IMF warns Romania's economy shows signs of overheating, criticizes low level of public investments

A document published on Wednesday by the International Monetary Fund (IMF) after consultations with Romania says that a more cautious fiscal discipline would help rebalance Romania’s economy and lessen the burden on the monetary policy.

In the context of solid economic growth, the IMF recommends a deficit under 3 percent, suggesting that some new fiscal measures may be necessary to achieve this objective.

The report warns that as Romania’s economy shows signs of overheating, “there is a risk that the current policy trajectory increases macroeconomic volatility, undermines the capacity to withstand adverse shocks, and eventually slows down convergence toward the advanced EU countries.”

The Fund criticized the decrease of investments in the public sector, as well as the lack of structural reforms and high inflation rate.

IMF officials are encouraging fiscal reforms to ensure the fulfillment of Romania’s medium-term budgetary objective (MTO). They highlight the need to avoid new tax cuts, say that salaries and pensions have to grow at a moderate rate and that the implementation of the unitary salary law and the changes to the pensions system should be revised in line with the available fiscal space and the medium-term fiscal objectives.

The IMF also emphasised the importance of reforms taken to increase the public sector’s efficiency through the strengthening of fiscal administration, in order to improve the efficiency of tax collection, as well as to better absorb European funds. It also warns that the Fiscal Agency’s IT system is old and fragile.

The Fund supports a stronger monetary policy that could reduce inflation, and encourages the central bank to remain vigilant and pursue further policy tightening as necessary to anchor inflation expectations to the targeted level. The IMF Directors also call for accelerated structural reforms and asks for measures so that the institutions that manage public investments can fully make use of EU funds and solve the major infrastructure needs.

The need for solid corporate governance in state companies is also mentioned by the IMF, which notes that the minimum wage mechanism should balance social and competitiveness-related concerns. The IMF recognizes the past progress in the fight against corruption and encourages Romanian authorities to maintain the reform momentum.