October 7 (SeeNews) - The World Bank said on Wednesday it expects Romania's economic output to shrink by 5.7% this year, as a result of the COVID-19 pandemic, maintaining its previous forecast made in June.
For 2021, the Romanian economy is expected to recover by growing 4.9%, slower than the previously projected 5.4% rise in gross domestic product (GDP), the World Bank expects said in its October 2020 Europe and Central Asia Economic Update report.
The 2020 economic downfall is mainly due to a slow recovery of manufacturing and a poor agricultural year, the bank noted.
"The protracted COVID-19 pandemic has seriously affected Romania’s economic activity and household incomes in the short-run. A proactive but constrained fiscal response supported firms to retain employees and fed into household incomes," the World Bank's said.
The severity of the recession and the magnitude of the 2021 economic recovery will depend on the evolution of the health crisis and its policy response, on the impact of the national economic stimulus, and on the spillovers from the stimulus pursued at EU level.
Romania is expected to receive 79.9 billion euro ($93.9 million) from the EU by 2027, funds which will be critical for its growth recovery and for keeping the fiscal deficit in check.
In order to address the consequences of COVID-19, the fiscal deficit is expected to widen to around 9% of GDP in 2020, up from a planned deficit of 3.6% before the crisis, and a substantial reduction of the deficit in 2021 is improbable, as the government will have to support the economic recovery process. According to the World Bank, a widening fiscal deficit would push public debt to an estimated 45.1% of GDP in 2020 and 47.7% in 2021 from 37.6% in 2019. However, the global lender noted, Romania's public debt remains one of the lowest in the EU.
Poverty is projected to increase on the back of the triple-hit in incomes facing poorer segments of the population, in the form of the domestic COVID-19 pandemic, the poor agricultural year, and declining remittance incomes, according to the report.
In the short run, the key challenge for Romania is to contain the COVID-19 crisis and limit its health and economic consequences, as a prolonged crisis with extensive additional mitigating measures to reduce transmission would affect growth prospects.
"The pro-cyclical fiscal trajectory before the COVID-19 crisis added to the fiscal space constraints, feeding into lower investor confidence and increasing financing costs. Slower recovery of the European economy, and in particular of Germany and Italy, Romania’s main trading partners, would put additional pressure on the domestic economy," , the World Bank said.
In addition, the 40% increase in public pensions, resulting in fiscal costs close to 2.7% of GDP, passed recently by the parliament, if not reversed, would seriously impact macroeconomic stability while, in the short run, could lead to a downgrade in Romania’s sovereign ratings, the global lender warned.
Additional risk stems from Romania’s historical low EU funds absorption rates raising questions on the country’s capacity to take advantage of the EU recovery funds, which is one of its main economic recovery engines, the bank stressed.
The contraction of the Romanian economy in 2020 forecast by the World Bank in the June report is much stronger that the shrinking of GDP by 3.8% expected by the country's government.
Romania's economy expanded by 4.1% last year, according to the latest data available from the statistics office.
($=0.8504 euro)