EBRD comment: Romania’s economy in the time of coronavirus

EBRD economists Jakov Milatovic and Radu Cracan analyze the preliminary impact of the coronavirus pandemic on the Romanian economy, the policy response, and developments in structural reforms in this exclusive article for Romania-Insider.com.

Early estimates of the damage

Romania has been severely affected by the coronavirus crisis. GDP for the first half of 2020 fell by 4.6% year on year, with the key channels for this decline being lower consumption and a drop in exports. In contrast, investments saw positive growth, driven by the construction sector. The unemployment rate rose to 5.4% in July 2020 (up from 3.7% in January 2020), with further job losses likely in the months ahead as government support schemes are phased out. Currently, we expect that GDP will drop by 5% in 2020 but rebound by 3% in 2021. The recovery will depend on a gradual normalization of economic activity in Romania and its main economic partners and a resumption of structural reforms. However, these would be hard to achieve if further major outbreaks of Covid-19 occur.

The fiscal position has deteriorated further. Romania entered the Covid-19 crisis following a significant fiscal deficit of 4.3% of GDP in 2019. The combination of a declining economy and lower fiscal revenue, a stimulus programme of around 4% of GDP, and another increase in pensions in September 2020, is expected to raise the 2020 fiscal deficit to an estimated 8.6% of GDP, as envisioned in the revised budget of August 2020. However, the deficit is likely to be higher as the figure of 8.6% is based on a 14% increase in pensions, rather than the 40% increase approved by Romania’s parliament. Nevertheless, market access to funding on favorable terms remains strong. Moreover, Romania still has the mitigating factor of a relatively moderate level of public debt, which stood at 35% at the end of 2019, although this ratio is increasing rapidly. As a result of the widening budget deficit, credit rating agencies downgraded their outlook on Romania, but the country remains in the investment-grade territory.

Policy response to the Covid-19 crisis

The government intervened to support liquidity and preserve jobs. The state’s initial support package included, among other measures, partial coverage of wages for those who were in “technical unemployment” (their employment contracts had been temporarily suspended), state credit guarantees to support lending (particularly to small and medium-sized enterprises), the deferral of loan payments and the temporary suspension of certain tax payments. Since June, the government has focused on stimulating recovery and limiting unemployment. Key measures have included support for a short-term work scheme (similar to the Kurzarbeit programme used in Germany to avoid unemployment during times of crisis) in affected firms, partial wage coverage for the self-employed and employees who return to work after technical unemployment, subsidies for firms that employ older and younger cohorts of workers, and further guarantee and credit schemes.