IMF ups economic growth forecast for Romania but warns of increasing imbalances

The International Monetary Fund (IMF) increased its forecast for Romania’s economic growth in 2019 from 3.1% to 4%.

However, the fund’s representatives warn that this growth, driven by consumption, comes with the cost of higher imbalances. “Growth in 2019 is expected to stay above potential at 4 percent, led by continued fiscal stimulus and strong wage growth, and be accompanied by further widening of current account and fiscal deficits. Inflation in 2019 is expected to stay above the central bank’s target band,” reads an official statement of the IMF’s Executive Board, which concluded the Article IV consultations with Romania on August 28.

“Growth is expected to moderate to 3 percent in the medium term as the transitory effects of the fiscal stimulus fade. Lack of progress on structural reforms and subdued investment will constrain potential growth over the medium term,” the IMF representatives believe.

IMF also warns that the macroeconomic imbalances are becoming increasingly evident, eroding buffers and undermining Romania’s capacity to withstand adverse shocks. “There is a risk that the income convergence with the EU could suffer a setback,” the IMF concludes.

The key domestic risk is an increase in vulnerability caused by policy shocks, including further fiscal stimulus or regresses on structural reforms.

Externally, the key risk stems from a sharper-than-expected external slowdown, which would widen the current account deficit, magnifying financing pressures. “While Romania’s moderate public debt and reserves can provide a temporary cushion, these buffers can prove insufficient under an adverse event,” IMF also warns.

The fund’s specialists estimate Romania’s real economic growth this year at 4%, to decline to 3.5% next year. The fiscal deficit is expected to hit 3.7% of the GDP (up from 2.8% in 2018) and the current account deficit to reach 5.5% of the GDP (up from 4.5% in 2018).

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