## 1rouea2025001-source-pdf

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### Context
- Romania’s GDP per capita in PPP terms: 73 percent of the euro area average in 2024 (up from 45 percent in 2007).
- Convergence slowed since 2024 due to weak investment and low productivity growth.
- Current account (CA) deficit: 8.2 percent of GDP in 2024.
- Fiscal deficit (cash basis): 8.7 percent of GDP in 2024; on an accrual (ESA) basis: 9.3 percent of GDP in 2024.
- Public debt-to-GDP: 57.5 percent in 2024.
- Rating outlook: all rating agencies revised outlook to negative since late 2024; sovereign retains investment-grade rating one notch above speculative grade.
- New coalition government (in office June) adopted fiscal consolidation package for 2025–26 aiming to reduce fiscal deficit to below 6 percent of GDP in 2026 and committed to deficits below 3 percent of GDP by 2031 under the MTFSP and new EU fiscal rule.

### Recent Developments — Key Findings
- Fiscal slippage in 2024:
  - Pension spending rose by 40 percent in 2024.
  - Public sector wage bill rose by 24 percent in 2024.
  - Fiscal deficit rose by more than 3 percentage points to 8.7 percent of GDP in 2024.
  - Public debt-to-GDP ratio reached 57.5 percent in 2024 (contributed a 5-percentage point increase).
- 2025 persistence:
  - Late-2024 package froze public sector wages, social assistance, and pensions in 2025, but large fiscal deficit persisted in the first eight months of 2025 due to continued current expenditure increases and carryover effects.
- EU funds absorption (as of September 2025):
  - NGEU disbursement at 38 percent of originally committed amount.
  - Absorption of structural EU funds around 17 percent.
  - July 2025 agreement reduced total NGEU amount to €21.6 billion from originally committed €28.5 billion.
- Growth and demand:
  - Real GDP growth: 0.9 percent in 2024.
  - Growth momentum weak in H1 2025; output gap estimated to have turned negative in 2025.
  - Private consumption remained strong due to robust wage growth.
- Inflation and labor:
  - NBR tolerance band: 2.5±1 percent.
  - Core inflation: 8.1 percent (y/y) in September 2025 (also reported as 8.2 percent in other sections).
  - Headline inflation: 9.9 percent (y/y) in September 2025.
  - Nominal wage growth: 6.7 percent (y/y).
  - Headline inflation drivers: end of electricity price cap, VAT rate increase, renewed food price rises.
- External and competitiveness:
  - CA deficit: 8.2 percent of GDP in 2024; widening since mid-2010s.
  - ULC-based REER appreciation: 11.6 percent in 2024.
  - Services exports declined after expiration of IT sector tax incentives and sector restructuring.
  - More than two thirds of large CA deficits in 2023–24 financed by portfolio and other investment flows (debt-creating).
  - External position in 2024 assessed as substantially weaker than medium-term fundamentals and desirable policies.
- Financial sector:
  - Private sector credit growth: 8.0 percent (y/y) in August 2025 (other series report 8.8 percent for 2024; 8.6 percent for 2025; 7.3 percent for 2026).
  - Private sector credit-to-GDP: 24 percent of GDP (lowest in the EU).
  - FX lending to corporates increased by 10 percentage points since early 2022; FX corporate loans about 47 percent of total corporate loans as of 2025Q2.
  - Households hold about 35 percent of deposits in FX.
  - Banking system indicators (selected):
    - ROE: 18.2 percent in 2025Q2 (18.4 percent in 2024).
    - Capital adequacy: 24.2 percent (2025 Jun.; 24.9 percent in 2024).
    - NPL ratio: 2.8 percent (2025 Jun.; 2.5 percent in 2024).
    - Liquidity coverage ratio: above 250 percent (254.7 in 2024; 234.6 in 2025 Jun.).
    - All banks met MREL since January 2024.
    - NBR relaxed suspension on dividend payout for 50 percent of profits in 2025.

### Outlook and Projections
- Growth projections:
  - Real GDP: 1.0 percent in 2025; 1.4 percent in 2026.
  - Medium-term real GDP: projected to rise close to potential around 3¼ percent.
  - Main multi-year series (selected): 2027: 2.7; 2028: 2.9; 2029: 3.1; 2030: 3.3.
- Current account:
  - CA deficit projections: 2025: -8.0 percent of GDP; 2026: -6.6 percent of GDP; medium term around -5 percent.
- Inflation path:
  - Headline inflation expected to remain elevated until mid-2026, then decline to 3½ percent (y/y) by end-2026 (upper bound of NBR tolerance band).
  - Drivers keeping inflation high through mid-2026: end of electricity price cap in June, VAT rate hike in August, removal of natural gas price cap in March 2026, supply shock from 2024 drought.
  - ETS2 implementation in 2027 expected to cause a temporary rise in energy and transport prices.
- Scenario risk (downside summary):
  - Global divergence, trade war, higher uncertainty could lower global GDP by 1.3 and 1.9 percentage points by 2025 and 2026 relative to WEO reference; euro area GDP reduced by 1.0 and 1.8 percentage points by 2025 and 2026.
  - Under this scenario, Romania’s real GDP level could be 0.9 percentage points below staff’s baseline in 2026 before rebounding in 2027 and recovering close to baseline by 2030.
  - Primary deficit could widen by 0.2 percentage points of GDP in each forecast year under the downside scenario.
  - Policy recommendations in scenario: consider temporary and targeted fiscal support for vulnerable households and corporates given limited fiscal space; implement planned consolidation without delay; enhance FX flexibility; prioritize structural reforms.

### Risks
- Fiscal:
  - Risk of sovereign credit rating downgrade if planned fiscal consolidation for 2025–26 is not executed or medium-term sustainability is not restored.
- Growth:
  - Downside risks: delays in structural reforms; continued large increases in unit labor costs weakening exports and FDI; external slowdown in major trading partners; higher trade barriers; regional conflicts.
  - Upside: strong implementation of fiscal adjustment and EU-funded investments could improve investor sentiment and raise private investment and growth.
- Inflation:
  - Upside risks: increases in energy prices; adverse climate shocks affecting food prices; stronger and more persistent-than-expected wage growth that could unanchor inflation expectations and delay disinflation.

### Policy Discussions and Recommendations
- Fiscal policy (near and medium term):
  - Near-term large fiscal consolidation for 2025–26 is welcome and necessary; decisive tightening would support monetary policy and disinflation.
  - Government measures since July 2025: raising standard and reduced VAT rates; taxing more items at the standard rate; increasing excise, property, and dividend taxes; freeze public sector wages and pensions in 2026; prioritize public investment.
  - Fiscal deficits expected to narrow: 2024: 8.7 percent of GDP; 2025: 8.2 percent; 2026: 5.8 percent.
  - Without further measures, deficit projected at about 5 percent of GDP by 2030 and public debt-to-GDP projected to rise by about 10 percentage points to close to 70 percent by 2030—posing high sovereign debt stress risk.
  - Additional consolidation from 2027 of about 2/3 percent of GDP per year on average is needed to lower the deficit to below 3 percent of GDP by 2030 and stabilize public debt around 60 percent of GDP. Upfront specification of concrete measures effective from 2027 is recommended.
- Monetary policy:
  - Given elevated inflation and risk of unanchored expectations, NBR should maintain a cautious monetary policy stance and resume policy rate cuts only after wage growth and inflation moderate in a sustained manner.
- Structural reforms and EU funds:
  - Prioritize reforms to boost labor force participation and improve governance.
  - Improve administrative capacity in planning and investment management and address procurement bottlenecks to increase absorption of EU funds.
  - Full utilization of EU funds and structural reforms will enhance medium-term growth potential and support fiscal consolidation.
- Exchange rate and external policy:
  - Consider greater exchange rate flexibility as part of the policy mix to address persistent currency overvaluation and maintain reserve coverage.
  - Reserves assessed as adequate: gross international reserves 19.9 percent of GDP at end-2024; 20.3 percent of GDP as of end-September 2025; coverage metrics include about 5.7 months of prospective imports at end-2024 and around 108 percent of the Fund’s ARA metric by December 2024 (110 percent by September 2025).

### Tax Policy Findings and Recommendations (detailed)
- Tax revenue: 27 percent of GDP in 2023 (EU average 40 percent).
- Objectives for tax reform: mobilize revenues; improve fairness; strengthen work incentives; remain attractive to capital investment.
- Specific measures recommended:
  - Introduce a graduated personal income tax (PIT) with multiple tax brackets to help increase revenues by 0.5 percent of GDP or more; moderate impacts on labor tax wedge by reducing the health contribution and increase basic allowance or an in-work benefit for low wages.
  - Eliminate remaining PIT exemptions (tax expenditures including those for pensioners amount to 0.6 percent of GDP); staff welcomed elimination of sectoral PIT exemptions in construction, agriculture, and IT in 2025 but called for further eliminations.
  - Strengthen carbon pricing: planned introduction of a moderate carbon tax is welcome; increase over time consistent with climate goals; strengthen carbon pricing through higher excise duties and a predictable carbon tax trajectory.
  - Reform property taxation: recurrent property tax revenues about half the EU average; market-value property tax and reduced exemptions could raise revenues by 0.1–0.2 percent of GDP annually.
  - Avoid distortive turnover taxes: bank turnover tax to be raised to 4 percent in January 2026 and expire end-2026; such taxes could weaken banks’ buffers and financial intermediation.
  - Align microenterprise registration thresholds with VAT exemption: threshold reduced from €500,000 to €250,000 in 2025 and further lowered to €100,000 in January 2026; aligning with VAT exemption threshold of €88,500 recommended.
  - Increase means-tested social transfers and in-work benefits to protect low-income households while pursuing revenue measures.

### Medium-Term Fiscal Projection (Baseline vs IMF-recommended scenario) — Selected Numeric Paths (percent of GDP)
- Budget deficit under current policies (IMF estimate):
  - 2025: -8.2
  - 2026: -5.8
  - 2027: -5.7
  - 2028: -5.6
  - 2029: -5.5
  - 2030: -5.0
- IMF-recommended budget:
  - 2026: -5.8
  - 2027: -4.5
  - 2028: -3.9
  - 2029: -3.3
  - 2030: -2.6
- Implied annual adjustments relative to previous year (In percent of GDP): 2.4, 1.3, 0.6, 0.6, 0.6.
- Measures needed (estimated cumulative yield relative to the baseline, In percent of GDP; 2027–2030 horizon):
  - Total measures needed: 1.2, 1.7, 2.2, 2.3.
  - Revenue measures: 0.9, 1.3, 1.7, 1.8.
    - PIT Reform: 0.5, 0.5, 0.5, 0.5.
    - Gradual elimination of PIT exemptions: 0.1, 0.2, 0.3, 0.4.
    - Increase in carbon taxation: 0.2, 0.3, 0.4, 0.5.
    - Property reform: 0.1, 0.1, 0.1, 0.1.
    - Tax administration reform: 0.2, 0.4, 0.4 (timing aligned with cumulative totals).
  - Spending measures (savings): -0.3, -0.4, -0.5, -0.5.
    - Implementing spending reviews in all parts of public sector: -0.3, -0.4, -0.5, -0.5.

