## 1. The Unified Wage Law (cr17133)

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**Canonical URL:** [1. The Unified Wage Law (cr17133)](https://www.imf.org/-/media/files/publications/cr/2017/cr17133.pdf)

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### Context and macro-fiscal backdrop
- Output grew 4.8 percent in 2016; growth accelerated in 2016, closing the output gap.
- The cyclically adjusted budget deficit grew by 1½ percent of GDP in 2016.
- Headline general government deficit (cash basis) rose by 0.9 percent to 2.4 percent of GDP in 2016.
- ESA deficit for 2016 is estimated at 3 percent of GDP.
- On current policies, staff projects a deficit of 3.7 percent of GDP in 2017 and 3.9 percent of GDP in 2018.
- Staff recommendation: aim for a medium-term deficit of 1.5 percent of GDP; achieve this by reducing the 2017 deficit to around 2.3 percent of GDP and to 2 percent in 2018.

### Fiscal risk from the unified wage law and related measures
- Authorities plan to introduce a unified wage law to eliminate distortions in the public remuneration system.
- Staff assessment: the current draft would imply a large increase in average public wages posing considerable fiscal risks.
- Risk to competitiveness: higher public wages could induce similar private sector wage increases, undermining competitiveness.
- Longer-term fiscal risk: government’s 2017–2020 plan (including unified wage bill, reduction of social security contribution rates, and further tax cuts) could raise the deficit by 6 percent of GDP by 2022 (staff estimate), not factoring potential second-round effects.

### Quantified fiscal impacts (staff estimates and scenario figures)
- Fiscal Cost of Potential Additional Measures, 2017-2022 (Percent of GDP)
  - Revenue total: 3.4
    - Cut in social security contributions: 1.0
    - Differential reduced PIT: 1.4
    - Reduction in VAT to 18 percent: 0.4
    - Loss of dividends from SOEs: 0.3
    - Zero-rated VAT for real estate: 0.3
  - Expenditure total: 2.6
    - Unified wage law: 2.6
  - Total effect on the budget: 6.0
  - Note: Staff estimates based on preliminary information as of April 2017. Figures may not add up due to rounding off. Figures reported for the unified wage law represent the net effect on the budget (net of contributions to taxes and social security).

- Measures to Reduce the 2017 Fiscal Deficit and Yields (Percent of GDP; cash basis)
  - Reprioritize expenditures; failing that, enforce the 10 percent buffer on spending: 0.6
  - Reconsider implementation of pension point increase: 0.3
  - Enforce the cap on personnel spending: 0.2
  - Revenues from higher SOE dividends: 0.1
  - Other measures (including efficiency gains from revenue administration): 0.1

- Fiscal Balance Targets (Percent of GDP; cash basis)
  - Budget deficit under current policies (IMF estimate): 2017: -3.7; 2018: -3.9; 2019: -3.8
  - Authorities' budget target: 2017: -3.0; 2018: -3.0; 2019: -2.6
  - Measures needed (cumulative) to reach authorities' target: 2017: 0.8; 2018: 1.0; 2019: 1.2
  - IMF-recommended budget: 2017: -2.3; 2018: -2.0; 2019: -1.5
  - Additional measures needed (cumulative) to reach IMF-recommended budget: 2017: 0.7; 2018: 1.0; 2019: 1.1
  - Note: The 2017 target of 2.96 percent of GDP in cash terms corresponds to around 3 percent in ESA terms.

### Staff policy recommendations on the unified wage law and related reforms
- Revisit the unified wage law draft to reduce its cost in line with medium-term fiscal objectives.
- Implement the unified wage law only within available fiscal space and as part of broader public administration reform to create a more transparent and equitable pay system.
- Strengthen implementation of reforms included in the 2014 Public Administration Strategy to streamline the public sector, improve services, and reduce red tape.
- Moderate wage and pension growth to protect fiscal sustainability.
- Protect the revenue envelope by avoiding any further tax cuts; changes to tax rates should be part of a broader tax review.
- Accelerate reform of the tax administration (ANAF): implement a modern compliance risk management approach, strengthen the large taxpayers’ unit, and reform the IT system.
- Enhance expenditure efficiency and commitment controls: implement recommendations from expenditure reviews (starting with the Ministry of Transport), strengthen transparency and commitment controls for local investment programs, and assess the sustainability of the pension system.
- Improve compliance with fiscal rules: ensure full enforcement of the fiscal responsibility law, assess past performance against the fiscal rule in the budget, and further integrate the fiscal council's work into the budget process.

### Key cautionary points
- The unified wage law, as drafted, would significantly raise average public wages and pose fiscal and competitiveness risks.
- Without timely policy action, the 2017 deficit is set to exceed the EDP threshold of 3 percent of GDP.
- Medium-term consolidation should be supported by reforms to enhance public sector effectiveness, better EU funds absorption, and improved SOE governance.

