The implementation of the consolidated budget in the first five months of 2020 registered a deficit of RON 38.8 billion (3.59% of GDP), of which… Mai mult›
2020 European Innovation Scoreboard: Big problems of Romania, which is by more than 68% behind EU average
Romania remains the weakest innovator in the EU, with a score in last year’s indicator ranking at only 31.6% of the EU’s average performance, according… Mai mult›
According to March 2020 data, the EC Convergence Report for Romania points out that the long-term interest rate for convergence purposes was 1.5 percentage points… Mai mult›
Conditions and mechanism for accessing financing from recovery fund: supervision, indicators, approvals, diplomacy
The European Commission is doubling its efforts to show that Europe has learned the lessons of the past and will avoid now, after the “Great… Mai mult›
S&P maintains Romania’s rating at level recommended for investments: Romania has access to foreign financing / Fiscal consolidation is inevitable after elections
Rating agency Standard & Poor’s has confirmed the ratings for Romania at ‘BBB minus / A-3’ and maintained the negative outlook. This rating maintains Romania… Mai mult›
IMF report – Conclusions show that Romania has become a new and atypical growth model: through imbalances. Which will soon get to be paid
de Adrian N Ionescu , 10.6.2019
Romania’s macroeconomic imbalances have increased in the past year, and economic and fiscal policies have to change so that the population’s incomes and prospects of euro adoption to not suffer from counter performances – this is one of the International Monetary Fund (IMF) experts’ conclusions.
The IMF forecasts an economic growth of 4% in 2019 for Romania, fuelled by higher wages and consumption, but at the cost of a current account deficit of over 5% of GDP, according to the IMF monitoring report published Friday.
The IMF delegation was in Bucharest last week to issue the annual monitoring report, which is common to all member countries of the institution.
“Macroeconomic imbalances have deepened: the current and current account deficits have increased and inflationary pressure is rising again. Unless policies will change, convergence (with the Eurozone, editor’s note) could take a step back, which could affect the incomes of the poor and the retired,” says the IMF’s preliminary monitoring report.
The report contains the idea of a “balanced mix of policies” (always featured also in BNR reports), as well as the need to change the trend of public and private investments, which were on a downward trend in recent years.
Download IMF IMF Preliminary Monitoring Report, Romania: Staff Conclusion Statement of the 2019 Article IV Mission
Here are the main ideas of the report:
Real incomes eroded by inflation
- The rush to increase incomes of the population to the levels of developed countries in the EU caused, through consumption and macroeconomic imbalances, inflationary pressures that actually affect incomes in real terms
- Inflation also undermines competitiveness, and the decline in public and private investment has weakened perspectives for long-term economic growth
Repetition of a boom-bust scenario?
- Changing official policies is necessary to avoid the repetition of the boom-bust scenario.
- The current account deficit will remain high in the medium term, while GDP growth will slow down and express this way the loss of competitiveness.
- More balanced policies and re-energising structural reforms are necessary to support the long-term growth potential and the convergence of sustainable incomes to the level of advanced EU countries.
Typical imbalances in Romania
- Fiscal (budget) deficits typically increase in Romania in times of economic growth, although it would be normal to decrease.
- The Government should target a budget deficit of 2.75% of GDP in 2019, which would mean measures to consume the difference of 0.9% of GDP compared to the current foreseeable deficit.
- A credible decrease in the deficit of up to 1.5% in 2022 would strengthen confidence in the budgetary framework and reduce the vulnerability of public finances.
- The pension law, which is currently under parliamentary debate, needs a reassessment in order to balance social needs and fiscal sustainability. The current bill provisions will lead to a spending of 4% of GDP and severe pressure on public finances.
- The pension law in its current form will burden the young generation and affect other priority spendings for public investment, education and health.
- Strengthening the management of public revenue (ANAF), including the modernization of the IT system is critical.
- The tax system has been distorted because of the many changes taking place in recent years. The system should be carefully examined.
- The budget structure should be improved. It should make room for more investment. The efficiency of spending needs to be improved.
Contribution of monetary policy
- The first line of defence against inflation and against loss in population’s real incomes is the independence and credibility of the central bank.
- On the contrary, the new benchmark interest rate for household loans will harm the transmission of monetary policy to the economy.
- The current account deficit substantially increases the margin of a higher flexibility in the exchange rate as a shock absorber.
- The minimum wage should be established through a transparent and objective mechanism that would reflect the productivity improvement.
- Reforming state-owned companies and engaging them in improving corporate governance will increase their financial performance and the quality of service for the public.
- More emphasis should be placed on the absorption of European funds, especially in the infrastructure, and less on public-private partnerships, which often involve substantial risks.
- Certain measures of OUG 114/2018 and 19/2019 leave room for corrections from the perspective of the adverse effect on economic development.
- Taxes and specific incentives to certain sectors (banks, construction, and utilities) can create distortions and discourage investment or the efficient allocation of resources.
Growth vs. corruption
- Efficient and healthy institutions are essential for a sustainable and inclusive growth (for the whole population).
- Reducing corruption helps increase government revenues, increases efficiency in spending, and boosts competitiveness.
- Good government also reduces the emigration, especially in the highly skilled workforce.
- While Romania’s anti-corruption initiatives have been recognized internationally, some amendments to the laws on the judiciary and the criminal code have been criticized because of their threat against the independence of the judiciary and the weakening of the capacity to fight corruption.
- Higher predictability and focusing on the mid-term would generate positive investment impulses.