The World Bank said Wednesday it expects Romania’s economic output to shrink by 5.7% this year, as a result of the Covid-19 pandemic, sticking to a forecast it made in June.
However, the economy is expected to rebound in 2021 and grow by 4.9%, lower than the previous projection of a 5.4% rise in the gross domestic product, the World Bank said in its October 2020 Europe and Central Asia Economic Update report.
The 2020 economic contraction is mainly due to a slow recovery of the manufacturing industry and a poor agricultural year due to a prolonged drought.
„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 said.
The severity of the downturn and economic recovery will depend on the health crisis and government response.
Romania is scheduled to receive 79.9 billion euros from the EU by 2027, funds which will be critical for its growth recovery and for keeping the fiscal deficit in check.
Due to the consequences of the Covid-19 pandemic, the fiscal deficit is expected to grow to about 9% of GDP in 2020, up from a planned deficit of 3.6% before the crisis.
A substantial reduction of the deficit in 2021 is unlikely.
Poverty is projected to increase in Romania due to the effects of the pandemic on poorer people, a poor agricultural year, and a decline in remittances, the report says.
In the short term, Romania’s main challenge is to limit the Covid-19 crisis and its effect on healthcare, public health and the economy.
Beyond that, the economy is also dependent on its main trading partners.
“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, a 40% increase in public pensions which was recently approved by Parliament could impact macroeconomic stability and lead to a downgrade in Romania’s sovereign ratings, the World Bank warned.
Romania’s economy grew 4.1% in 2019, according to the statistics office.