---

### Box 3. The Sovereign Fund for Development and Investment

### Overview, structure and objectives (original proposal)
- Aim to launch in July 2017; intend to exclude the vehicle’s investments from the state budget while conforming to EU sector classification rules.
- Proposed name: Sovereign Fund for Development and Investment (Fondul Suveran de Dezvoltare si Investiţii, FSDI).
- Proposed legal form: joint stock company.
- Proposed asset scope: hold the state’s shares in SOEs.
- Proposed fiscal treatment: will not be part of the general government (while adhering to the accounting rules of the EU).
- Proposed financing sources: dividends of those companies; debt issuance.
- Proposed investment partners and instruments: partner with IFIs and the private sector; invest in infrastructure (e.g., highways, hospitals); recapitalize large Romanian companies including CEC and Eximbank; set up new manufacturing in disadvantaged regions.

### Potential benefits
- Could accelerate investment in Romania.
- Independent expertise in FSDI could accelerate administrative, procurement and oversight aspects of investment spending.
- Could enhance effectiveness and efficiency of EU-funded spending.

### Fiscal and governance risks / modalities to define
- FSDI could generate significant fiscal risks.
- Key unresolved aspects:
  - whether SOEs included in the FSDI are part of general government;
  - how the loss of dividends from the general budget will be compensated;
  - how projects will be selected and the role of the public investment program and national investment agency;
  - process for selection and appointment of supervisory and managing boards.

### Best-practice guidance
- Consider Polish Development Fund (PFR) as a possible model.
- Design features to follow best international practices: appointment of management, transparency, auditing, selection of investment projects, and cautious use of state guarantees.
- Emphasize prudent asset management, coordination with government institutions, and stringent accountability mechanisms.

---

### Annex I. Debt Sustainability Analysis

### Baseline projections and key drivers
- Public debt-to-GDP: 39.1 percent (current) → 44.8 percent (2022, baseline).
- Gross financing needs: around 9 percent of GDP in 2016; projected to average around 8 percent of GDP and remain below 10 percent over the projection horizon.
- Under the baseline, budget deficit exceeds 3 percent every year until 2021, reaching 2.9 percent of GDP by 2022.
- Real GDP growth projection: 4.2 percent for 2017; medium-term growth stabilizes at 3.3 percent of GDP.
- Projected 3-year adjustment in the cyclically-adjusted primary balance (CAPB): 1.0 percent of GDP.
- Average maturity of domestic government securities: 3.5 years.
- Foreign-currency denominated debt: about half of total public debt.
- Non-residents’ share in domestic debt securities holdings: 17.6 percent.
- SOE debt: around 7 percent of GDP.

### Risk assessment and stress-test scenarios
- Exchange rate volatility and exposure to capital outflows present notable risks; debt-profile vulnerability indicators exceed upper early warning benchmarks.
- Real GDP growth shock (standard): debt reaches about 55 percent of GDP by 2022; public gross financing needs increase above the 10 percent threshold in 2017–2019.
- Recession scenario (illustrative): assumes real GDP growth drops to 0.5 percent in 2018; public debt reaches 60 percent in 2022; public gross financing needs average around 11 percent of GDP over the medium term.
- Combined shock (largest effects of individual shocks): debt reaches 60 percent of GDP in 2022; gross financing needs peak at around 13 percent of GDP in 2019 and average 12 percent thereafter.
- Stochastic results: under symmetric distribution, high certainty debt remains below 60 percent of GDP over medium term; under asymmetric (restricted) distribution, 75 percent certainty debt will not exceed 60 percent of GDP.

### External debt and current account outlook
- Projected medium-term current account deficit: -2.7 percent of GDP in 2022.
- External debt-to-GDP ratio expected to decline gradually through 2022.
- Financing in recent years: strong increase in FDI inflows helped finance widening current account deficit in 2016.

---

### External Debt Sustainability and External Sector Assessment

### Main findings and metrics
- Gross external debt: 54.6 percent of GDP in 2016 (2.0 percentage points lower than 2015).
- Around one-third of external debt stock was public debt.
- Around 25 percent of external debt was at short-term maturities (mainly non-bank sector).
- Short-term financing risk for non-bank private sector limited as substantial portion of short-term debt are intra-company loans.
- Bound tests: a 30 percent currency depreciation shock would markedly increase external-debt-to-GDP ratio over the medium term.
- Net international investment position (IIP): -48.6 percent of GDP in 2016.
- Current account: cyclically-adjusted CA norm = -3.3 percent of GDP; cyclically-adjusted CA = -2.1 percent of GDP in 2016; model estimated CA gap = 1.2 percent of GDP.
- EBA-lite REER undervaluation estimates: around 4–7 percent (three EBA-lite models) and specific EBA-lite indicants of 6.0 percent and 6.8 percent undervaluation cited.

### Selected baseline external debt time-series (percent of GDP)
- External debt (baseline): 2012: 74.6; 2013: 68.0; 2014: 63.0; 2015: 56.5; 2016: 54.6; 2017: 52.9; 2018: 49.8; 2019: 47.3; 2020: 44.9; 2021: 43.6; 2022: 41.2.
- Gross external financing need (in percent of GDP): 2012: 31.4; 2013: 31.6; 2014: 27.9; 2015: 27.4; 2016: 22.8; 2017: 22.8; 2018: 22.3; 2019: 19.2; 2020: 18.3; 2021: 17.6; 2022: 16.8.

