IMF recommendations addressed to Romanian authorities

International Monetary Fund (IMF) recommends the Romanian authorities to start a process of sustainable fiscal consolidation, to re-evaluate the new Pension Law and to improve governance of state-owned companies.

According to an IMF report released on 30 August, growth in 2019 is expected to stay above potential at 4 percent, led by continued fiscal stimulus and strong wage growth, and be accompanied by further widening of current account and fiscal deficits. Inflation in 2019 is expected to stay above the NBR’s target band. Growth is expected to moderate to 3 percent in the medium term as the transitory effects of the fiscal stimulus fade. Lack of progress on structural reforms and subdued investment will constrain potential growth over the medium term.

With macroeconomic imbalances becoming increasingly evident, eroding buffers and undermining Romania’s capacity to withstand adverse shocks, there is a risk that the income convergence with the EU could suffer a setback.

Executive Directors agreed with the thrust of the staff appraisal. They welcomed the strong economic growth and low unemployment, but raised concerns about widening current account and fiscal deficits and renewed inflation, as well as lagging structural reforms and investment. To address the growing imbalances, Directors called for shifting from procyclical to countercyclical fiscal policy, complemented by a tighter monetary policy stance and greater exchange rate flexibility. They further supported strengthening policy predictability and renewing structural reform initiatives to sustain convergence to average EU income levels.

Directors called for a durable fiscal consolidation to help curb the twin deficits and reduce the burden on monetary policy. They encouraged sustained fiscal reforms to achieve consolidation over the medium term and improve budget composition. Directors supported meeting this year’s budget target with quality measures, including shifting expenditures away from rigid spending–such as wages and pensions–towards investment, reversing the trend of declining public investment in recent years. They cautioned that the new pension law could undermine fiscal sustainability and should be subjected to a comprehensive review, balancing social, equity and investment needs in line with available fiscal space. Directors also encouraged modernizing revenue administration by upgrading IT systems and improving compliance risk management, and improving expenditure efficiency and transparency through stronger expenditure reviews and the procurement process.

Directors supported further monetary policy tightening, given continuing inflation pressures. They encouraged further action beyond tight liquidity management to rein in inflation, which would support the credibility and independence of the central bank.

While welcoming the strong banking sector performance, Directors noted that efforts to strengthen financial stability should continue, including sustaining the good progress on implementing the 2018 FSAP recommendations. They called for measures to increase resilience to risks stemming from high bank exposure to the Romanian state and encouraged close monitoring of the new tax on bank assets due to its potential impact on monetary policy transmission and credit allocation. Directors also noted that the new AML/CFT legislation should be followed by a robust implementation.

Directors emphasized the need to re-energize the structural reform agenda to improve Romania’s medium-term growth prospects. They noted that public investment should be increased by focusing on public infrastructure and achieving a more efficient absorption of EU funds. Directors called for moving ahead with the state-owned enterprise reform agenda to improve the quality of public goods and services. They recommended moderating minimum wage hikes and linking changes to a set of objective criteria that reflect productivity. Directors further highlighted that Romania’s fight against corruption should be renewed, noting that these reforms could alleviate constraints on growth, enhance competitiveness and facilitate investment.

Source:RRA,IMF.Translated by Miruna Matei