The IMF has issued a report on Romania’s economy following the conclusion of discussions on recent economic developments and budget plans.

Policy priorities include maintaining fiscal discipline and pushing ahead with structural reforms. The economy is growing healthily with real GDP expected to grow by 3.4% in 2015. Fiscal loosening is expected to increase growth to around 3.9% in the next year, but will reverse progress made on stabilizing public debt. Volatility in global financial markets and risks to trade and capital flows could put further strain on the economy.

Romania is planning tax cuts and public wage increases in 2016 and 2017, policies that will increase the fiscal deficit to around 3% in 2016 and higher than 3% in 2017 without measures to offset the effect. The recommended deficit target for 2016 is 1.5% of GDP. The IMF recommends that raising revenue collection and reducing inefficient spending can create fiscal space to permit the lower tax rates to be brought in at a measured pace.

The IMF notes that despite the improvements in tax collection the tax collection gap is still significant. Priority should be given to implementing a modern compliance risk management approach to move the resources of the tax administration away from VAT refund audits and towards audit activities that yield more revenue. The IMF also considers that the new natural resource taxation regime planned by Romania should maintain a balance between encouraging investment and collecting sufficient tax revenue.

The IMF notes that the average annual inflation rate will remain negative until mid 2016, mainly owing to the VAT rate on food in mid-2015 and the general VAT rate reductions from 1 January 2016.

The IMF considers that more structural reforms are required for long term growth prospect. These should include actions to improve the performance of inefficient state owned enterprises (SOEs) in the transportation and energy sectors. If the draft legislation on corporate governance is implemented this could rebuild credibility. Also more progress should be made with private sector involvement in SOEs.