Inflation will go up to 7% or even 8% after the VAT hike, theeconomy will shrink more than previously anticipated, but the RONstands chances of avoiding a significant depreciation if theagreement with the IMF remains in place.
The inflation hike to 7 or 8% by the end of the year and thedeepening recession as a result of the decline in private consumerspending will be the main effects felt by the economy after the VATraise from 19% to 24%, analysts say.
A double price increase pace would narrow the National Bank'sroom to manoeuvre, and the bank could be forced to raise the keyrate at least to a level that covers inflation, so that the loansfor individuals and companies will become more expensive.
Economists say the intensity of the effects of such a decisionwill largely depend on the reaction of the people and will only bepossible to gauge precisely in a few months' time.
Laurian Lungu, managing partner of Macroanalitica says that thefive-percent VAT hike is too steep compared with the difficultsituation of the economy and as such will not necessarily helppublic finances improve.
"Hungary did the same thing last year and now is not doing thatwell in terms of public finance. If the projected revenues are notcollected 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.
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