IMF Executive Board Concludes 2021 Article IV Consultation with Romania
IMF News, August 27, 2021
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- Published: August 27, 2021
Overview
- The Executive Board concluded the Article IV consultation with Romania on August 26, 2021, and considered and endorsed the staff appraisal without a meeting.
- The Romanian economy experienced a relatively mild GDP contraction in 2020 (-3.9 percent) compared with the EU average (-6.2 percent), aided by timely fiscal, monetary, and financial policy easing.
Economic performance 2020 and early 2021
- 2020 outcomes:
- Real GDP growth: -3.9 percent.
- Contributing factors: private consumption and net exports led the decline; gross fixed capital formation continued to expand, supported by a pickup in public investment.
- Wage growth slowed substantially; inflation declined into the lower half of the target band.
- Fiscal deficit widened to 9.7 percent of GDP to accommodate crisis support (emergency health care expenditures, income support for households, business support).
- Early 2021 developments:
- GDP rebounded sharply, reaching 4.6 percent (Q4 2020) and 2.8 percent (q/q) (Q1 2021), with output in Q1 2021 surpassing the pre-pandemic peak.
- Headline inflation increased partly due to higher energy prices; inflation expectations remain well-anchored within the target band.
- The current account deficit widened concurrently with the recovery.
Projections and macro outlook
- Short- and medium-term projections:
- Real GDP growth projected at 7 percent in 2021, led by private consumption and accompanied by a transitory increase in inflation.
- Over the medium term, output is projected to recover to its pre-pandemic trajectory as protracted scarring from the pandemic is expected to be contained.
- Public investment is expected to be boosted by a pickup of EU-funded projects, including new resources under the NGEU funds and the EU 2021-27 multiannual budget.
- The current account deficit is projected to narrow moderately into the medium term as fiscal consolidation proceeds and growth decelerates toward potential.
- Risks:
- Downside risks remain, including uncertainty about the evolution of the pandemic.
Executive Board assessment and policy recommendations
- Shift pandemic support toward most affected sectors:
- Ensure a speedy vaccine rollout as the most important economic policy to address the pandemic, with continued generous fiscal resources.
- Reorient pandemic support measures toward the most severely hit sections of the economy and disadvantaged groups.
- If the recovery surprises on the upside, authorities should save windfall revenues.
- Fiscal policy and consolidation:
- As the recovery becomes entrenched, fiscal policy should increasingly prioritize rebuilding space for fiscal maneuver.
- The 2021 budget appropriately lays the foundation for fiscal consolidation, but significant additional medium-term consolidation will be needed to reduce the deficit to the authorities’ target of 3 percent of GDP.
- Broaden the revenue base and strengthen revenue administration to achieve a more equitable tax distribution and improve tax efficiency.
- Reprioritize expenditures by boosting public investment while ensuring a sustainable medium-term trajectory for wage and pension spending.
- Structural and governance reforms:
- Re-energize efforts to overcome subpar governance and government effectiveness to continue raising incomes toward average EU levels.
- SOE reforms, starting with strengthening corporate governance, would help address governance challenges.
- Governance improvements are integral to revenue administration reform and to improving and speeding up public investment.
- Strengthen the anti-corruption framework and ensure robust implementation, including of the AML/CFT framework.
- Use of EU funds:
- Take full advantage of RRF grants and EU structural funds, with a total envelope of 20 percent of GDP over the next six years.
- Successful implementation of RRF reform commitments and investment projects would boost medium-term growth prospects.
- Use RRF focus on digitalization to support modernizing tax administration and to jumpstart climate-change efforts.
Monetary and financial sector guidance
- Monetary stance:
- The National Bank of Romania (NBR) should sustain monetary and financial accommodation to support the recovery and cushion the impact of fiscal consolidation, while monitoring inflationary risks.
- Financial stability and bank asset quality:
- If bank asset quality deteriorates, the NBR should balance an accommodating stance with prudential concerns.
- Preparations should be in place to handle potential deterioration in bank asset quality once relief measures expire and to ensure efficient insolvency procedures.
- Exchange rate policy:
- Once the crisis recedes, exchange rate flexibility should be gradually increased to absorb external shocks and help address the current account deficit.
Key economic indicators (selected, as reported)
- Population: 19.3 million (2020)
- Per capita GDP: US$12,854 (2020)
- Quota: 1,811 million SDRs (0.4% of total)
- Literacy rate: 99% (2019)
- People at risk of poverty: 31.2% (2019)
- 2019, 2020, 2021, 2022 (Proj.) — Selected series:
- Real GDP growth (%): 4.1; -3.9; 7.0; 4.8
- Output gap (%): 3.0; -2.4; -1.0; 0.0
- Unemployment (%): 3.9; 5.0; 4.9
- CPI inflation (%, period average): 3.8; 2.6; 3.6; 2.7
- General government revenue (% GDP): 28.9; 30.3; 30.0
- General government expenditure (% GDP): 33.5; 38.6; 37.1; 35.8
- Fiscal balance (% GDP): -4.6; -9.7; -6.8; -5.8
- Primary balance (% GDP): -3.5; -8.4; -5.3; -4.2
- Structural fiscal balance 1/ (% GDP): -5.1; -6.1; -5.5; -5.6
- Public debt (including guarantees) (% GDP): 36.8; 49.8; 51.5; 53.5
- Broad money (% change): 10.9; 15.3; 10.2; 9.5
- Credit to the private sector (% change): 6.6; 5.5; 9.7; 7.9
- Policy rate (%): 2.5; 1.5; …
- Current account (% GDP): -4.9; -5.2; -5.4
- FDI (% GDP): -2.2; -0.9; -1.6; -1.7
- Reserves (months imports): 4.5
- External debt (% GDP): 49.2; 57.7; 57.6
- REER (% change): 2.4
- Note: 1/ Fiscal balance (cash basis) adjusted for the automatic effects of the business cycle and one-off effects.
IMF Executive Board Concludes 2021 Article IV Consultation with Romania — August 27, 2021
