March 16 (SeeNews) - Although Romania's economy is growing strongly and the financial sector is improving, growth will turn increasingly fragile in the absence of policy changes, the IMF said on Friday.
"A combination of fiscal moderation and monetary tightening would be the best course of action. Monetary tightening alone would have to push interest rates to a level that weighs on investment and competitiveness," an IMF staff mission said in a statement at the end of its visit to the country.
An IMF staff team visited Bucharest during March 6-16 for Article IV consultations.
Continuing sizable fiscal deficits, especially with low investment spending, would also reduce the space to support the economy in future downturns and weaken Romania’s growth potential, the IMF said.
"The best time to act on all these fronts is now, with monetary and fiscal policies acting in unison," the Fund warned.
In February, Romanian finance ministry analysts raised their 2018 growth forecast to 6.1% from 5.5% based on expectations of more robust performance across sectors than originally projected. Romania's economy expanded by 7% year-on-year in 2017 compared to a growth rate of 4.8% in 2016, provisional figures from Romania's statistical office show.
On February 7, BNR increased its monetary policy rate to 2.25% from 2.0% - the second rate hike in as many months.
The IMF expects growth to decelerate from last year’s high level due to multiple factors: a waning fiscal impulse, low public investment, slow progress on structural reforms, and tightening financial conditions.
"We project GDP growth to be about 5% in 2018 and to slow towards 3% over the medium term. Risks to this outlook are tilted to the downside, the IMF said.
"Global financial volatility, further deterioration in fiscal and external balances, or weakening of institutions could dent investor confidence in Romania. The continuation of current expansionary policies would undermine the country’s capacity to withstand a severe shock."
According to the IMF, a prudent mix of fiscal consolidation and monetary tightening would avert overheating, while reducing the fiscal and external deficits, and enhancing macro-financial stability.
Romania also needs to improve its revenue collection and tax changes need to be more predictable and less frequent, and further tax rate cuts should be avoided, according to the statement. Also, prioritization of large investment projects should be enforced and reflected in annual budgets.
Romania’s progress on the fight against corruption has been recognized internationally, and needs to continue, the IMF said, stressing that reducing corruption would help improve government revenue, enhance spending efficiency, and strengthen competitiveness.
At the end of February, Romania's Superior Council of Magistracy (CSM) rejected the proposal of justice minister Tudorel Toader to dismiss the chief of anti-corruption directorate DNA, Laura Codruta Kovesi. Tudorel Toader said that he is seeking the dismissal of Kovesi, sparking protests across the country. Toader said Kovesi had allegedly damaged the image of the country abroad and accused her of being too authoritarian.
Romanian president Klaus Iohannis has the final say on the proposal to dismiss Kovesi.
EU officials and anti-corruption institutions have praised DNA's activity in general and Kovesi's activity in particular on numerous occasions, stressing that her efforts are crucial for the country's fight against corruption.