IMF suggests Romania to change policy course to avoid likelihood of boom-bust scenario

Romania's consumption-fueled growth has raised macroeconomic imbalances, including inflation pressure and increased fiscal and current account deficits, so a change in the course of policies is needed to reduce the likelihood of another boom-bust scenario, the International Monetary Fund writes in its Staff Concluding Statement of the 2019 Article IV Mission posted on Friday. 

"While helping people's income to rise faster towards the levels in advanced European Union (EU) countries, Romania's consumption-fueled growth has raised macroeconomic imbalances," reads the document released on Friday by the IMF mission chief for Romania and Bulgaria Jaewoo Lee. 

"Inflation pressure has re-surfaced after a lull late last year, disproportionately affecting the real incomes of the poor and potentially undermining competitiveness. The fiscal and current account deficits have increased. Both public and private investment have been on a downward trend in recent years, weakening long-term growth prospects. In all this Romania is, to an appreciable extent, an outlier relative to its peers," said Lee. 

He has suggested a change in the course of policies is needed to reduce the likelihood of another boom-bust scenario. 

"A change in the course of policies is needed to reduce the likelihood of another boom-bust scenario. A downturn tends to weigh more severely on the income and living standards of the poor," added Lee. 

He also warned that unless policies change course, the progress in convergence could suffer a setback that hurts the real incomes of retirees and poor people particularly hard. 

"Unless policies change course, the progress in convergence could suffer a setback that hurts the real incomes of retirees and poor people particularly hard. A more balanced policy mix is needed to reduce the likelihood of such a setback: first and foremost, fiscal consolidation complemented by monetary tightening and greater exchange rate flexibility." 

"Whereas growth is currently projected to remain around 4 percent in 2019, fueled by wage increases and consumption, the current account deficit is projected to exceed 5 percent of GDP. Over the medium term, the current account deficit is projected to remain elevated, while GDP growth slows, reflecting lost competitiveness. More balanced policies and re-energized structural reforms are necessary to support long-term growth potential and sustainable income convergence toward the advanced EU countries," added Lee. 

Fiscal deficits should come down in good times so that they can go up in bad times in support of people's incomes, he said, mentioning that typically, this has not happened in Romania and the current juncture is no exception. 

"Durable fiscal consolidation based on high quality measures, starting this year, is paramount to put the economy on a more resilient footing. Fiscal deficits should come down in good times so that they can go up in bad times in support of people's incomes. Typically, this has not happened in Romania and the current juncture is no exception. More fiscal adjustment will also mean less inflation and thus less monetary tightening, which is good for competitiveness," reads the IMF document. 

The document says to improve revenue collections, strengthening the revenue administration (ANAF) is critical. 

"Structural fiscal reforms would facilitate and sustain medium term fiscal consolidation. To improve revenue collections, strengthening the revenue administration (ANAF) is critical, including by modernizing the IT system and adopting modern compliance risk management to ensure that everyone pays what they owe. Given the numerous changes in recent years, the tax system should be carefully examined to identify distortions and areas where revenue gains are possible," said Lee.