Boom and bust warning for Romania

10 Jun 19

Romania must change course if it is to avoid squandering progress it has made converging with more developed European economies.

The IMF has warned that fiscal and current account deficits have widened in the country and inflation pressure is rising again.

A more balanced policy mix is needed, Fund economists have said after visiting the country, making fiscal consolidation complemented by monetary tightening and greater exchange rate flexibility a priority.

Moreover, policies need to become more predictable and governance needs to be improved.

Despite rapid development, Romania’s economy has experienced recurrent growing pains in recent years, and recent reforms aimed at introducing new bank, energy and telecoms taxes have stumbled.

While just a few years ago growth in the country of 20 million people was outpacing its European peers, this has slowed – prompting analysts to warn of a boom and bust cycle.

In their concluding statement of an ‘Article IV’ mission to Romania, the IMF team said consumption-led growth has remained strong, raising people’s incomes towards those in advanced Europe.

However, Romania’s consumption-fuelled growth has deepened macroeconomic imbalances, risking progress made so far that could hurt the real incomes of retired and poor people particularly hard.

The Fund economists said inflation pressure has resurfaced after a lull late last year, disproportionately affecting the the poor and potentially undermining competitiveness

Fiscal and current account deficits have increased, and both public and private investment have been on a downward trend in recent years, weakening long-term growth prospects.

Whereas Romania’s growth is currently projected to remain at about 4% this year, fuelled by wage increases and consumption, the current account deficit is set to exceed 5% of GDP and remain high – reflecting lost competitiveness.

“A change in the course of policies is needed to reduce the likelihood of another boom-bust scenario,” the IMF economists say in their mission report.

“A downturn tends to weigh more severely on the income and living standards of the poor. More balanced policies and re-energised structural reforms are necessary to support long-term growth potential and sustainable income convergence towards the advanced EU countries.”

  • Gavin O'Toole, expert on Latin America
    Gavin O'Toole

    A freelance journalist. He has written six books about Latin America and taught the politics of the region at Queen Mary, University of London.

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