The economy under pressure – the impact of inflation

Romania has been struggling with excessive budget deficit for several years

Corina Cristea, 19.01.2024, 14:00

Having been under an excessive deficit procedure for several years, since 2020, to be exact, Romania starts the year 2024 with the ambition of doing something to address the situation. A normal objective, but one which is going to be extremely ambitious, given that Bucharests efforts in recent years have not been able to solve the problem. The equation is all the more complicated now, in a year with four types of elections. There will be European Parliament, local, presidential and parliamentary elections, and Romania – the only country in the EU subject to excessive deficit procedure in 2023 – finished the past year with parameters far from Brusselss requirements. The figure reached is even higher than the targeted 4.4%, and we are talking about a budget deficit of around 6%.

At the same time, the annual inflation rate, an indicator that has given Romania and other EU countries a hard time, reached 6.61% at the end of 2023, according to the latest data from the National Institute of Statistics. Overall, the entire macroeconomic picture of Romania is rather characterised by gaps between the calculations made by the government at the beginning and end of 2023 regarding inflation, deficit and budget revenues, analysts say. “2023 was a very complicated economic year for Romania. Inflation went down, in line with the developments in Europe, albeit more slowly. But the economy slowed down in the second part of the year and the real GDP growth will probably be around 2%, below the forecast value,” reads a Romania – the Euro Zone MONITOR report published in December, under the coordination of academician Daniel Daianu. How does the National Bank of Romania see the situation? Here is the spokesperson for the institution, Dan Suciu:

Dan Suciu: “The year 2023 eventually ended in much better circumstances than I anticipated during it, especially at the beginning, but also along the way. At some point many feared that inflation will be even higher. We had doubts related to the economic growth in 2023, in the sense that the goal of the Central Bank was to reduce inflation, but not push the economy into recession, as it happened in many other countries, and at the same time to make sure that foreign currency reserves reach this historical record level, so that the financial and economic stability of the country, especially from the external perspective, should not be called into question at all. At the end of the day, we do have good results, and this creates the conditions for a reasonable 2024. I wouldnt say we expect miracles as of 2024, there are still many uncertainties. You know that we have a new tax package that came into force on January 1. This, despite the central banks efforts, will have a certain inflationary impact in the first quarter of this year, but we still cannot size it up properly. I mean, obviously it is important that it starts from an inflation rate of over 6% rather than 7% or 8%, so one the one hand it will not be very high, and we must trust that at least after this first quarter, the inflation will go down. This is one of the goals, to end the year with lower inflation, even if it will go up slightly in the first quarter.”

The National Banks forex reserves that Dan Suciu mentioned had reached EUR 59.77 bln in late December 2023, compared to EUR 46.63 bln on December 31, 2022. This reserve is important, Dan Suciu explained:

Dan Suciu: “This is money that the National Bank has from several sources, but all in all, depending on the amount of forex reserves, money may be issued and channelled into the economy, so that borrowing may stay at acceptable levels, so that payment obligations may be met, and so that the currency exchange rate may benefit from some stability. There are several roles that this reserve is able to play, including the fact that it helps keep interests for government loans at a lower level, and it enables the economy to run at a reasonable pace, without inflationary pressures.”

All economic experts agree that the beginning of the year will see a rise in inflation, triggered by an excise increase and the scrapping of some tax facilities. The national currency may also depreciate slightly against the euro, says the financial analyst Adrian Codirlaşu, vice-president of CFA Romania:

Adrian Codirlaşu: “In the coming year, I believe the depreciation of the leu against the euro will resume, at a slow pace, around 2-3% per year, as it has been lately, given that the inflation rate in Romania is higher than in the Euro zone, and given the high current account deficit that Romania has. There will be a rise in inflation in January, following the recent tax changes, with VAT increases, excise increases, the tax on turnover which is in fact another form of VAT. So there will be this inflation shock in January, of around 1-1.5%.”

Later this year, in the context of the high budhet deficit, the tax policy will be the main risk for inflation, Adrian Codirlașu added. (L Simion, AM Popescu)