IMF Executive Board Concludes 2022 Article IV Consultation with Romania

IMF News, September 26, 2022

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• Published: September 26, 2022

Background and current situation

• On September 21, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Romania.
• After a solid recovery from the pandemic, Romania faces headwinds related to the war in Ukraine, with further spillovers due to its proximity.
• Output had reached pre-crisis levels in H1 2021 and growth in H1 2022 remained strong.
• Headline inflation has risen rapidly, driven primarily by the energy price shock and its impact on associated goods and services; inflation expectations have risen more moderately but are also above the target band (1.5­-3.5 percent).
• The labor market remains less tight than pre-pandemic levels.
• The authorities implemented an energy price cap and subsidy scheme to help alleviate pressures on the economy and the vulnerable.

Macroeconomic outlook and projections

• GDP growth is expected to moderate to 4¾ percent in 2022 (2021: 5.9 percent), supported mainly by momentum in domestic demand.
• Energy and food prices are expected to keep inflation relatively elevated until the end of 2023.
• The fiscal deficit narrowed in 2021 after the pandemic-induced widening and is projected to consolidate moderately further in 2022 as nominal revenue growth has been strong.
• The current account deficit is projected to remain elevated, but the rebound in FDI and the start of the EU-supported National Recovery and Resilience Plan provide substantial funding.

Executive Board assessment and key policy recommendations

• Executive Directors welcomed Romania’s strong recovery but noted spillovers from Russia’s war in Ukraine and tighter financial conditions that cloud the outlook with downside risks and higher uncertainty.
• Directors underscored the importance of implementing prudent macroeconomic policies to safeguard macroeconomic stability and reenergizing structural reforms to boost economic growth.
• Fiscal policy:
  • Pursue medium-term fiscal consolidation to rebuild buffers, safeguard fiscal sustainability, and reduce external imbalances.
  • Current energy price caps should be temporary; gradually phase them out and replace them with measures targeting the most vulnerable.
  • Recommend reforms to pensions and public sector wages to improve medium-term budgeting and ensure predictability.
  • While welcoming recent tax measures, consider a more ambitious reform of the personal income tax and improvements to the efficiency of the value added tax.
• Monetary and exchange rate policy:
  • Monetary policy needs to stay nimble to firmly guide inflation and inflation expectations back toward the central bank’s target.
  • Policy rates will need to rise further to prevent the entrenching of inflationary pressures and the emergence of a wage-price spiral.
  • Encourage gradually moving toward a more flexible exchange rate to help address external imbalances and absorb potential future external shocks, together with fiscal consolidation.
• Financial sector and governance:
  • The banking sector remains resilient and the macroprudential stance is appropriate.
  • Call for continued vigilance of financial stability risks and for further strengthening the AML/CFT framework.
  • Reenergize structural reforms to boost growth and address regional inequalities; emphasize implementing Romania’s National Recovery and Resilience Plan and strengthening public investment management.
  • Prioritize reforms in green transition and energy security, digitalization, health and education, governance, and anticorruption.

Key statistics and selected economic indicators (as reported)

• Population: 19.3 million (2020)
• Per capita GDP: US$14,667 (2021)
• Quota: 1,811 million SDRs (0.4% of total)
• Literacy rate: 99% (2019)
• People at risk of poverty: 31.2% (2019)
• Key export markets: European Union (Germany, Italy, France)
• Main products and exports: Machinery and transport equipment, manufactured goods

• Selected time series (2020 / 2021 / 2022 / 2023 Proj.):
  • Real GDP growth (%): -3.7 / 5.9 / 4.8 / 3.4
  • Output gap (%): -2.3 / -0.6 / 0.2 / 0.0
  • Unemployment (%): 6.0 / 5.6 / 5.7 / 5.5
  • CPI inflation (%, period average): 2.6 / 5.0 / 13.3 / 10.0
  • General government revenue (% GDP): 28.8 / 30.6 / 31.4
  • General government expenditure (% GDP): 38.6 / 37.5 / 38.2 / 35.7
  • Fiscal balance (% GDP): -9.8 / -6.9 / -6.4 / -5.1
  • Primary balance (% GDP): -8.5 / -5.4 / -5.2 / -3.4
  • Structural fiscal balance 1/ (% GDP): -5.3 / -7.6 / -6.1 / -4.9
  • Public debt (including guarantees) (% GDP): 49.6 / 51.4 / 51.7 / 52.0
  • Broad money (% change): 15.3 / 15.8 / 15.1 / 12.5
  • Credit to the private sector (% change): 14.8 / 17.2 / 12.8
  • Policy rate (%): 1.5 / 1.75 / …
  • Current account (% GDP): -5.0 / -7.0 / -7.7 / -7.4
  • FDI (% GDP): -1.4 / -3.0 / -2.5 / -2.7
  • Reserves (months imports): 4.6 / 4.2 / 3.6 / 3.1
  • External debt (% GDP): 57.9 / 55.9 / 52.2 / 51.0
  • REER (% change), CPI based: 0.9

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

IMF Communications Department — Press Release No. 22/320 (September 26, 2022).

References

• 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