IMF Executive Board Concludes Article IV Consultation with Romania

IMF News, August 30, 2019

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Bibliographic details

• Published: August 30, 2019

Executive summary and Board assessment

• On August 28, 2019 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Romania.
• Directors welcomed strong economic growth and low unemployment but raised concerns about widening current account and fiscal deficits, renewed inflation, lagging structural reforms, and subdued investment.
• Directors called for shifting from procyclical to countercyclical fiscal policy, complemented by a tighter monetary policy stance and greater exchange rate flexibility.
• Directors supported strengthening policy predictability and renewing structural reform initiatives to sustain convergence to average EU income levels.

Recent developments and outlook

• 2018 outcomes:
  • Growth in 2018 was strong, reflecting pro-cyclical fiscal policy and rapid wage increases.
  • Unemployment reached record lows and the financial sector is stable.
  • Fiscal deficit: 2.8 percent of GDP in 2018.
  • Current account deficit: 4.5 percent of GDP in 2018.
  • National Bank of Romania’s (NBR) inflation target was met in 2018, but headline inflation exceeded the target band since February 2019.
  • Structural reform agenda remains stalled and investment growth lagged broader economic activity.
• Growth and inflation outlook:
  • Growth in 2019 is expected to stay above potential at 4 percent, led by continued fiscal stimulus and strong wage growth, with further widening of current account and fiscal deficits.
  • Inflation in 2019 is expected to stay above the NBR’s target band.
  • Growth is expected to moderate to 3 percent in the medium term as transitory effects of fiscal stimulus fade.
  • Lack of progress on structural reforms and subdued investment will constrain potential growth over the medium term.

Risks and buffers

• Key domestic risk: increased vulnerability from policy shocks, including further fiscal stimulus or regressions on structural reforms.
• Key external risk: a sharper-than-expected external slowdown that would widen the current account deficit and magnify financing pressures.
• Buffers:
  • Romania’s moderate public debt and reserves can provide a temporary cushion, but these buffers could be insufficient under an adverse event.

Policy recommendations (Executive Directors’ guidance)

• Fiscal policy:
  • Implement durable fiscal consolidation to curb twin deficits and reduce the burden on monetary policy.
  • Pursue sustained fiscal reforms to achieve consolidation over the medium term and improve budget composition.
  • Support meeting this year’s budget target with quality measures, including shifting expenditures away from rigid spending—such as wages and pensions—towards investment, reversing the trend of declining public investment.
  • Subject the new pension law to a comprehensive review to ensure fiscal sustainability and balance social, equity, and investment needs in line with available fiscal space.
  • Modernize revenue administration by upgrading IT systems and improving compliance risk management.
  • Improve expenditure efficiency and transparency through stronger expenditure reviews and procurement process reforms.
• Monetary policy and exchange rate:
  • Support further monetary policy tightening given continuing inflation pressures.
  • Encourage action beyond tight liquidity management to rein in inflation and bolster central bank credibility and independence.
  • Increase exchange rate flexibility to help absorb shocks.
• Financial sector and regulatory:
  • Continue efforts to strengthen financial stability and sustain progress on implementing the 2018 FSAP recommendations.
  • Increase resilience to risks from high bank exposure to the Romanian state.
  • Closely monitor the new tax on bank assets due to potential impacts on monetary policy transmission and credit allocation.
  • Ensure the new AML/CFT legislation is followed by robust implementation.
• Structural reforms:
  • Re-energize structural reform agenda to improve medium-term growth prospects.
  • Increase public investment focusing on infrastructure and improve absorption of EU funds.
  • Advance state-owned enterprise reform to improve quality of public goods and services.
  • Moderate minimum wage hikes and link changes to objective criteria reflecting productivity.
  • Renew anti-corruption efforts to alleviate growth constraints, enhance competitiveness, and facilitate investment.

Key statistics and projections (Romania: Selected Economic Indicators, 2017–20)

• Population: 19.6 million (2018)
• Per capita GDP: US$12,301 (2018)
• Quota: 1,811 million SDRs (0.4% of total)
• Literacy rate: 99%
• People at risk of poverty: 35.7% (2017)
• Key export markets: European Union (Germany, Italy, France)
• Main products and exports: Machinery and transport equipment, manufactured goods

• Output
  • Real GDP growth (%): 7.0 (2017), 4.1 (2018), 4.0 (2019), 3.5 (2020)
  • Output gap (%): 1.8 (2017), 2.1 (2018), 2.4 (2019), … (2020 not reported)
• Employment
  • Unemployment (%): 4.9 (2017), 4.2 (2018), 4.3 (2019), 4.6 (2020)
• Prices
  • CPI inflation (%, period average): 1.3 (2017), 3.3 (2018), … (2019–20 not fully reported)
• General government finances (% GDP)
  • Revenue: 28.0 (2017), 29.4 (2018), 29.8 (2019), 30.5 (2020)
  • Expenditure: 30.8 (2017), 32.2 (2018), 33.5 (2019), 34.0 (2020)
  • Fiscal balance: -2.8 (2017), -3.7 (2018), -3.5 (2019), … (2020 primary balance reported)
  • Primary balance: -1.7 (2017), -1.5 (2018), -2.3 (2019), -2.1 (2020)
  • Structural fiscal balance1/: -3.6 (2017), -4.1 (2018), -4.0 (2019)
  • Public debt (including guarantees): 36.9 (2017), 36.7 (2018), 37.4 (2019), 38.6 (2020)
• Money and credit
  • Broad money (% change): 11.5 (2017), 8.8 (2018), 12.0 (2019), 9.0 (2020)
  • Credit to the private sector (% change): 5.7 (2017), 8.0 (2018), 8.1 (2019), 6.5 (2020)
  • Policy rate (%): 1.75 (2017), 2.5 (2018)
• Balance of payments
  • Current account (% GDP): -3.2 (2017), -4.5 (2018), -5.5 (2019), -5.2 (2020)
  • FDI (% GDP): -2.6 (2017), -2.5 (2018), -2.4 (2019)
  • Reserves (months imports): 3.9 (2017), 3.7 (2018)
  • External debt (% GDP): 49.8 (2017), 48.1 (2018), 47.3 (2019), 46.5 (2020)
  • Exchange rate REER (% change): 2.0 (2017), 4.4 (2018)

1/ Fiscal balance (cash basis) adjusted for the automatic effects of the business cycle and one-off effects.

IMF Press Release No. 19/321 — IMF Communications Department; August 30, 2019.

References

• https://www.imf.org/-/media/images/imf/bios/imfboard.jpg
• The Executive Board
• Romania and the IMF
• IMF Policy Advice -- A Factsheet
• Press Releases
• PRESS CENTER
• http://www.imf.org/external/np/sec/misc/qualifiers.htm
• https://www.imf.org/en/home