### Risk Assessment Matrix — selected risks and policy responses
- Risk: Significant further strengthening of the US dollar and/or higher rates
  - Relative likelihood: Medium
  - Policy response: Utilize some fiscal financing buffer; allow exchange rate flexibility while offsetting excessive volatility.
- Risk: Policy uncertainty and divergence
  - Relative likelihood: High/Medium
  - Policy response: Preemptively increase FX reserves; maintain adequate fiscal buffers.
- Risk: Continued fiscal relaxation
  - Relative likelihood: High/Medium
  - Policy response: Restrain future wage increases; cut lower priority expenditure; improve tax administration.
- Risk: Slippages in structural reforms
  - Relative likelihood: High/Medium
  - Policy response: Improve EU projects implementation capacity; improve procurement and anti-corruption efforts.

---

### Reserve Adequacy

### Key figures and assessment
- Reserve level at end-December 2016: €37.9 billion.
- Reserve level is above standard rules of thumb: three months coverage of prospective imports; 20 percent of broad money.
- Reserve level in line with the New ARA-metric for emerging markets.
- Comparing with 100 percent short-term debt (at remaining maturity) benchmark, reserves are slightly above full coverage in 2016.

### Policy implication
- In light of downside external and domestic risks, a prudent stance with moderate reserve accumulation remains appropriate.

---

### Monetary Policy and Financial Sector

### Monetary policy
- Policy rate has remained at 1.75 percent since May 2015; staff notes policy rate at 1.75 percent.
- Corridor around policy rate: ±1.50 percentage points.
- Excess liquidity pushed money market rate close to the lower bound; in real terms (adjusted for underlying inflation) it is negative.
- Staff projects that without monetary tightening, inflation will exceed upper end of target band by mid-2018.
- Staff recommendations:
  - Central bank should remain vigilant and consider tightening monetary conditions.
  - Reduce gap between short-term market and policy rate by narrowing interest rate corridor and absorbing excess liquidity (e.g., issuance of certificates of deposit and deposit-taking operations).
  - Prepare ground for eventual policy rate hike later when inflation pressures are clearer.
  - In absence of corrective fiscal measures, monetary policy will need to shoulder bigger burden.

### Financial sector findings and risks
- Significant reduction in banks’ NPLs; overall NPL ratio fell from 21.5 percent in September 2014 to less than 10 percent presently.
- NPLs for corporates remain at around 19 percent (EBA definition, Dec. 2016).
- Since launch of Prima Casa in 2009 until end-November 2016, 203,783 government guarantees provided, total approximately RON 17.5 billion (2.2 percent of GDP).
- Banking-sector average total capital ratio: 18.3% as at December 2016.
- ROA 1.1 percent and ROE 10.7 percent at year end 2016.
- Risks and recommendations:
  - An increase in average interest rate by 200 basis points could raise the DSTI ratio by 6–10 percentage points.
  - Monitor banks’ exposure to households and government; address emerging risks.
  - Continue reducing NPLs—especially for corporates—and improve access to credit for SMEs by raising SME capitalization, accelerating property registration, strengthening insolvency framework, and improving specialized bank expertise.

---

### Structural Reforms, EU Funds Absorption, SOEs, and Insolvency Framework

### EU funds absorption and public investment
- Only one third of total capital spending is EU-funded.
- Raising EU funds absorption to 95 percent for the 2014–2022 programming period could raise potential growth to about 4½ percent—1 percentage point above staff’s baseline—by increasing the efficiency-adjusted public capital stock.
- Total public investment would increase by close to 2 percent of GDP over the medium term under the 95 percent absorption scenario.
- Strengthening PIM institutions to EU average would raise the efficiency-adjusted public capital stock by about 15 percent.

Staff recommendations to raise EU funds absorption:
- Conduct strong feasibility assessments; simplify administrative burden.
- Better prioritize large infrastructure projects by integrating prioritization into the budget and publishing project lists with budgeted amounts.
- Strengthen public procurement legal framework; eliminate overlapping competences and improve competition.
- Systematically limit domestic financing of EU-eligible projects; ensure stable funding for strategic projects.

### State-owned enterprises (SOEs)
- SOEs prominent in transport and energy; service delivery poor, profitability weak, arrears significant.
- SOE restructuring fiscal costs (severance and complementary state payments) expected about ½ percent of GDP.
- Typical severance payments from SOEs around 6 to 12 months of wages.
- Staff recommendations:
  - Restart restructuring and privatization of SOEs; strengthen Ministry of Public Finances unit monitoring SOEs and overseeing corporate governance law implementation.
  - Exclude banks from SOE corporate governance law.
  - Strengthen reporting and accountability of SOE investment projects in budget documents.
  - If creating an investment fund with shares of SOEs, base on best international practices.

