Romania: Staff Concluding Statement of the 2025 Article IV Mission

September 12, 2025

Washington, DC: An International Monetary Fund (IMF) mission, led by Joong Shik Kang, conduct ed discussions for the 2025 Article IV Consultation with Romania during September 3-12. At the end of the visit, the mission issued the following statement:

• Outlook: The economy is expected to grow gradually amid the necessary fiscal consolidation, which is essential to address the widening twin deficits. Inflation will remain elevated temporarily before falling within NBR's tolerance band by end-2026.
• Fiscal policy: The recent reform package for 2025-26, including tax reforms, is welcome and marks an important step forward. Its full execution and additional adjustment measures from 2027 to reduce the fiscal deficit to below 3 percent of GDP are critical to restore fiscal and macroeconomic sustainability.
• Monetary policy: The NBR's cautious approach remains appropriate, and policy rate cuts should resume only after inflation is on a firm downward trend . Greater exchange rate flexibility over the medium term would enhance resilience to shocks.
• Structural policies: A dvancing structural reforms , including strengthening the efficiency of the state, are crucial to make full use of EU funds and support growth amid the needed fiscal adjustment .

Deepening Twin Deficits amid Slowing Growth

Economic activities have been subdued, while inflation has recently risen notably due to temporary factors. Real GDP growth softened to 0.8 percent in 2024 as strong private consumption on the back of robust wage growth was offset by continued contractions in investment activities. Growth momentum remained weak in the first half of 2025 as significant uncertainty weighed on economic sentiment. Core inflation remained high at 7.9 percent (year-over-year, y/y) in August, driven by persistent services inflation due to still strong, albeit moderating, wage growth. Headline inflation rose significantly to 9.9 percent (y/y) upon the removal of the electricity price cap and the VAT rate increase.

Twin deficits have deepened further due to the deterioration of the fiscal balance. The fiscal deficit rose to 8.7 percent of GDP (cash basis) in 2024, driven by significant increases in pension spending, public wages, and domestically financed public capital expenditure. Rising fiscal deficits contributed to a widening current account deficit, reaching 8.4 percent of GDP. Despite the freeze on public sector wages and pensions in 2025, the large fiscal deficit persisted through mid-year, driven by continued increases in current expenditures.

Growth is expected to rise gradually to moderate levels amid fiscal consolidation. Real GDP is projected to grow by 1.0 and 1.4 percent in 2025 and 2026, respectively, as the acceleration of NGEU-funded investments would partly offset a moderation in private consumption resulting from temporarily high inflation and the effects of fiscal consolidation. The government has introduced a large fiscal reform package for 2025-26, which includes tax reforms to raise the standard and reduced VAT rates, along with a continued freeze on public sector wages and pension in 2026. Headline inflation is expected to remain elevated over the next 12 months before falling within the NBR's tolerance band by the end of 2026.

The risks to the outlook are tilted to the downside for growth and to the upside for inflation. A sovereign credit rating downgrade remains a risk as concerns persist regarding the execution of the planned fiscal consolidation for 2025-26 and the medium-term sustainability of public finances due to the still high fiscal deficit. Slower growth among major trading partners-potentially coupled with higher trade barriers, uncertainty, and an intensification of regional conflicts-could dampen trade and FDI flows. On the upside, strong implementation of the fiscal adjustment and EU-funded investment projects could strengthen investor sentiment and lower risk premia faster than expected, resulting in higher private investment and growth. The upside risks to inflation include higher energy prices and adverse climate shocks affecting food prices. Stronger-than-expected wage growth, possibly driven by temporarily high headline inflation, could delay the projected normalization of core inflation.

Strengthening Fiscal Sustainability While Supporting Growth

The large fiscal consolidation for 2025-26 is welcome and its execution, along with additional adjustment in the medium term, is critical to restore fiscal sustainability and market confidence. The reform package, if fully executed, is expected to reduce the primary fiscal deficits by about 1¼ and 2 percentage points of GDP in 2025 and 2026, respectively, narrowing the overall fiscal deficit to about 6 percent of GDP in 2026. However, the fiscal deficit is projected to narrow only gradually thereafter to about 5 percent of GDP by 2030, with the public debt-to-GDP continuing to rise to close to 70 percent. Additional fiscal adjustments of about ⅔ percent of GDP per year on average from 2027 are needed to further reduce the deficit to below 3 percent of GDP over the medium term and stabilize public debt at around 60 percent. Upfront specification of concrete measures effective from 2027 would help restore credibility and increase the predictability of tax policy, facilitating planning by households and companies and improving the investment climate.

