IMF More Optimistic On Romania This Year

The International Monetary Fund expects Romania’s GDP to grow by 5.2% year-over-year, down slightly from the government’s more optimistic 6% y/y projections, according to the latest World Economic Outlook issued by the Fund. The IMF is also more cautious regarding disinflation, foreseeing a 7.8% average CPI growth this year against the 7.2% y/y expected by the government’s forecasting body CNP. The fund grounds expectations on existing demand-side pressures such as rising wages, growing credit and lower tax rates that propel inflation.

Meanwhile, the Fund’s projections for Romania’s CA gap are slightly more optimistic than the government’s forecasts. IMF believes the country’s CA gap will reach 8.3% of GDP, while the government has been more drastic, adjusting expectations from 7% to 8.5%, according to the spring preliminary adjustment.

The Fund’s concerns vis-à-vis Romania are related more to the fiscal deficit, an issue that will likely be discussed by Finance Minister Sebastian Vladescu, who will attend the joint WB/IMF meeting in Washington. While the Fund strongly suggested cutting the fiscal deficit to zero, the government recently increased the gap from 0.5%-of-GDP to 0.9%. Under these circumstances, it is unsure whether the Fund will smoothly complete the precautionary arrangement with Romania this summer or fall.

However, Romania’s accession prospects are increasingly bright and the key problems are more related to justice and VAT collection system. The negative impact of a failed arrangement with the IMF would not dramatically jeopardize the country’s accession prospects. Nonetheless, the particular issue of budget revenues is also critical for the accession, and EU officials are urging Romania to improve tax collection.