### Insolvency and SME debt resolution
- Business insolvency law provisions are "broadly in line with international best practice."
- Areas for improvement:
  - Encourage use of pre-insolvency procedures.
  - Streamline and speed insolvency process, particularly for SME debt restructuring.
  - Harmonize other laws (e.g., tax) to support insolvency objectives.
- Personal insolvency law (not yet in effect) could provide good faith debtors a fresh start; staff advises detailed impact assessment and safeguards to protect secured creditor rights and avoid moral hazard.

---

### Implementation, Recent Developments and Key Statistics (selected)

- GDP growth: 4.8 percent in 2016; 5.6 percent (y/y) in Q1 2017 (flash estimates).
- Private consumption contribution: 7.3 percent in 2016.
- Unemployment rate: 5.9 percent (average annual).
- Wage bill: 7.5 percent of GDP in 2016; 10 percent of GDP in 2018; authorities plan to keep wage bill around 8 percent of GDP from 2018 onward.
- Convergence Program yields: around 0.2 percent of GDP in 2017 and 0.6 percent of GDP in 2018.
- Inflation: 0.2 percent (y/y) in March 2017; 0.6 percent (y/y) in April 2017; core inflation ~1 percent (y/y) in March–April 2017.
- Monetary policy rate: 1.75 percent; corridor ±1.50 percentage points.
- Required reserve ratios: leu-denominated liabilities 8 percent; forex-denominated liabilities 8 percent (after cuts, most recently May 5, 2017).
- Current account: deficit widened in 2016 by 1.1 percent of GDP; projected medium-term current account deficit: -2.7 percent of GDP (2022).
- External short-term debt share: around 25 percent.
- Gross external debt: 54.6 percent of GDP in 2016.
- International reserves: €37.9 billion at end-December 2016.
- Banking sector capital ratio: 18.3% (Dec 2016).
- NPL ratio: declined from 21.5 percent in Sept. 2014 to less than 10 percent presently.
- ROA: 1.1 percent (2016); ROE: 10.7 percent (2016).
- Gross financing needs: around 9 percent of GDP in 2016; projected to average around 8 percent.

*Source: IMF staff report excerpts and annexes (cr17133).*

### 1. The Unified Wage Law_________________________________________________________________________ 22

### 1. The Unified Wage Law

### Context and macro-fiscal backdrop
- Growth accelerated in 2016, closing the output gap; pro-cyclical fiscal policy contributed to this expansion. Output grew 4.8 percent in 2016.
- The cyclically adjusted budget deficit grew by 1½ percent of GDP in 2016. The headline general government deficit (cash basis) rose by 0.9 percent to 2.4 percent of GDP in 2016. The ESA deficit for 2016 is estimated at 3 percent of GDP.
- On current policies, staff projects a deficit of 3.7 percent of GDP in 2017 and 3.9 percent of GDP in 2018.
- Staff recommendation: aim for a medium-term deficit of 1.5 percent of GDP to rebuild buffers; achieve this by reducing the 2017 deficit to around 2.3 percent of GDP and to 2 percent in 2018.

### Fiscal risk from the unified wage law and related measures
- The authorities are planning to introduce a unified wage law to eliminate distortions in the public remuneration system.
- Staff assessment: the current draft would imply a large increase in average public wages that would pose considerable fiscal risks.
- Risk to competitiveness: a rise in public wages could lead to similar wage increases in the private sector, undermining competitiveness.
- Longer-term fiscal risk: the government’s 2017–2020 plan (including unified wage bill, reduction of social security contribution rates, and further tax cuts) has not been finalized but, if adopted, could raise the deficit by 6 percent of GDP by 2022. This calculation does not factor in any potential second-round effects that may reduce the cost by expanding the economy.

### Quantified fiscal impacts (staff estimates and scenario figures)
- Fiscal Cost of Potential Additional Measures, 2017-2022 (Percent of GDP)
  - Revenue total: 3.4
    - Cut in social security contributions: 1.0
    - Differential reduced PIT: 1.4
    - Reduction in VAT to 18 percent: 0.4
    - Loss of dividends from SOEs: 0.3
    - Zero-rated VAT for real estate: 0.3
  - Expenditure total: 2.6
    - Unified wage law: 2.6
  - Total effect on the budget: 6.0
  - Note: Staff estimates based on preliminary information as of April 2017. Figures may not add up due to rounding off. Figures reported for the unified wage law represent the net effect on the budget (net of contributions to taxes and social security).

