The International Monetary Fund (IMF) said on Friday it raised its forecast for Romania's 2022 economic growth to 3.5% from 2.2% projected in April and advised the government to reduce the fiscal deficit.

In 2023, Romania's economy is seen rising 4.5% from 3.4% estimated in April, the IMF said in a press release. An IMF mission visited Bucharest from May 30 until June 10 to evaluate the state of the country's economy.

According to the IMF, after a solid recovery from the pandemic, Romania is now facing adverse spillovers from the war in Ukraine and rising inflation.

Moreover, the country is also confronting these new challenges from a weak fiscal position, the global lender said, adding that measures to alleviate the impact of surging prices, in particular for energy, should be temporary and targeted at the most vulnerable, to limit their budgetary cost and not hinder energy conservation.

"To rebuild fiscal space and support market borrowing for budget financing, policies to reduce the fiscal deficit over the medium term need to be introduced without delay. This should include ambitious tax reform to ensure that everyone pays their fair share," the IMF said.

The global lender also stressed that every effort needs to be made to use the available New Generation EU funds efficiently and that monetary policy should firmly aim at returning inflation and inflation expectations to the central bank target band, while financial sector policies need to preserve the strength of the banking system.

According to the IMF, although direct risks from the war are limited as Romania is a substantial grain producer, largely self-sufficient in energy with only limited imports from Russia, and other direct trade and financial links with Russia and Ukraine are negligible, a broad Russian gas shut-off would raise energy prices further and reduce activity in European trade partners.

Other risks could also worsen the economic growth outlook, as high inflation could reduce demand further and trigger a wage-price spiral; external and domestic financing conditions may tighten more than anticipated; and domestically, stalling reforms could weaken confidence and risk a credit rating downgrade.

On the upside, rapid implementation of reforms envisaged under Romania’s National Recovery and Resilience Plan could lift growth above the baseline, the IMF concluded.

Romania is set to receive 29.2 billion euro ($30.9 billion) in total through its Recovery and Resilience plan, consisting of 14.2 billion euro in grants and 14.9 billion euro in loans.

Currently, Romania has no ongoing funding agreement with the IMF.