IMF warns Romania on need for 'fiscal discipline'

After announcing that a new agreement with Romania is not possible at the moment, the International Monetary Fund (IMF) mission chief Andrea Schaechte has expressed concerns related to the fiscal relaxation our country is heading to.

The IMF representative stated that, although our county’s “near-term growth outlook is strong but risks are tilted to the downside. The economy is growing at a healthy clip with real GDP projected to advance by 3.4 percent in 2015, reflecting broad-based contributions from consumption, investment, and exports. Pro-cyclical fiscal loosening in 2016 aiming to spur domestic demand further is expected to contribute to an acceleration of economic activity to about 3.9 percent next year; however, it will also reverse recent progress on stabilizing public debt.”

This, Andrea Schaechte said, could put an unnecessary strain on Romania’s economy, as global markets present volatility and downside risks to trade an capital flows.

Though for this year the budget will stay within the planned limit of 1.9 percent of GDP, planned tax cuts and wage increases will push the fiscal deficit close to 3 percent in 2016 and above this threshold in 2017 unless measures are taken or capital spending is not entirely carried out, IMF warned.

” This procyclical stance will add stimulus to the economy at a time that it is not needed given the strong expansion of activity and will put public debt on a rising path. The fiscal plans compare with a recommended deficit target of about 1.5 percent of GDP for next year, which would be consistent with lowering the public debt-to-GDP ratio and, as cyclically neutral, would accommodate current growth prospects,” Schaechte explained.

She went on to say that fiscal structural reforms, like Raising revenue collection and reducing inefficient spending, are better advised at the moment, as they would create a favorable fiscal space which will eventually allow for tax cuts, ” though at a more measured pace”.

On the spending side, the IMF representative said key measures to improve efficiency include pilot spending reviews, improving investment quality by better prioritization and enforcement, and a better expenditure management through the rollout of the commitment-control system.

Schaechte said that Romania’s inflation is expected to stay negative through mid-2016, reflecting largely the VAT rate cut on food in June and the general VAT rate cut from January 2016 as well as lower commodity prices. However, with all fiscal measures planned to go on during the next year, further monetary easing is not necessary, as continued low imported inflation could complicate future policy decisions.

“Lack of progress in structural reforms is a key obstacle to long-term growth prospects. Romania’s strongest pillar of structural reforms have been continuous improvements in energy pricing, accompanied by ongoing efforts to strengthen the support system for the most vulnerable. However, actions to sustainably raise the performance of many inefficient state-owned enterprises (SOEs) in the transportation and energy sectors have stalled, in part because the concept for better SOE corporate governance still has to be fully embraced. The new draft legislation on corporate governance, if comprehensively implemented, would be an opportunity to rebuild credibility in this area. At the same time, the authorities should give new impetus to private sector involvement in SOEs, through initial public offerings or strategic privatizations. Without modernizing Romania’s public infrastructure, the benefits of the current strong economic activity could be short-lived and progress on economic convergence would be slow,” the IMF statement concluded.

IMF will have another work visit to Romania in March 2016, when the government plans to have another talk for an agreement, Eugen Teodorovici, finance minister, said.

Natalia Martian

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