- Measures to Reduce the 2017 Fiscal Deficit and Yields (Percent of GDP; cash basis)
  - Reprioritize expenditures; failing that, enforce the 10 percent buffer on spending: 0.6
  - Reconsider implementation of pension point increase: 0.3
  - Enforce the cap on personnel spending: 0.2
  - Revenues from higher SOE dividends: 0.1
  - Other measures (including efficiency gains from revenue administration): 0.1

- Fiscal Balance Targets (Percent of GDP; cash basis)
  - Budget deficit under current policies (IMF estimate): 2017: -3.7; 2018: -3.9; 2019: -3.8
  - Authorities' budget target: 2017: -3.0; 2018: -3.0; 2019: -2.6
  - Measures needed (cumulative) to reach authorities' target: 2017: 0.8; 2018: 1.0; 2019: 1.2
  - IMF-recommended budget: 2017: -2.3; 2018: -2.0; 2019: -1.5
  - Additional measures needed (cumulative) to reach IMF-recommended budget: 2017: 0.7; 2018: 1.0; 2019: 1.1
  - Note: The 2017 target of 2.96 percent of GDP in cash terms corresponds to around 3 percent in ESA terms.

### Staff policy recommendations on the unified wage law and related reforms
- Revisit the unified wage law draft to reduce its cost in line with medium-term fiscal objectives.
- Implement the unified wage law only within available fiscal space and as part of a broader public administration reform to create a more transparent and equitable pay system.
- Strengthen implementation of reforms included in the 2014 Public Administration Strategy to streamline the public sector, improve services, and reduce red tape.
- Moderate wage and pension growth to protect fiscal sustainability.
- Protect the revenue envelope by avoiding any further tax cuts; changes to tax rates should be part of a broader tax review.
- Accelerate reform of the tax administration (ANAF): implement a modern compliance risk management approach, strengthen the large taxpayers’ unit, and reform the IT system.
- Enhance expenditure efficiency and commitment controls: implement recommendations from expenditure reviews (starting with the Ministry of Transport), strengthen transparency and commitment controls for local investment programs, and assess the sustainability of the pension system in light of recent increases.
- Improve compliance with fiscal rules: ensure full enforcement of the fiscal responsibility law, assess past performance against the fiscal rule in the budget, and further integrate the fiscal council's work into the budget process.

### Key cautionary points highlighted by staff
- The unified wage law, as drafted, would significantly raise average public wages and pose fiscal and competitiveness risks.
- Without timely policy action, the 2017 deficit is set to exceed the EDP threshold of 3 percent of GDP.
- Medium-term consolidation should be supported by reforms to enhance public sector effectiveness, better EU funds absorption, and improved SOE governance.

*Source: IMF staff summary based on "1. The Unified Wage Law" (cr17133).*

### 17. The authorities emphasized their strong commitment to adhere to the European fiscal

### 17. The authorities emphasized their strong commitment to adhere to the European fiscal

### Fiscal stance and 2017 deficit target
- Authorities committed to adhere to the European fiscal rules and recognized meeting the 2017 deficit target will be challenging.
- They will monitor budget execution closely and take compensatory measures if needed.

### Unified wage law
- Agreed with staff on the need for gradual implementation.
- Authorities noted the fiscal impact may be lower than anticipated because the law would cancel entitlements related to future wages granted by the Constitutional Court.

### Revenue administration
- Revenue administration is a government priority; authorities expressed confidence that implementation of key identified actions for ANAF would improve revenue collection.
- Authorities requested follow-up technical assistance on improving compliance in the segment of high net worth individuals.
- World Bank support: overhaul of ANAF’s IT system through the Revenue Administration Modernization Program (RAMP) — progress has been slow.

### Structural reforms: public and private investment
Findings
- Improving public and private investment is important for higher sustainable growth.
- Capital spending has outpaced peers, but quality of Romania’s infrastructure is amongst the lowest in the EU.
- Only one third of total capital spending is EU-funded.
- Raising EU funds absorption to 95 percent for the programming period 2014–2022 could raise potential growth to about 4½ percent—1 percentage point above staff’s baseline—by increasing the efficiency-adjusted public capital stock.
- Total public investment would increase by close to 2 percent of GDP over the medium term under the 95 percent absorption scenario.
- Strengthening quality of public investment management (PIM) institutions to the average of EU countries would raise the efficiency-adjusted public capital stock by about 15 percent.

Staff recommendations to raise EU funds absorption
- Preparation: Conduct strong feasibility assessments on identified large infrastructure projects, strictly following standards required for EU financing; simplify administrative burden.
- Prioritization: Better prioritize large infrastructure projects by integrating project prioritization in the budget process and publishing the list with budgeted amounts allocated to each project.
- Procurement: Strengthen the legal framework for public procurement by streamlining the fragmented system, eliminating overlapping competences, and improving competition.
- Funding source: Systematic effort to limit domestic financing of projects that qualify for EU funds, including making eligibility checks compulsory; ensure a stable source of funding for strategic projects over the medium-term.

### State-owned enterprises (SOEs)
Findings
- SOEs play a notable role in transport and energy but service delivery has been poor, profitability is weak, and arrears are still significant.
- Announcing a timeframe for IPOs of selected large SOEs, such as Hidroelectrica, would help raise Romania’s international profile.
- SOE restructuring is estimated to have a limited impact on employment, of less than 1 percent of the labor force.
- Fiscal costs of SOE reforms (severance payments and complementary state payments for layoffs) expected to be about ½ percent of GDP.
- Typical severance payments from SOEs are usually around 6 to 12 months of wages.

