20210826-IMF-Romania_2021_Article_IV_Consultation-Press_Release_and_Staff_Report_74页_11mb

Summary of the 2021 Article IV Consultation with Romania

Core Content

The 2021 Article IV Consultation with Romania, conducted by the IMF, assessed the country's economic performance during the pandemic and its recovery trajectory. The consultation concluded that Romania experienced a relatively mild GDP contraction (-3.9%) in 2020, which was less severe than the EU average (-6.2%). The country's recovery was robust, with GDP growth reaching 4.6% in Q4 2020 and 2.8% in Q1 2021, among the strongest in the EU. The IMF also noted a strong fiscal and monetary policy response that helped stabilize the economy and support recovery.

Main Economic Indicators

Key Points from the Consultation

Economic Performance During the Pandemic

• Romania's economy fared better than the EU average due to a limited initial outbreak, short-lived surges, and effective public health measures.
• Private consumption and net exports were the main contributors to the decline in 2020, while gross fixed capital formation continued to grow due to public investment and prior-year stimulus.
• Inflation fell to 2.1% in 2020, but rose again in 2021 due to re-liberalization of electricity prices, higher natural gas prices, and global commodity rebounds.
• Unemployment rose to 5.0% in 2020 but has since stabilized at around 4.9%.

Fiscal Policy

• The 2020 fiscal deficit widened to 9.7% of GDP due to the crisis support package, which included emergency health care, income support, and business liquidity measures.
• The 2021 budget aims for a deficit of 7.2% of GDP, reflecting a shift towards medium-term fiscal consolidation.
• The government plans to return the deficit to 3% of GDP by 2024, in line with EU fiscal rules.
• Revenue administration and broadening the tax base are emphasized to improve fiscal sustainability and equity.

Monetary and Financial Sector Policies

• The National Bank of Romania (NBR) reduced policy rates by 125 bps and implemented liquidity measures to support the recovery.
• The accommodative stance is expected to continue to cushion the impact of fiscal consolidation and support inflation control.
• Preparations are needed to address potential deterioration in bank asset quality once relief measures expire, with emphasis on efficient insolvency procedures.
• Exchange rate flexibility should be gradually increased once the crisis subsides to help manage external imbalances.

Structural Reforms

• Governance improvements are essential for enhancing public investment quality and absorption capacity.
• SOE reforms and strengthening corporate governance are highlighted as key areas for reform.
• The Recovery and Resilience Facility (RRF) and Next Generation EU (NGEU) funds are expected to play a significant role in supporting long-term growth.
• Romania is projected to benefit from the RRF grants, which are expected to boost GDP growth by 0.3–1.9 percentage points over 2021–2026.
• The RRF is also expected to support digitalization and climate change initiatives.

Risks and Outlook

• Downside risks include unexpected pandemic developments, such as new virus strains or reduced vaccine effectiveness.
• Political risks may hinder structural reforms and fiscal consolidation efforts.
• Despite the strong recovery, the current account deficit is expected to remain wide in the medium term, though it should narrow as growth stabilizes.
• The IMF expects output to recover to its pre-pandemic trajectory by 2022, with inflation returning to the target band.

Key Recommendations

• Fiscal Policy: Shift support towards the most affected sectors, strengthen revenue administration, and broaden the tax base.
• Monetary Policy: Maintain accommodative stance to support recovery and inflation control, with gradual increase in exchange rate flexibility.
• Structural Reforms: Focus on governance improvements, public investment quality, and SOE reforms to enhance growth prospects.

Conclusion

The IMF endorsed the staff report and expressed confidence in Romania's recovery and fiscal consolidation efforts. It emphasized the importance of continuing macroeconomic support, implementing structural reforms, and utilizing EU funds effectively to boost long-term growth and resilience. The consultation also highlighted the need for continued monitoring of pandemic-related risks and the importance of maintaining fiscal and monetary discipline.