Over the medium term, growth is projected to be supported by EU funds. To promote transparency and accountability of the pandemic support measures, key implementing institutions were audited by the Court of Accounts, with follow-ups expected in 2021.ġ0. While smaller in size than in many EU peers (chart), the types of support were broadly similar: first, health care expenditures second, income support measures in the form of temporary wage subsidies, leave and unemployment benefits, and targeted hiring incentives and third, business support with liquidity extended through tax deferrals and credit guarantees predominantly targeting SMEs (see Annex III and Annex VI Table B). 2 The implemented fiscal package comprised 2.2 percent of GDP in direct spending and revenue measures and an additional 1.7 percent of GDP in guarantees and other actions.
The deficit in 2020 expanded to 9.7 percent of GDP (2019: 4.6 percent of GDP), as the measures to soften the impact of the pandemic crisis came on top of a structural fiscal expansion in 2019. In response to the pandemic, the fiscal deficit widened markedly. Data in early 2021, when compared with early 2020, point towards a further widening in the current account deficit, but may reflect pandemic-related idiosyncrasies.ħ. As a result, foreign exchange reserves increased, and reserve coverage remains more than adequate ( Annex II). Portfolio investment was the main source of current account financing, reflecting significant sovereign bond issuance. Next Generation EU (NGEU)-related grants are likely to contribute to sustained capital account inflows and add persistence to the current account deficit. This deterioration was somewhat offset by a rise in net services exports (with a fall in outbound tourism and increasing IT receipts) and by higher secondary income – on account of higher EU fund inflows. Gross merchandise trade contracted sharply in 2020 H1, but rebounded in H2, although the overall balance continued to deteriorate.The current account deficit widened modestly in 2020 (to 5.2 percent of GDP from 4.9 percent in 2019) These policies are to be complemented by governance reforms to reinforce the growth trajectory over the medium term.Ħ. Furthermore, to take advantage of the Next Generation EU (NGEU) funding opportunities, it will be important to undertake structural reforms to enhance EU fund absorption and revenue mobilization. This should be supported by preserving accommodative monetary and financial conditions. The focus of discussions with the authorities was on actions to sustain fiscal support to secure a recovery from the pandemic while laying the ground for consolidation over time to rebuild room for policy maneuver. Markets appeared to recognize these reforms and have readily absorbed record Eurobond and domestic issuances.ģ.
During the PNL’s one-year term as a minority government preceding the elections, the authorities curbed risks to fiscal sustainability, including by capping very large legislated pension hikes. It also is engaging more closely with the EU for support and has committed to structural and governance reforms that had languished over the past several years ( Annex I). After the December 2020 elections, the new center-right coalition government led by the Liberal party (PNL) has introduced a budget that balances continued pandemic support with the start of consolidation, and envisages returning the deficit to 3 percent of GDP by 2024, consistent with EU rules. Political developments have turned favorable for reforms.