Staff recommendations
- Restart restructuring and privatization of SOEs; strengthen the Ministry of Public Finances unit monitoring SOEs and overseeing corporate governance law implementation.
- Exclude banks from the SOE corporate governance law since they are already subject to a specialized corporate governance law.
- Strengthen reporting and accountability of SOE investment projects in budget documents and budget execution reports.
- If creating an investment fund with shares of SOEs, base it on best international practices concerning appointment of management, transparency, auditing, selection of investment projects, and use of state guarantees to minimize fiscal risks.

### Private investment: labor market and corruption
Labor market recommendations
- Address low labor force participation, high youth unemployment, rapid aging, and high emigration.
- Improve vocational education and training and strengthen the capacity of the National Employment Agency.
- Establish a transparent minimum wage setting mechanism based on clear and objective criteria, especially labor productivity; recent increases in the minimum wage risk undermining competitiveness and job creation for low-skilled employees.

Anti-corruption recommendations
- Continue the fight against corruption to raise tax collections, improve allocation of public resources, and attract investment.
- Focus on effective implementation of the national anti-corruption strategy, preventing conflicts of interest in public procurement, strengthening management of seized assets, enhancing monitoring of asset declarations, and effectively implementing AML/CFT measures in line with international standards.

### Authorities’ views on reforms
- Broad agreement with staff’s recommendations to improve the efficiency of public investment and accelerate EU funds absorption.
- Noted progress in appointing managing authorities and lifting ex-ante conditionality will help accelerate absorption.
- Privatization and IPOs depend on progress establishing the sovereign fund.
- Agreed that the fight against corruption should continue.

### Monetary policy
Findings
- Policy rate has remained at 1.75 percent since May 2015.
- Excess liquidity in the system has pushed the money market rate close to the lower bound of the interest rate corridor (the rate on the NBR’s deposit facility); in real terms (adjusted for underlying inflation) it is negative.
- The gap between the interbank market and the policy rate undermines the effectiveness of the monetary policy framework.
- Underlying inflation and credit growth subdued, but inflationary pressure is building due to rising oil prices, inflation in trading partners, tight labor market conditions, and additional fiscal stimulus.
- Staff projects that without monetary tightening, inflation will exceed the upper end of the target band by mid-2018.
Recommendations
- Central bank should remain vigilant and consider tightening monetary conditions.
- Reduce the gap between the short-term market and the policy rate by narrowing the interest rate corridor and absorbing excess liquidity (e.g., issuance of certificates of deposit and deposit-taking operations).
- Prepare the ground for an eventual policy rate hike later when there is greater clarity regarding inflation pressures.
- In the absence of corrective fiscal measures, monetary policy will need to shoulder a bigger burden in managing domestic demand.

Authorities’ views
- Prefer to be on hold until inflation becomes more visible; NBR forecasts inflation tending to approach the upper bound of the inflation target variation band towards the end of the projection horizon but cites high uncertainties.
- Concern that higher domestic rates could lead to short-term capital inflows given the regional low interest rate environment.

### External position
- Staff’s assessment: Romania’s external position in 2016 was broadly in line with underlying fundamentals.
- Three EBA-lite models suggest a moderate REER undervaluation of around 4–7 percent.
- Decline in the REER (CPI based) in 2016 likely predominantly due to strong appreciation of the dollar after the US elections.
- Staff assesses recent wage growth has exceeded productivity gains, suggesting external competitiveness may have weakened.
- Reserve coverage is broadly adequate according to all reserve adequacy metrics.
- NBR increased FX sales in late 2015 and early 2016 due to excess liquidity and worsening global sentiment; interventions have been limited since then.

### Financial sector
Findings
- Significant reduction in banks’ NPLs; NPLs for corporates remain at around 19 percent.
- NPLs fell due to NBR’s efforts to encourage NPL sales and write-offs.
- Overall credit growth sluggish; mortgage lending has grown primarily due to the government’s Prima Casa guarantee program.
- Since the launch of Prima Casa in 2009 until end-November 2016, 203,783 government guarantees were provided, for a total of approximately RON 17.5 billion (2.2 percent of GDP).
Risks and recommendations
- Rising interest rates could burden household balance sheets: an increase in the average interest rate by 200 basis points could raise the debt service-to-income (DSTI) ratio by 6–10 percentage points.
- Potential market risk from large holdings of government debt by Romanian banks.
- Monitor growing banks’ exposure to households and the government; central bank should address emerging risks.
- Continue efforts to reduce NPLs—especially for corporates—and improve access to credit for SMEs through raising SME capitalization, accelerating property registration, strengthening the insolvency framework, and improving specialized expertise at banks.

