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IMF warns of growing macroeconomic risks

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Romania's widening macroeconomic imbalances have raised concern among the IMF officials who recently completed a staff visit to Bucharest. Their preliminary findings emphasize that the country's consumption-led growth has remained strong, but macroeconomic disparities have also deepened, reflected in the wider fiscal and current account deficits, and higher inflation pressure.
“Unless policies change course, the progress in convergence could suffer a setback that hurts the real incomes of retirees and poor people particularly hard. A more balanced policy mix is needed to reduce the likelihood of such a setback: first and foremost, fiscal consolidation complemented by monetary tightening and greater exchange rate flexibility. Additionally, policies need to become more predictable and governance improve to enhance the medium-run prospects of income convergence,” the IMF officials indicated in the Staff Concluding Statement of the 2019 Article IV Mission.
According to the same source, reducing imbalances should start with fiscal moderation, and “durable fiscal consolidation based on high quality measures, starting this year, is paramount to put the economy on a more resilient footing.”
In addition, the IMF officials’ report notes that structural fiscal reforms “would facilitate and sustain medium term fiscal consolidation.” There is also room for improvement on the expenditure side. “The budget structure can be improved by moderating growth in rigid spending - the wage bill and pensions - while making room for more investment. Expenditure efficiency can be improved by further strengthening the procurement process and expenditure reviews.”
Moreover, the report suggests that more efforts are needed to improve investment in public infrastructure, and a more effective absorption of EU funds, noting that public-private partnerships, a model favored by the Romanian Government in recent years, often entail substantial risks.
The IMF also recommends further tightening of the monetary policy, as inflationary pressure is expected to stay elevated, while adding that effective and sound institutions are critical for inclusive and sustained growth. “Reducing corruption helps improve government revenue, enhance spending efficiency, and strengthen competitiveness,” the report points out.
Another point raised in the report claims that greater policy predictability would have a positive impact on investment and growth. “Adequate impact assessment, prior consultations with stakeholders and a more measured implementation would strengthen policy predictability and effectiveness.”
Whether the current policy and political decision makers in Bucharest will make any of the suggested corrections is hard to predict, but Business Arena will continue to keep an eye on all the issues affecting the business community, reflecting its views, hopes and challenges. 

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