IMF Executive Board Concludes 2022 Article IV Consultation with Romania

September 26, 2022

WASHINGTON, DC: On September 21, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Romania.

After a solid recovery from the pandemic, Romania is now, like other EU countries, facing headwinds related to the war in Ukraine, with further spillovers due to its proximity. In the run-up to the war, output had reached pre-crisis levels in H1 2021 and growth in H1 2022 remained strong. Driven primarily by the energy price shock and its impact on associated goods and services, headline inflation has risen rapidly. Inflation expectations have risen more moderately but are also above the target band (1.5­-3.5 percent). Nonetheless, the labor market remains less tight than pre-pandemic levels. The authorities have implemented an energy price cap and subsidy scheme to help alleviate the pressures on the economy and the vulnerable.

Given this backdrop, GDP growth is expected to moderate to 4¾ percent in 2022 (2021: 5.9 percent), supported mainly by momentum in domestic demand. Energy and food prices are expected to keep inflation relatively elevated until the end of 2023. The fiscal deficit narrowed in 2021 after the pandemic-induced widening and is projected to consolidate moderately further in 2022 as nominal revenue growth has been strong. The current account deficit is projected to remain elevated, but the rebound in FDI and the start of the EU-supported National Recovery and Resilience Plan provide substantial funding, with the latter anchored to a path for reforms and growth-enhancing investment into the medium term. Monetary and financial sector policies have more than reversed the pandemic easing and have further tightened to buttress price and financial stability.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They welcomed Romania’s strong economic recovery from the pandemic but noted that the spillovers from Russia’s war in Ukraine—mainly through indirect channels—and tighter financial conditions have clouded the outlook with downside risks and higher uncertainty. Against this backdrop, Directors underscored the importance of implementing prudent macroeconomic policies that safeguard macroeconomic stability and of reenergizing structural reforms to boost economic growth.

Directors stressed the need to pursue medium-term fiscal consolidation to rebuild buffers, safeguard fiscal sustainability, and reduce external imbalances. They generally agreed that the current energy price caps should be temporary and encouraged the authorities to gradually phase them out and replace them with measures targeting the most vulnerable. To help improve medium-term budgeting and ensure predictability, Directors recommended reforms to pensions and public sector wages. While welcoming the recent tax measures, they encouraged the authorities to consider a more ambitious reform of the personal income tax and improvements to the efficiency of the value added tax.

Directors stressed that monetary policy needs to stay nimble to firmly guide inflation and inflation expectations back toward the central bank’s target. They agreed that policy rates will need to rise further to prevent the entrenching of inflationary pressures and the emergence of a wage-price spiral. Noting the weakening of external competitiveness and the rising current account deficit, Directors encouraged gradually moving toward a more flexible exchange rate that—together with fiscal consolidation—would help address external imbalances and absorb potential future external shocks. Directors agreed that the banking sector remains resilient and that the macroprudential stance is appropriate. They called for continued vigilance of financial stability risks and for further strengthening the AML/CFT framework.

Directors stressed the need to reenergize structural reforms to boost economic growth and address regional inequalities. In this context, they emphasized the importance of implementing Romania’s National Recovery and Resilience Plan while further strengthening public investment management to make the most out of the funds available under the European Recovery and Resilience Facility. They underscored that reforms in the areas of green transition and energy security, digitalization, health and education, as well as governance and anticorruption are especially critical.

It is expected that the next Article IV consultation with Romania will be held on the standard 12-month cycle.


[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .

Romania: Selected Economic Indicators

Population: 19.3 million (2020)

Per capita GDP: US$14,667 (2021)

Quota: 1,811 million SDRs (0.4% of total)

Literacy rate: 99% (2019)

People at risk of poverty: 31.2% (2019)

Key export markets: European Union (Germany, Italy, France)

Main products and exports: Machinery and transport equipment, manufactured goods

2020

2021

2022

2023

Proj.

Output

Real GDP growth (%)

-3.7

5.9

4.8

3.4

Output gap (%)

-2.3

-0.6

0.2

0.0

Employment

Unemployment (%)

6.0

5.6

5.7

5.5

Prices

CPI inflation (%, period average)

2.6

5.0

13.3

10.0

General government finances (% GDP)

Revenue

28.8

30.6

31.4

30.6

Expenditure

38.6

37.5

38.2

35.7

Fiscal balance

-9.8

-6.9

-6.4

-5.1

Primary balance

-8.5

-5.4

-5.2

-3.4

Structural fiscal balance 1/

-5.3

-7.6

-6.1

-4.9

Public debt (including guarantees)

49.6

51.4

51.7

52.0

Money and credit

Broad money (% change)

15.3

15.8

15.1

12.5

Credit to the private sector (% change)

5.5

14.8

17.2

12.8

Policy rate (%)

1.5

1.75

…

…

Balance of payments

Current account (% GDP)

-5.0

-7.0

-7.7

-7.4

FDI (% GDP)

-1.4

-3.0

-2.5

-2.7

Reserves (months imports)

4.6

4.2

3.6

3.1

External debt (% GDP)

57.9

55.9

52.2

51.0

Exchange rate

REER (% change), CPI based

1.5

0.9

…

…

Sources: Romanian authorities, World Bank, Eurostat and IMF staff calculations.

1/ Fiscal balance (cash basis) adjusted for the automatic effects of the business cycle and one-off effects.

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