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IMF suggests Romania a change in the course of policies to reduce the likelihood of another boom-bust scenario

Romania’s consumption-fueled growth has raised macroeconomic imbalances, including inflation pressure and increased fiscal and current account deficits, so a change in the course of policies is needed to reduce the likelihood of another boom-bust scenario, the International Monetary Fund writes in its Staff Concluding Statement of the 2019 Article IV Mission posted on Friday.

“While helping people’s income to rise faster towards the levels in advanced European Union (EU) countries, Romania’s consumption-fueled growth has raised macroeconomic imbalances,” reads the document released on Friday by the IMF mission chief for Romania and Bulgaria Jaewoo Lee.

“Inflation pressure has re-surfaced after a lull late last year, disproportionately affecting the real incomes of the poor and potentially undermining competitiveness. The fiscal and current account deficits have increased. Both public and private investment have been on a downward trend in recent years, weakening long-term growth prospects. In all this Romania is, to an appreciable extent, an outlier relative to its peers,” said Lee.

He has suggested a change in the course of policies is needed to reduce the likelihood of another boom-bust scenario.

“A change in the course of policies is needed to reduce the likelihood of another boom-bust scenario. A downturn tends to weigh more severely on the income and living standards of the poor,” added Lee.

He also warned that unless policies change course, the progress in convergence could suffer a setback that hurts the real incomes of retirees and poor people particularly hard.

“Unless policies change course, the progress in convergence could suffer a setback that hurts the real incomes of retirees and poor people particularly hard. A more balanced policy mix is needed to reduce the likelihood of such a setback: first and foremost, fiscal consolidation complemented by monetary tightening and greater exchange rate flexibility.”

“Whereas growth is currently projected to remain around 4 percent in 2019, fueled by wage increases and consumption, the current account deficit is projected to exceed 5 percent of GDP. Over the medium term, the current account deficit is projected to remain elevated, while GDP growth slows, reflecting lost competitiveness. More balanced policies and re-energized structural reforms are necessary to support long-term growth potential and sustainable income convergence toward the advanced EU countries,” added Lee.

Fiscal deficits should come down in good times so that they can go up in bad times in support of people’s incomes, he said, mentioning that typically, this has not happened in Romania and the current juncture is no exception.

“Durable fiscal consolidation based on high quality measures, starting this year, is paramount to put the economy on a more resilient footing. Fiscal deficits should come down in good times so that they can go up in bad times in support of people’s incomes. Typically, this has not happened in Romania and the current juncture is no exception. More fiscal adjustment will also mean less inflation and thus less monetary tightening, which is good for competitiveness,” reads the IMF document.

The document says to improve revenue collections, strengthening the revenue administration (ANAF) is critical.

“Structural fiscal reforms would facilitate and sustain medium term fiscal consolidation. To improve revenue collections, strengthening the revenue administration (ANAF) is critical, including by modernizing the IT system and adopting modern compliance risk management to ensure that everyone pays what they owe. Given the numerous changes in recent years, the tax system should be carefully examined to identify distortions and areas where revenue gains are possible,” said Lee.

 

IMF recommends Romania to set wages reflecting improvements in productivity

 

Going forward, Romania should set the minimum wages by a transparent and objective mechanism reflecting improvements in productivity or productivity will be affected, International Monetary Fund (IMF) chief of mission for Romania and Bulgaria Jaewoo Lee told the release on Friday of a staff concluding statement of the Article IV mission involving Romania.

“Continued rapid wage growth – including the minimum wage – in excess of productivity gains bodes ill for competitiveness. Going forward, minimum wages should be set by a transparent and objective mechanism reflecting improvements in productivity,” reads the IMF document.

Lee called for determined reform of state-owned enterprises.

“Determined reform of state-owned enterprises, accompanied by a commitment to strong corporate governance, would improve their financial performance and service to the public. Efforts are needed to improve investment in public infrastructure, including to achieve more effective absorption of EU funds,” said Lee.

He warned that public-private partnerships often entail substantial risks, therefore such projects should be subject to careful analysis of their value-for-money, fiscal risks, and alternative financing options (e.g. EU funds).

“Public-private partnerships often entail substantial risks. Therefore, such projects should be subject to careful analysis of their value-for-money, fiscal risks, and alternative financing options (e.g. EU funds),” according to the IMF document.

On the other hand, IMF says the budget structure can be improved by moderating growth in rigid spending – the wage bill and pensions – while making room for more investment.

“Room for improvement exists on the expenditure side too. The budget structure can be improved by moderating growth in rigid spending – the wage bill and pension – while making room for more investment. Expenditure efficiency can be improved by further strengthening the procurement process and expenditure reviews,” the IMF evaluation shows.

Lee added that monetary policy tightening needs to contribute as well.

“Monetary policy needs further tightening, as inflationary pressure is expected to stay elevated. Inflation is driven by the additional fiscal stimulus currently envisaged, output that is above its long-term potential, and rapidly rising wages. The first line of defense against high inflation and losses in people’s real incomes has to be the independence and credibility of the central bank. The second line, monetary tightening. That said, the extent of tightening can be much less if fiscal policy is adjusted as we recommend. The strict liquidity management announced by the central bank is a step in the right direction. By contrast, the recently introduced benchmark index for bank loans will hamper the transmission of monetary policy. The sizable current account deficit increases the premium of greater exchange rate flexibility as a shock absorber,” according to IMF.

Lee also drew attention to the need for Romania to continue its anti-corruption initiatives.

“Reducing corruption helps improve government revenue, enhance spending efficiency, and strengthen competitiveness. Strong governance has also been found to help reduce emigration, especially of the high-skilled. Whereas Romania’s anti-corruption initiatives had been internationally recognized, some of the amendments to the justice laws and the criminal codes have been criticized for potentially threatening the independence of Romania’s judicial system and weakening the capacity to fight corruption. However, we welcome the strong commitment made by the government to uphold judicial independence and the rule of law,” added Lee.

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