IMF Staff Concludes Visit to Romania

IMF News, February 1, 2024

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Growth slowed in 2023, primarily due to weaker consumption.
Core and headline inflation declined to single digits during the second half of 2023.
The policy interest rate was prudently kept on hold.
The current account deficit remains large but has fallen to around 7 percent of GDP, owing to slower domestic demand and lower prices of commodity imports.
Adequate international reserves have risen due to large inflows of EU funds.

The economy is projected to recover in 2024, 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.
Ongoing double-digit wage increases, among other factors, can obstruct the normalization of inflation.

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.
IMF staff project fiscal deficits above 6 percent of GDP in the next few years, given the fiscal costs of the new pension law.
New measures will be needed to reduce the deficit to sustainable levels.
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.

Large current account and fiscal deficits are constraining Romania’s capacity to withstand adverse shocks.
Emerging financial sector risks include the increased level of corporate FX borrowing.
Some buffers remain, including adequate international reserves.

Effective fiscal consolidation is needed to restore the soundness of government finances.
Last year’s fiscal package was a step in the right direction and creates additional revenue, but more is needed.
Containing non-pension spending and improving government and tax administration efficiency are welcome, but 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; substantial tax policy reform is needed. 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.
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.

Inflation is decelerating but remains well above the target.
Monetary policy should remain tight until there is firmer evidence that inflation will converge to the tolerance band of the National Bank of Romania in a timely manner.
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.
The banking system maintains strong capital, liquidity, and profitability positions, but financial sector risks should be monitored closely.

IMF Staff Concludes Visit to Romania — End-of-Mission press release issued February 1, 2024.