### EU Support and Public Investment Management
- NGEU funds available through 2026: about 6 percent of 2025 GDP.
- EU structural funds in 2021–27 budget period: around 10 percent of 2025 GDP.
- Authorities estimate around €15 billion in EU-funded investment will be available in 2026 (approximately two-thirds from NGEU grants and one-third from cohesion funds).
- Recommendation: strengthen coordination and monitoring to support efficient public investment planning, allocation, and implementation; full utilization of EU funds is critical to growth and fiscal consolidation.

### External Sector Assessment and REER Findings
- CA deficit widened to 8.2 percent of GDP in 2024 (from 6.7 percent in 2023).
- NIIP deteriorated to -41.3 percent of GDP in 2024 (NIIP reported elsewhere as -41).
- 2024 EBA CA model assessment:
  - CA-Actual: -8.2
  - Cyclically adjusted: -8.0
  - Adjusted CA norm: -1.8
  - CA Gap: 6.2 (percent)
  - Policy gaps: -1.2; Residual: -5.0.
- REER movements in 2024:
  - CPI-based REER appreciated by 2.8 percent.
  - PPI-based REER appreciated by 0.1 percent.
  - ULC-based REER appreciated by 11.6 percent.
- EBA REER implications:
  - CA gap implies REER gap of 18.5 percent (elasticity 0.33) in one model; other estimates give 8.1 percent and 28.0 percent from different regressions—large measurement uncertainty.
- Financing composition in 2024:
  - Capital account inflows: 1.5 percent of GDP (down from 2.8 percent in 2023).
  - Net FDI inflows: 1.3 percent of GDP (down from 2.0 percent in 2023).
  - Portfolio inflows: 3.5 percent of GDP (down from 4.2 percent in 2023).
  - Other investment inflows: 1.0 percent of GDP.
- Policy recommendation: decisively implement planned large fiscal consolidation in 2025–26; consider greater exchange rate flexibility; structural reforms to boost productivity and competitiveness.

### Monetary and Financial Sector Details
- Monetary stance:
  - NBR paused policy rate cuts since mid-2024; policy rate maintained at 6.5 percent (after two 25 bps cuts earlier).
  - Real policy rate remained positive relative to core inflation measures.
  - Policy rate cuts to resume only after wage growth and inflation moderate in a sustained manner.
- Financial indicators (selected time-series highlights and projections):
  - Gross external debt: 2024: 57.5 percent of GDP; 2025: 59.5; 2026: 63.5; 2027: 67.4; 2028: 70.5; 2029: 71.7; 2030: 73.0.
  - NIIP: 2024: -41.3 percent of GDP; 2025: -44.2; 2026: -47.8; 2027: -51.6; 2028: -54.7; 2029: -56.2; 2030: -57.1.
  - International reserves (bn €): 2024: 70.5; 2025: 70.6; 2026: 75.2; 2027: 79.8; 2028: 85.3; 2029: 91.4; 2030: 100.7.
  - Reserve coverage metrics (selected): months of prospective imports: 2024: 5.8; 2025: 6.0; 2026: 6.2.
- Financial soundness (selected):
  - Regulatory capital/risk-weighted assets: 2024: 24.9; 2025 (Jun.): 24.2.
  - NPLs/total loans: 2024 (Dec.): 2.5; 2025 (Jun.): 2.8.
  - NPL provisions/NPLs: 2024: 66.0; 2025 (Jun.): 64.5.
  - Return on assets: 2024: 1.7; 2025 (Jun.): 1.7.
  - Return on equity: 2024: 18.4; 2025 (Jun.): 18.2.
  - Liquidity coverage ratio: 2024: 254.7; 2025 (Jun.): 234.6.
  - Net stable funding ratio: 2024: 197.3; 2025 (Jun.): 191.9.
- Risks and supervision:
  - Supervisors should monitor asset quality, liquidity stress-testing, banks’ growing sovereign exposure, buoyant consumer credit growth, and sizable unhedged FX loans.
  - Authorities should be ready to recalibrate macroprudential policies as risks evolve.

### Debt Sustainability and Medium-Term Risk Assessment (Annex III highlights)
- DSA and risk signals:
  - Overall DSA assessment: Risk of sovereign stress: High; Near term: Medium; Medium term: High; Long term: Moderate.
  - Final medium-term index: 0.5; Debt fanchart index (DFI): 2.6.
  - Probability of missed crisis, 2025-2030, if stress not predicted: 72.7 pct; probability of false alarms: 3.4 pct.
  - Gross financing needs (GFN) average baseline GFN value: 12.0 (contrib 4.1).
  - GFN financeability index (GFI): 24.1.
- Baseline public debt path (percent of GDP):
  - 2024 actual: 57.5
  - 2025: 61.2
  - 2026: 62.5
  - 2027: 64.1
  - 2028: 66.0
  - 2029: 67.8
  - 2030: 69.1
  - 2031: 70.2
  - 2032: 71.3
  - 2033: 72.3
  - 2034: 73.3
- Gross financing needs (GFN) and debt service (percent of GDP):
  - GFN: 2024 actual: 14.1; 2025: 13.4; 2026: 11.4; 2027: 9.8; 2028: 11.7; 2029: 12.1; 2030: 13.6.
  - Debt service: 2024 actual: 7.5; 2025: 8.2; 2026: 8.1; 2027: 6.9; 2028: 9.0; 2029: 9.5; 2030: 11.6.
- Interpretation and policy implication:
  - Despite planned consolidation in 2025–26, public debt-to-GDP expected to continue rising absent further consolidation; average GFNs over the medium term remain considerable around 11 percent of GDP.
  - Urgent need for additional consolidation and revenue mobilization to reduce probability of sovereign stress.

### Structural and Labor Market Reforms
- SOEs and governance:
  - Establishment of an independent agency to monitor large SOEs is welcome; timely board appointments needed.
  - Improve governance, speed up anti-corruption proceedings, enhance predictability and quality of regulations.
- Labor force participation (LFP):
  - Overall LFP rate: just under 70 percent in 2024 (third lowest in the EU).
  - Closing LFP gap with EU average could increase labor force by 14½ percent and raise potential GDP by 6½ percent.
  - Policy priorities: help women work in formal economy through better availability of childcare and investment in education quality.
- Green transition and energy security:
  - Authorities submitted updated Integrated National Energy and Climate Plan and National Energy Strategy 2025–35 to achieve net zero GHG emissions by 2050.
  - Consider complementary carbon tax in transport and building sectors and additional excise taxes on fossil fuels to ease ETS2 transition.
  - Monitor climate-related financial risks; avoid stranded assets from over-reliance on gas-powered plants.
  - Completion of EU-wide Energy Union and stronger cross-border interconnections recommended.

### Data, Institutional, and Process Notes
- Data adequacy rating: A.
- Romania adheres to SDDS Plus since November 2019 and publishes data on National Summary Data Page.
- Selected data reporting timeliness and latest observations as of October 14, 2025 (examples):
  - Exchange Rates: latest observation 13-Oct-25; received 14-Oct-25.
  - CPI: latest observation Sep-25; received Oct-25.
  - GDP/GNP: latest observation Jun-25; received Sep-25.
- Administrative recommendation: next Article IV consultation on 12–month cycle.

*Source: 1rouea2025001-source-pdf*

### 1. Recent Developments—Slowing Growth and Rising Inflation _________________________________ 19

### 1. Recent Developments—Slowing Growth and Rising Inflation _________________________________ 19

### Context
- Romania’s GDP per capita in PPP terms rose to 73 percent of the euro area average in 2024, up from 45 percent in 2007.
- Pace of income convergence has slowed since 2024 due to weak investment and low productivity growth.
- Current account (CA) deficit reached 8.2 percent of GDP in 2024; fiscal deficit increased to 8.7 percent of GDP in 2024 (cash basis). Footnote: On an accrual basis (European System of Accounts), the fiscal deficit was 9.3 percent of GDP.
- All rating agencies revised Romania’s outlook to negative since late 2024, while the sovereign retains an investment-grade rating one notch above speculative grade.
- New coalition government (in office June) adopted a fiscal consolidation package for 2025–26 aimed at reducing the fiscal deficit to below 6 percent of GDP in 2026 and committed to deficits below 3 percent of GDP by 2031 under the medium-term fiscal structural plan (MTFSP) and the new EU fiscal rule.

### Recent Developments — Key Findings
- Fiscal slippage in 2024:
  - Pension spending rose by 40 percent in 2024.
  - Public sector wage bill rose by 24 percent in 2024.
  - Fiscal deficit rose by more than 3 percentage points to 8.7 percent of GDP in 2024.
  - Public debt-to-GDP ratio reached 57.5 percent in 2024 (contributed a 5-percentage point increase).
- 2025 persistence:
  - A late-2024 package froze public sector wages, social assistance, and pensions in 2025, but the large fiscal deficit persisted in the first eight months of 2025 due to continued current expenditure increases and carryover effects.
- EU funds absorption (as of September 2025):
  - NGEU disbursement at 38 percent of originally committed amount due to under-execution of investment projects and slow structural reforms.
  - Absorption of structural EU funds around 17 percent.
  - July 2025 agreement reduced total NGEU amount to €21.6 billion from originally committed €28.5 billion.
- Growth and demand:
  - Real GDP grew by 0.9 percent in 2024, weighed down by subdued investment, weak exports, a surge in imports, and a drought affecting agricultural output.
  - Growth momentum was weak in H1 2025; output gap estimated to have turned negative in 2025.
  - Private consumption remained strong due to robust wage growth.
- Inflation:
  - NBR tolerance band is 2.5±1 percent.
  - Core inflation was 8.1 percent (y/y) in September 2025.
  - Nominal wage growth was 6.7 percent (y/y).
  - Headline inflation rose to 9.9 percent (y/y) driven by end of electricity price cap, VAT rate increase, and renewed food price rises.
- External and competitiveness:
  - CA deficit widened due to weak export performance and surge in imports.
  - CA deficit of 8.2 percent of GDP in 2024; worsening since mid-2010s.
  - ULC-based REER appreciation was 11.6 percent in 2024.
  - Expiration of IT sector tax incentives and sector restructuring led to decline in services exports.
  - More than two thirds of large CA deficits in 2023–24 financed by portfolio and other investment flows (debt-creating).
  - External position in 2024 assessed as substantially weaker than medium-term fundamentals and desirable policies (see Annex I).
- Financial sector:
  - Private sector credit growth reached 8.0 percent (y/y) in August 2025.
  - Private sector credit-to-GDP at 24 percent of GDP (lowest in the EU).
  - FX lending to corporates increased by 10 percentage points since early 2022; FX corporate loans about 47 percent of total corporate loans as of 2025Q2.
  - Households hold about 35 percent of deposits in FX.
  - Banking system:
    - ROE of 18.2 percent in 2025Q2.
    - Capital adequacy increased to 24.2 percent.
    - NPL ratio at 2.8 percent.
    - Liquidity coverage ratio above 250 percent.
    - All banks met MREL since January 2024.
    - NBR relaxed suspension on dividend payout for 50 percent of profits in 2025.

