Our athletes covered themselves in glory at the Paris Olympics

The middle of the calendar summer constituted a real challenge for the national energy system, in view of the increase in electricity consumption due to a prolonged period of 10 consecutive hot days, when temperatures of over 40 degrees in the shade were recorded in most of the country's counties. Red heat codes followed each other for days, prompting citizens to turn on air conditioners both during the day and during tropical nights, which led to several power outages (power outages current), in many localities in the country. In order to keep the situation under control, Prime Minister Marcel Ciolacu convened an Energy Command in which a set of measures was established, including the temporary reopening of some coal-based electricity generation groups, to make up the difference needed for covering consumption during the summer, during hot periods.

Regarding the macroeconomic situation, the Government continued to increase budget expenditures, by financing new investments and support schemes, by increasing the number of civil servants, but also by increasing the budgets of some ministries, actions that will have negative effects on the budget deficit that at the end of the first semester it already reached 3.6% of the Gross Domestic Product. Although the Minister of Finance, Marcel Boloş, announced that ANAF exceeded the level of receipts established for the month of July, the budget revenues were far below the level of expenses, which led the relevant ministry to issue new issues of state securities and Fidelis bonds and Treasury and to borrow from the financial markets to obtain the necessary sums to cover all expenses. Following this effort, at the end of last month, the Ministry of Finance accounted for the attraction of 6.58 billion lei, money intended for refinancing the public debt and financing the state budget deficit.

But the budgetary expenses will be difficult to keep under control until the end of this year, especially in the conditions of the parliamentary and presidential elections, for which the Government established the dates of the polls at the beginning of last month. Thus, on November 24 the first round of the presidential elections will take place, on December 1 - on National Day - the parliamentary elections will take place, and on December 8 the second round of the presidential elections would take place, if no candidate does not obtain in the first round 50% plus one of all freely and validly cast votes.

In these conditions, Prime Minister Marcel Ciolacu decided to instruct the Ministry of Finance to discuss with all the social partners and to put together a multi-year plan regarding the reintegration of our country into the budget deficit target of 3% at the European level, a plan that would extends over the next seven years, but which should be approved this autumn by the new composition of the European Commission. Moreover, in order to ensure the necessary conditions to reduce the revenue gap in the state budget, the Ministry of Finance has developed a project to amend the Fiscal Code and the Fiscal Procedure Code, which it has put up for public debate until the beginning of September, period in which the future normative act will be debated with all social partners.

Good news came from the National Bank of Romania, which, under the conditions of decreasing inflation, decided to reduce by 0.25 percentage points the monetary policy interest rate, the interest rate for the credit facility (Lombard) and the interest rate for the credit facility deposit. It was the first reduction approved by the BNR Board of Directors, from January 2023 onwards, during which the central bank maintained the same monetary policy interest rate of 7%.

Last month ended very well for the sporting breath of our country with the start of the Olympic Games in Paris. On June 29, on National Anthem Day, David Popovici became the Olympic champion in the 200-meter freestyle, and only two days later he won the bronze medal in the 100-meter freestyle. He was followed the next day, August 1, by Romanian rowers Florin Enache and Andrei Cornea, who became Olympic double rowing champions, while Ancuţa Bodnar and Simona Radiş won Olympic silver medals in double rowing on the same day.

• In-band power generation capabilities, vital to the national energy system

Although Prime Minister Marcel Ciolacu declared himself satisfied on July 9, on the occasion of the inauguration by Hidroelectrica of the new investment at the Vidraru dam, on which occasion the head of the Government specified that he had financially supported several major green energy projects in recent years, it seems that the new production capacities of wind and solar power did not provide sufficient energy for the consumption of domestic and industrial customers during the heat wave period. In reality, wind and solar energy was sold at very low prices during the day, due to the lack of storage capacities, and in the evening, when consumption increased throughout the country due to the tropical nights recorded during July, Romania had to imports energy at very high prices, which in some places even reached 900 euros per Megawatt, in some time intervals this price exceeded the limit of 1000 euros, during the hot days from the middle of last month.

The shortage of electricity also led to the recording of hundreds of blackouts in most localities in the country, due to overloading of the transmission and distribution networks. In order for the population not to be affected by an increase in the value of the bills and for untimely interruptions of electricity to be less and less, Sebastian Burduja, the Minister of Energy, asked the citizens to stop using the washing machine in the evening and to set the air conditioned at temperatures of 24-26 degrees Celsius.

