The increase in food and energy prices and the decrease in remittances sent from abroad have a strong impact on vulnerable Romanians. A protracted war in Ukraine could significantly weaken economic growth and lead to an increase in poverty in the short term, according to a World Bank report.

The prospects of the Romanian economy depend on the development of the war in Ukraine and its impact on the European economy. The poverty rate is expected to drop to 11.7% in 2022.

Poor and vulnerable households disproportionately affected by rising food and energy prices despite price caps

Over the past two decades, Romania has made impressive progress in terms of economic growth. However, the shocks caused by the COVID-19 pandemic and the war in Ukraine have exposed the structural vulnerabilities of the economy, including persistent poverty and disparities between regions and between urban and rural areas, structural rigidity in the labor market, and weakness in fiscal policy. as well as significant institutional constraints that prevent efficient use of resources.

Poor and vulnerable families have been disproportionately affected by rising food and energy prices, despite gas and electricity price caps. The economic recovery helped reduce the share of the population living on less than $6.85 a day in 2017 PPP prices to 11.7% in 2022 from 12.1% in 2021.

The main short-term challenges are limiting the socio-economic consequences of the conflict in the region and the COVID-19 crisis. Significant inflationary pressures have led to a tightening of monetary policy, and increasing external imbalances are increasing currency pressures and risk aversion in markets.

Absorption of European funds will be important

Romania’s economy grew by 5.8 percent in the first half of 2022 thanks to strong private consumption, supported by the gradual lifting of COVID-19 restrictions, higher wages and lower unemployment. Labor shortages as well as high inflation have pushed up wages, with nominal net wages up 12.3% in June 2022 compared to the previous year. Meanwhile, annual inflation has risen to 15% in July 2022, and inflationary pressures have prompted the National Bank of Romania to gradually raise the monetary policy interest rate.

Rising food and energy prices have undermined the real purchasing power of households, especially among the poor and vulnerable. Almost 90 percent of low-income households said they had to sacrifice other expenses to cope with food and energy inflation.

The war in Ukraine and supply disruptions will continue to affect the economies of the countries where Romanians have gone to work, reducing their remittances. Thus, despite economic recovery and employment, the poverty rate is declining at a moderate pace.

European funds should also reduce fiscal pressure

Romania’s economy is estimated to grow by 4.6 percent in 2022, but estimates are subject to a high degree of uncertainty. A slowdown or possible recession of major trading partners could affect Romania’s growth in 2023.

Growth prospects depend on several factors, including the development of the COVID-19 crisis, the dynamics of inflation, as well as the severity of the conflict in the region and its impact on the European economy (with which Romania is closely integrated).

Romania’s ability to absorb EU funds will be important for a sustainable recovery process. European funds should also ease fiscal pressure.

In the medium term, the budget deficit will remain high. Fiscal consolidation efforts remain important and must address the large structural deficit that requires reforms to improve spending efficiency.

See the full report here

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