### Outlook and Projections
- Growth:
  - Real GDP projected to grow by 1.0 percent in 2025 and 1.4 percent in 2026.
  - Medium-term real GDP projected to rise close to potential around 3¼ percent.
- Current account:
  - CA deficit expected to narrow to 8.0 percent of GDP in 2025 and 6.6 percent of GDP in 2026, stabilizing around 5 percent in the medium term.
- Inflation:
  - Headline inflation expected to remain elevated until mid-2026, then decline to 3½ percent (y/y) by end-2026 (upper bound of NBR tolerance band).
  - Drivers keeping inflation high through mid-2026: end of electricity price cap in June, VAT rate hike in August, removal of natural gas price cap in March 2026, supply shock from 2024 drought.
  - ETS 2 implementation in 2027 expected to cause a temporary rise in energy and transport prices.
- Scenario risk (Box 1 — downside scenario summary):
  - Global divergence, trade war, higher uncertainty, and tighter financing could lower global GDP by 1.3 and 1.9 percentage points by 2025 and 2026 relative to WEO reference; euro area GDP reduced by 1.0 and 1.8 percentage points by 2025 and 2026.
  - Under this scenario, Romania’s real GDP level could be 0.9 percentage points below staff’s baseline in 2026 before rebounding in 2027 and recovering close to baseline by 2030.
  - Primary deficit could widen by 0.2 percentage points of GDP in each forecast year under the downside scenario.
  - Policy recommendations in the scenario: consider temporary and targeted fiscal support for vulnerable households and corporates given limited fiscal space; implement planned consolidation without delay; enhance FX flexibility; prioritize structural reforms to strengthen governance, rule of law, business environment, FDI, labor market, and structural fiscal and financial reforms.

### Risks
- Fiscal:
  - Risk of sovereign credit rating downgrade if planned fiscal consolidation for 2025–26 is not executed or medium-term sustainability is not restored.
- Growth:
  - Downside: delays in structural reforms, continued large increases in unit labor costs weakening exports and FDI; external slowdown in major trading partners; higher trade barriers; regional conflicts.
  - Upside: strong implementation of fiscal adjustment and EU-funded investments could improve investor sentiment and raise private investment and growth.
- Inflation:
  - Upside risks: increases in energy prices, adverse climate shocks affecting food prices, stronger and more persistent-than-expected wage growth that could unanchor inflation expectations and delay disinflation.

### Policy Discussions and Recommendations
- Fiscal:
  - Near-term large fiscal consolidation for 2025–26 is welcome and necessary; decisive tightening would support monetary policy and disinflation.
  - Since July 2025, government measures include raising standard and reduced VAT rates, taxing more items at the standard rate, and increasing excise, property, and dividend taxes; freeze public sector wages and pensions in 2026; prioritize public investment.
  - Fiscal deficits expected to narrow from 8.7 percent of GDP in 2024 to 8.2 percent in 2025 and 5.8 percent in 2026. Without further measures, deficit projected at about 5 percent of GDP by 2030 and public debt-to-GDP projected to rise by about 10 percentage points to close to 70 percent by 2030—posing high sovereign debt stress risk (see Annex III).
  - Additional consolidation from 2027 of about 2/3 percent of GDP per year on average is needed to lower the deficit to below 3 percent of GDP by 2030 and stabilize public debt around 60 percent of GDP. Upfront specification of concrete measures effective from 2027 is recommended to restore credibility and predictability.
- Monetary:
  - Given elevated inflation and risk of unanchored expectations, NBR should maintain a cautious monetary policy stance and resume policy rate cuts only after wage growth and inflation moderate in a sustained manner.
- Structural reforms and EU funds:
  - Prioritize reforms to boost labor force participation and improve governance.
  - Improve administrative capacity in planning and investment management and address procurement bottlenecks to increase absorption of EU funds.
  - Full utilization of EU funds and structural reforms will enhance medium-term growth potential and support fiscal consolidation.

*Source: 1rouea2025001-source-pdf*

### 17.      Additional tax policy reforms should be the main source of fiscal adjustment to

### 17.      Additional tax policy reforms should be the main source of fiscal adjustment to strengthen public finances in a sustainable manner.

### Tax policy findings and recommendations
- Romania’s tax revenue is 27 percent of GDP in 2023, among the lowest in the EU (average 40 percent), and insufficient to support increasing spending needs for social outlays and public services.
- A tax reform package should mobilize revenues, improve fairness, strengthen work incentives, and remain attractive to capital investment to enable growth-friendly and equity-enhancing fiscal consolidation.
- Specific tax measures recommended:
  - Introduce a graduated personal income tax (PIT) with multiple tax brackets to help increase revenues by 0.5 percent of GDP or more and improve fairness; moderate impacts on the labor tax wedge by reducing the health contribution and increase basic allowance or an in-work benefit for low wages.
  - Eliminate remaining PIT exemptions (tax expenditures including those for pensioners amount to 0.6 percent of GDP); staff welcomed elimination of sectoral PIT exemptions in construction, agriculture, and IT in 2025 but called for further eliminations.
  - Strengthen carbon pricing: planned introduction of a moderate carbon tax is welcome; tax-based decarbonization measures should increase over time consistent with Romania’s climate mitigation goals; strengthen carbon pricing through higher excise duties and a predictable carbon tax trajectory.
  - Reform property taxation: despite a planned increase in 2026, recurrent property tax revenues are about half the EU average; a property tax on market values and reduced exemptions could raise revenues by 0.1–0.2 percent of GDP annually.
  - Avoid distortive turnover taxes: a bank turnover tax will be raised to 4 percent in January 2026 and expire end-2026; such taxes could weaken banks’ buffers and financial intermediation; turnover taxes on large enterprises unfairly burden low-margin firms—consider less distortive measures.
  - Align microenterprise registration thresholds with VAT exemption: threshold reduced from €500,000 to €250,000 in 2025 and will be further lowered to €100,000 in January 2026; a further reduction aligning with the VAT exemption threshold of €88,500 would curb tax arbitrage.
  - Increase means-tested social transfers and in-work benefits to protect low-income and vulnerable households while pursuing revenue measures.

### Medium-term fiscal projection (Baseline vs IMF-recommended scenario)
- Budget deficit under current policies (IMF estimate): 2025 -8.2, 2026 -5.8, 2027 -5.7, 2028 -5.6, 2029 -5.5, 2030 -5.0 (In percent of GDP).
- IMF-recommended budget (In percent of GDP): 2026 -5.8, 2027 -4.5, 2028 -3.9, 2029 -3.3, 2030 -2.6.
- Implied annual adjustments relative to previous year: 2.4, 1.3, 0.6, 0.6, 0.6 (In percent of GDP).
- Implied adjustment relative to baseline (cumulative): 1.2, 1.7, 2.2, 2.3 (In percent of GDP).

- Measures needed (estimated cumulative yield relative to the baseline, In percent of GDP):
  - Total measures needed: 1.2, 1.7, 2.2, 2.3 (2027–2030 horizon).
  - Revenue measures: 0.9, 1.3, 1.7, 1.8.
    - PIT Reform: 0.5, 0.5, 0.5, 0.5.
    - Gradual elimination of PIT exemptions: 0.1, 0.2, 0.3, 0.4.
    - Increase in carbon taxation: 0.2, 0.3, 0.4, 0.5.
    - Property reform: 0.1, 0.1, 0.1, 0.1.
    - Tax administration reform: 0.2, 0.4, 0.4 (timing aligned with cumulative totals).
  - Spending measures (savings): -0.3, -0.4, -0.5, -0.5.
    - Implementing spending reviews in all parts of public sector: -0.3, -0.4, -0.5, -0.5.

### EU support and public investment management
- Make full use of available EU support and strengthen public investment management framework to unlock committed EU funds.
  - NGEU funds available through 2026 amount to about 6 percent of 2025 GDP.
  - EU structural funds in the 2021–27 budget period amount to around 10 percent of 2025 GDP.
- Strengthen coordination and monitoring to support efficient public investment planning, allocation, and implementation, as noted in the IMF Public Investment Management Assessment (PIMA).

### Fiscal governance, tax administration, and budgeting
- Tax administration:
  - Progress includes robust taxpayer registration database and enhanced taxpayer services.
  - Fiscal reform package mandates bank accounts for all companies to improve compliance.
  - NAFA’s new digital transformation strategy is an opportunity to strengthen tax administration and public service provision.
- Budget process:
  - Planned introduction of a new digital budgeting platform to strengthen information management and budget planning.
  - Regular public sector spending reviews should be better integrated into annual budgeting.
  - Adopt a stronger medium-term fiscal framework with credible medium-term revenue and expenditure strategies and contingency plans.

### Authorities’ views on fiscal reform
- Authorities committed to restoring public debt sustainability by reducing fiscal deficits under the new EU fiscal rule.
- They expected the 2025–26 fiscal reform package to reduce the fiscal deficit to 6 percent of GDP in 2026 but agreed additional adjustment is needed beyond 2026.
- Authorities committed to strengthen tax administration and spending efficiency, including through digitalization, and to secure full disbursement of renegotiated EU funds by completing NGEU projects feasible by August 2026.

### Structural and labor market reforms
- Establishment of an independent agency to monitor large state-owned enterprises (SOEs) is welcome; timely board appointments are needed for full functionality and improved SOE oversight, competition, and efficiency.
- Improve governance, speed up anti-corruption proceedings, enhance predictability and quality of regulations to improve the investment climate and reduce informality.
- Raise labor force participation (LFP):
  - Romania’s overall LFP rate is just under 70 percent in 2024, the third lowest in the EU.
  - Closing the LFP gap with the EU average could increase the labor force by 14½ percent and raise potential GDP by 6½ percent.
  - Policies should focus on helping women work in the formal economy through better availability of childcare and investment in the quality of education.