In these conditions, on July 19, the meeting of the Energy Command convened by Prime Minister Marcel Ciolacu took place, in which, in addition to Minister Sebastian Burduja, representatives of ANRE, the Competition Council, state companies in the energy field, OPCOM, and representatives of the main structures participated energy employers - HENRO, ACUE and AFEER.

Following the meeting of the Energy Command, it was established the increase in energy production in the band, regardless of the source, the identification of a standard format for the transmission/communication of electricity measurement data between distributors and suppliers in order to have the clearest possible picture of the need for consumption and production and to reduce imbalances, ANRE's analysis of the price formation mechanism in order to protect the final consumer from market fluctuations and the acceleration of investments in all segments of the energy field.

Two days before the meeting of the Energy Command, President Klaus Iohannis sent to the Parliament, for re-examination, the law on the approval of the Government's Emergency Ordinance no. 163/2022 for the completion of the legal framework for the promotion of the use of energy from renewable sources, as well as for the modification and completion of some normative acts, as well as the law on the approval of the Government Emergency Ordinance no. 32/2024 for the amendment and completion of the Government Emergency Ordinance no. 27/2022 regarding the measures applicable to final customers in the electricity and natural gas market between April 1, 2022 and March 31, 2023. The President declared himself dissatisfied with the fact that the parliamentarians decided that the future energy projects of the prosumers should be financed only if they also provide for a related storage capacity of excess produced energy and the establishment by the respective law of the deadline of December 31, 2027 in which all prosumers have storage capacities. Klaus Iohannis considered that this condition will prevent the achievement of the targets assumed by our country in the energy transition by making it difficult for citizens to access the quality of prosumers.

Also in the field of energy, on July 25 the Government approved and submitted to the Parliament a draft law aimed at modernizing the centralized heating system, proposing new legal solutions to stimulate economic operators in order to provide the public service of thermal energy supply, to new standards quality and efficiency. The legal solutions have an impact on the continuation of ELCEN's activity as a public thermal energy supply service in Bucharest, after the merger with Compania Municipală Termoenergetica Bucharest. The project also provides that the contract for delegation of the management of the heating service can be assigned directly, including when the operator has full/majority share capital owned by the administrative-territorial units and/or the Romanian state. In order to avoid the risk of carrying out the activity of thermal energy supply at a loss, the project establishes the obligation of ANRE to issue the opinion regarding the adjustment of prices and tariffs and the possibility of recovering, within a period of 12 months, any financial losses generated by the price change/ tariff, registered by the operator in the interval between the date of price approval by the deliberative authority of the administrative-territorial unit and the date of the first delivery made at the new prices.

• New budget expenses

Despite the deficit of 3.6% of GDP registered at the end of the first semester, the Government continued in July to increase the envelope of budget expenditures, by approving new investments and by financing new support schemes. For the development and modernization of the medical infrastructure, the Executive approved a program of 13.25 billion lei which will be financed from national funds, from European funds allocated for the period 2021-2027, from other external funds attracted, but also from PNRR, and for the continuity of the contractual relationship between health insurance companies and medical service providers by the end of the current year, it approved a commitment loan of over 3 billion lei.

The Ciolacu Cabinet also approved the allocation of 300 million from the budget credits for the payment last month of the compensation for the increase in the diesel excise duty, for the granting of state aid to stimulate investments that promote regional development by creating jobs and state aid that stimulates investments with major impact in the economy, as well as for the IMM INVEST Plus state aid scheme and its components.

From the budgetary reserve fund, the budget of the Ministry of Investments and European Projects was supplemented with the amount of 646 million lei, to ensure the necessary financing, in August, of the material support that disadvantaged people can use for the purchase of food and hot meals, support from which 2.58 million people benefit, aid with a nominal value of 250 lei and which is granted once every two months.

• Positive decision from the NBR

The board of directors of the National Bank of Romania, meeting on July 5, 2024, decided to lower the monetary policy interest rate to 6.75 percent per year, from 7 percent per year, starting on July 8 2024, lowering the interest rate on the lending facility (Lombard) to 7.75 percent per annum from 8 percent per annum and the interest rate on the deposit facility to 5.75 percent per annum from 6 to hundred a year. The decision of the BNR management meant the first reduction of the monetary policy interest rate in the last year and seven months, during which the respective rate was maintained at 7%.

