## IMF Staff Concludes Visit to Romania

_IMF News, February 1, 2024_

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## Bibliographic details
- Published: February 1, 2024

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### 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.
- 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.

### Outlook
- 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.

### Budget and fiscal projections
- 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.

### Risks
- 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.

### Policy priorities and recommendations
- 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.

### Monetary policy and financial sector
- 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.*

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## References

- [Romania and the IMF](http://www.imf.org/external/country/ROU/index.htm)
- [Press Releases](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2024/02/01/pr2432-romania-imf-staff-concludes-visit_