*Source: IMF staff compilation.*

### 31.      The transition to a low-carbon economy, along with the completion of the EU-wide

### The transition to a low-carbon economy, along with the completion of the EU-wide Energy Union, will help strengthen energy security.

### Energy transition and energy security
- Authorities submitted updated Integrated National Energy and Climate Plan and National Energy Strategy 2025–35 to achieve net zero GHG emissions by 2050.
- To ease transition to the EU Emissions Trading System 2 (ETS2) regime, additional incentives could be considered, including:
  - a complementary carbon tax in the transport and building sectors,
  - additional excise taxes on fossil fuels.16
- Climate-related financial risks should be carefully monitored and proactively managed; over-reliance on increased gas-powered plants risks investments becoming stranded assets.
- For energy security, building a genuine EU-wide Energy Union with a fully integrated and interconnected energy market is important (as noted in the Budapest Declaration).

### Authorities’ views
- Authorities concurred with staff on priority areas and the importance of advancing structural reforms to support growth and achieve energy security.
- They reiterated commitment to fulfill all reforms under the NRRP to unlock available EU funds in a timely manner.
- Authorities noted efforts to advance reforms to improve fairness and efficiency of the state, including creation of a new independent monitoring agency to strengthen SOEs’ performance and governance.
- They emphasized criticality of advancing EU-level energy market integration to reduce energy costs and share green transition benefits with consumers and businesses.

### Staff appraisal — Growth and macroeconomic outlook
- Growth is expected to rise gradually to moderate levels in the near term amid necessary fiscal consolidation and low productivity.
- Recent dynamics:
  - economic activity subdued as significant uncertainty weighted on economic sentiment,
  - external position in 2024 was substantially weaker than level implied by fundamentals and desirable policies.
- Acceleration of NGEU-funded investments will partly offset moderation in private consumption resulting from temporarily high inflation and effects of fiscal consolidation.
- The government introduced a large fiscal reform package for 2025–26, which includes a VAT rate hike and other tax measures.
- Headline inflation is expected to remain elevated temporarily before falling within the NBR’s tolerance band by the end of 2026.

### Risks to the outlook
- Risks are tilted to the downside for growth and to the upside for inflation.
- Key downside risks:
  - sovereign credit rating downgrade risk due to concerns about execution of planned fiscal consolidation for 2025–26 and medium-term public finance sustainability given still high fiscal deficit.
- Key upside risk for inflation:
  - stronger-than-expected wage growth, possibly driven by temporarily high headline inflation, which could unanchor inflation expectations and delay normalization of core inflation.
- Upside scenario for growth:
  - strong implementation of fiscal adjustment and EU-funded investment projects could strengthen investor sentiment, lower risk premia faster than expected, and raise private investment and growth.

### Fiscal policy recommendations
- Full execution of planned fiscal consolidation in 2025–26 followed by additional adjustment in the medium term is critical to restore fiscal sustainability and market confidence.
- Further medium-term tax reform should aim to:
  - mobilize revenues,
  - improve fairness,
  - strengthen work incentives,
  - remain attractive to capital investments.
- Upfront specification of concrete measures effective from 2027 would help restore credibility, increase predictability of tax policy, and improve investment climate.

### Monetary policy and exchange rate
- Re-emergence of inflation pressures calls for a cautious monetary policy approach to ensure inflation securely returns to the tolerance band.
- Temporary impact of the VAT rate hike, end of energy price caps, and ongoing wage pressures heighten risk of unanchored inflation expectations.
- Policy rate cuts should resume only after wages and prices moderate in a sustained manner.
- A gradual increase in two-way exchange rate flexibility over the medium term would enhance resilience to shocks.

### Financial sector stability
- Financial sector systemic risk remains limited, but emerging vulnerabilities warrant continued vigilance.
- Banking system resilience has improved with stronger balance sheets.
- Supervisors should continue monitoring:
  - asset quality,
  - liquidity stress-testing,
  - banks’ growing sovereign exposure,
  - buoyant consumer credit growth,
  - sizable unhedged FX loans.
- Authorities should be prepared to recalibrate macroprudential policies to align with evolving risks and ensure enhanced resilience.

### Structural reforms and implementation priorities
- Advancing structural reforms is vital to unlock committed EU funds and sustainably boost growth while supporting fiscal consolidation.
- Priorities include:
  - timely appointment of the board of the independent agency monitoring large SOEs to strengthen oversight and efficiency in SOE-dominated sectors,
  - enhancing predictability and quality of regulations to improve business climate and reduce informality,
  - raising labor force participation and productivity with measures such as better availability of childcare and investment in quality of education, given an aging population.
- Romania’s transition to a low-carbon economy and completion of the EU-wide Energy Union will help strengthen energy security.

### Administrative recommendation
- It is recommended that the next Article IV consultation take place on the standard 12–month cycle.

*Source: IMF staff report excerpts on Romania (selected paragraphs 31–39, staff appraisal and authorities’ views).*

### 8.6 percent

### 8.6 percent

### External—Widening Imbalance
- The current account (CA) deficit widened to 8.2 percent of GDP in 2024, up from 6.7 percent in 2023, driven by weak export performance and a surge in imports amid large fiscal deficits.
- Romania has increasingly relied on debt-creating external flows to finance larger CA deficits; portfolio liabilities have risen since 2023 to finance government deficits.
- NIIP deteriorated in 2024 to -41 percent of GDP due to the widening CA deficit.
- 2024 (% GDP) balance-sheet snapshot provided in the assessment:
  - NIIP: -41
  - Gross Assets: 43
  - Debt Assets: 3
  - Gross Liab.: 84
  - Debt Liab.: 32
- Financing composition and trends (selected):
  - Capital accounts (grants), FDI+portfolio equity, deposits, other debt-creating flows, reserves, and E&O together determine CA and financing (chart shown for 2014–2024).
- Trade and competitiveness:
  - Imports rose driven by strong domestic demand (intermediate inputs, capital goods, consumer goods).
  - Exports declined amid ongoing weak growth among trading partners and continued real effective exchange rate appreciation.
  - Real Effective Exchange Rates (2013=100): CPI based, PPI based, ULC based (Eurostat) series shown 2013–2024.

### Monetary—Cautious Approach
- Inflation and policy stance:
  - Headline inflation remains well above the target band. Target: 2.5 (with tolerance range shown).
  - The NBR paused policy rate cuts since mid-2024.
  - Annual Inflation series (Headline, Core, Core at constant taxes) shown through 2025.
- Interest rates and real policy rates:
  - Selected Interest Rates series include NBR policy rate, corridor bands, interbank rate, Euribor 3M through 2025M9.
  - Real Policy Rate based on Core Inflation at Constant Taxes shows Romania (ROM), ECB, CZE, HUN, POL 2019M1–2025M7; the real policy rate remained positive.
  - Policy rate gaps between the NBR and the ECB widened, contributing to capital flows from carry trades, especially into domestic government bonds.
- Credit and external liabilities:
  - Credit to Private Sector (Households, Nonfin. Corp., Other fin. corp.) as percent of GDP shown 2019M1–2025M7; credit growth moderated in recent years in line with slowing economic growth.
  - Selected Short term External Liabilities (Nonresident ST claims on other sectors; Nonresident deposits in domestic banks; Nonresident holding of domestic gov. bonds; Liabilities linked to carry trade) shown 2019Q1–2025Q1.

### Banking—Healthy Balance Sheets
- Credit penetration and asset quality:
  - Banks' credit to the domestic private sector is low relative to peers (Loans as percent of GDP, 2024).
  - Nonperforming loans (NPLs)/total loans: 2.5 percent (2024) with NPL provisions/NPLs at 66.0 percent (2024), indicating sound asset quality supported by high provisions.
- Capitalization, profitability, liquidity:
  - Regulatory capital/risk-weighted assets: 24.9 percent (2024).
  - Return on assets: 1.7 percent (2024); Return on equity: 18.4 percent (2024).
  - Liquidity coverage ratio: 254.7 (2024); Net stable funding ratio: 197.3 (2024).
- Risks and exposures:
  - The share of sovereign bonds on banks’ balance sheets has increased (Banks' Exposure to Government, 2024).
  - Financial euroization has continued, particularly in NFC’s FX loans; euroization series for NFC and Households (FX deposits and FX loans) are provided through 2025M1.

### Main Economic Indicators (selected highlights, 2021–30)
- Real GDP growth:
  - 2021: 5.5
  - 2022: 4.0
  - 2023: 2.3
  - 2024: 0.9
  - 2025: 1.0
  - 2026: 1.4
  - 2027: 2.7
  - 2028: 2.9
  - 2029: 3.1
  - 2030: 3.3
- Inflation:
  - Consumer prices (avg): 2024: 5.6; 2025: 7.3; 2026: 6.7; 2027: 4.3; 2028: 3.1; 2029: 2.8; 2030: 2.6
  - Consumer prices (eop): 2024: 5.1; 2025: 9.5; 2026: 3.5; 2027: 4.2; 2028: 3.0; 2029: 2.7; 2030: 2.5
  - Core CPI (eop): 2024: 5.6; 2025: 8.3; 2026: 3.5; 2027: 3.7; 2028: 3.0; 2029: 2.4; 2030: 2.4
- External sector:
  - Current account balance: 2024: -8.2 percent of GDP; projected 2025: -8.0; 2026: -6.6; 2027: -6.1; 2028: -5.9; 2029: -5.4; 2030: -5.0
  - External debt: 2024: 57.5 percent of GDP; 2025: 59.5; 2026: 63.5; 2027: 67.4; 2028: 70.5; 2029: 71.7; 2030: 73.0
  - Net international investment position (NIIP): 2024: -41.3 percent of GDP; 2025: -44.2; 2026: -47.8; 2027: -51.6; 2028: -54.7; 2029: -56.2; 2030: -57.1
- Public finances:
  - Net lending/borrowing (general government, percent of GDP): 2024: -8.7; 2025: -8.2; 2026: -5.8; 2027: -5.7; 2028: -5.6; 2029: -5.5; 2030: -5.0
  - Primary balance: 2024: -6.7; 2025: -5.3; 2026: -3.3; 2027: -3.0; 2028: -2.7; 2029: -2.6; 2030: -2.1
  - Gross debt: 2024: 57.5 percent of GDP; 2025: 61.2; 2026: 62.5; 2027: 64.1; 2028: 66.0; 2029: 67.8; 2030: 69.1

