On the other hand, Romania’s GDP is now close to the level registered at the beginning of the crisis, i.e. EUR140 billion, after it had plummeted in 2009 and 2010.
The record-high loan of almost EUR20 billion, taken out at the beginning of 2009 from the International Monetary Fund, the European Commission and the World Bank, contributed significantly to the leap of the public debt. The loan was taken out by the authorities in charge at the time – president Traian Basescu, Prime Minister Emil Boc and central bank governor Mugur Isarescu.
The Finance Ministry got less than half the total loan, while the rest went to BNR. The Romanian central bank repays the IMF loan from its forex reserve, so this does not affect the state budget, but weakens Romania’s forex position.
The problem is that the money that ended up in the budget was mainly directed towards pensions and salaries, while investment spending fell.
Romania lags behind in Europe in terms of infrastructure, with just 548 kilometers of highway.
Roads authority CNADNR put up for auction projects for the construction of 370 km of highway in the past three years alone, but completed only 42 km, according to an analysis published by ZF.
The Ponta Government (Social-Liberal Union made up of PSD and PNL parties) came into power a year ago, amid pubic discontent with the Basescu-Boc governance. The current government has repeatedly cited the lack of fiscal room for major investments and has brought up prioritization of projects, but progress has been non-significant.
The low volume of investments reflects the low degree of absorption of EU funds meant for investments, as some EU-funded operational programs were temporarily suspended.
Investments are low also because they have been turned into a means of rebalancing the budget deficit. Investments are sacrificed in order for quarterly and annual targets to be met.
In the first half of this year public investments fell 10%, while spending on public sector employees went up 18%.
Romania has been through a steady fiscal adjustment process in the past few years, but it has been done on a quantitative level rather than a structural one.
“After Romania sealed its first arrangement with the IMF and the European Commission, the country’s budget deficit fell below 3% of GDP and fiscal slippages are much less likely. But the government has not managed to rein in current spending and arrears, which affects investment spending. Moreover, the banking system is in a process of deleveraging and consumer spending remains fragile. Under the circumstances, economic growth could remain below potential in the coming years,” says Mihai Patrulescu, senior economist of UniCredit Tiriac Bank.
Romania’s public debt sped up in crisis. Whereas between 2003 and 2006 the public debt did not grow by more than 10% from one year to the next, in the 2009-2010 period the growth rate accelerated to 30% or over. In 2011 the public debt leaped 14.5%, but last year the debt rose by just 8% (EUR4 billion).
Romania neared the public debt sustainability limit of 40% of GDP, the maximum level accepted by investors.
(English version by Daniela Stoican)