IMF says fiscal package solved a third of Romania’s fiscal consolidation needs

Romania’s economy will rise by 2.25% this year and the growth rate will strengthen to 2.75% in 2024, in line with the lack of effects of the fiscal package (”a step in the right direction”) this year when the public deficit would rise by 0.25pp y/y to 6.0%, according to the conclusions of the Article IV Consultations held by the International Monetary Fund (IMF) in Bucharest.

The fiscal deficit will moderate to 5% of GDP in 2024, the Fund’s experts estimate, adding that “additional adjustment by at least 2% of GDP in the next few years will be needed to achieve this [the 3%-of-GDP deficit target].”

The scope to achieve further fiscal adjustment via reductions in spending or increasing expenditure efficiency is limited, and further tax reforms are needed to increase revenue, efficiency, and fairness.

In the medium term, the economy is expected to return to its potential growth rate of 3.75% as consumption recovers, and investment, underpinned by Recovery and Resilience Facility funds, remains strong.

On the upside, subdued economic growth is expected to bring inflation down from 7.25% y/y at the end of 2023 to 4.5% by the end of 2024, still well above the National Bank of Romania’s inflation target band, under the Fund’s scenario.

The risks surrounding this outlook are substantial: exogenous risks related to growth, the wage growth undermining the core inflation slowdown and the government’s administrative capacity putting a question mark on the implementation of the fiscal package and the Resilience Facility.

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