Sat. Jun 25th, 2022

June 10, 2022

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

Washington, DC: An International Monetary Fund (IMF) mission, led by Jan Kees Martijn, visited Bucharest from May 30 to June 10 to conduct discussions on the 2022 Article IV Consultation with Romania. The mission has issued the following statement:

After a solid recovery from the pandemic, Romania is now facing adverse spillovers from the war in Ukraine and rising inflation. Moreover, the country is confronting these new challenges from a weak fiscal position. Measures to alleviate the impact of surging prices, in particular for energy, should be temporary and targeted at the most vulnerable, to limit their budgetary cost and not hinder energy conservation. To rebuild fiscal space and support market borrowing for budget financing, policies to reduce the fiscal deficit over the medium term need to be introduced without delay. This should include ambitious tax reform to ensure that everyone pays their fair share. Also, every effort needs to be made to use the substantial available NGEU funds efficiently. Monetary policy should firmly aim at returning inflation and inflation expectations to the National Bank of Romania’s (NBR) target band, while financial sector policies need to preserve the strength of the banking system.


Romania’s economy has recovered well from the COVID pandemic, but—like other EU countries—is now facing strong headwinds. GDP reached pre-crisis levels in in the first half of 2021 and rebounded very strongly in Q1 2022 from the COVID wave in the fall of last year. However, the war in Ukraine poses new pressures and risks. Its effects are already being felt in surging commodity prices that fuel high inflation, input shortages, weakening consumer and external demand, and higher sovereign risk premia. More than one million Ukrainian refugees have crossed the border, although most have moved on to third countries.

Even before the pandemic and the war, the current account and fiscal deficits had increased to high levels. A significant part of the current account deficit is financed by EU grants and direct investment flows, and reserves remain broadly adequate, but rising interest costs pose risks. Regarding the budget, higher expenditures have not been accompanied by commensurate revenue increases. The additional fiscal pressures, generated first by the pandemic and now the war spillovers, even if largely temporary, are further increasing debt, which necessitates medium-term consolidation.


Economic activity in the near term will be shaped by the fallout from the war in Ukraine. Assuming there is no further escalation to the war, growth is projected to moderate to around 3½ – 4½ percent in 2022 and 2023. Annual inflation is expected to average 12½ percent in 2022 and persist around 10 percent in 2023 as high global energy and food prices continue to feed into domestic prices.

The uncertainty surrounding this forecast is high. Direct risks from the war are limited as Romania is a substantial grain producer, largely self-sufficient in energy with only limited imports from Russia, and other direct trade and financial links with Russia and Ukraine are negligible. However, a broad Russian gas shut-off would raise energy prices further and reduce activity in European trade partners. Other risks could also worsen the outlook: (i) high inflation could reduce demand further and trigger a wage-price spiral; (ii) external and domestic financing conditions may tighten more than anticipated; and (iii) domestically, stalling reforms could weaken confidence and risk a credit rating downgrade. On the upside, rapid implementation of reforms envisaged under Romania’s National Recovery and Resilience Plan (NRRP) could lift growth above the baseline.

Policy Priorities

Managing the Energy Price Shock

Compensation measures for the energy price shock should cushion the impact on the most vulnerable while incentivizing energy conservation. Through March 2023, the authorities are implementing targeted payments to vulnerable households but also a price cap for most users at levels prevailing before the surge in energy prices in the fall of 2021. The cost to the budget is expected to be broadly offset by windfall profit taxes on energy producers, and higher dividend payouts of state-owned enterprises (SOEs). The authorities need to ensure that the system of compensating suppliers is working well to avoid cash-flow bottlenecks. Also, it would be helpful to start raising the price caps before March 2023, to avoid a sudden price shock and promote energy efficiency. At the same time, in the event of further shocks, any renewed fiscal support needs to be well-targeted at poor households.

Fiscal Policy

Strong fiscal measures will be needed to rebuild fiscal space and lean against deteriorating financing conditions. While welcoming the authorities’ intention to reduce the fiscal deficit in 2022 to 5.8 percent of GDP, the mission projects it at 6¾ percent based on current policies. With administrative reforms to improve tax collection and the lapse of the temporary support measures, the deficit is forecast to moderate over the medium term, but debt would continue to rise. Efforts to modernize revenue administration need to continue, including through digitalization and improved taxpayer services, in line with commitments under Romania’s NRRP. However, this will not be sufficient to restore fiscal sustainability.

