Is Romania On Course To Sustained Growth? – Analysis

Government’s sunny post-pandemic predictions may come true – as long as country gets to grips with out-of-control spending.

By Marcel Gascón Barberá

Romania has made international headlines recently for the impressive pace at which it has returned to economic growth this year, after its economy contracted by 3.9 per cent due to COVID-19 restrictions in 2020 for the first time in a decade.

This has been, unsurprisingly, celebrated by the country’s centrist government as proof of the Romanian economy’s good health despite the pandemic. 

Last May, after Eurostat announced that Romania’s economy had the highest growth in the EU in the first quarter of 2021, at 2.8 per cent, Prime Minister Florin Citu told the media: “In the coming years, I expect economic growth to exceed all the estimations made until now, and that all Romanians will benefit from it.”

A few days later, in June 2021, a Deloitte study listed Romania, together with China, Chile, Australia, Lithuania and South Korea, as one of only six countries in the world whose GDP had grown during the pandemic. 

By the end of the first quarter of 2021, the Romanian economy had expanded by 1 per cent compared to the end of the fourth quarter of 2019, the last quarter before economies in Europe were unaffected by the pandemic.

But are these green shoots heralding a healthy return to sustained GDP growth? Experts consulted by BIRN agree that the country adapted much better than most others to the economic crisis brought about by the pandemic restrictions – and do see a promising near future ahead. 

But they also warn that the rebound comes at the expense of the public deficit, which will have to be drastically reduced in the coming years.

Saved by IT sector and public money

Clara Volintiru, associate professor at Bucharest’s Academy of Economic Studies, partially attributes the quick return to growth to the vigour of the country’s IT sector, which in 2018 accounted for 6 per cent of GDP. 

“The IT sector and value-added services in the consultancy services have grown during the pandemic, and their contribution to Romania’s GDP has generated this economic growth,” Volintiru told BIRN.

Besides that, the economist noted, the public sector has injected large amounts of cash into the market. 

On the one hand, this came in the form of government compensation schemes to support companies affected by the lockdown and their workers. 

But it came also in the form of EU funds that Romania was not absorbing due to its lack of capacity to come up with eligible projects, and which were redirected into small and medium-sized enterprises. 

Volintiru also alluded to the large number of local companies, chiefly in hospitality and courier services, that thrived during the pandemic due to the explosion of online orders. 

Last but not least, agriculture, whose weight in Romania’s economy is larger than in most EU economies, remained unaffected by the crisis.

A different kind of crisis

To explain Romania’s good economic performance since the start of the pandemic, economist Bogdan Glavan points to the nature of the crisis itself. Unlike most other crashes, the COVID-19 depression was not caused by imbalances in the system but by the government-imposed restrictions.

“The moment that restrictions were lifted, the economy bounced back in a V shape, not only in Romania,” Glavan, a professor at Bucharest’s Romanian-American University, told BIRN.

The fact that most people kept receiving money from the state, even if their activities were interrupted by the lockdown or the subsequent restrictions, meant that the phased reopening of the economy found people with cash to spend. This permitted the quick reactivation of consumption that is fuelling growth.

“The question that remains is whether this economic growth will continue, or it is just the consequence of a rebound following the lockdown shutdown,” Glavan said.

In his view, Romania’s prospects of sustained growth are boosted by the nearly 30 billion euros it will have access to through the European Commission’s Resilience and Recovery Plan and the EU funds made available in the 2021-2027. 

“Just by absorbing this money, we would add more than a percentage point to Romania’s economic growth,” Glavan remarked.

The challenge to trim the deficit

But this golden opportunity comes with a challenge: reducing the public deficit below the 3 per cent threshold agreed by EU countries. Following years of lavish spending by leftist populist governments, which the now ruling centre-right coalition is committed to ending, Romania ended 2019 with a deficit of 4.6 per cent.

The plunge in revenue brought about by the two-months lockdown instituted in May 2020, along with the decision to postpone taxes and the increase in spending to compensate workers and companies affected by restrictions, led Romania to close 2020 with an all-time high deficit of 9.8 per cent. 

Prime Minister Florin Citu aims to end 2021 with a deficit of 7 per cent, “but the problem is that from 7 per cent it has to go down to 3 per cent,” Professor Glavan recalled.

In his view, Romania cannot afford an increase in taxes that would undermine the country’s attractiveness to investors. “The deficit won’t decrease unless taxes are collected more efficiently,” he maintained.

Access to recovery funds is a golden opportunity

The adaptability shown by important sectors of the Romanian economy, such as IT and the hospitality industry, are signs for optimism. Moreover, the prospects of having access to the 29 billion dollars of the European Commission’s recovery plan put Romania in an “unprecedented favourable context”, he said.

“In these circumstances, I expect Romania to continue to have one of Europe’s highest economic growth rates, concurring with Prime Minister’s Citu optimistic forecast for Romania’s economy.”

But the inflow of EU money comes with renewed pressure to put the books in order and meet the centre-right government’s promise to bring about fiscal restraint without sacrificing the economic growth that the former leftist government fuelled by spurring consumption with salary and pension hikes.

The COVID-19 crisis has made it impossible to balance the books. But when these mitigating circumstances disappear, Citu will have no excuse to keep on spending.