Romania 2021 Article IV Staff Concluding Statement
IMF News, May 28, 2021
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- Published: May 28, 2021
Pandemic impact and macroeconomic overview
- The COVID-19 pandemic represented a severe shock to the Romanian people, but the economy experienced a relatively shallow recession in 2020 compared to other European Union (EU) countries, aided by supportive macroeconomic policies.
- A strong economic recovery is underway in 2021.
- The government’s main tasks: ensure speedy vaccination, continue pandemic-related support, and move ahead with a medium-term budget correction of pre-pandemic excesses to rebuild room for policy maneuver.
- Monetary and financial policies need to remain accommodative to entrench the economic recovery.
- External financing has been favorable, bolstered by global monetary easing and EU support measures.
Fiscal response, outlook, and recommendations
- Authorities provided fiscal support analogous to other EU countries:
- Increased health care expenditures.
- Income support measures: temporary wage subsidies and targeted hiring incentives.
- Business support: grants and liquidity via tax deferrals and credit guarantees predominantly targeting SMEs.
- These support measures have been extended into 2021.
- 2021 fiscal stance and medium-term guidance:
- The 2021 budget ensures continued support of the recovery while laying a foundation for rebuilding fiscal space.
- Fiscal expenditures have shifted towards investment, including based on EU funding.
- The fiscal deficit in 2021 is now estimated at 6.8 percent of GDP, below the government’s budgeted deficit target of 7.2 percent of GDP.
- The resulting revenue windfall should be saved.
- Fiscal policy recommendations:
- Continue generous funding for speedy vaccine rollout.
- Maintain temporary income and business support measures (e.g., kurzarbeit allowances and grants to SMEs), shifting focus toward the most affected sectors including HoReCa and transport, and disadvantaged groups (for example, women and the less educated).
- Prioritize fiscal-structural reforms to rebuild room for fiscal policy maneuver and comply with EU norms.
- Strengthen revenue administration: modernize IT infrastructure, strengthen compliance risk management to combat tax avoidance, and improve ANAF governance and staffing.
- Broaden the tax base and close loopholes; eliminate disparities in income taxation to improve transparency and productivity of the tax system.
- Improve and speed up public investment management across planning, project prioritization, and implementation to maximize use of EU recovery and structural funds.
Growth projections and EU funds
- A strong, 7 percent real GDP rebound is projected for 2021.
- Romania’s economic pickup appears to have been the fastest among the EU countries since Q4 2020.
- A better agricultural harvest is expected to support output later in 2021.
- Main downside risk: unexpected adverse shifts in the pandemic (new virus strains, shorter vaccine effectiveness, or unwillingness to vaccinate).
- Over the next five years, absorption of large EU funds will be pivotal to Romania’s economic performance and a unique opportunity to fast-track income convergence with the EU and transition to a more digital and greener economy.
Monetary and financial sector policy
- National Bank of Romania (NBR) actions during the pandemic:
- Interest rate cuts, an asset purchase program for government bonds, provision of liquidity, regulatory easing, and bank loan repayment moratoria.
- Monetary policy guidance:
- Continued accommodative monetary policy is appropriate given well-anchored inflation expectations, the negative output gap and muted wage growth projections, and pandemic-related uncertainties.
- Inflation is expected to rise into the end of 2021 due mainly to electricity and fuel-related price adjustments, projected to fade in 2022, allowing inflation to return within the target band.
- As fiscal consolidation gets underway, extending monetary accommodation beyond 2021 can be appropriate, as long as consistent with the inflation target.
- The current account deficit is projected to widen further in 2021 to around 5½ percent of GDP.
- As the crisis recedes, gradually increasing exchange rate flexibility would help absorb external shocks and, together with fiscal consolidation, could help address the current account deficit.
- Banking system resilience and supervision:
- Romanian banking system entered the pandemic with strong capital, liquidity, and profitability and conservative supervision.
- Non-performing loans remained low into 2021; banks had pre-pandemic loan loss provisioning above the EU average and raised provisions further in 2020.
- NBR recommendations to limit dividend payouts and share buybacks helped raise capital retention.
- Loan classification standards were restored in 2021; debt service moratoria expired in March 2021 with the bulk of loans previously under moratoria having been repaid.
- Preparedness is needed for potential increases in debt restructuring and business insolvencies; if loan portfolios deteriorate materially, use of capital can be accommodated while allowing a longer period to rebuild.
Structural reforms, governance, and SOEs
- Governance and anti-corruption:
- Romania’s efforts to fight corruption during the EU accession period have been recognized internationally, but the fight against corruption and efforts to improve government effectiveness need to be re-energized.
- A sustained governance reform effort could meaningfully accelerate the speed of income convergence.
- Governance improvements should be integral to revenue administration reforms to limit corruption vulnerabilities and central to improving public investment management.
- State-owned enterprises (SOEs):
- Strengthening SOE governance is crucial for absorbing EU funds, bridging public infrastructure gaps with EU peers, and meeting climate targets.
- Better corporate governance of SOEs is a priority; reversing worsening financial performance of SOEs requires enhanced monitoring and reforms, especially for SOEs with heavy presence in the energy and transport sectors.
Mission and contact
- An IMF staff team virtually visited Bucharest during May 10-28 for the 2021 Article IV consultation discussions.
- Press Release No. 21/147.
- PRESS OFFICER: Raphael Anspach. Phone: +1 202 623-7100. Email: MEDIA@IMF.org.
Source: Romania 2021 Article IV Staff Concluding Statement (May 28, 2021) — International Monetary Fund.