May 25 (SeeNews) - Romania's budget deficit is expected to widen to 3.7% of GDP this year and to 3.9% of GDP in 2018 in the absence of additional fiscal measures, the International Monetary Fund (IMF) warned on Thursday.
"Staff projects a deficit of 3.7% of GDP on account of new wage and pension increases and tax cuts in the 2017 budget that will add to the effects of the previously legislated tax cuts entering into effect this year," the IMF said in a report following Article IV consultations with Romania.
The institution advised Romania to take near-term measures to reduce the deficit focusing on expenditure re-prioritisation and the postponement of a planned pension increase, while safeguarding social spending.
"The authorities prefer to wait to monitor budget execution in the first part of the year. However, without timely action, reducing the deficit to 3% may require withholding the automatic 10% spending buffer and delaying capital spending, both of which are less desirable ways to achieve the target," the IMF stressed.
Moreover, there are risks of further deterioration of the fiscal balance going forward.
Under current policies, the deficit is projected to deteriorate to 3.9% of GDP in 2018,accounting for the full-year effect of the pension increase scheduled to enter into effect in July 2017, the report showed.
IMF said this estimation does not reflect measures included in the government’s 2017–2020 plan such as the implementation of the unified wage bill, reduction of social security contribution rates, and further
tax cuts. These measures have not been finalised but if adopted could raise the deficit by 6% of GDP by 2022, IMF warned.
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.
In order to prevent growing deficits from threatening fiscal sustainability, Romania should consider medium term consolidation supported by reforms to enhance the effectiveness of the public sector, IMF said.
The IMF kept projections made in April that Romania's economy will grow by 4.2% in 2017 before it decelerates to 3.4% in 2018.
Growth in 2017 will be supported by continued stimulus to private consumption from a new round of fiscal relaxation and wage increases, it said.
However, the main risks to Romania's economic outlook include a perception of weakening fiscal prudence or institutions, which could adversely affect market confidence. Also, heightened political tensions, could erode consumption and investment, increase the cost of government borrowing and put pressure on the exchange rate which would affect banks’ balance sheets through their FX exposures.
"Maintaining adequate reserve levels, a flexible exchange rate, and fiscal buffers will help against such risks. Prudent economic policies and visible steps to accelerate the pace of structural reforms and improve governance would send a powerful signal about Romania as a good place for doing business," IMF noted.
The IMF's latest forecast for Romania's economic growth is more pessimistic than the government's expectations. Romania's 2017 budget bill is built on projections of 5.2% economic growth and sets deficit equivalent to 2.99% of GDP, a target many find too ambitious.
Earlier in May, the European Commission warned Romania that it may not meet its budget deficit target and urged the government to take action to avoid the opening of an excessive deficit procedure.
(1 euro = 4.5512 lei)