Romania’s economy ‘vulnerable to shocks’

2 Sep 19

Romania’s economy grew in strength last year but macroeconomic imbalances could leave it vulnerable to shocks, the International Monetary Fund has warned.

In 2018, unemployment reached record lows, growth was 4.1% of gross domestic product, and the National Bank of Romania’s inflation target (1.5%-3.5%) was met in December.

But headline inflation has exceeded the target since February 2019, and fiscal and current account deficits have been widening for the past few years – reaching 2.8% and 4.5% of GDP respectively.

And while growth is expected to stay above 4% this year, led by “continued fiscal stimulus and strong wage growth”, according to the IMF, it could fall in the medium term because of “lack of progress on structural reforms and subdued investment”.

“Increasingly evident” macroeconomic imbalances, the IMF said, pose a risk that income will stop catching up with the rest of the EU.

Policy shocks or a sharper-than-expected external slowdown could leave Romania’s moderate reserves “insufficient”, the fund said.

The IMF’s executive directors recommended that Romania shifted to a ‘countercyclical fiscal policy’, where it would reduce spending and raise taxes during a boom period or increase spending and cuts taxes during a recession.

Romania should also spend on infrastructure improvements and renew reform efforts to try to push income to converge towards the average EU level.

Earlier this year, Romania jailed the man described as the country’s ‘most powerful politician’ on corruption charges.

The EU and IMF have both warned the government not to abandon its drive against corruption.

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