### Fiscal Accounts (selected, percent of GDP, 2021–30)
- Revenue:
  - Total revenue: 2024: 31.3; 2025: 32.2; 2026: 32.8; 2027: 32.3; 2028: 32.3; 2029: 32.1; 2030: 32.2
  - Tax revenue: 2024: 27.4; 2025: 27.6; 2026: 28.2; 2027: 28.6; 2028: 28.4; 2029: 28.3; 2030: 28.3
  - VAT (share): 2024: 6.9; 2025: 7.0; 2026: 7.3; 2027: 7.6; 2028: 7.6; 2029: 7.6; 2030: 7.6
- Expenditure:
  - Total expenditure: 2024: 40.0; 2025: 40.4; 2026: 38.6; 2027: 38.0; 2028: 37.9; 2029: 37.6; 2030: 37.2
  - Interest: 2024: 2.1; 2025: 2.9; 2026: 2.6; 2027: 2.8; 2028: 2.9; 2029: 2.9; 2030: 3.0
  - Transfers: 2024: 18.6; 2025: 19.3; 2026: 18.6; 2027: 17.5; 2028: 17.3; 2029: 17.3; 2030: 17.2
  - EU-related (excl. direct agricultural payments): 2024: 2.6; 2025: 3.1; 2026: 3.1; 2027: 1.9; 2028: 1.5; 2029: 1.5; 2030: 1.6
- Financing and debt:
  - Financing (percent of GDP): 2024: 8.7; 2025: 8.2; 2026: 5.8; 2027: 5.7; 2028: 5.6; 2029: 5.5; 2030: 5.0
  - Gross debt (authorities' definition): 2024: 57.5; 2025: 61.2; 2026: 62.5; 2027: 64.1; 2028: 66.0; 2029: 67.8; 2030: 69.1
  - Gross debt (Maastricht definition): 2024: 53.9; 2025: 57.4; 2026: 58.6; 2027: 60.1; 2028: 61.9; 2029: 63.6; 2030: 64.8

### Balance of Payments (selected, 2021–30)
- Current account: 2024: -8.2; 2025: -8.0; 2026: -6.6; 2027: -6.1; 2028: -5.9; 2029: -5.4; 2030: -5.0
- Merchandise trade balance: 2024: -9.3; 2025: -7.9; 2026: -7.6; 2027: -7.6; 2028: -7.4; 2029: -7.1; 2030: -6.9
- Financial account: 2024: -5.6; 2025: -6.5; 2026: -4.6; 2027: -4.9; 2028: -4.6; 2029: -4.1; 2030: -3.6
- Gross external debt: 2024: 57.5 percent of GDP; 2025: 59.5; 2026: 63.5; 2027: 67.4; 2028: 70.5; 2029: 71.7; 2030: 73.0
- International reserves (bn €): 2024: 70.5; 2025: 70.6; 2026: 75.2; 2027: 79.8; 2028: 85.3; 2029: 91.4; 2030: 100.7
- Reserve coverage and metrics:
  - In percent of short-term debt (orig. maturity): 2024: 143.8; 2025: 139.9; 2026: 149.9; 2027: 150.8; 2028: 153.1; 2029: 155.1; 2030: 161.2
  - Months of prospective imports: 2024: 5.8; 2025: 6.0; 2026: 6.2; 2027: 6.3; 2028: 6.5; 2029: 6.7; 2030: 7.0

### Monetary Survey (selected, 2021–26; amounts in billion lei where indicated)
- National Bank of Romania:
  - Net foreign assets: 2021: 217; 2022: 246; 2023: 314; 2024: 329; 2025: 312; 2026: 338
  - Reserve money: 2021: 143; 2022: 160; 2023: 181; 2024: 184; 2025: 205; 2026: 224
- Banking system:
  - Broad money (M3): 2021: 564; 2022: 603; 2023: 668; 2024: 742; 2025: 812; 2026: 888
  - Domestic credit: 2021: 445; 2022: 464; 2023: 486; 2024: 552; 2025: 640; 2026: 721
  - Credit to general government, net: 2021: 121; 2022: 101; 2023: 98; 2024: 131; 2025: 183; 2026: 230
  - Credit to the private sector, net: 2021: 324; 2022: 364; 2023: 387; 2024: 421; 2025: 457; 2026: 491
- Monetary indicators (annual percent change):
  - Broad money: 2024: 11.1; 2025: 9.4; 2026: 9.3
  - Domestic credit growth: 2024: 13.8; 2025: 15.8; 2026: 12.7
  - Private sector credit growth: 2024: 8.8; 2025: 8.6; 2026: 7.3
- FX shares:
  - Share of foreign currency private deposits (commercial banks, percent): 2021: 35.3; 2022: 34.3; 2023: 30.3; 2024: 30.0; 2025: 31.9; 2026: 31.5
  - Share of foreign currency private loans (commercial banks, percent): 2021: 27.6; 2022: 31.2; 2023: 31.6; 2024: 30.0; 2025: 29.7; 2026: 29.4

### Financial Soundness Indicators (selected, 2021–25)
- Capital and asset quality:
  - Regulatory capital/risk-weighted assets: 2024: 24.9; 2025 (Jun.): 24.2
  - Nonperforming loans (NPLs)/total loans: 2024 (Dec.): 2.5; 2025 (Jun.): 2.8
  - NPL provisions/NPLs: 2024: 66.0; 2025 (Jun.): 64.5
- Profitability and efficiency:
  - Return on assets: 2024: 1.7; 2025 (Jun.): 1.7
  - Return on equity: 2024: 18.4; 2025 (Jun.): 18.2
  - Net interest income/gross income: 2024: 64.1; 2025 (Jun.): 62.6
- Liquidity and funding:
  - Liquid/total assets: 2024: 31.7; 2025 (Jun.): 33.8
  - Liquid assets/short-term liabilities: 2024: 43.0; 2025 (Jun.): 46.2
  - Liquidity coverage ratio: 2024: 254.7; 2025 (Jun.): 234.6
  - Net stable funding ratio: 2024: 197.3; 2025 (Jun.): 191.9
- Other indicators:
  - Noninterest expense/gross income: 2024: 55.7; 2025 (Jun.): 56.3
  - Lending-deposit rates spread (bps): 2024: 557; 2025 (Jun.): 560.3

### External Sector Assessment — Overall Assessment and Policy Recommendations
- Overall Assessment:
  - The external position of Romania in 2024 is assessed to be substantially weaker than the level implied by fundamentals and desirable policies, although the magnitude of this imbalance is subject to large uncertainty given the sizable residual.
  - The CA deficit widened to 8.2 percent of GDP in 2024 primarily driven by rising imbalances in the government sector.
  - Foreign exchange reserves are assessed to be adequate according to most metrics.
- Potential Policy Responses:
  - The authorities need to decisively implement the planned large fiscal consolidation in 2025–26 to address widening twin deficits and restore domestic and external imbalances.
  - Romania should consider greater exchange rate flexibility as part of the policy mix, both to address a persistent currency overvaluation and to maintain reserve coverage.
  - Structural reforms to boost productivity and competitiveness, as well as investments in infrastructure and human capital, are also necessary.
- Trajectory:
  - The NIIP-to-GDP is projected to remain broadly constant in the medium term with gradually narrowing CA deficits.

*Italic: Source — Authorities' data and IMF staff estimates and projections.*

### 6.6 percent of GDP in 2025 and 2026, respectively, with

### 1rouea2025001-source-pdf - 6.6 percent of GDP in 2025 and 2026, respectively, with

### Current Account Assessment and External Balance Analysis
- 2024 EBA CA model assessment (using the 2024 CA) indicates:
  - CA gap of -6.2 percent of GDP.
  - Policy gap of -1.2 percent.
  - Negative EBA norm of -1.8 percent.
  - Residual of -5.0 percent, implying high uncertainty about CA drivers and misalignment with fundamentals.
- External Sustainability (ES) approach of the EBA finds a CA gap of -5.4 percent of GDP.
- Factors affecting interpretation:
  - EU grants augment the CA deficit without entailing new liabilities and are not incorporated in the CA norm.
  - The CA deficit has been financed largely by capital transfers from the EU and FDI, though Romania has increasingly relied on debt-creating flows more recently.
- EBA model components and estimates shown for 2024:
  - CA-Actual: -8.2
  - Cyclically adjusted: -8.0
  - Adjusted CA norm: -1.8
  - CA Gap: 6.2 (percent)
  - Of which: Policy gaps: -1.2; Residual: -5.0
  - Elasticity: 0.33
  - REER Gap (percent) reported as: 18.5, 16.1, 8.1, -28.0 (from different regressions/models as presented)

### Real Exchange Rate (REER) Findings
- 2024 REER movements:
  - CPI-based REER (IMF data) appreciated by 2.8 percent in 2024.
  - PPI-based REER appreciated by 0.1 percent in 2024.
  - ULC-based REER appreciated by 11.6 percent in 2024.
- Cumulative REER appreciation since 2019 is similar to many CESEE peers.
- EBA REER implications for 2024:
  - EBA CA gap implies a REER gap of 18.5 percent (overvaluation) using elasticity 0.33.
  - EBA REER index regression estimates REER gap at 8.1 percent in 2024.
  - EBA REER level regression estimates REER gap at 28.0 percent in 2024.
- Staff judgment:
  - Both EBA REER models have large unexplained residuals and are subject to measurement uncertainty; staff favor the EBA CA model assessment as the overall assessment.

### Capital and Financial Accounts: Flows and Outlook
- 2024 flow outcomes:
  - Capital account inflows declined to 1.5 percent of GDP in 2024 (from 2.8 percent in 2023), primarily reflecting lower EU grants with delayed reforms.
  - Net FDI inflows declined to 1.3 percent of GDP in 2024 (from 2.0 percent in 2023).
  - Portfolio inflows declined to 3.5 percent of GDP in 2024 (from 4.2 percent in 2023), with the latter largely for government funding needs.
  - Other investment inflows remained at 1.0 percent of GDP, largely loans under the EU Recovery and Resilience Facility and IFIs.
  - Resulted in less reserves accumulation in 2024 than in 2023.
- Policy and outlook:
  - No restrictions on capital and financial accounts.
  - Expected continuation of capital account inflows as EU-funded projects ramp up, including NGEU (which will expire in 2026).
  - Scope for higher absorption of structural EU funds in the 2021–27 multi-annual EU budget.
  - FDI inflows are expected to edge up to 2.6 percent of GDP.
  - Portfolio investment flows into sovereign bonds would decline given planned large fiscal consolidation.

