## IMF Executive Board Concludes Article IV Consultation with Romania

_IMF News, August 30, 2019_

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## Bibliographic details
- Published: August 30, 2019

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### 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.*

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## References

- [https://www.imf.org/-/media/images/imf/bios/imfboard.jpg](https://www.imf.org/-/media/images/imf/bios/imfboard.jpg)
- [The Executive Board](https://www.imf.org/external/np/sec/memdir/eds.aspx)
- [Romania and the IMF](http://www.imf.org/external/country/ROU/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Press Releases](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [http://www.imf.org/external/np/sec/misc/qualifiers.htm](http://www.imf.org/external/np/sec/misc/qualifiers.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2019/08/29/pr19321-romania-imf-executive-board-concludes-article-iv-consultation_