Romania’s economy is expected to grow gradually, driven by much-needed fiscal consolidation which is essential to counteract widening twin deficits, while inflation will remain temporarily high before dropping below the National Bank of Romania’s (BNR) tolerance margin by the end of 2026, according to the conclusions of the International Monetary Fund (IMF) mission following Article IV consultations with Romanian authorities.
The recent reform package for 2025-2026, fiscal reforms included, is welcome and marks an important step forward. Its full implementation and additional adjustment measures from 2027 to reduce the fiscal deficit below 3 percent of GDP are critical for restoring fiscal and macroeconomic sustainability, the IMF believe.
In the monetary policy area, the prudent approach of the BNR remains appropriate, and interest rate cuts should resume only after inflation is on a firmly declining path. A greater exchange rate flexibility in the medium term would improve resilience to shocks. In addition, boosting structural reforms, including strengthening the efficiency of the public administration, is essential to fully use European funds and support economic growth in the context of the necessary fiscal adjustments, the report shows.
„Economic growth is low, while inflation has recently increased significantly due to temporary factors. Romania’s GDP growth slowed to 0.8 percent in 2024, with solid private consumption, following robust wage increases, offset by the continued decline in investment activity. The growth pace remained weak in the first half of 2025, with significant uncertainties affecting confidence in the economy. Annual inflation rose to 9.9 percent in August, following the removal of the energy price cap and the VAT increase,” the IMF noted.
The international financial institution also underscored that twin deficits widened further following fiscal deterioration. The fiscal deficit rose to 8.7 percent of GDP (according to the Cash methodology) in 2024, because of a significant increase in pension and public sector wage expenditures, as well as domestically financed public capital spending. The rise in the fiscal deficit contributed to the deepening of the current account deficit, which reached 8.4 percent of GDP. Despite the freeze on public sector wages and pensions in 2025, the high fiscal deficit persists mid-year because of the continued increase in current expenditures, the report reveals.
The IMF expects the economy to grow gradually at a moderate pace, against the backdrop of fiscal consolidation. Romania’s GDP is projected to expand by 1 percent in 2025 and 1.4 in 2026, with the acceleration of investments financed through the „NextGenerationEU” programme partially offsetting the moderation in private consumption, caused by temporarily high inflation and the effects of fiscal consolidation. Inflation is expected to remain elevated over the next 12 months before falling below the BNR’s tolerance margin by the end of 2026.
The IMF estimates that risks to the economic outlook are tilted to the downside, while inflation risks are increasing. The risk of a downgrade to Romania’s sovereign rating remains, as concerns persist over the implementation of the planned fiscal consolidation in 2025-2026 and the medium-term sustainability of public finances, because of the still high fiscal deficit. Slower growth among major trading partners, potentially coupled with higher trade barriers, uncertainties and an escalation of regional conflicts could affect trade and FDI (foreign direct investment) flows.
On the positive side, strong implementation of fiscal adjustment and investment projects funded with European funds would strengthen investors’ confidence and reduce risk premiums faster than expected, resulting in higher economic growth and increased private investment.
Risks to inflation include higher energy prices and adverse climate shocks affecting food prices. A higher-than-expected increase in wages, possibly determined by temporarily high inflation, could delay the projected normalization of core inflation, the IMF said.
The substantial fiscal consolidation in 2025-2026 is welcome, and its implementation, along with further medium-term adjustments, is critical to restore fiscal sustainability and market confidence. If the reform package is fully implemented, primary fiscal deficits are expected to decrease by approximately 1.25 and 2 percent points of GDP in 2025 and 2026 respectively, easing the overall fiscal deficit to around 6 percent of GDP in 2026. However, the fiscal deficit is projected to decline only gradually thereafter, to about 5 percent of GDP by 2030, while the debt-to-GDP ratio continues to rise to nearly 70 percent. Further fiscal adjustments are needed as of 2027 in order to reduce the deficit below 3 percent of GDP over the medium term and stabilize public debt at around 60 percent. Detailing concrete measures from 2027 will help restore credibility and enhance fiscal policy predictability, facilitating planning for companies and households, and improving the investment climate, the report noted.
The new structural fiscal reforms aimed at improving fiscal governance and enhance efficiency are key to supporting the effective implementation of fiscal adjustment. The Government’s current digitalization efforts will help strengthen tax administration and the public services sector. The planned introduction of the new digital budgeting platform represents a positive development for improving information management and budget planning. To further enhance expenditure efficiency, regular reviews of public sector expenditures should be better integrated into the annual budgeting process. A stronger medium-term fiscal framework, one that includes credible medium-term revenues, spending strategies and contingency plans, would also help instill fiscal prudence and credibility, according to the IMF.
The reemergence of inflationary pressures requires a prudent approach to monetary policy, so that the authorities can ensure inflation returns safely within the tolerance margin. The temporary impact of the VAT increase and the end of the energy price cap, along with ongoing wage pressures, highlighted the risk that inflation expectations may become unanchored. Therefore, monetary policy remains appropriate, and interest rate cuts should resume only after wage and price growth moderates in a sustained manner. Taking into account the high uncertainties and the risks development, the BNR should be prepared to adjust the policy rate depending on economic conditions and price dynamics, the report said.
A gradual medium-term increase of exchange rate flexibility in both directions would improve resilience to economic shocks. Greater exchange rate flexibility, accompanied by clear communication, would improve economic resilience to external shocks. Alongside fiscal adjustment, this would help strengthen the weak external position, the IMF believes.
The resilience of Romania’s banking sector has improved, with stronger balance sheets. Banks are well capitalized and have liquidity. The BNR’s guidance on profit retention, combined with increased countercyclical capital buffers (CCyB), has improved the financial system’s resilience by increasing capital and capital reserves that can be released. Despite a recent deterioration, the quality of banking sector assets remains viable, with the non-performing loan (NPL) ratio close to the average, the release mentioned.
The progress of structural reforms is vital to stimulate sustainable growth amid extensive fiscal consolidation. The establishment of an independent agency to monitor large state-owned enterprises (SOE) is welcome. Timely appointment of leadership will allow the agency to operate at full capacity and strengthen oversight and governance in sectors dominated by state-owned companies. Improving the predictability and quality of regulation will boost business confidence and reduce the informal economy.
With an aging population, increasing labor force participation and raising productivity are also important, including through better availability of childcare programmes and investments in quality education, the IMF believes.
Romania’s transition to a low-carbon economy, alongside the completion of the EU-wide energy strategy, will help achieve energy security. Last autumn, the authorities submitted the updated energy and climate plan and the national energy strategy for 2025-35 aiming for net zero emissions by 2050. In order to meet this objective, additional subsidies should be considered to limit emissions in sectors not covered by the emissions trading scheme (ETS), including a complementary carbon tax on transport and construction. A fully integrated and interconnected energy market within the energy Union at Community level remains crucial, the IMF argues. AGERPRES