### FX Intervention and Reserves Adequacy
- Exchange rate arrangement classification:
  - De facto exchange rate arrangement classified as stabilized since September 2021.
  - Romania’s exchange rate was re-classified retroactively as crawl-like from floating from July 2016, and subsequently reclassified retroactively as stabilized from crawl-like from September 2021.
- Reserves levels and coverage:
  - Gross international reserves: 19.9 percent of GDP at end-2024.
  - Gross international reserves: 20.3 percent of GDP as of end-September 2025.
  - Coverage metrics at end-2024:
    - About 5.7 months of prospective imports.
    - About 48 percent of M2.
    - 106 percent of short-term debt by residual maturity.
  - Reserve adequacy relative to ARA metric (emerging markets with de-facto ‘fixed’ exchange rate) by December 2024:
    - Around 108 percent of the Fund’s metric for assessing reserve adequacy (ARA).
    - 110 percent by September 2025.
  - If a floating exchange rate regime were assumed, reserve adequacy would be above 151 percent of the ARA metric by December 2024 (153 percent by September 2025).
- Staff assessment:
  - Reserves are assessed to be adequate.
  - In the medium term, reserves are projected to remain robust as CA deficits are expected to narrow in line with planned large fiscal consolidation.

### Risk Assessment Matrix — Key Risks, Transmission, Impact, and Policy Responses
- Global risks (selected):
  - Escalating Trade Measures and Prolonged Uncertainty
    - Likelihood: High.
    - Expected impact: High (through trade, capital flows, investment, confidence; weakens fiscal revenues).
    - Policy response: Temporary and targeted support to most vulnerable; enhanced FX flexibility; advance structural reforms.
  - Fiscal Vulnerabilities and Higher Long-Term Interest Rates
    - Likelihood: High.
    - Expected impact: Medium (capital outflows, rising risk premia, tighter financial conditions).
    - Policy response: Implement planned fiscal consolidation without delay; monetary policy to preserve price stability; temporary targeted financial stabilization measures if needed.
  - Financial Market Volatility and Correction
    - Likelihood: High.
    - Expected impact: Medium (capital outflows, FX and financial market volatility).
    - Policy response: Implement planned fiscal consolidation without delay; monetary policy to preserve price stability; temporary targeted financial stabilization measures if needed.
  - Geopolitical Tensions
    - Likelihood: High.
    - Expected impact: Medium (commodity price volatility, migration, trade and investment impacts).
    - Policy response: Avoid overly costly broad-based price supports; provide temporary targeted support to vulnerable households; accelerate investment projects and structural reforms, financed where possible with EU support.
  - Commodity Price Volatility
    - Likelihood: High.
    - Expected impact: Medium (supply disruptions could lead to high and volatile food and energy prices, though Romania is largely self-sufficient in food and energy).
    - Policy response: Avoid overly costly broad-based price supports; targeted support to vulnerable households; monetary policy focus on price stability.

- Domestic risks:
  - Delays in fiscal consolidation and necessary reforms
    - Likelihood: Medium.
    - Expected impact: High (erosion of investor confidence, risk of sovereign rating downgrade, increased sovereign-bank nexus risks).
    - Policy response: Implement planned fiscal consolidation without delay; NBR to use policy rate adjustments, liquidity management, and FX intervention if market stress reemerges.

### Debt Sustainability Assessment and Projections (Annex III)
- Risk of sovereign stress:
  - Overall: High.
  - Near term: Medium.
  - Medium term: High.
  - Long term: Moderate.
- Summary observations:
  - Despite planned large fiscal consolidation in 2025-26, a sovereign credit rating downgrade to speculative status remains a risk due to investor concerns about medium-term fiscal sustainability.
  - Long-term risks are moderated by strong growth prospects, scope for revenue mobilization and inward investment, and expected structural improvements from EU membership.
  - Medium-term risks are high: absent additional fiscal consolidation beyond 2026, public debt as a percentage of GDP is expected to continue to increase and average gross financing needs over the medium term are projected to be relatively high.
- DSA Summary Assessment:
  - The fiscal consolidation measures adopted in July 2025 are an important step, but more fiscal adjustment is needed to stabilize public debt in the medium term.
  - Fiscal pressures from climate action, demographic pressures, and defence priorities underline the need for further action.
- Baseline projections and key metrics (percent of GDP unless indicated otherwise):
  - Public debt:
    - Actual 2024: 57.5
    - 2025: 61.2
    - 2026: 62.5
    - 2027: 64.1
    - 2028: 66.0
    - 2029: 67.8
    - 2030: 69.1
    - 2031: 70.2
    - 2032: 71.3
    - 2033: 72.3
    - 2034: 73.3
  - Change in public debt (year-on-year):
    - 2024 actual: 3.5
    - 2025: 3.7
    - 2026: 1.3
    - 2027: 1.6
    - 2028: 1.9
    - 2029: 1.8
    - 2030: 1.3
    - 2031: 1.1
    - 2032: 1.1
    - 2033: 1.0
    - 2034: 0.9
  - Contribution of identified flows to debt change (selected):
    - Contribution of identified flows 2024 actual: 3.6
    - 2025: 4.8
    - 2026: 2.4
    - 2027: 2.2
    - 2028: 2.2
    - 2029: 2.0
    - 2030: 1.5
    - 2031: 1.3
    - 2032: 1.2
    - 2033: 1.1
    - 2034: 1.1
  - Primary deficit (percent of GDP):
    - 2024 actual: 6.7
    - 2025: 5.3
    - 2026: 3.3
    - 2027: 3.0
    - 2028: 2.7
    - 2029: 2.6
    - 2030: 2.1
    - 2031: 2.1
    - 2032: 2.1
    - 2033: 2.1
    - 2034: 2.1
  - Noninterest revenues (percent of GDP):
    - 2024 actual: 31.2
    - 2025: 32.2
    - 2026: 32.8
    - 2027: 32.3
    - 2028: 32.2
    - 2029: 32.1
    - 2030–2034: 32.1 (each year)
  - Noninterest expenditures (percent of GDP):
    - 2024 actual: 37.9
    - 2025: 37.5
    - 2026: 36.1
    - 2027: 35.3
    - 2028: 35.0
    - 2029: 34.7
    - 2030: 34.2
    - 2031–2034: 34.2 (each year)
  - Automatic debt dynamics contribution (percent of GDP):
    - 2024 actual: -3.0
    - 2025: -0.5
    - 2026: -0.9
    - 2027: -0.7
    - 2028: -0.5
    - 2029: -0.5
    - 2030: -0.6
    - 2031: -0.8
    - 2032: -0.9
    - 2033: -1.0
    - 2034: -1.0
  - Gross financing needs (GFN):
    - 2024 actual: 14.1 (percent of GDP)
    - 2025: 13.4
    - 2026: 11.4
    - 2027: 9.8
    - 2028: 11.7
    - 2029: 12.1
    - 2030: 13.6
    - 2031: 14.6
    - 2032: 13.3
    - 2033: 14.1
    - 2034: 14.2
  - Debt service (percent of GDP):
    - 2024 actual: 7.5
    - 2025: 8.2
    - 2026: 8.1
    - 2027: 6.9
    - 2028: 9.0
    - 2029: 9.5
    - 2030: 11.6
    - 2031: 12.5
    - 2032: 11.3
    - 2033: 12.0
    - 2034: 12.1
- Memo indicators:
  - Real GDP growth (percent):
    - 2024 actual: 0.9
    - 2025: 1.3
    - 2026: 1.4
    - 2027: 2.7
    - 2028: 2.9
    - 2029: 3.1
    - 2030: 3.3
    - 2031–2034: 3.5 (each year)
  - Inflation (GDP deflator; percent):
    - 2024 actual: 9.6
    - 2025: 6.9
    - 2026: 6.5
    - 2027: 4.2
    - 2028: 3.0
    - 2029: 2.7
    - 2030–2034: 2.5 (each year)
  - Nominal GDP growth (percent):
    - 2024 actual: 10.6
    - 2025: 8.3
    - 2026: 7.9
    - 2027: 7.1
    - 2028: 6.0
    - 2029: 5.9
    - 2030: 5.8
    - 2031–2034: 6.0 (each year)
  - Effective interest rate (percent):
    - 2024 actual: 4.2
    - 2025: 5.5
    - 2026: 4.5
    - 2027: 4.7
    - 2028: 4.8
    - 2029: 4.7
    - 2030: 4.6
    - 2031: 4.4
    - 2032: 4.6
    - 2033: 4.4
    - 2034: 4.4
- Interpretation:
  - Despite planned large consolidation in 2025 and 2026, the fiscal deficit is projected to narrow only gradually after 2027 and the public debt-to-GDP ratio is expected to continue to rise in the medium to long term.
  - Average GFNs over the medium term remain considerable at around 11 percent of GDP.

*Source: IMF staff estimates and assessments as presented in the provided content.*

### Annex III. Figure 4. Romania: Medium-Term Risk Assessment

### Annex III. Figure 4. Romania: Medium-Term Risk Assessment

### Debt dynamics and indices
- Final Fanchart (Percent of GDP)
  - Debt fanchart module: Value 64.2; Contrib 0.9 (percent of GDP)
  - Probability of debt non-stabilizaiton (percent): Value 92.8; Contrib 0.8
  - Terminal debt-to-GDP x: Value 39.2; Contrib 0.9
  - institutions index: Debt fanchart index (DFI) Value 2.6
- Risk signal 3/: High
  - Note: "The signal is low risk if the DFI is below 1.13; high risk if the DFI is above 2.08; and otherwise, it is moderate risk."

### Gross Financing Needs and financeability
- Gross Financing Needs (Percent of GDP)
  - Gross financing needs (GFN) module: Average baseline GFN Value 12.0; Contrib 4.1 (percent of GDP)
  - Initial Banks' claims on the gen. govt Value 27.0; Contrib 8.8 (pct bank assets)
  - Chg. In banks' claims in stress Value 33.7; Contrib 11.3 (pct banks' assets)
  - GFN financeability index (GFI) Value 24.1
- Risk signal 4/: High
  - Note: "The signal is low risk if the GFI is below 7.6; high risk if the DFI is above 17.9; and otherwise, it is moderate risk."

