Romania needs to take cautious steps for long-term growth, says IMF

Although Romania has made significant economic progress and is expected to continue on the path, there are certain risks threatening our country’s outlook, International Monetary Fund (IMF) representatives warn in a press statement released following a consultation with our country’s officials.

Two major risks have been pointed out: domestically, electoral efforts translated into populist measures, and internationally, a deterioration in emerging market risk perception could trigger capital outflows, a depreciation of the currency, and a substantial increase in the external debt-to-GDP ratio. On the long term, Romania’s growth prospects can be maintained by applying prudent macroeconomic policies and advancing the pace of structural reforms, IMF said.

Although Romania made “significant progress in reducing vulnerabilities after the global financial crisis,” with improvements in fiscal and external balances, the recent procyclical fiscal relaxation poses a threat to our country’s economic outlook, the statement read.

“In light of the large fiscal relaxation adopted last year, it is crucial that fiscal policy is anchored on a credible debt reduction path going forward. Repealing the planned tax reductions or postponing them until offsetting measures are identified will help achieve these objectives,” IMF recommended.

The report did not look too kindly on the recently passed debt discharge law, stating “poorly targeted measures for providing debt relief to borrowers could undermine financial stability, legal predictability, and credit growth.” IMF representatives called on the authorities to “reconsider the recently passed measures” and to put safeguards in place.

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The report further underscored the importance of strengthening fiscal institutions and strictly enforcing fiscal rules and the fiscal responsibility law. Among other recommendations from the IMF were the passing of the procurement law, intensified efforts to strengthen the corporate governance of state-owned enterprises and an improvement in the planning and utilization of EU funds.

The Romanian economy has been on an upswing due to increased domestic demand, supported by recent hikes in minimum and public wages, low fuel prices and VAT reductions. Annual headline inflation turned negative in June 2015 following a drop in VAT for food items from 24 to 9 percent. Adjusting for the VAT changes, underlying inflation was 2.4 percent year-on-year in March 2016, according to Eurostat estimates.

Growth is expected to reach 4.2 percent in 2016—largely due to the one-off stimulus to consumption from the recent fiscal expansion—and decelerate to 3.6 percent in 2017. Underlying inflation is expected to continue growing and the current account deficit to widen further because of import growth.

However, BNR has recently reconsidered its inflation estimates for this year to 0.6 percent (a drop of 0.8 percent over previous forecasts) and to 2.7 percent for next year (another drop from the previous estimates of 3.4 percent).

Given current inflation projections, the IMF said, a tightening bias in monetary policy would be appropriate at the moment, recommending that “the authorities begin reducing the gap between the market and policy rates, absorb liquidity from the market, and further narrow the interest rate corridor, while continuing to enhance the effectiveness of the monetary policy framework.”

Natalia Martian