OPINION: Romania's fast-growing foreign debt

OPINION: Romania's fast-growing foreign debt
Romania's accumulation of external debt started in the early transition period and has accelerated during the last three years.
By Alexandru M. Tănase and Mihai Radoi May 23, 2023

It is high time to scrutinise the sustainability of Romania’s foreign debt, which has reached over €154bn and is now close to 60% of the country’s GDP.

Even back in 2016, when we raised the question of whether Romania’s foreign debt was too high — in an article published by this magazine under the title “Is the level of Romania’s foreign debt a cause for concern?” — the conclusion then was that Romania’s external borrowing was close to the brim. At that time country’s foreign debt stood at €89.0bn. Today, the answer to the same question is an even more definite yes.

Romania is not the only country facing rising debt. The sustainability of debt was one of the topics dealt with at the IMF - World Bank Spring Meetings held in Washington DC in April. However, as we underlined in an article published in April 2023 by the Romanian Magazin Istoric, there are major risks for Romania from “living on debt”. Along with the undisputed benefits of foreign borrowing for economic growth and investments, the accumulation of such debts in significant proportions as compared with the economic potential of the country (measured via GDP) could harm the macroeconomic equilibria, and could have an impact on Romania’s statehood as well as on the living standards of future generations. Moreover, losing control of the level of external debt would be an unpardonable and grave mistake of national policy.

The figures in Tables 1 and 2 and Graph 1 need no further presentation. It is quite clear that the large trade deficits and their parallel current account deficits recorded during Romania’s transition to a market economy led the country to a situation in which it lost the net comparative advantage it had as compared to other countries in the 1990s. On one hand, the zero external debt reached in March 1989 had internal negative social consequences and created a certain negative perception externally. On the other hand, this situation offered to the new Romania a huge chance to focus on development of a competitive economy, in which the macroeconomic equilibria were observed. Unfortunately, it was not to be.

The accumulation of external debt started during the first part of transition and has accelerated during the last three years. The prospects for this year are not favourable, especially now that the costs of external borrowing have increased quite significantly. It is true that the pandemic which started in March 2020 (and was only recently declared by the WHO as over) has had significant foreign currency, material and financial costs. This only contributed to more fundamental disequilibria which Romania registered already during transition. This is how we reached a situation in which out of total foreign debt, the state had borrowed €67.3bn as of March 31, 2023. The preliminary data for 2022 and the first three months of 2023 as recently published by the National Bank of Romania (BNR) also show large trade and current account deficits and a sizeable increase of foreign debt during the first quarter of this year (€12bn). The general impression is now that there is no strict control over what Romania is borrowing, either internally or externally. The state budget also registered a large deficit during Q1, estimated at 1.42% of GDP or €4.6bn at the end-March 2023 exchange rate. 

Table 1: Romania’s external debt evolution, 1989 - March 2023

$bn (1926 - 1996); €bn (2010 - March 2023)

Source: BNR, interactive database, EBRD Transition Report Update 1996 and Trading Economics.


One of the key instruments, namely the balance of payments, to control the debt has partially lost its monitoring role for the Romanian external position. Moreover, the external debt control which used to be exercised through the stand-by programmes with the IMF is not exercised anymore as Romania did not conclude any such programmes during recent years. Politicians in the country currently have other priorities which are not related to the level of its external debt.

Table 2: Current account and international reserves, 2021 - March 2023, €bn

Source: BNR, database/provisional data, IMF methodology; * as of 30 April 2023, including gold.

Romania currently has economic growth based on consumption, as reflected by the serious trade deficits (imports substantially larger than exports). This is a completely wrong strategy, where consequences were clearly seen during the energy crisis and also during the geo-political crisis in the region (the war in Ukraine started by the Russian Federation). Another damaging recent factor for Romania’s economy is the systematic ‘dumping’ policies used by Ukraine, especially for cereals. Compensation from the EU is  insufficient and paid several months later. Investments were neglected in all domains of activity, but the most concerning trend was the large emigration of the young labour force. Romania has the largest decrease of population density in the EU. It is true that billions of euros are registered on an annual basis as remittances, but disequilibria are much worse, so that the public and private external debt, in the short and long term, reached some 58% of the country’s 2021 estimated GDP. 

Under such circumstances, many Romanians are taking their frustrations to the streets. Part of the population (some 2.2mn employees) lives on the minimum wage (gross minimum at RON3,000 or €610 per month) and a quarter of the retired population have as their main income the minimum pension guaranteed by the state of RON1,125 per month (around €230 at the current exchange rate). No wonder some of these are busking for a meagre additional income in front of commercial banks in Bucharest or elsewhere. 

A busker next to the BNR and the oldest bank of the country, CEC Bank

Source: Authors’ collection

It should be noted, though, that one factor which alleviates to some extent the concerns regarding the high level of foreign debt in Romania’s case is the good level of international reserves which stood at €59.4bn as of end-April 2023. Currently, Romania has 103.6 tonnes of pure gold, which is deposited in the country and abroad. Based on the international prices as of April 30, 2023, the gold was valued at €6.0bn. However, it should also be noted that the interest cashed on the international reserves is much lower than the costs of borrowing abroad, so the strategy should be reconsidered by those institutions in charge, such as the BNR and the Ministry of Public Finances. 

We have written previously that Romania, a Nato country since 2004 and a member of the European Union (EU) with full rights from January 1, 2007, did not use these two big achievements in a proper or efficient way. For instance, the utilisation of the EU funds allocated through the National Plan for Recovery and Resilience (NPRR) is more than necessary, but the results in this respect are modest. Large amounts allocated as loans (some of them non-reimbursable) and free technical assistance still wait to be disbursed through implementation of projects. The case of the €3bn undisbursed by end-March 2023 because of non-fulfilment of the measures regarding the special pensions is simply alarming.

The whole Romanian society is concerned about how to stave off inflation and to avoid the consequences of the energy crisis. There are also concerns about Romania’s delays in joining the Schengen zone, the security of its eastern borders, special pensions and how to finance the large deficits of the whole pension system. All valid, but reduction of the external debt via reducing budgetary deficits (fiscal adjustment, according to the BNR), elimination of trade and current account deficits and incentivising the inflows of capital are not amongst the top priorities. 

Despite the fact that this became an issue of national interest, the government, Ministry of Public Finances (which should control the public external debt), the BNR and, more generally, the political parties and society as a whole have a permissive attitude. The main slogan is: “For the time being, everything is fine!” This is the opinion of the majority, even if this is not formally expressed. It is based on the opinion that external borrowing helps with economic growth and stimulates investments if the funds are properly used, but this is an over-optimistic attitude. Borrowing externally for consumption is simply a policy mistake. The former Yugoslavia’s case still haunts the Balkans after so many years. Greece is another more recent case. Canada’s experience in the 1990s also provides us with a few lessons on how to reduce the budget deficit and foreign debt. This could be a valid example for Romania today.

If Romania will not control the level of its foreign debt, the international capital markets will do this at much higher costs. This will lead to more imported inflation, with serious consequences on the living standards of Romanians, especially of the future generations. The sustainability of Romania’s foreign debt in the medium and long term is under a big question mark.

Alexandru M. Tănase, PhD, is an independent author and former associate director, senior banker at the EBRD and former IMF advisor. Mihai Radoi is a director of a specialised investment fund focused on Eastern Europe and former executive director of Anglo-Romanian Bank, London, and previously of the BFR Bank, Paris. 

These are personal views of the authors and are not of any quoted institution (including, but not limited to, those of the IMF, EBRD and BNR). The assessment and data are based on available information as of mid-May 2023.