EC expects wider public deficit in Romania this year despite Govt.'s promises

Under the Spring Forecastpublished on May 16, the European Commission (EC) updated its projection for Romania's economy, bringing it in line with the consensus expectations - and going a bit further.

The public deficit-to-GDP ratio will rise to 7.5% of GDP this year (under ESA) and will stay in 2023 just above the 6.2%-of-GDP target set by the Government for 2022, according to the scenario drafted by the Commission's experts for the Spring Forecast.

The Government still sticks with the 5.8%-of-GDP cash target - consistent with 6.2%-of-GDP under ESA.

Consistent with the wider public deficits, the EC projects the general government debt to rise to 50.9% of GDP in 2022, and 52.6% in 2023.

Several factors are behind the public finance deterioration expected by the EC: the 2022 budget already contained new expenditure measures (mainly increasing social expenditure, e.g., pensions and children allowance), a higher interest burden due to rising interest rates and lower social security contributions.

In addition, the Commission argues, Romania adopted a compensation scheme to deal with the surge in energy prices until March 2023 and provides support to people fleeing Ukraine.

A new set of social and economic measures was announced on 11 April 2022, which based on the available information, would have a negative budgetary impact of 0.4% of GDP.

The twin deficits will remain twinned this year and in the year to come, the EC predicts. The current account (CAD) is seen at 7.5% of GDP in 2022 and 7.3% of GDP in 2023 - propped by net imports of goods in excess of 10% of GDP, in both years. When it comes to the real sector, the EC brought its 2022 growth forecast for Romania more in line with the consensus expectations, to 2.6% from 4.2% in February.

It also upped the inflation (HIPC) forecast to an average of 8.9% this year, from 5.3% in February - again in line with the current circumstances and expectations. The central bank itself admitted a gloomier inflationary outlook when hiking, on May 10, the policy rate by 75bp to 3.75%.

(Photo: Diony Teixeira/ Dreamstime)