Romania continues to face problems related to the fiscal deficit and trade balance, according to the European Commission’s report on Romania. This makes the economy vulnerable to shocks. The high budget deficit has not been properly corrected in recent years. Maintaining high public deficit figures could increase Romania’s dependence on external sources of financing, which would make the country vulnerable to external shocks. A reliable path of fiscal consolidation is a key policy priority to mitigate risks to the stability of the economy, the authors of the Report note

Consolidation will require the application of PNRR reforms, especially those aimed at structurally increasing public revenues

and much stricter implementation of the budget than in recent years.

This in-depth analysis presents the main findings of Commission staff assessing Romania’s macroeconomic vulnerability for the purposes of Regulation (EU) no. 1176/2011 on prevention and correction of macroeconomic imbalances. It provides the Commission with technical information for the European Semester – Spring Package 2024 communication

Romania’s economy slowed in 2023 but is expected to accelerate in 2024, but risks remain significant

Real GDP continued to grow by around 2% in 2023, well below the 4.1% recorded in 2022 and 5.7% in 2021. The slowdown reflected the impact of inflation on household incomes and weakening global demand.

Infrastructure investment was the main contributor to growth in 2023.

Although labor market tensions are easing, real wage growth remains higher than productivity growth. The current account deficit is expected to narrow from 9.3% of GDP in 2022 to 7.0% of GDP in 2023 due to weaker domestic demand growth and lower energy prices.

According to the Commission’s 2024 Winter Interim Forecast, economic growth will gradually pick up to around 3% in 2024 and 2025, supported by steady growth in household incomes as inflation moderates. The balance of risks to the economic outlook is tilted towards lower-than-expected growth.

Real wages are rising faster than productivity, which will slow inflation and over time may reduce the cost of competitiveness.

The current account deficit narrowed in 2023 thanks to the dynamics of private sector net savings, but remained significant.

The large current account deficit mainly reflects the unresolved budget deficit. In 2023, fiscal consolidation stopped. The deficit target of 4.4% of GDP, set in 2023, has not been met.

The commission estimated that the general government deficit reached 6.3% of GDP in ESA terms, roughly the same level as in 2022. This happened mainly due to high public spending, especially on social transfers, partly due to measures to overcome the consequences of the energy crisis.

In addition, government revenues were lower than expected due to weak economic activity. It is expected that the current account deficit will stabilize at the level of about 7% of GDP in the future.

According to the Commission’s autumn forecast for 2023, the current account deficit will not change significantly in 2024 and 2025. The expected increase in external demand should contribute to the positive development, but this will be offset by the acceleration of imports caused by the recovery of domestic demand.

Romania’s external debt remains moderate. Between 2021 and 2023, Romania’s private debt fell from around 50% of GDP to just over 40% of GDP, while public debt rose from 48.5% of GDP to 49.3% of GDP in 2023. So far, Romania has not faced any difficulties in covering its financing needs.

The recently passed budget consolidation package will help, but more is needed.

In October 2023, Romania adopted a budget consolidation package amounting to approximately 1.2% of GDP, to be implemented in 2024. The package envisages a reduction in spending by 0.4% of GDP thanks to measures to streamline public administration and stricter eligibility conditions for civil servants who receive leave and meal allowances. On the revenue side, the new measures will generate additional revenue of 0.8% of GDP. Among them are an increase in corporate taxation (the introduction of a minimum turnover tax of 1% for companies with a turnover of more than 50 million euros and a turnover tax for banks), the gradual abolition

preferential fiscal regimes for construction and agriculture, as well as the abolition of VAT discounts

See the full analysis of the European Commission on Romania here