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October 7, 2022

IMF warns: Romania’s economy shows signs of overheating. Country’s ability to handle external shocks may be affected by fiscal policy’s trajectory

Romania’s economy is showing signs of overheating, and the trajectory of the fiscal policy may lead to a rise in volatility, which would affect the country’s ability to handle external shocks and would slow down the process of convergence with the advanced members of the European Union (EU), an International Monetary Fund (IMF) report shows.

IMF representatives estimate that the Romanian economy will grow by approximately 5 percent this year, and the stimulation of consumption through fiscal policy relaxation will continue to be the main engine of growth. At the same time, the IMF warns that a potential sudden risk-adverse shift among global investors is among the main risks for the Romanian economy.

“Domestically, a continued deterioration of fiscal and external balances or a weakening of institutions may affect investor confidence. External and internal shocks may coincide, may weaken confidence in the economy and may affect capital flows. Maintaining an adequate level of forex reserves, of fiscal buffers and a flexible exchange rate would alleviate these risks,” the IMF report shows.

IMF representatives appreciate last year’s robust economic growth, the slump in unemployment and the improvement of crediting conditions but warn about the increasingly clear signs of economic overheating. The growing inflation and the growth in twin deficits are among these signs.

In this context, the IMF considers that Romania should adopt a more cautious attitude in what concerns fiscal policies, and boost predictability, so that the process of convergence toward higher EU living standards would not be affected.

On Thursday, the National Statistics Institute (INS) confirmed the estimates published in May regarding a 4 percent year-on-year economic growth, gross series, in the first quarter this year.

Nevertheless, the inflation rate, which measures the evolution of consumer prices in the last year, climbed to 5.2 percent in April, the highest level since June 2013 (5.37 percent).

Moreover, Romania’s trade deficit in the first three months rose by 18.1 percent to EUR 2.72 billion.

At the same time, in the first quarter, Romania registered a current account deficit of EUR 967 million, up by 25.6 percent year-on-year, according to National Bank of Romania (BNR) data.

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