Additional tax reforms over the medium term, along with making full use of the available EU funds, would help strengthen public finances while supporting growth.

• Romania's tax revenue as a share of GDP is among the lowest in the EU and insufficient to support increasing needs for social protection and public services at levels aligned with EU averages. A tax reform package aimed at mobilizing revenues and improving fairness, while strengthening work incentives and remaining attractive to capital investments, would help facilitate a growth-friendly and equity-enhancing fiscal consolidation.
• Amid significant fiscal consolidation, it is crucial to advance structural reforms to sustainably strengthen growth and to unlock the committed EU funds. Romania's public investment management framework should be further enhanced by strengthening coordination and monitoring, which will support efficient public investment planning, allocation, and implementation. Continued prudence is also needed with wage and pension policies beyond 2026.

Further fiscal structural reforms to enhance fiscal governance and improve efficiency are key to underpin effective implementation of fiscal adjustment. The government's ongoing digitalization efforts would help strengthen tax administration and public sector service provision. The planned introduction of a new digital budgeting platform is a positive development to strengthen information management and budget planning. To further improve spending efficiency, regular public sector spending reviews should be better integrated into annual budgeting. A stronger medium-term fiscal framework that incorporates credible medium-term revenue and expenditure strategies as well as contingency plans, would also help instill fiscal prudence and credibility.

Bringing Inflation Durably Back to Target

The re-emergence of inflation pressures calls for a cautious monetary policy approach to ensure that inflation securely returns to the target band. The temporary impact of the VAT rate hike and the end of energy price caps as well as ongoing wage pressures have heightened the risk of inflation expectations becoming unanchored. Therefore, the current monetary policy stance remains appropriate, and policy rate cuts should resume only after growth of wages and prices moderate in a sustained manner. Meanwhile, given heightened uncertainty and the evolving risks, the NBR should stand ready to adjust the policy rate based on prevailing economic conditions and price dynamics.

A gradual increase in two-way exchange rate flexibility over the medium term would enha nce resilience to economic shocks. Greater exchange rate flexibility, accompanied by clear communication, would help limit opportunities for carry trade, mitigate balance sheet mismatches, and enhance economic resilience to external shocks. In conjunction with fiscal adjustment, it would also help strengthen the weak external position.

Safeguarding Financial Sector Stability

The resilience of the banking system has improved with stronger balance sheets. Banks remain well capitalized and liquid. NBR guidelines to retain profits combined with the increased countercyclical capital buffer (CCyB) have enhanced the resilience of the financial system by bolstering capital and releasable buffers. Despite some recent deterioration, asset quality in the overall banking system remains healthy, with the NPL ratio close to the EU average.

Emerging pockets of vulnerability warrant continued vigilance. Supervisors need to continue monitoring asset quality and stress-testing liquidity conditions amid banks' growing sovereign exposure, buoyant consumer credit growth, and sizable unhedged FX loans. The NBR's ongoing effort to expand the range of eligible collaterals according to risk-based haircut criteria is welcome and will strengthen the emergency liquidity assistance scheme. The authorities should be prepared to recalibrate macroprudential policies to align with evolving risks and ensure enhanced resilience

Structural Reforms to Boost Growth Potential

Advancing structural reforms is vital to sustainably boost growth amid large fiscal consolidation. The establishment of an independent agency to monitor the large state-owned enterprises (SOE) sector is welcome. A timely appointment of the board would allow the agency to function at its full capacity and strengthen oversight and enhance efficiency in SOE-dominated sectors. Enhancing the predictability and quality of regulations would improve the business climate and reduce informality. With an aging population, it is also important to raise labor force participation and productivity, including through better availability of childcare and investment in the quality of education.

Romania's transition to a low-carbon economy, along with the completion of the EU-wide Energy Union, will help achieve energy security. In fall 2024, the authorities submitted their updated Integrated National Energy and Climate Plan and National Energy Strategy 2025-35 to achieve net zero GHG emissions by 2050. To achieve this goal, additional incentives could be considered to limit emissions in sectors that are not covered under the EU Emissions Trading System (ETS) regime, including a complementary carbon tax in the transport and building sectors. More fundamentally, a fully integrated and interconnected energy market within an EU-wide Energy Union remain crucial.

In closing, the mission would like to thank the Romanian authorities and other stakeholders for their warm hospitality and for the open and productive discussions.