Romania’s total public debt slightly declined this year from 35 percent of gross domestic product (GDP) at end-2017 to 34.1 percent at end-June despite higher public spending and deficits, according to Eurostat data.

Romania’s gross public debt declined last year to a 6-year low level of 35 percent of GDP, down from 37.6 percent of GDP in 2016, due to the rapid growth of the economy.

However, despite higher spending and public deficits, Romania’s public debt has declined to 34.5 percent of GDP at end-March and to 34.1 percent of GDP at end-June.

But this apparently positive picture could hide many uncertainties.  In fact, in nominal terms, Romania’s public debt has continued to rise – from RON 300.6 billion at end-2017 up to RON 305.9 billion in June, according to official data.

In fact, these amounts are compared to different GDP values – the value registered in 2017 and the value estimated for 2018.

Last year, Romania’s GDP registered by 6.9 percent up to RON 858.3 billion (EUR 187.9 billion), while for this year the government estimates a GDP growth rate of 5.5 percent to RON 945 billion – both considered overoptimistic by many analysts.

Larger fiscal gap

Romania’s general consolidated budget, which includes fiscal and social budgets of the government, registered after the first eight months of this year a deficit of RON 14.56 billion (EUR 3.1 billion), or 1.54 percent of GDP, 2.2 times bigger compared with the same period of 2017 as soaring expenses overshadows revenue increase, according to the Ministry of Finance.

“Due to the increasing share of rigid state spending, the commitment to the budget deficit limit of 3.0 percent of GDP could become a trade-off between political costs associated with this ‘fiscal rule’ and those arising from entering the excessive deficit procedure (EDP), including lower budget flexibility,” ING Bank economists wrote in a recent report.

The general budget in the first eight months of 2018 closed with a deficit of RON 14.56 billion, or 1.54 percent of GDP, compared with a deficit of RON 6.5 billion in the same period of 2017, Finance Ministry data show.

After the first seven months of this year, the budget registered a deficit of RON 11.9 billion, or 1.26 percent of GDP.

Official data suggest the deficit for the month of August was close to RON 2.6 billion (EUR 564 million), making it more difficult for the government to maintain the fiscal gap below its target of 3 percent of GDP.

These numbers put pressure on the Ministry of Finance to find money needed to cover larger expenses on public wages and pensions.

A recent BR Analysis showed that Romania’s Ministry of Finance has a difficult job in controlling the fiscal gap and maintaining the public deficit under the 3 percent of GDP during the last quarter of this year, after poor results in the first nine months of this year, amid worries about fiscal policy and political situation.

Reversed advantage?

In May, National Bank of Romania’s deputy governor Liviu Voinea said that Romania’s main advantage is its low level of public debt, but this can be reversed in the medium term unless a prudent policy mix is implemented, and the trend of fiscal consolidation has been reversed in the last couple of years.

Voinea, a former budget minister in 2013-2014 in the PSD government, praised Romania’s efforts to consolidate its public finances after the global financial crisis.

“In the aftermath of the global financial crisis, we had one of the largest adjustments of the budget deficit in the EU: from 9.5 percent in 2009 to less than 1 percent in 2015. Romania exited the excessive deficit procedure in 2013 and also in 2013 reached the Medium Term Objective of 1 percent of GDP structural deficit, down from 8.8 percent of GDP in 2009. (…) The current account adjustment was also impressive, from -13% in 2007 to just -1% in 2013-2015,” Voinea pointed out.

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