WB: EU grant funds will be critical for Romania’s growth recovery

The World Bank (WB) has maintained its forecast for a 5.7% economic contraction in Romania this year, under its Europe and Central Asia Economic Update.

However, it revised the forecast for next year to a more cautious 4.9% growth rate, from 5.4% projected in June - an expected adjustment, given the prolonged health crisis worldwide.

Overall, the WB's scenario sketches a somewhat healthy recovery over the 2021-2022 forecast period, with the GDP growth at 3.7% in 2022 and the budget deficit narrowing to 4.0% of GDP in 2022 compared to 9.1% of GDP this year.

Still, the WB identifies three significant risks to its baseline scenario: low absorption of funds from the European Union, excessive pension increase, and risks related to the COVID-19 pandemic developments.

The WB stresses that the EU grant funds, being budget neutral, will be critical for Romania's growth recovery and keeping the fiscal deficit in check.

Romania is expected to receive EUR 79.9 billion from the EU by 2027. The WB's baseline forecast assumes, without explicitly specifying, ideal use of the budget made available by the EU to the country.

However, Romania's historical low EU funds absorption rates raise questions on the country's capacity to take advantage of the EU recovery funds, which is one of its main economic recovery engines, the WB says - identifying one of the three main risks faced by its baseline scenario.

Under its baseline scenario, the WB also assumes that the Government will somehow avoid the 40% pension hike - the second major risk. This depends on the outcome of the December 6 general elections. If not reversed (by a future Liberal Government), the 40% hike would seriously impact the country's macroeconomic stability and lead to a downgrade in Romania's sovereign ratings, the WB warns.

The third risk identified by the WB for Romania's recovery is more general and exogenous, related to the evolution of the health crisis and its policy response, the impact of the national economic stimulus, and the spillovers from the measures pursued at EU level.

(Photo: Marian Wejcik/ Dreamstime)