*Italic: IMF staff summary of chapter content provided in the source document.*

### 31. The framework for private debt resolution, particularly for SMEs, could be further

### 31. The framework for private debt resolution, particularly for SMEs, could be further strengthened

### Assessment of insolvency framework and IMF staff findings
- The provisions of the business insolvency law are "broadly in line with international best practice."
- Room for improvement identified in three main areas:
  - Encouraging the use of pre-insolvency procedures.
  - Streamlining procedures and enhancing the speed of the insolvency process, particularly for SME debt restructuring.
  - Ensuring that other laws (for example, tax laws) are harmonized so as to fully support the objectives of the insolvency law.
- The recently enacted personal insolvency law (which is not yet in effect) could provide good faith debtors with a fresh start while maintaining credit discipline.
- Staff advice regarding the personal insolvency law:
  - Secondary legislation for implementing the law should be informed by a detailed impact assessment including for banks.
  - Implementation should safeguard against eroding secured creditor rights and moral hazard.
- A Selected Issues Paper analyzes the impact of the recent reforms to the insolvency laws and identifies areas for future work.

### Empirical indicators and context (as reported)
- Main difficulties in accessing bank financing (NBR, Survey on the access to Finance by NFCs, Dec. 2016): factors cited include "High level of interest rates", "Collateral requirements", "Contractual clauses", and "Bureaucracy" (share of NFCs indicating these factors represent either a significant or moderate difficulty).
- Non-performing Loan Ratio by Company Size (Percent, EBA definition): data source NBR, Data for December 2016.
- Debt Recovery from Insolvency and Bank Credit (Selected countries, percent): Bank Credit to NFCs, 2014 (Percent of GDP) and Estimated Recovery Rate (Percent of claims). Source: World Bank, Doing Business Report, 2014.

### Authorities’ views
- Authorities broadly agreed with staff’s views.
- Assessment points by authorities:
  - Immediate threats to financial stability have abated.
  - Medium-term risks from banks’ exposure to households and government debt are rising and require careful monitoring.
  - Additional capital requirements and lower DSTI ratio ceilings were mentioned as possible remedial measures.
  - The drop in the volume of loans to NFCs, particularly to SMEs, is worrisome for economic growth potential and credit institutions’ capacity to generate operating profits.
- Authorities agreed that the potential impact of the personal insolvency law on banks could usefully be assessed as part of the forthcoming FSAP planned for 2017-18.

### Staff appraisal — implications for policy and broader reforms
- Macro and fiscal context:
  - Romania made important progress with reforms after the global financial crisis, but successive tax cuts, wage increases in excess of productivity, and limited high-quality public investment are beginning to threaten gains.
  - It is imperative to reorient policies from focusing on fueling consumption to supporting investment.
- Fiscal policy recommendations:
  - Focus on gradually reducing deficits under a clear medium-term anchor.
  - Refrain from further tax cuts and moderate the increase of the wage bill and pensions.
  - Target a medium-term deficit of 1.5 percent of GDP to rebuild buffers.
  - The planned unified wage law should be carefully assessed and modified to align with medium-term fiscal objectives, create a transparent and equitable pay system, and avoid labor market distortions.
- Public sector and structural reforms:
  - Strengthen ANAF to tackle pervasive tax evasion and support revenue collections.
  - Enhance expenditure efficiency by implementing recommendations from recent expenditure reviews and strengthening transparency and commitment controls for local investment programs.
  - Assess the sustainability of the pension system.
  - Reenergize macro-critical structural reforms to support efficient investment and faster income convergence with the EU, including strengthening public investment management institutions to fully utilize EU funds.
  - Improve the performance of SOEs by restarting privatization and restructuring programs and implementing the corporate governance law.
- Anti-corruption:
  - Continue the fight against corruption through effective implementation of the national anti-corruption strategy, preventing conflict of interest in public procurement, enhancing detection of proceeds of corruption, and strengthening the management of seized assets.
- Monetary and financial sector policy:
  - The central bank should consider tightening monetary conditions: inflation is expected to exceed the upper end of the NBR’s target band by mid-2018 on account of rising inflation in trading partners, high wage growth amidst tight labor market conditions, and the additional fiscal impulse.
  - Given lags in the monetary transmission mechanism, the NBR should start supporting higher market rates by narrowing the interest rate corridor and absorbing excess liquidity to lay groundwork for a subsequent rate hike.
  - Interventions in the foreign exchange market should be limited to smoothing excessive volatility.
  - The NBR should closely monitor the growing exposure of banks to households and government debt and address any emerging risks.
- Financial stability:
  - Romania stands out for significant progress in reducing NPLs and the central bank should remain on guard for emerging risks in the financial sector.
- Consultations:
  - It is recommended to hold the next Article IV consultation on the standard 12-month cycle.

*IMF staff report excerpt (cr17133).*

### Box 3. The Sovereign Fund for Development and Investment

### Box 3. The Sovereign Fund for Development and Investment

### Overview and intent
- The Romanian government is designing a sovereign fund to support investment, with the aim of launching it in July 2017.
- Intention: exclude this vehicle’s investments from the state budget, while still conforming to the sector classification rules of the EU.
- Exact modalities are not yet known; likely to include elements of the original proposal in the newly-elected government’s economic plan.