### Medium-term index and final assessment
- Medium-Term Index (Index Number)
  - Debt fanchart index: 2.6 (Value)
  - GFN finaceability index: 24.1 (Value)
  - Medium-term index: 0.5 (Value)
  - Risk signal 5/: High
  - Final assessment: Prob. of missed crisis, 2025-2030, if stress not predicted: 72.7 pct.
  - Final assessment: Prob. of false alarms, 2025-2030, if stress predicted: 3.4 pct.
  - Note: "The fiscal trajectory under the baseline point to a high risk of debt distress in the medium term, in absence of additional fiscal consolidation measures beyond 2026."
- Additional indices and thresholds:
  - Terminal institutional index threshold guidance: 2/ The comparison group is emerging markets, non-commodity exporter, surveillance.
  - Footnote on index calculation: 1/ See Annex IV of IMF, 2022, Staff Guidance Note on the Sovereign Risk and Debt Sustainability Framework for details on index calculation.
  - Signal thresholds for medium-term index: 5/ The signal is low risk if the GFI is below 0.26; high risk if the DFI is above 0.40; and otherwise, it is moderate risk.

### Triggered stress-test context (visual indicators reproduced in source)
- Percentile in peer group (0, 25, 50, 75, 100) visualized for several indicators.
- Triggered stress tests (stress tests not activated in gray) shown across years 2020–2030.
- Financing provided by banks: Actual, Baseline, Stress scenario trends shown across 2020–2030.

*Source: IMF staff estimates and projections.*

---

### Annex III. Figure 5. Romania: Realism of Baseline Assumptions

### Forecast track record and comparator context
- Forecast Track Record: projections made in the October and April WEO vintage. (Label: 1/)
- Comparator Group: Emerging Markets, Non-Commodity Exporter, Surveillance.
- Color code percentile references:
  - Exchange rate depreciation: > 75th percentile
  - SFA: 50-75th percentile
  - real-time t+3 t+5: 25-50th percentile
  - Historical Output Gap Revisions 2/: < 25th percentile

### Historical and projected fiscal and macro dynamics (selected numeric/percentile statements)
- 3-year debt reduction above 75th percentile: (5.9 ppts of GDP)
  - percentile rank: 29.
- 3-year adjustment above 75th percentile (3-year adjustment): (2 ppts of GDP)
  - percentile rank: 87
- Laubach (2009) rule note 4/: "The Laubach (2009) rule is a linear rule assuming bond spreads increase by about 4 bps in response to a 1 ppt increase in the projected debt-to-GDP ratio."
- Time series visual indicators span 2020–2027 for fiscal adjustment and growth scenarios with multipliers:
  - Fiscal Adjustment (rhs) shown versus Baseline with multipliers Multiplier=0.5 and Multiplier=1.
- Distribution notes: Data cover annual observations from 1990 to 2019 for MAC advanced and emerging economies. Percent of sample on vertical axis.

### Key qualitative points from the figure
- Macroeconomic forecasts are affected by fluctuating base effects stemming from frequent revisions to historical data.
- Charts illustrate historical output gap revisions, public debt-creating flows, bond issuances (percent of GDP) and avg marginal interest rates, 3-year debt reductions, and baseline versus alternative growth paths under fiscal adjustment scenarios.

*Source: IMF Staff.*

---

### Annex III. Figure 6. Romania: Triggered Module—Climate Change Mitigation

### Summary of long-term risk assessment
- Long-Term Risk Assessment: Large Amortization Incl. Custom Scenario
- Overall statement: "Despite the deterioration in the medium-term fiscal outlook, the long-term scenario remains favorable compared to past fiscal performance. Spending pressures from climate action and demographic trends pose the most important risks to long-term debt sustainability."
- Urgent climate change mitigation measures represent the most critical source of spending pressures in the long term, underlining the urgency of revenue mobilization and fiscal consolidation.

### Key projection variables and scenario values (selected figures)
- Table-like variable excerpts for scenarios (Variable / 2030 / 2034 to 2038 average / Custom Scenario):
  - Real GDP growth: 3.3% - 17.2% - 3.5%
  - Primary Balance-to-GDP ratio: -2.1% - -1.7% - -2.1%
  - Real depreciation: -2.4% - -2.4% - -2.4%
  - Inflation (GDP deflator): 2.5% - 18.0% - 2.5%
- GFN-to-GDP Ratio and Amortization-to-GDP ratio series shown over long-run projection horizons (2017–2053) for:
  - Baseline with t+5
  - Baseline with t+5 and DSPB
  - Historical 10-year average
  - Custom
  - With climate mitigation (standardized scenario)
  - With climate mitigation (customized scenario)
- Visual indicators show total public debt-to-GDP and GFN-to-GDP under the baseline and climate mitigation scenarios across 2017–2053.

### Risk indication and policy implication
- Overall Risk Indication: Spending pressures from climate action and demographic trends are highlighted as the most important long-term risks.
- Policy implication emphasized: urgency of revenue mobilization and fiscal consolidation to meet mitigation-related spending pressures.

*Source: IMF staff estimates and projections.*

---

### Annex IV. Implementation of Past Article IV Recommendations (2023 Article IV)

### Fiscal recommendations and implementation status
- Further fiscal consolidation is needed. Staff advised to reduce the fiscal deficit to 3 percent by 2025.
  - Recommended measures: Efficiency improvements in expenditure and tax administration; removing loopholes and tax privileges in VAT and personal income taxes; considering progressive income taxation.
  - Implementation in progress. Authorities committed to reduce the deficit to below 3 percent of GDP by 2031 as envisaged in MTFSP.
  - Policy actions taken:
    - September 2023: reduction of PIT exemptions.
    - December 2024: further removal of SSC and PIT exemptions and lower tax rate on dividends.
    - Summer 2025: large package including VAT rate hike and higher excise and dividend taxes and measures to strengthen tax administration.
- Ensure fiscal policy becomes more predictable. Staff advised adopting credible path for consolidation and announcing tax reforms in advance; recommended formulas for pension and wage increases to ensure fiscal sustainability.
  - Implementation in progress. Pension reform in late 2023 aims to support pension sustainability but entails large upfront fiscal costs.
  - MTFSP in 2024 envisages fiscal consolidation path by 2031; supporting measures announced in large fiscal package in summer 2025.

### Monetary and financial recommendations and implementation status
- Follow a cautious approach for monetary easing to ensure inflation returns to the target range by early 2025; advocated delaying policy rate cuts until core inflation was on a firm downward path.
  - Implemented. After two policy rate cuts (25 bps each), with the re-emergence of inflation, the NBR has paused its policy rate cuts since mid-2024 and maintained the policy rate at 6.5 percent.
- Gradually increase two-way exchange rate flexibility over the medium term.
  - Implementation in progress. Exchange rates against the euro remained stable; in response to large capital outflows pressures in May 2025, the NBR allowed more flexibility with a 3 percent depreciation.

### Structural reforms and implementation status
- Maximize the use of available EU support: strengthen budget framework, develop centralized coordination mechanism, pipeline of appraised investment projects.
  - Implementation in progress. Coordination strengthened; government identified NGEU projects feasible for completion by August 2026 to secure full disbursement of renegotiated EU funds. Slow progress in specific reform efforts has delayed EU disbursements.
- Reenergize governance reforms: enhance administrative capacity and transparency, fight corruption, make SOEs more efficient.
  - Implementation in progress. Authorities established an independent agency to monitor large SOEs, but the board remains to be appointed and NRRP commitments not yet implemented.
- Raise labor force participation to mitigate falling population effects: increase opportunities for women and improve education outcomes.
  - Still outstanding.

---

### Annex V. Data Issues

### Data adequacy assessment (Annex V. Table 1)
- Overall Data Adequacy Assessment Rating: A
- Questionnaire Results 2/ — Median Rating: B A A A A A A
- Detailed Questionnaire Results — Data Quality Characteristics (selected ratings):
  - Coverage: B A A A A
  - Granularity 3/: B (top cell) A B A (bottom cell entries for sectors)
  - Consistency: A A A
  - Frequency and Timeliness: A A A A A
- Note on interpretation:
  - A = The data provided to the Fund are adequate for surveillance.
  - B = The data provided to the Fund have some shortcomings but are broadly adequate for surveillance.
  - C, D definitions provided in source.

### Rationale, changes, and priorities
- Rationale for staff assessment: Data provision is adequate for surveillance. Romania’s economic and financial statistics are comprehensive, generally of high quality, and provided with a calendar of main statistical releases. It has adopted ESA 2010.
- Suggested improvements:
  - Publish decomposition of public and private investment in quarterly GDP releases to improve coverage and granularity of the SNA.
  - Reduce discrepancies between production- and expenditure-side quarterly GDP to attenuate fluctuations in changes in inventories.
  - Expand coverage of financial soundness indicators (FSIs) for comprehensive assessment.
  - Enhance granularity of government debt stocks and amortizations, and external debt indicators (including amortization, interest payments, and stocks of debt at remaining maturity).
- Changes since last Article IV consultation: No changes.
- Corrective actions and capacity development priorities: NBR is working to transition to the 2019 FSI guideline.
- Use of data/estimates in consultations: Staff do not use any data and/or estimates in the staff report in lieu of official statistics.
- Other data gaps: None.

### Data standards initiatives (Annex V. Table 2)
- Romania adheres to the Special Data Dissemination Standard (SDDS) Plus since November 2019 and publishes data on its National Summary Data Page.
- The latest SDDS Plus Annual Observance Report is available on the Dissemination Standards Bulletin Board.

