IMF recommends fiscal consolidation for Romania

IMF recommends fiscal consolidation for Romania
By bne IntelliNews May 26, 2017

The International Monetary Fund (IMF) has estimated that the fiscal policies envisaged by Romania will result in a wide deviation (of over 2% of GDP) from the optimum 1.5% of GDP medium-term budget deficit. The fund has recommended that the central bank streamline its monetary policy by narrowing the interest rates corridor ahead of a possible monetary tightening decision amid inflationary pressures. 

The Fund projected 4.2% GDP growth in 2017 amid a 3.5% p.a. medium term trend growth. Nonetheless, the Fund recommended re-orienting policies from stimulating consumption to supporting investments as required to reduce poverty, raise medium term growth, and accelerate the pace of convergence towards the EU’s income level.

The main risks to the economic outlook, the Fund stressed, concern a perception of weakening fiscal prudence or even institutions, which could adversely affect market confidence. This is a direct hint at the government’s planned fiscal reforms including the unified wage law (with a significant impact on the public payroll) and possibly the radical reform of income tax (by introducing the household income tax, with a huge and not yet quantified impact on budget revenues).

The IMF has projected a 3.7% of GDP budget deficit this year and a 3.9% of GDP gap in 2018. Notably, Fund’s scenario does not include the supplementary fiscal policies envisaged by the government. 

A brief evaluation of the policies envisaged over 2017-2022 led to the conclusion of a supplementary gross (not including the second-round effects) impact of 6% of GDP. Out of this, the unified wage law would result in a 2.6% of GDP deterioration of the fiscal balance, the Fund estimated. 

The unified wage bill should be conducted at the speed allowed by the fiscal constraints and in parallel with public administration reform, the Fund recommended. The fiscal measure with the second largest impact on the budget is the planned reduction in the personal income tax (PIT): 1.5% of GDP.

The IMF’s board endorsed Conclusions to the Article IV Consultations with Romania on May 25.

 

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