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.


Related Articles

EC opens in-depth investigation into Romanian energy producer CE Hunedoara

The European Commission announced on March 12 that it has opened an in-depth investigation to assess whether various public support measures from Romania in favour of energy ... more

UAE investor poised to take over Romania's largest farm in €200mn deal

United Arab Emirates company Al Dahra is close to taking over Romanian Braila Farming, the largest farmer in Romania that operates under concession contracts 56,000 hectares of land owned by the ... more

British paper group DS Smith completes €208mn takeover in Romania

British group DS Smith announced it has completed the acquisition of Romanian paper and cardboard factories EcoPack and EcoPaper, ... more