*Source: IMF staff estimates and projections; IMF staff.*

### Annex V. Table 3. Romania: Table of Common Indicators Required for Surveillance

### Annex V. Table 3. Romania: Table of Common Indicators Required for Surveillance

### Data Provision and Dissemination
- Data provision to the Fund: Publication under the Data Standards Initiatives through the National Summary Data Page.
- Selected latest observations and reporting frequencies (as of October 14, 2025):
  - Exchange Rates: Date of Latest Observation 13-Oct-25; Date Received 14-Oct-25; Frequency D; Frequency of Reporting D.
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation Sep-25; Date Received Oct-25; Frequency M; Frequency of Reporting M; Expected Frequency M; Expected Timeliness 1W.
  - Reserve/Base Money: Date of Latest Observation Aug-25; Date Received Sep-25; Frequency M; Frequency of Reporting M; Expected Frequency M; Expected Timeliness 2W; Romania Timeliness 1M.
  - Broad Money: Date of Latest Observation Aug-25; Date Received Sep-25; Frequency M; Frequency of Reporting M; Expected Frequency M; Expected Timeliness 1M.
  - Central Bank Balance Sheet: Date of Latest Observation Aug-25; Date Received Sep-25; Frequency M; Frequency of Reporting M; Expected Frequency M; Expected Timeliness 2W; Romania Timeliness 1M.
  - Consolidated Balance Sheet of the Banking System: Date of Latest Observation Aug-25; Date Received Sep-25; Frequency M; Frequency of Reporting M; Expected Frequency M; Expected Timeliness 1M.
  - Interest Rates: Date of Latest Observation Aug-25; Date Received Oct-25; Frequency M; Frequency of Reporting M.
  - Consumer Price Index: Date of Latest Observation Sep-25; Date Received Oct-25; Frequency M; Frequency of Reporting M; Expected Frequency M; Expected Timeliness 1M; Romania Timeliness 12D.
  - Revenue, Expenditure, Balance and Composition of Financing—General Government: Date of Latest Observation Aug-25; Date Received Sep-25; Frequency M; Frequency of Reporting M; Expected Frequency A/Q; Expected Timeliness Q; Romania Expected Frequency 2Q/12M; Romania Timeliness 100D.
  - Revenue, Expenditure, Balance and Composition of Financing—Central Government: Date of Latest Observation Aug-25; Date Received Sep-25; Frequency M; Frequency of Reporting M; Expected Frequency M; Expected Timeliness Q; Romania Timeliness 1M.
  - Stocks of Central Government and Central Government-Guaranteed Debt: Date of Latest Observation Jun-25; Date Received Sep-25; Frequency Q; Frequency of Reporting Q; Expected Frequency Q; Expected Timeliness 1Q.
  - External Current Account Balance: Date of Latest Observation Aug-25; Date Received Oct-25; Frequency M; Frequency of Reporting M; Expected Frequency Q; Expected Timeliness 1Q.
  - Exports and Imports of Goods and Services: Date of Latest Observation Aug-25; Date Received Oct-25; Frequency M; Frequency of Reporting M; Expected Frequency M; Expected Timeliness 8W; Romania Timeliness 40D.
  - GDP/GNP: Date of Latest Observation Jun-25; Date Received Sep-25; Frequency Q; Frequency of Reporting Q; Expected Frequency Q; Expected Timeliness 1Q; Romania Timeliness NLT 75D.
  - Gross External Debt: Date of Latest Observation Jun-25; Date Received Aug-25; Frequency Q; Frequency of Reporting Q; Expected Frequency Q; Expected Timeliness 1Q.
  - International Investment Position: Date of Latest Observation Jun-25; Date Received Sep-25; Frequency Q; Frequency of Reporting Q; Expected Frequency Q; Expected Timeliness 1Q; Romania Timeliness 3M.

### Macroeconomic Outlook and Growth
- Recent performance:
  - Growth in the first half of 2025: 0.3 percent year-on-year.
- Authorities’ growth expectations:
  - Current year: +0.6 percent.
  - Next year: +1.2 percent.
- Staff and authorities’ view:
  - Outlook marked by high and rising political and policy uncertainties.
  - External position expected to gradually improve due to fiscal consolidation restraining import demand and increased share of stable, non-debt-creating flows, especially in 2026 from EU funds-related capital transfers.

### Inflation Developments and Outlook
- Recent inflation dynamics:
  - CPI inflation: 9.9 percent in September (up from 5.7 percent in June).
  - Electricity prices: up 69.2 percent y-o-y in September.
  - Core inflation: 8.2 percent in September.
- Drivers:
  - Expiration of the electricity price cap in July and VAT and excise duties increases in August.
  - Strong pass-through of VAT increases and indirect effects from higher electricity and fuel prices.
- Forecasts and expectations:
  - CPI inflation is expected to gradually decline after 2025Q3, with a sharper drop in 2026Q3 as base effects fade and negative output gap widens.
  - The latest NBR forecast places end-2026 inflation at 3.5 percent (at the upper limit of the variation band around the 2.5 percent target).
- Risks:
  - End-March 2026 expiry of capping measures on gas and basic food prices may add to inflationary pressures.
  - Risks tilted to the upside for inflation.

### Risks to Growth and Inflation
- Balance of risks:
  - Risks tilted to the downside for growth and upside for inflation.
- Specific risk factors:
  - Deviation from the fiscal consolidation path could slow disinflation and affect growth.
  - Volatile trade environment and slowdown in external demand could negatively affect activity.
  - Russia’s war on Ukraine continues to expose economy to heightened security risks, inflationary pressures, and fiscal demands linked to energy and defense.

### Fiscal Policy, Consolidation, and Reform Delivery
- Consolidation objectives and sources:
  - Fiscal consolidation builds on large packages adopted in the second half of the year, combining revenue increases and expenditure cuts.
  - More than two-thirds of the adjustment is estimated to come from revenue-enhancing measures.
- Fiscal projections (ESA terms):
  - Headline deficit: 9.3 percent of GDP in 2024; around 8.4 percent in 2025; 6.0 percent in 2026.
  - Primary deficit: expected to narrow cumulatively by around 4.3 percentage points of GDP over 2025–2026.
  - Structural deficit: projected to improve by about 3.5 percentage points.
- Implementation caveats:
  - Several key measures take effect from January 1, 2026; full fiscal, economic, and social impacts to be assessed once implementation data are available.
- Key reform and policy actions:
  - NRRP milestones: enhancing health sector spending efficiency; strengthening corporate governance of SOEs; restructuring regulatory bodies; reinforcing fiscal discipline; intensifying fight against tax evasion.
  - Magistrates’ pensions reform: authorities remain committed despite recent rejection by the Constitutional Court.
  - Personnel expenditure reductions under discussion across central and local public administration.
  - NRRP-financed digital platform to prepare the 2026 budget, enabling direct data input and enhancing transparency.
  - ANAF reform focus: institutional reorganization; performance-based tax collection; modernizing IT systems; improving insolvency legislation; tightening transfer pricing procedures; regular public reporting on VAT gaps and operational performance.
- Public investment and EU funds:
  - Authorities estimate around €15 billion in EU-funded investment will be available in 2026, approximately two-thirds from NGEU grants and one-third from cohesion funds.
  - Government prioritizing viable NRRP projects, reallocating others to cohesion policy or suspending them to maximize absorption ahead of August 2026 deadline.
- Targeted social support:
  - Means-tested support scheme for 2.1 million vulnerable households through March 2026 to cushion end of electricity price cap, costing about 0.05 percent of GDP.

### Monetary Policy Stance
- Policy stance:
  - Authorities concur with staff that a prudent and data-dependent monetary policy stance is warranted to anchor expectations and support a sustainable return to target.
- Expectations and conditions:
  - Short-term inflation expectations have ticked up; medium-term expectations (e.g., end-2026) have only slightly moved upwards and are close to the upper limit of the interval around the central bank’s target.
  - As aggregate demand weakens, underlying price pressures should ease and medium-term expectations should remain contained.
- Financial market developments:
  - Market conditions normalized after May 2025 Presidential elections.
  - Sovereign risk premium declined, enabling government to attract larger volumes of external and internal financing at lower marginal costs.
  - Interbank money market rates edged lower; EUR/RON broadly stable but trading with greater volatility than pre-election period.

### Financial Sector Resilience and Risks
- Systemic soundness:
  - Banking sector core risk indicators for solvency, liquidity, profitability, and asset quality sit in the EBA’s low-risk bucket, with most outperforming EU averages.
  - Capital ratios: adequate and substantially above Basel III minima.
  - Profitability: strong, well above EU averages.
  - Liquidity: comfortably above the EBA best-bucket threshold.
- Specific indicators and metrics:
  - NPLs: 2.8 percent (August 2025).
  - Coverage by provisions: 62.3 percent (August 2025).
  - Net open FX position to capital: 0.68 percent (2025Q2).
  - Slightly less than half of corporate loans denominated in foreign currency; around 60 percent of these exposures held by large firms and about 40 percent finance equipment acquisition.
- Stress-test results and buffers:
  - ECB-methodology stress test indicates system remains robust under the severely adverse scenario, though solvency ratios would compress.
  - Banks’ relatively large sovereign-bond holdings serve as high-quality liquid assets but may lead to allocation distortions.
- Policy readiness:
  - Authorities prepared to deploy further targeted macroprudential measures if foreign-currency lending to non-financial corporates generates rising vulnerabilities.
  - Temporary one-year turnover tax set to take effect in 2026 may reduce earnings but not expected to pose systemic risks.

### Structural Reforms and Policy Priorities
- OECD accession:
  - Authorities committed to OECD accession with objective of full membership by 2026.
  - Technical assessments in 25 sectoral committees; 16 formal opinions secured on alignment (education, corporate governance and SOEs, competition policies, digitalization, statistics, employment, social affairs).
- Labor market and human capital:
  - Targeted measures to address labor force participation gaps: expanding early childhood education; modernizing vocational training; promoting youth employment including rural youth.
- Green transition and energy policy:
  - Implementation of EU Emissions Trading System 2 (ETS2) starting 2027 to price carbon emissions from buildings and road transport.
  - New electronic tolling system (TollRo) launching in July 2026 with distance- and emissions-based charges on heavy vehicles.
  - Continued prioritization of investments in nuclear energy, renewable capacity, and storage infrastructure to diversify energy mix and enhance security of supply.
  - Authorities support further EU-level efforts to advance a common Energy Union and strengthen cross-border interconnections.

### Institutional and Governance Details
- Fund relations and membership:
  - Membership status: Joined 12/15/72; Article VIII.
  - Quota: 1,811.40 SDR million (100.00 percent).
  - Fund holdings of currency: 1,811.40 (100.00 percent).
  - Reserve tranche position: 0.00 (0.00 percent).
  - SDR Department net cumulative allocation: 2,720.91 SDR million (100.00 percent); holdings 2,739.16 (100.67 percent).
- Article IV consultations:
  - Romania on a 12-month consultation cycle.
  - Previous Article IV consultation concluded by the Executive Board on December 8, 2023.
- Technical assistance and capacity building (selected FAD dates and topics):
  - February–March 2022: Addressing VAT non-compliance (virtual).
  - March–April 2022: Addressing tax noncompliance by multinational enterprises (virtual); Managing tax risks related to e-commerce/platform economy (virtual); Taxpayer services (virtual).
  - July–August 2022: Human Resource Development; July–August 2023: Compliance risk management analytical capability (virtual).
  - March–April 2024: Developing a new Strategic Plan.
  - October–November 2024: A Tax Mix to Achieve Fiscal Sustainability and Fairness.
- Resident Representative:
  - Since September 2025, local Fund office in Bucharest overseen by Senior Regional Resident Representative Mr. Carlos Mulas Granados.

*Source: Annex V. Table 3. Romania: Table of Common Indicators Required for Surveillance (as of October 14, 2025) and related sections of the Romania staff report for the 2025 Article IV consultation.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1rouea2025001-source-pdf.pdf_