To reduce the deficit to a sustainable level below 3 percent of GDP and stabilize debt, on the revenue side, tax policy measures amounting to at least 2 percent of GDP should be implemented.

  • Personal Income Tax (PIT): The tax system is complicated by exemptions for specific sectors, special treatments (including a low dividend tax), and loopholes (including through micro-enterprises), that greatly impair its effectiveness and fairness. Comprehensive reform is urgently needed to clean up the tax base across sectors and income sources. This could yield more than  percent of GDP. Introducing progressivity for those with the highest incomes could generate additional revenue and mitigate Romania’s high income inequality.
  • Value Added Tax (VAT): The efficiency of Romania’s VAT system is among the lowest in the EU. Raising the VAT efficiency to the EU average through base broadening and streamlining, as well as additional administrative strengthening (beyond already-programmed improvements) could yield  percent of GDP.
  • Property Tax: Reforms to broaden the tax base, make valuations more market-based, and simplify design and implementation could yield about ¼ percent of GDP.
  • Taxation of carbon emissions —once the current price spike has receded—could constitute an additional source of revenue while also contributing to Romania’s green transition. Such revenues could be used to reduce income taxes for lower-income earners.

Expenditures on pensions and public sector wages need to become more predictable. Pension system reforms committed in the NRRP should be expeditiously implemented. Public sector wages should also be set in a predictable way, and their influence on private wages and overall competitiveness taken into account. Also, medium-term budgeting needs to be strengthened.

Monetary and Financial Sector Policies

The monetary tightening undertaken by the NBR has helped anchor inflation expectations. Policy rate increases and tight liquidity management have been combined to keep monetary conditions broadly aligned with global and regional trends. The functioning of the government bond market has also been preserved. Nonetheless, the pass through of energy and food prices to core inflation continues to rise.

Under our baseline scenario for inflation and economic growth, continuing the pace of recent policy rate step increases through the end of 2022 would help to prevent the entrenchment of inflationary pressures and guide inflation expectations back toward the target band. Monetary policy will need to react nimbly to evolving conditions and the strategy should continue to be communicated clearly. Should longer-term inflation expectations rise further, while economic growth stays robust, accelerating the pace of tightening relative to the suggested trajectory would be warranted. Acting firmly is also important to prevent the emergence of a wage-price spiral. While this dynamic has not yet materialized as labor markets remain less tight than before the pandemic, it could be triggered by large public sector wage increases. On the other hand, a faster normalization of prices for supply-constrained goods or a stronger reaction of core inflation to recent rate increases may allow smaller future policy rate steps.

Exchange rate flexibility should be gradually increased. A broadly stable exchange rate against the euro has avoided fueling inflation and underpinned confidence in the domestic currency. However, as external competitiveness has weakened and to help absorb external shocks, exchange rate flexibility should be increased over time, together with the necessary fiscal consolidation.

Financial sector policies need to balance preserving the Romanian banking system’s soundness and maintaining the flow of credit. Emerging from the pandemic, the banking system has maintained its strong capital, liquidity, and profitability position. The NPL ratio has fallen below pre-pandemic levels, and loan-loss provisioning remains much higher than the EU average. Financial intermediation has improved, with strong credit growth over the past two years. In this context, credit guarantee schemes should be reduced over time. Furthermore, raising the countercyclical capital buffer was appropriately calibrated. While providing a safety net in the current uncertain environment, the application of the new loan moratorium needs to be limited to affected borrowers.

Structural Reforms and Managing the Green Transition

The additional funds available under the NGEU program represent an important opportunity, but also a significant challenge to absorb. Already, Romania lags peers in absorbing EU funds. The authorities are advised to expeditiously implement recent IMF recommendations for public investment management, including to strengthen medium-term planning, and develop a centralized coordination mechanism and a pipeline of appraised investment projects across sectors.

Better public investment management would also help implement the climate policies committed under the NRRP. Romania consumes less energy per capita than most EU countries. Nonetheless, the investments required to meet NRRP climate targets are large, and projects need to be executed without delay. Investments to strengthen energy security (such as the new gas interconnector with Bulgaria and the development of new gas fields in the Black Sea) should also receive high priority.

Structural reforms and investments to raise productivity would boost Romania’s growth potential. This requires expanding digitalization, strengthening the anti-corruption framework, improving the health and education systems, and reforming SOEs. Also, addressing large income gaps between regions requires particular attention to strengthening regional and local capacity and infrastructure.

Source – IMF