debt levels. Moreover, maximal and effec- tive absorption of the EU Multiannual Fi- ROMANIA Key conditions and nancial Framework and Next Generation EU (NGEU) funds will be crucial for a sus- challenges tainable recovery. Table 1 2021 Prior to the COVID-19 pandemic, Romania Population, million 19.2 enjoyed strong economic growth. Howev- GDP, current US$ billion 266.7 er, the pandemic exposed the vulnerabil- Recent developments GDP per capita, current US$ 13902.1 ities of the economy, including persistent a 2.4 International poverty rate ($1.9) poverty and disparities in economic op- The Romanian economy grew by 5.9 per- a 4.4 portunity across regions and between ur- cent in 2021, but growth decelerated in Q4 Lower middle-income poverty rate ($3.2) a 9.5 ban and rural areas, structural rigidities in (2.4 percent yoy) amid supply disruptions, Upper middle-income poverty rate ($5.5) Gini index a 35.1 the product and labor markets, weakness- significant pick-up in inflation and a new School enrollment, primary (% gross) b 87.5 es in fiscal policy and significant institu- COVID-19 wave. Private consumption re- b 75.5 tional constraints hindering the efficient covered strongly in 2021 (7 percent yoy) Life expectancy at birth, years use of resources. led by robust demand for durable and Total GHG Emissions (mtCO2e) 80.5 Disruptions in the global supply chain household goods. Higher prices of raw Source: WDI, Macro Poverty Outlook, and official data. from the pandemic coupled with the im- materials, however, tempered investment a/ Most recent value (2019), 2011 PPPs. b/ Most recent WDI value (2019). pact of the war in Ukraine have resulted growth (4 percent yoy). Trade volumes in rising food and energy prices. The were affected by global value chain dis- depleted real purchasing power and de- ruptions and cost-push inflation, while the Romania’s economy rebounded at 5.9 clining remittances impose a heavy bur- deterioration of the secondary income bal- den on the poor and marginalized pop- ance added to the current account pres- percent in 2021, despite supply disrup- ulation groups in Romania already dis- sures. On the supply side, growth was led tions, a significant pick-up in inflation proportionality affected by the prolonged by the ICT sector (13.4 percent yoy in 2021) and the effects of the pandemic. The pandemic. Despite the economic rebound, which benefited from increased remote economy is projected to modestly expand the share of the Romanian population liv- work needs. Industry growth decelerated ing on less than $5.5 a day at 2011 revised (5 percent yoy in 2021), as new industrial in 2022, although recession risks result- PPP prices is estimated to have declined orders declined in Q4. The economic re- ing from the Ukraine crisis are high. modestly to 10.1 percent in 2022 from 10.3 covery and labor supply constraints re- Despite some consolidation measures, percent in 2021. duced unemployment to 5.4 percent in De- the fiscal deficit will remain elevated in The key challenges in the short term are cember from 6 percent in January 2021. La- 2022, at around 6.6 percent of GDP. to contain the socio-economic effects of the bor shortages coupled with higher infla- conflict in the region and the COVID-19 tion led to wage increases, with nominal Poverty is anticipated to slightly decline crisis. Significant inflationary pressures net wages up by 7.2 percent yoy in De- to 10.1 percent in 2022. triggered a more hawkish stance from the cember 2021. Annual inflation accelerated National Bank of Romania (NBR). Once re- to 8.4 percent in January 2022 reflecting covery is firmly established, fiscal consoli- strong supply-side inflationary pressures, dation will be critical to limit increases in including recent spikes in energy prices. FIGURE 1 Romania / Real GDP growth and contributions to FIGURE 2 Romania / Actual and projected poverty rates real GDP growth and real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 40 40 12000 30 35 10000 20 30 8000 10 25 20 6000 0 15 -10 4000 10 -20 2000 5 -30 0 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Gov. cons. GFCF Private cons. International poverty rate Lower middle-income pov. rate Imports Exports GDP Upper middle-income pov. rate Real GDP pc Source: World Bank. Source: World Bank. Notes: see table 2. MPO 33 Apr 22 This prompted the NBR to further increase The fiscal deficit surged to 9.4 percent of 2026. However, low historical absorption the policy rate in mid-January and mid- GDP at the end of 2020 and remained rates reflect