definitely see a further decline in consumption and hence put a crimp on the country’s exit from recession. The measure will also spill over lending which would boost inflation rate. A VAT growth could force the National Bank of Romania raise key rate – or at least halt its series of rate cuts, and therefore, access to lending will remain poor, and credit costs will remain high”, said Victor Safta (photo), director of X-Trade Brokers Romania.

As for the national currency, investors had a harsh reaction on Friday after the Constitutional Court rejected the 15% cut in pensions that blocked the implementation of the entire austerity package.

The leu fell Friday to 4.2831 low against euro, but recouped some of the losses in late trading. “Investors grasped the fact that Romania was at risk of losing the next tranche from the International Monetary Fund and reacted accordingly”, X-Trade Brokers said.

X-Trade Brokers analysts expect Romanian economy to contract by 2% this year. “The problem here is the economic performance of Romania in 2011, and what authorities should do so as to emerge from the economic recession”, director of XTB Romania added.

“For the private sector to cope well with the VAT increase, the fiscal measure should be attached to a set of actions to stimulate sector so as to dodge a drastic decline in consumption”, Safta pointed out.