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BUCHAREST (Romania), September 2 (SeeNews) - The International Monetary Fund (IMF) said it raised Romania's economic growth forecast to 4% from 3.1% predicted in April but warned that growing macroeconomic imbalances could hinder economic progress.
Growth in 2019 is expected to stay above potential at 4%, led by continued fiscal stimulus and strong wage growth, and be accompanied by further widening of current account and fiscal deficits, the IMF said in a press release on Friday evening following the conclusion of Article IV consultations. Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year.
"Inflation in 2019 is expected to stay above the central bank's target band. Growth is expected to moderate to 3% 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 said.
According to the global lender, with macroeconomic imbalances 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.
Moreover, 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, the IMF stressed.
To address the growing imbalances, the IMF directors called for shifting from procyclical to countercyclical fiscal policy, complemented by a tighter monetary policy stance and greater exchange rate flexibility. They further supported strengthening policy predictability and renewing structural reform initiatives to sustain convergence to average EU income levels.
The IMF also called for a durable fiscal consolidation to help curb the twin deficits and reduce the burden on monetary policy and said they support further monetary policy tightening, given continuing inflation pressures.
On August 5, Romania's central bank maintained its monetary policy rate at 2.50%.
Also, the IMF noted that efforts to strengthen financial stability should continue and emphasized the need to re-energize the structural reform agenda to improve Romania’s medium-term growth prospects.
Romania's 2019 budget bill is built on projections of 5.5% economic growth and envisages a deficit equivalent to 2.76% of GDP.
Currently, Romania has no ongoing funding agreement with the IMF.
(1 euro=4.7294 lei)