Romania: 2016 Article IV ConsultationConcluding Statement of the IMF Mission

Stocks and Financial Services Press Releases Tuesday March 15, 2016 09:09
IMF--15 Mar--International Monetary Fund
Context: hard won gains at risk

1. Romania has made important progress in addressing economic imbalances and restoring growth. Fiscal and current account deficits have improved markedly since the global financial crisis, per capita income has surpassed pre-crisis levels, and growth is projected to be amongst the highest in the region in the near term.

2. However, macroeconomic policies have weakened recently and hard won gains are at risk of being reversed. The 2016 budget inappropriately gives stimulus when consumption growth is already strong. If no measures are taken, next year's fiscal deficit will exceed the authorities' target and there is a risk that further deficit-increasing measures may be passed in an election year that would put debt on an upward trajectory. Legislative initiatives in the financial sector, such as the current version of the giving-in-payment law (datio in solutum), contain provisions that could threaten private property rights, undermine investor sentiment, and curtail credit provision to households and businesses; there are better ways to target relief to distressed borrowers. The mission recommends stronger efforts to maintain prudent policies and resume the structural reform momentum in order to safeguard hard won gains.

Outlook: cyclical upswing

3. The economy is on a cyclical upswing supported by strong domestic demand. Private consumption has been boosted by recent hikes in minimum and public wages, record low interest rates, low fuel prices, and a VAT reduction on food items. Investment has recently shown some signs of a pick-up, partly related to a catch-up in EU funds absorption. On the basis of the largely one-off stimulus to consumption, the mission expects real GDP growth of 4.2 percent in 2016, decelerating to 3.6 percent in 2017. Notwithstanding this cyclical performance, raising Romania's potential output growth will hinge on strong progress on structural reforms.

4. Risks to the outlook relate mostly to the pre-electoral environment and external uncertainties. Further fiscal stimulus in an election year may boost consumption in the short-term but will undermine sustainability of public finances and could dent market sentiment. Measures targeting the financial sector lacking proper impact analysis and consultation could harm credit intermediation and investment and undermine financial stability. On the external side, an abrupt deterioration in emerging market risk perception could trigger currency depreciation and raise the external debt ratio.

Fiscal policy: boost resilience to shocks

5. Fiscal policy is pro-cyclical and will put public debt on a gradually rising trajectory. Romania achieved impressive fiscal consolidation since 2009—one of the largest amongst peers. However, the large fiscal relaxation approved last year is expected to reverse this trend and deviate from the previously announced fiscal path. Although the fiscal code contains welcome simplification of the tax code, the fiscal stimulus is difficult to justify at a time when economic growth is already strong. In light of this expansion, the fiscal deficit is projected to exceed the authorities' target by ½ percent of GDP in 2017 unless further measures are taken (table). Even if the deficit is kept at the authorities' target of 2.8 percent of GDP (in cash terms, equivalent to about 3 percent in ESA terms), public debt will exceed 40 percent of GDP and continue to gradually rise. Although the current level of debt-to-GDP is not high relative to conventional metrics, public debt tripled between 2008 and 2015, showing the vulnerability to a sudden deterioration in public finances.

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