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August 10, 2022
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IMF estimates Romania’s inflation at 12.5 pct in 2022 and 10 pct in 2023

Romania’s average annual inflation rate, assuming that there will be no further escalation of the Ukraine war, is expected to be 12.5 percent this year and carry on at about 10 percent in 2023, as high global energy and food prices continue to feed into the domestic prices, the IMF said in the concluding statement issued at the end of the visit of the Fund’s regular Article IV consultation mission to Romania.

The IMF also expects the growth of the Romanian economy to moderate to around 3.5 – 4.5 percent in 2022 and 2023, but warns of high uncertainties surrounding these projections.

“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,” the IMF report states.

The financial institution considers that other risks could also worsen the outlook: high inflation, which could reduce demand further and trigger a wage-price spiral; external and domestic financing conditions which may tighten more than anticipated; and domestically, stalling reforms which 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.”

The IMF warns that 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.

The global financial institution also considers that 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 6.75 percent based on current policies.

The IMF believes that 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, the report notes.

Romania does not have an ongoing financing agreement with the International Monetary Fund, but the international financial institution annually assesses the evolution of the Romanian economy, based on consultations under Article IV of the IMF’s Articles of Agreement.

 

Via Agerpres

Photo: www.pixabay.com

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