The coronavirus pandemic is seriously hurting the Romanian 2020 budget as its economy contracts due to the restrictions taken to stop the spread of the novel virus. As a matter of fact, what was the worst-case scenario, that the 2020 budget deficit could reach 7 percent of GDP, is now fast becoming the best-case scenario. So, borrowing from various sources (including the IMF and/or EBRD) has become a matter of when, not if.
There is good news though: budget income was 9.6 percent higher in the first two months of this year compared to the same period a year ago. However, expenses rose by 14.8 percent, which resulted in a budget deficit 60 percent higher at the end of February than in the same month of 2019. Between February 23 and March 15, retail sales were up 37 percent, a short-term rise that will likely be followed by a strong downturn, as stocking up on supplies due to the coronavirus has reached an end. The effects of this slowdown will likely become visible in April, triggering a lower VAT payment trend and increasing the 2020 budget deficit. Last year, the government’s income from VAT levies was RON 65.5 billion (~EUR 13.5 billion).
As the government instituted the state of emergency, close to half a million employees technically became unemployed, which means roughly 10 percent of the country’s total employed workforce. Although the government said it would cover the costs of the technical unemployment, this increases the burden on the country’s budget, as revenue generated by personal income tax drops by 10 percent. Restrictions on movement also affect companies of all sizes, forcing them to close their doors and send employees home or into technical unemployment. That, too, hurts the 2020 budget, as income generated by taxes on profits was RON 17.7 billion (~EUR 3.6 billion) last year, while personal income tax added a further RON 23 billion (~EUR 4.7 billion) to GDP.
All this means that the 2020 budget will be much lower than originally forecast: EUR 216 billion instead of the projected EUR 238–240 billion, and the central budget’s income will drop to EUR 69–70 billion instead of the expected EUR 76–77 billion.
In an interview with Reuters, however, Finance Minister Florin Cîțu said that Romania is prepared to enforce the technical unemployment measures for more than a month, and that the country can cover five months of funding needs. At this point, the finance minister is not considering borrowing from the International Monetary Fund (IMF), contradicting earlier reports that claimed Cîțu was in talks with the IMF and EBRD about an unconditional loan of EUR 500 million. However, in a video interview with Hotnews, he did say that they are looking at all unconditional borrowing opportunities available in order to fund expenses and balance the budget deficit. Romania borrowed from the IMF more than a decade ago during the financial crisis.
