Agnes Lovasz
July 12, 2010

Romania’s recession this year will be deeper than previously seen as the government cut spending and raised the value-added tax to curb a swelling budget deficit, Bank of America Merrill Lynch said.

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BOA Merrill lowered its forecast for the European Union member’s 2010 economic performance to a 1.3 percent contraction from a previous forecast for a decline of 0.7 percent, Mai Doan, a London-based analyst at the bank, wrote in an e-mailed note. The economy shrank a record 7.1 percent in 2009.

“As spending cuts and a VAT hike become effective in the second half of 2010, while euro-zone demand slows into 2011, there is little support for economic growth in Romania,” Doan wrote. “Private consumption and investment continued to subtract from annual growth” in the first quarter, “a reflection of high unemployment and stagnant lending.”

Prime Minister Emil Boc’s administration, raised the value- added tax as of July 1 by 5 percentage points to 24 percent and made further cuts to public-sector wages to secure further disbursements from a International Monetary Fund-led 20 billion- euro ($25 billion) bailout program. The IMF backs a budget- deficit target of 6.8 percent of gross domestic product this year.

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