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The aftermath of the VAT increase goes on. The measure decided by the government on July 1 first and foremost means lesser consumption, an analysis by X-Trade Brokers suggests. ‘Increasing the value-added tax is, no doubt, the kind of measure that will contribute to a decline in consumption considering the 8-10 per cent price mark-ups that are being contemplated , therefore we will surely see an additional fall of consumption, which is a first hindrance to coming out of recession; the second encumbrance are, however, the consequences on credit: with the effect it is expected to have on inflation, the VAT hike may also prompt the central bank to elevate the key-interest rate or not to cut it further, in which case credit will continue to be and difficult’, the head of the X-Trade Brokers subsidiary in Romania, Victor Safta, states in a press release. As for the national currency, financial markets had a very violent reaction on Friday, after the Constitutional Court had ruled the 15 per cent pension cut unconstitutional, therefore blocking the enforcement of the entire austerity plan. The RON/EUR exchange rate on Friday went up to a maximum of 4.2831, but recovered some of the loss towards the end of the trading session. ‘All investors grasped the danger of the following instalment of the IMF loan not being disbursed and reacted’, X-Trade Brokers analysts say. ‘The announcement that the value-added tax would be put up came at the week-end, when financial markets were closed, therefore they took over the ‘initial shock’ rather weakly, with quotations first thing in the morning on Monday being close to those registered on Friday. Nonetheless, the local currency depreciating trend is obvious’, Victor Safta said. Yesterday, the RON fell to an all-time low of 4.3 to the euro, but the exchange rate improved slightly during the rest of the day when the central bank – brokers say - made an indirect intervention, Mediafax reports. Brokers also say corporate clients are worried now that BNR director Eugen Radulescu has said the exchange rate may escalate to 5-6 RON/1 EUR. X-Trade Brokers analysts add that, the planned VAT hike would affect the public and also the private sector through its long-term consequences; the falling consumption because of big prices will make more and more companies downsize and lay off workforce and the ‘effect will carry on in a spiral on a medium and long term’, they claim. ‘In order to be bearable by the private sector, the measure of increasing the VAT should be accompanied by others designed to support companies so that at least most of them be able to sustain part of the price rise that should not reach the end consumer in its entirety and discourage consumption’, Victor Safta noted. Based on the existing elements, the X-Trade Brokers analysts expect Romanian economy to decrease by a minimum of 2 per cent this year. ‘I believe everyone now is looking at how the economy will perform in 2011 and what measures should be taken to make sure Romania comes out of recession at least next year’, Victor Safta said.