In justifying their decision, members of the central bank's Board of Directors pointed out that the annual rate of inflation accelerated its decline in the first two months of the second quarter of 2024, falling to 5.12 percent in May, below the forecast level from 6.61 percent in March, mainly as a result of the substantial cheapening of energy, especially natural gas, under the influence of the legislative changes applied since April, as well as against the background of the continued decrease in the dynamics of food prices. They noted that the annual adjusted CORE2 inflation rate continued to decline gradually, in line with forecasts, easing to 6.3 percent in May from 7.1 percent in March 2024. The deceleration was driven by and in this interval disinflationary base effects and price corrections of agri-food commodities. Additional influences stemmed from the drop in import price dynamics and the re-entry into a slightly downward trend of short-term inflationary expectations.

Moreover, the annual rate of inflation calculated on the basis of the harmonized index of consumer prices (IAPC - inflation indicator for EU Member States) decreased to 5.8 percent in May 2024, from 6.7 percent in March 2024 At the same time, the average annual CPI inflation rate and the average annual HICP inflation rate decreased in May to 7.6 percent, from 8.5 percent and 8.3 percent, respectively, in March 2024 .

The NBR stated that economic activity continued to grow, even if the increase was minimal, that industrial production revived strongly, and the pace of the volume of construction works rose again to a double-digit level, after falling to a considerable negative value on the whole of the first three months of the year.

For the reduction decided, the CA members also took into account the central bank's estimate that the annual inflation rate will continue to decrease in the coming months on a significantly lower trajectory than the one highlighted in the medium-term forecast of May 2024, mainly under the influence base effects and legislative changes in the field of energy, as well as against the background of the deceleration of import price growth and the gradual downward adjustment of short-term inflationary expectations.

Regarding the increased uncertainties and risks stemming from the future conduct of fiscal and revenue policy, the BNR draws attention to the excessive deficit in the first semester, a deficit that would attract new conditionalities for the Bucharest authorities from the European Commission.

• The budget deficit causes problems for the Government

Regarding the excessive budget deficit identified as an increased risk by the central bank, according to the budget execution for the first semester published by the Ministry of Finance at the end of July, the deficit exceeded 12.8 billion euros (63.66 billion lei), by 5 billion euros more than in the first six months of 2023. Basically, the budget deficit reached the end of June at 3.6% of GDP, which represents the most advanced decline in the last 10 years, with the exception of the pandemic year 2020 (when the 6-month deficit was 4.17% of GDP, generated by the objective cause of the closure of the economy) . As a consequence, the public debt reported by the Ministry of Finance was also at a historical record. At the end of April (for which there are available data) public debt reached 52.5% of GDP (852.82 billion lei, i.e. 171.59 billion euros), and thus registered an increase of 354.24 billion lei ( 71 billion euros) compared to the end of the pandemic year 2020. In nominal terms, the deficit for the first semester of 2024, of 63.66 billion lei, was even higher than the result from the similar period of the pandemic year 2020 (45.18 billion lei), period when the economy was severely affected by the pandemic restrictions.

The increase in the budget deficit in the first half of the year, by 26.45 billion lei compared to the similar period in 2023 (+71%) is only partially explained by the increase in investments. According to the data communicated by the Ministry of Finance, investment expenses (which include capital expenses) increased in the same period by only 13.47 billion lei compared to the similar period in 2023, the difference of almost 13 billion lei from the additional deficit representing the increase in expenses general functioning of the state, including the increase in interest paid for the public debt whose payment reached a historical maximum recorded in the first 6 months of a fiscal year. Interest expenses thus came to represent more than a quarter of the budget deficit, namely 17.6 billion lei for the period January-July 2024 (1% of GDP).

Compared to the general operating expenses of the state (339.17 billion lei in the first 6 months), the recorded budget deficit represents 18.67% of their value, also a new negative record, which means that almost a fifth of the expenses made from borrowed amounts: out of every 5 lei spent by the state, one is borrowed. The size of the deficit in the first 6 months of 2024 (63.66 billion lei) thus came to represent more than all receipts from VAT for this period (57.09 billion lei) and much more than the combined receipts from three other chapters budget, respectively from profit tax, salary and income tax and from other taxes on income, profit and capital gains, all of which generate total receipts of 42.3 billion lei.