BUCHAREST (Romania), May 23 (SeeNews) - The Russian invasion of Ukraine is expected to hit Romania’s economy, as indirect effects of the conflict on certain industries could be sizeable, the European Commission said on Monday.
Some important Romanian industries, such as automotive, machineries and construction are particularly vulnerable to energy imports, energy price movements and raw material needs, the European Commission (EC) said in its country-specific recommendations on Romania which are part of the European Semester Spring 2022 Package.
Among raw materials with an endangered supply are rubber, steel, iron, lumber and phosphate rock, a primary input in fertilizer and chemical industry. According to the Commission, the direct negative effects of the invasion are likely to be limited due to Romania’s small overall trade linkages to Russia and Ukraine.
Romania produces the majority of its gas domestically but imports almost 20% of total gas consumption, which is heavily dependent on a Russian pipeline via Ukraine.
The Commission said that Romania is a frontline country in the humanitarian and geopolitical crisis caused by the war, as it is hosting a large number of displaced persons from Ukraine, even though the majority eventually leave to other EU countries.
"Addressing their needs will require the mobilisation of additional resources in the healthcare and social systems, which came under great strain during the pandemic, but also in education. In the medium to long run, integration in the labour market of individuals deciding to stay in Romania could bring about an increase in active population and boost potential output," the Commission said.
Due to a slowdown in late 2021 and aggravated by Russia’s invasion of Ukraine in 2022, Romania's real GDP is projected to grow by 2.6% in 2022 and by 3.6% in 2023, mainly supported by investments from several EU funds, including the Recovery and Resilience Facility (RRF). Exports and imports are set to grow at a lower pace due to supply-side bottlenecks and shortages, with the current account deficit to remain broadly unchanged, the Commission said.
The EC said that lowering the fiscal deficit below 3% by 2024, in line with the June 2021 Council recommendation, will remain a challenge without corrective measures, even though the deficit is projected to decline somewhat by 2023 due to growth recovery and increased revenue collection, supported by the RRF. In 2021, the deficit was 7.1% of GDP, down from 9.3% in 2020, as additional spending to fight the pandemic and offset increases in energy prices prevented a lower deficit, according to the report.
"Beyond the reforms and investments in the RRP, Romania would benefit from putting an end to the excessive deficit situation by 2024 at the latest, by means of a budgetary consolidation with the objective to secure a lasting correction on the excessive deficit, while being geared towards enhancing the quality of the public finances and reinforcing the growth potential of the economy," the EC added.
In November, the EC said no additional measures need to be taken within the excessive deficit procedure (EDP) for Romania for the time being but it will reassess the situation once the new government presents the 2022 budget and a medium-term fiscal strategy.
In June, the Council adopted a recommendation with a view to bringing an end to the situation of an excessive government deficit in Romania by 2024 at the latest. Thus, Romania was advised to reduce the general government deficit to 8% of GDP in 2021, 6.2% of GDP in 2022, 4.4% of GDP in 2023, and 2.9% of GDP in 2024.
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