IMF recommends Romania to take advantage of strong growth and start durable fiscal consolidation

The International Monetary Fund (IMF) recommends the Romanian authorities to start a durable fiscal consolidation, underpinned by high-quality measures to rein in the twin deficits and improve the macroeconomic policy mix, modernize revenue administration and improve expenditure efficiency, reassess the new pension law to balance social needs and fiscal sustainability, reads the IMF staff report for the 2019 article IV consultation. 

According to the IMF experts, the economic growth is projected to remain at around 4 percent in 2019 and to slow to 3 percent over the medium term. 

"Economic activity would continue to be led by consumption, accompanied by elevated inflation and a current account deficit exceeding 5 percent of GDP in 2019-2020. Growth is projected to decline as productive investment has weakened amid regresses on structural reforms, while the fiscal impulse fades over time," the IMF report reads. 

Also, the IMF experts draw the attention that risks are tilted to the downside and sizable. 

"The key domestic risk is a further increase in vulnerability caused by policy shocks. Given the electoral cycle over the next two years, there are risks of further fiscal stimulus or backtracking on structural policies that could further reduce Romania's competitiveness. Currently, the new pension law poses a significant (medium-term) risk to fiscal sustainability. The key external downside risk is a sharper-than-expected external slowdown, which would further deteriorate an already large current account deficit and magnify financing pressures," the IMF report reads. 

Given the cyclical strength and rising vulnerabilities, the IMF experts recommend the Romanian authorities to take advantage of the economy's growth to initiate a durable fiscal consolidation supported by quality measures. 

"Achieving the authorities' target deficit of 2.8 percent of GDP in 2019 would be a start," the IMF highlights. 

However, according to the estimates of the IMF experts, Romania's budget deficit will reach 3.7 percent of the GDP in 2019 if no additional measures are taken. 

"Staff views revenues overestimated by about 0.9 percent of GDP, due to optimistic assumptions on improvement in tax collection and growth in the private sector wage bill," the document shows. 

The IMF staff says quality measures equivalent to about 1 percent of GDP are needed to achieve the 2019 deficit target. Drawing on a list of quality measures, the consolidation in 2019 and the future should aim at protecting the revenue envelope while shielding the poor and vulnerable groups and improving the budget structure by moderating growth in wages and pensions. The consolidation would strengthen confidence in the budget framework and help build fiscal buffers. 

Moreover, the IMF experts maintain the new pension law, adopted in June 2019, calls for a reassessment, as it could endanger fiscal sustainability. According to the IMF staff, it is critical to reconsider the pace of implementation of the law. 

"Such a review should reflect available fiscal space and reassess the balance among social needs, equitable distribution and competing budgetary priorities," the IMF underscores. 

The fiscal consolidation process should be accompanied, according to the IMF, by a monetary policy tightening, taking into account the inflation pressures. According to the IMF projections, in 2019 inflation will remain above the target interval, taking into account the good period the economy is going through and the fiscal incentives. That is why, the IMF recommends the authorities new measures, going beyond liquidity tight management, to keep inflation under control, which would also increase the independence and credibility of the central bank. 

IMF says structural reform initiatives require a re-start, to remove the most binding constraints to investment and long-term growth prospects. 

Public investments should increase by focusing on public infrastructure and reaching a more efficient absorption of EU funds, the report also mentions. 

State-owned companies reform must be re-started, and increases in the minimum wage should be moderated and linked to a set of objective criteria reflecting productivity, said the IMF experts. 

The Romanian authorities expressed a more optimistic vision, with a stronger economic growth this year, 5.5 percent, and exceeding 5 percent on the medium term. The Romanian authorities committed to observe the 2.8 percent of the GDP deficit target provided in the budget law. 

An IMF mission visited Romania in the period May 27 - June 7, 2019, for the annual assessment of the Romanian economy, known as Article IV Consultation. 

At present, Romania has no undergoing funding contract with the IMF, but the financial institutions evaluates on an annual basis the developments of the Romanian economy, based on the Article IV consultations.