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IMF Report: GDP growth would reach 4.2pct in 2016
The Romanian economy is on a cyclical upswing supported by strong domestic demand, so that GDP growth would reach 4.2pct in 2016, with the main risks to the outlook being electoral and foreign uncertainties, IMF's staff show in a report drawn up following consultations with Romania under Article IV of the IMF Articles of Agreement, posted on Wednesday on the Fund's website.
"On the domestic side, populist measures in an election year could negatively affect market confidence and undermine investment. On the external side, a deterioration in emerging market risk perception could trigger capital outflows, a depreciation of the currency, and a substantial increase in the external debt-to-GDP ratio. Maintaining adequate reserve levels, a flexible exchange rate regime, and fiscal buffers will be key in mitigating risks," the IMF said in its release.
The IMF's Executive Board is concerned with the recent procyclical fiscal relaxation, changes in financial sector legislation that could adversely affect financial stability, and the slowdown in structural reforms.
"In light of the large fiscal relaxation adopted last year, it is crucial that fiscal policy is anchored on a credible debt reduction path going forward. Repealing the planned tax reductions or postponing them until offsetting measures are identified will help achieve these objectives," the IMF argues.
Also, the IMF Board requires stepping up efforts to strengthen governance in state-run companies and improving the use of European funds. "It will also be important that policies on public and minimum wages take into account fiscal space, productivity growth, and competitiveness considerations," reads the document.
The IMF Directors believe that tightening the monetary policy is appropriate given the current inflation forecasts and recommend that authorities start reduce the gap between interest rates on the market and the key interest rate, absorb the liquidity on the market and narrow more the corridor of interest.
The IMF Board welcomes the progress made in strengthening the financial sector, especially reducing the level of non- performing loans but also warns that the measures to support borrowers could undermine financial stability, justice predictability and credit growth. "They called on the authorities to reconsider the recently passed measures and to put adequate safeguards in place," reads the IMF release.
IMF mission conducted the annual evaluation of the Romanian economy in March this year, in Bucharest.
Periodical consultations required by Article IV of the Fund's Articles of Agreement is a surveillance exercise mandatory for all member states, to examine the financial and economic situation nationally and formulate some general recommendations on monetary, financial and economic policies to be followed to ensure stability and a positive development of the economy.
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The increase of the minimum wage well beyond productivity could do more harm than good in Romania, say the experts of the International Monetary Fund (IMF) in a report released after Article IV consultations with Romania.
Minimum wage policy can provide protection to low income workers. However, with the sharp hike planned for this year, the ratio of minimum-to-average wage in Romania will surpass the regional average (chart) which will undermine the external competitiveness and hamper job creation, particularly for low-skilled labour and in labour-intensive industries, says the IMF report.
The IMF staff recommended that the pace of future minimum wage increases be moderate and balance social considerations with competitiveness, productivity growth, and employment prospects. More generally, it would be useful to establish labor market expert committee and periodically reassess the impact of labor market policy including minimum wages.
The minimum wage was increased on May 1 to 1,250 lei; according to Romanian authorities, some 1,131,600 employees will benefit from this measures, namely 39,322 public employees and 1,092,364 in the private sector.
An IMF mission has carried its annual evaluation of the Romanian economy in March 2016, in Bucharest.