Underpinned by surging capital inflows, Romania’s economy has performed strongly in recent years, said International Monetary Fund (IMF), in a press release, recently issued. With a large pool of foreign savings becoming available and domestic financial intermediation advancing rapidly, aggregate spending on private investment and consumption has boomed. At the same time, real GDP growth has expanded at a robust pace, while disinflation has continued, reads the release.
On the other hand it underlines that “since July, the external environment has taken a turn to the worse. The widening gap between Romania’s spending and income has been mirrored by a ballooning external deficit. Romania’s protracted spending boom increasingly puts strains on productive capacities, particularly in labor markets. These strains have been aggravated by procyclical fiscal and incomes policies, while political gridlock has impeded structural reforms needed to alleviate capacity constraints.”
As regards the economy’s external situation, the IMF press release notices that the already large current account deficit has continued to widen, while rising real unit labor costs are scrimping Romania’s competitive edge. “In 2007, real domestic spending growth will again outpace real GDP growth by a large margin, and the mission now projects the current account deficit to reach about 14 percent of GDP, with a similarly high level projected for 2008. As a matter of concern, capital flows are increasingly shifting away from foreign direct investment, adding to external net debt. However, Romania’s present net external liabilities remain moderate compared with those of many of its new EU member peers.”
The IMF also says external labor cost competitiveness needs to be watched, as loose public sector wage policies are increasingly spilling over to private sector wage settlements. It considers export volume growth performance remains robust, and that the shift toward higher value-added export goods, reflected in significant terms of trade gains, has continued.
“Recent indicators point to a moderation in growth but inflation remaining high for the remainder of the year. Mostly on account of drought effects in agriculture, staff now expects real GDP growth to moderate to 6 percent in 2007, in line with the National Commission of Economic Forecasting’s views.” GDP growth is considered to remain at about 6 percent in 2008. “Our conservative calculations suggest that the underlying fiscal position might be at least one percentage point of GDP weaker than indicated by the actual fiscal deficit. Thus, to the extent that temporary revenue windfalls have been used to finance permanent spending increases or tax cuts, future restrictive fiscal measures will be needed to shore up the public finances at a time when the economy may be weakening,” the report reads.
IMF recommends consistent with stability – and growth-oriented fiscal policy framework, the government’s budgetary and incomes policies during 2007-2008 should avoid adding procyclical pressures. “As regards monetary policy, the NBR’s inflation targeting framework calls for keeping inflationary expectations firmly anchored. Safeguarding financial stability requires continued close monitoring of growing exposures and the banking sector’s capacity to absorb adverse shocks,” the communiqué reads.
IMF says that although the already approved significant increase for 2008 might be justifiable given Romania’s low pension replacement rates, the also approved almost doubling of pensions over the next two years seems unsustainable. “These largely ad hoc pension measures underscore the need for a more coherent pension reform strategy that takes into account the deteriorating demographic outlook and further significant labor migration outflows,” concludes the release.