IMF urges Romania to address impact of fiscal loosening to prevent rise in budget deficit

IMF urges Romania to address impact of fiscal loosening to prevent rise in budget deficit Source: www.bnm.md

BUCHAREST (Romania), March 17 (SeeNews) - Romania's budget deficit is likely to surpass the 3% threshold agreed with the EU and reach 3.7% of Gross Domestic Product (GDP) in 2017 in the absence of proper measures to compensate for fiscal loosening, the IMF said on Friday.

"Successive legislative changes have made the structure of the budget rigid and by that I mean successive tax cuts and successive measures to raise wages and pensions and salaries at the cost of public investment have led to a budget that is structurally less flexible to deal with shocks and vulnerabilities that may arise," IMF mission chief in Romania, Reza Baqir, said during a press conference broadcast live by video news service privesc.eu.

Without further measures to address the impact of tax cuts and wage and pensions hikes the budget deficit will reach 3.8% of GDP in 2018, Baqir said.

He added that in IMF's view the way forward to bring flexibility into the budget is for the government to realise that there is no room left for tax cuts.

Among the fiscal easing measures that have entered into force since the beginning of the year is a law doing away with health and social insurance contributions paid by pensioners and scrapping income tax on pensions under 2,000 lei ($469/443 euro), a bill eliminating 102 fees and charges, and a hike of the minimum wage by 16% to 1,450 lei. Romania also reduced its VAT rate from 20% to 19% as of January 1. This cut follows a reduction in the VAT rate from 24% to 20% in 2016.

Even though Romania significantly recovered after the 2008 crisis, posting record economic growth among EU states, the fiscal loosening endangers all these achievements, the IMF official added.

Baqir also stressed the need for Romania to rethink its economic policy trend of recent years which was mainly focused on encouraging strong consumption rather than supporting investments and production.

To achieve this, Romania needs to improve the absorption of EU funds, significantly boost budget revenue collection, provide predictability and further support the fight against corruption, he added.

Romania's economy is expected to grow by 3.8% in 2017, according to the IMF's latest economic forecast issued in October last year.

The 2017 budget bill is built on projections of 5.2% economic growth and sets deficit equivalent to 2.99% of GDP, a target that many find too ambitious.

In 2016, Romania's economy expanded by 4.8% year-on-year compared to a revised growth rate of 3.9% in 2015. The country's consolidated budget showed a deficit equivalent to 2.41% of the projected GDP last year, compared to 1.47% of GDP in 2015, according to finance ministry data.

(1 euro =4.5654 lei)

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