Washington, DC: An International
Monetary Fund (IMF) mission, led by Jan Kees Martijn, visited Bucharest
from January 29 to February 1 as part of its regular engagement with the
Romanian authorities and other stakeholders. At the conclusion of the
visit, Mr. Martijn issued the following statement:
- Macroeconomic developments. Growth
slowed in 2023, primarily due to weaker consumption. Core and headline
inflation declined to single digits during the second half of 2023, while
the policy interest rate was prudently kept on hold. Although the current
account deficit remains large, it has fallen to around 7 percent of GDP,
owing to slower domestic demand and lower prices of commodity imports.
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Outlook. In 2024, the economy is projected to recover,
with growth close to 3 percent, as consumption—driven by rising real
wages—and external demand are strengthening. Headline inflation is
expected to return gradually to the target band by end-2025. However,
ongoing double-digit wage increases, among other factors, can obstruct
the normalization of inflation.
-
Budget. The 2023 fiscal deficit is estimated around 5¾
percent of GDP, which is well above the originally budgeted level (4.4
percent of GDP). The newly enacted pension reform makes the pension
system fairer and reduces spending in the long run, but is expected to
create large additional fiscal costs of about 1½ percent of GDP in the
coming years.
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Risks. Large current account and fiscal deficits are
constraining Romania’s capacity to withstand adverse shocks. That said,
some buffers remain, including adequate international reserves, which
have risen due to large inflows of EU funds.
Policy Priorities
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Effective fiscal consolidation is needed to restore the soundness
of government finances.
Fiscal deficits—projected at 6 percent or more—will need to fall below
3 percent of GDP over the medium term to stabilize public debt, secure
affordable market financing, and support ongoing disbursement of EU
funds. Last year’s fiscal package was a step in the right direction,
but more is needed. While efforts to contain non-pension spending and
improve government and tax administration efficiency are welcome, their
potential to contribute to fiscal adjustment is limited, especially over
the short run. Romania’s tax revenue is well below the level in peer
countries, and too low to support public services at EU standards.
Therefore, there is no realistic way forward without substantial tax
policy reform. Key options include:
(i) Income tax reform: Elimination of remaining loopholes and
exemptions, including by lowering the threshold for micro enterprises, and
possibly making the PIT progressive.
(ii) VAT reform: Increasing VAT revenue, including by taxing more
items at the standard rate.
(iii) Green taxes: Introducing a carbon tax in the transport and
building sectors or additional excises on fossil fuels.
(iv) Property taxes: Increasing property taxation, if possible by
implementing the reforms already prepared.
(v) Pension reform impact: Developing a mechanism to effectively
stretch out the fiscal burden resulting from the pension reform.
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In designing and implementing tax policy changes, predictability is
critical.
Early discussion and communication of plans for tax reforms would
facilitate planning by firms and households and improve the investment
climate.
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Tight monetary policy is warranted.In light of upside risks to
inflation from strong wage growth and a positive fiscal impulse in
2024, the policy rate should not be lowered until headline and core
inflation are on a firm downward path and on track to reaching the
tolerance band of the National Bank of Romania’s target of 2.5 percent
in a timely manner.
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The banking system maintains strong capital, liquidity, and
profitability positions.
Nonetheless, emerging financial sector risks—including the increased
level of corporate FX borrowing—should be monitored closely.
