Romania: 2023 Article IV Consultation-Press Release; and Staff Report; IMF Country Report No. 23/395

IMF Staff Country Reports, December 8, 2023

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Canonical URL: Romania: 2023 Article IV Consultation-Press Release; and Staff Report; IMF Country Report No. 23/395

Romania has weathered the economic shocks from the pandemic, Russia’s war in Ukraine, and the resulting surges in energy and food prices relatively well.
Growth is expected to recover modestly in 2024, and to return to its potential rate in the medium term, but there are substantial risks.
A weak fiscal position renders Romania vulnerable.
The scope to respond to adverse developments is circumscribed by a structural budget deficit well in excess of sustainable levels.
The recently adopted fiscal package offers welcome improvements in tax policy and should help reduce the fiscal deficit somewhat in 2024; but more will be needed.
Announcing further tax reforms well in advance will help companies and households adjust to these changes.
Monetary policy should not be relaxed until core inflation is on a firm downward path as needed for returning headline inflation within the tolerance band by early 2025.
There is significant room to underpin real income growth and further convergence with Western Europe.
Achieving stronger convergence requires investment in physical infrastructure as well as people, and strengthening the efficiency of the state.

Pursue further fiscal consolidation beyond the recently adopted fiscal package to address the structural budget deficit.
Announce and phase in further tax reforms with sufficient lead time to allow households and firms to adjust.
Maintain a cautious monetary policy stance until core inflation demonstrates a sustained decline and headline inflation returns within the tolerance band by early 2025.
Prioritize public and private investment in physical infrastructure and human capital to underpin real income growth and convergence with Western Europe.
Strengthen state efficiency, including public financial management and revenue administration, to improve fiscal sustainability and growth potential.

Substantial risks to the growth outlook despite a modest recovery projected for 2024.
Limited fiscal space due to a structural budget deficit well above sustainable levels constrains the policy response to adverse shocks.
The timing of monetary policy easing should be conditional on core inflation developments to achieve the headline inflation target by early 2025.

Subject: Fiscal consolidation, Fiscal policy, Government debt management, Inflation, International organization, Labor, Monetary policy, Prices, Public financial management (PFM), Revenue administration, Wages
Keywords: budgetary funds, cash budget, Eastern Europe, electricity production, Europe, Fiscal consolidation, fund office, Global, Government debt management, growth potential, growth trajectory, Inflation, liability positions vis-à-vis nonresident, monetary policy effectiveness, office in Bucharest, potential GDP, Wages, Western Europe