On May 9, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Romania.
The Romanian economy is on a cyclical supported by strong domestic demand. Recent hikes in minimum and public wages, record low interest rates, low fuel prices, and a Value-Added Tax (VAT) reduction have boosted private consumption. A catch-up in absorption of European Union (EU) funds has contributed to an increase in investment. Annual headline inflation turned negative in June 2015 following a sharp reduction in VAT on food items from 24 to 9 percent. However, adjusting for the VAT changes, underlying inflation was 2.4 percent (year-over-year) in March 2016 (Eurostat estimate) despite the recent fall in international commodity prices and low inflation in the euro area. There has been welcome progress in reducing banking sector non-performing loans.
Growth is expected to reach 4.2 percent in 2016—largely due to the one-off stimulus to consumption from the recent fiscal expansion—and decelerate to 3.6 percent in 2017. Underlying inflation is expected to continue growing and the current account deficit to widen further because of import growth.
Two main risks to the economic outlook are electoral and external uncertainties. On the domestic side, populist measures in an election year could negatively affect market confidence and undermine investment. On the external side, a deterioration in emerging market risk perception could trigger capital outflows, a depreciation of the currency, and a substantial increase in the external debt-to-GDP ratio. Maintaining adequate reserve levels, a flexible exchange rate regime, and fiscal buffers will be key in mitigating risks. Improving Romania’s long-term growth prospects to close the gap with advanced EU countries will depend on maintaining prudent macroeconomic policies and advancing the pace of structural reforms.