substantial headwinds to a February 2022 by 0.25 pp and 0.5 pp, re- high in 2021 at an estimated 7 percent on high absorption scenario. Significant infla- spectively, to 2.5 percent. Private credit the back of the COVID-19 related fiscal tionary pressures from the energy and sector growth remained high, up 15.1 per- stimulus. Higher revenues, up 17.7 per- food markets challenge the nascent recov- cent yoy in January 2022. cent yoy in 2021, supported by the eco- ery requiring a careful balancing act from An economic and employment rebound nomic recovery, offset the 8.8 percent yoy the NBR. meant that household income, in partic- increase in expenditure, but fiscal pres- A substantial reduction of the fiscal deficit ular labor income, also recovered. The sures remain significant. in 2022 is improbable, as the government Rapid Household Survey in December will have to support the economic recov- 2021 showed that most workers including ery process while also supporting macro- low-wage workers have returned to work, economic stabilization. Over the medium helping to bring household labor income Outlook term, the deficit will follow a downward close to the pre-crisis level. However, ris- trajectory but is likely to remain above 3 ing food and energy prices have depleted Romania’s economy is projected to grow percent of GDP. Renewed attention should households’ real purchasing power, espe- at 1.9 percent in 2022, with risks strongly be given to fiscal consolidation to avoid an cially among the poor and vulnerable, as tilted to the downside. The strength of the unsustainable increase in public debt over they spend nearly 65 percent of their bud- recovery will depend on the evolution of the medium term. get on these necessities. Moreover, the war new COVID-19 variants and the severity Poverty is projected to decline to the pre- in Ukraine and further disruption of the of the hostilities in the region. Romania’s crisis level by 2024. However, rising food global supply chain will continue to affect capacity to absorb the EU funds will be and energy prices, and declining remit- the economies of host countries for Ro- critical to a sustainable, green, and inclu- tance incomes could mean a longer recov- manian migrants, which will inevitably sive recovery process. According to Gov- ery process for vulnerable population seg- hamper income for Romanians at home. ernment estimations, in a scenario of 100 ments compared to others in the coming Thus, despite economic and employment percent absorption, the Resilience and Re- years. A protracted war in Ukraine may recovery, poverty is expected to have de- covery funds will, on average, add around however push growth into negative terri- clined modestly to 10.1 percent in 2022 yet one percentage point to Romania’s real tory and lead to an increase in poverty in remains above the pre-crisis level. GDP growth per year between 2022 and the short run. TABLE 2 Romania / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 4.2 -3.7 5.9 1.9 4.1 4.3 Private Consumption 3.9 -5.1 7.0 3.8 6.1 6.3 Government Consumption 7.9 5.9 -2.8 1.2 4.6 5.2 Gross Fixed Capital Investment 12.9 4.1 4.0 4.7 8.1 8.2 Exports, Goods and Services 5.4 -9.4 11.1 5.9 7.0 7.3 Imports, Goods and Services 8.6 -5.2 13.7 7.0 8.2 8.4 Real GDP growth, at constant factor prices 4.0 -3.5 5.9 1.9 4.1 4.3 Agriculture -5.0 -14.9 13.5 2.8 3.9 3.9 Industry -1.3 -4.5 5.0 1.6 4.7 4.4 Services 7.9 -1.9 5.7 2.0 3.8 4.3 Inflation (Consumer Price Index) 3.8 2.6 5.1 9.8 5.3 3.2 Current Account Balance (% of GDP) -4.7 -5.0 -7.1 -7.2 -6.3 -5.7 Net Foreign Direct Investment (% of GDP) 2.2 0.9 2.3 1.8 2.3 2.3 Fiscal Balance (% of GDP) -4.4 -9.4 -7.0 -6.6 -5.3 -4.7 Debt (% of GDP) 35.3 47.4 49.4 52.0 53.9 54.1 Primary Balance (% of GDP) -3.2 -8.0 -5.4 -4.9 -3.7 -3.2 a,b International poverty rate ($1.9 in 2011 PPP) 2.4 2.7 2.6 2.6 2.5 2.3 a,b Lower middle-income poverty rate ($3.2 in 2011 PPP) 4.4 5.0 4.8 4.7 4.5 4.3 a,b Upper middle-income poverty rate ($5.5 in 2011 PPP) 9.5 10.8 10.3 10.1 9.7 9.2 GHG emissions growth (mtCO2e) -0.9 -8.7 3.2 -1.0 0.5 1.4 Energy related GHG emissions (% of total) 85.4 85.9 86.5 87.0 87.7 88.3 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on ECAPOV harmonization, using 2007-EU-SILC and 2019-EU-SILC.Actual data: 2019. Nowcast: 2020-2021. Forecasts are from 2022 to 2024. b/ Projection based off elasticities calibrated on 2007-2019 growth periods and rapid assessment data, allowing for elasticities to vary between periods of contraction, recovery and expansion. MPO 34 Apr 22