IMF advises Romania to fight tax evasion

Romanian Prime Minister Marcel Ciolacu declared that he was happy after holding discussions with International Monetary Fund experts after their annual visit from 25 September and 4 October.

According to Romanian Finance Minister Marcel Bolos the IMF had advised the government to crack down on tax evasion. The IMF overall focused on four main subjects: the budget deficit, economic growth, taxes and fees, and predictable fiscal policy.

The budget deficit

Romania’s 2023 budget deficit target was estimated at 4.4% of GDP, but after the first 8 months, the deficit rose to 2.65%, or lei 42bn, and is expected to grow rapidly until the year-end.

Ciolacu said the government aims to end the year with a budget deficit of 5.5%. “Last year we had a deficit of 6.2%, the basic rule when you talk to the Commission is from 6.2% to decrease by 0.5%. “People are not stupid… I said from the beginning, if you want 4.4%, I can achieve it… but the patient will be dead. In my opinion, we will fall into a maximum deficit 5.5%.”

On the other hand, the IMF was not so optimistic, estimating that Romania will end the year with a deficit of 6% of GDP, with a return to 5% only in 2024. “The recently adopted fiscal package is a step in the right direction, but further reforms are needed. The initial fiscal deficit for 2023, of 4.4%, will be overcome and we forecast a deficit of 6% of GDP.

“Fiscal deficits will need to fall below 3% of GDP, as agreed with the European Commission, to stabilize public debt in the medium term, to help secure the necessary financing in the market at lower interest rates and to support the continued payment of EU funds,” IMF mission leader Jan Kees Martjin said.

Economic growth

The IMF noted Romania’s economic growth slowdown in the first half, due to weaker consumption caused by high inflation eroding real wages.

In 2023, economic growth is forecast at 2.3% of GDP, supported by a large increase in investment, the IMF said, adding that as fiscal consolidation also emerges, it will hit 3%, the IMF says. After the first 6 months of the year, the increase was only 1.7%, however. 

In August, the inflation rate dropped slightly to 9.43%, from 9.44% in July, and the IMF notes the tightening of monetary policy. Romania’s central bank raised the key interest rate to 7% to be maintained until the end of the year.

The IMF did not recommend that the government intervene to control prices to reduce inflation, which it said would lead to the compression of supply and the rise of other prices.

Taxes and fees

The IMF recommended a tougher fiscal regime for Romania, and criticised its 1% turnover tax on large companies, as “an additional burden”. Local observers commented, however, that while some firms have small profit margins, this is not the case with large banking institutions, for example. On the other hand, the IMF would like a tougher fiscal framework for SMEs, in which case it recommends higher taxes and a threshold of only EUR 60,000.

The IMF did not recommend progressive taxation. Tax revenues in Romania are very low compared to other European states and therefore we believe there is room for improvement collection, the Fund argued.  Ciolacu claimed that he is convinced that there will be no need for new taxes, however.

“We had a discussion with the IMF, we also looked at the document he was going to present. I explained the short and long term program. Let’s not confuse the fiscal reform with the measures taken (…) we must be careful this year-end and next year, so that the expenses are not out of control, as happened before. (…) I say that by being more in solidarity with each other we will also overcome this moment “, said the prime minister after a visit to the Coca-Cola Factory in Ploiesti on Wednesday.

Predictable fiscal policy

The IMF said “fiscal policy must be more predictable”. The document explains the “difficult financial situation of Romania”, which should be resolved quickly. Measures are needed with a general objective of the fiscal-budgetary consolidation through the efficient administration of public revenues,’ the Fund added.

Ciolacu said the IMF appreciated the measures taken by the government and that encouraged the continuation of investments in health, education, and infrastructure, adding that he is convinced that there will be no need for new taxes in Romania, if the government keeps its promises and continues the reorganization in the ministries.