7.4 C
Bucharest
February 26, 2021
ECONOMY FINANCE&BANKING

IMF: Romanian economy is on a cyclical upswing (II). Two main risks to the economic outlook are electoral and external uncertainties.

Executive Directors welcomed the significant progress in reducing vulnerabilities after the global financial crisis, notably the marked improvements in fiscal and external balances and in the resilience of the banking sector. Directors observed, however, that there are downside risks to the economic outlook. They also noted with concern the recent procyclical fiscal relaxation, changes in financial sector legislation that could adversely affect financial stability, and the slowdown in structural reforms. Directors underscored the importance of implementing prudent economic policies and regaining the structural reform momentum to preserve Romania’s hard-won gains and raise medium-term growth potential.

Directors emphasized the need to ensure fiscal sustainability and the credibility of the fiscal framework. In light of the large fiscal relaxation adopted last year, it is crucial that fiscal policy is anchored on a credible debt reduction path going forward. Repealing the planned tax reductions or postponing them until offsetting measures are identified will help achieve these objectives. Directors also underscored the importance of strengthening fiscal institutions and strictly enforcing fiscal rules and the fiscal responsibility law. They welcomed recent steps to enhance transparency in public spending, and called on the authorities to accelerate complementary reforms to strengthen the spending review unit, pass the procurement law, improve the targeting of social protection schemes, and strengthen public administration more broadly.

Directors highlighted the urgency of stepping up structural reforms to unlock Romania’s potential growth, particularly by improving the efficiency of public investment and the business climate. They called for intensified efforts to strengthen the corporate governance of state-owned enterprises—including through passage of the draft legislation in parliament—and improve the planning and utilization of EU funds. Directors also encouraged further reforms in tax administration, focusing on large taxpayers and making tax administration more business friendly more generally. It will also be important that policies on public and minimum wages take into account fiscal space, productivity growth, and competitiveness considerations. Directors commended the authorities for the progress in fighting corruption and encouraged them to address remaining weaknesses.

Directors concurred that a tightening bias in monetary policy is appropriate given current inflation projections. They recommended that the authorities begin reducing the gap between the market and policy rates, absorb liquidity from the market, and further narrow the interest rate corridor, while continuing to enhance the effectiveness of the monetary policy framework. Maintaining adequate international reserves remains crucial in light of elevated uncertainty in global financial markets.

Directors welcomed the significant progress in strengthening the financial sector, particularly in reducing non-performing loans. Priorities going forward are to pursue predictable and market-friendly policies and ensure proper oversight. In this context, Directors cautioned that poorly targeted measures for providing debt relief to borrowers could undermine financial stability, legal predictability, and credit growth. They called on the authorities to reconsider the recently passed measures and to put adequate safeguards in place. Sustained efforts to further deepen financial intermediation are critical to foster private investment and growth.

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