### Structure, objectives, and financing (original proposal)
- Proposed name: Sovereign Fund for Development and Investment (Fondul Suveran de Dezvoltare si Investiţii, FSDI).
- Proposed legal form: set up as a joint stock company.
- Proposed asset scope: will hold the state’s shares in SOEs.
- Proposed fiscal treatment: will not be part of the general government (while adhering to the accounting rules of the EU).
- Proposed financing sources:
  - Dividends of those companies.
  - Debt issuance.
- Proposed investment partners and instruments:
  - Partner with IFIs and the private sector (for example, in the form of PPPs).
  - Invest in infrastructure projects (e.g., highways, hospitals).
  - Recapitalize large Romanian companies, including the state-owned banks, CEC and Eximbank.
  - Set up new manufacturing companies in disadvantaged regions.

### Potential benefits (as noted)
- A public entity could play a role in accelerating investment in Romania.
- Independent expertise implicit in the FSDI could accelerate administrative, procurement and oversight aspects of investment spending.
- The FSDI could be considered as a possible mechanism to enhance the effectiveness and efficiency of EU-funded spending.

### Fiscal and governance risks / key modalities still to be defined
- A vehicle like the FSDI could also generate significant fiscal risks.
- Key aspects still to be defined include:
  - (i) whether all SOEs included in the FSDI are part of general government;
  - (ii) how the loss of dividends form the general budget will be compensated;
  - (iii) how projects will be selected and what role the public investment program and national investment agency will play;
  - (iv) the process for selection and appointment of supervisory and managing boards.

### Possible model and precedent
- The authorities are considering the Polish Development Fund (PFR) as a possible model.
- PFR background (as noted):
  - Announced in February 2016.
  - Integrates the Polish state-owned development bank (BGK) and the state-owned investment fund (PIR), aiming to raise their efficiency.
  - The fund plans, inter alia, to finance small and large domestic companies, finance infrastructure, and support exports.

### Best-practice guidance and recommended institutional design features
- The FSDI should be based on best international practices covering:
  - Appointment of management.
  - Transparency.
  - Auditing.
  - Selection of investment projects.
  - Use of state guarantees to minimize potential fiscal risks.
- Emphasis should be placed on:
  - Prudent management of assets.
  - Coordination with other government institutions.
  - Transparent rules and operations with stringent mechanisms to ensure accountability and prevent misuse.

*Source: IMF staff summary contained in Box 3 of the PDF chapter "cr17133 - Box 3. The Sovereign Fund for Development and Investment".*

### Annex I. Debt Sustainability Analysis

### Annex I. Debt Sustainability Analysis

### Overview and headline projections
- Public debt in Romania is expected to remain relatively low but rise gradually over the medium term.
- Baseline projection: public debt-to-GDP ratio projected to reach 44.8 percent by 2022 from the current level of 39.1 percent.
- Gross financing needs: around 9 percent of GDP in 2016; expected to remain contained below 10 percent over the projection horizon and averaging around 8 percent of GDP.
- Under the baseline, the budget deficit is expected to exceed 3 percent every year until 2021, and reach 2.9 percent of GDP by 2022.

### Baseline dynamics, drivers, and realism of projections
- Debt level:
  - Gross debt (including guarantees) projected to rise gradually to 44.8 percent in 2022.
- Fiscal balance and adjustment:
  - Budget deficit worsens in 2017 and 2018 before gradually improving to 2.9 percent of GDP in 2022.
  - Revenue deterioration in 2017–2018 driven by 2017 revenue cuts and 2015 tax code measures entering into effect in 2017; full effects taken into account in 2018.
  - Spending increases reflect wage and pension increases implemented in 2017, with full effects taken into account in 2018.
  - Assumption: absorption of EU funds will gradually improve over the medium term.
  - Projected 3-year adjustment in the cyclically-adjusted primary balance (CAPB) is 1.0 percent of GDP.
- Growth assumptions and realism:
  - Real GDP growth projection: 4.2 percent for 2017; medium-term growth stabilizes at 3.3 percent of GDP.
  - Boom-bust analysis not triggered because the three-year cumulative change in the credit-to-GDP ratio does not exceed 15 percent.
- Maturity and rollover:
  - Authorities maintain a foreign currency financing buffer (excluding privatization proceeds).
  - Average maturity of government securities issued on the domestic market is 3.5 years.
  - Foreign-currency denominated debt accounts for about half of total public debt.
  - Non-residents’ share in domestic debt securities holdings: 17.6 percent.

### Risk assessment and debt-profile vulnerabilities
- Exchange rate volatility and exposure to international capital outflows present notable risks, with associated debt-profile vulnerability indicators exceeding the upper early warning benchmarks.
- Debt sensitivity to GDP growth surprises is high; shocks to real GDP growth shift the debt trajectory up significantly.
- Contingent liabilities:
  - Barring unexpected events, the effect on public debt of potential contingent liabilities would be limited.
  - SOE debt is estimated at around 7 percent of GDP (including SOEs under insolvency procedures).

### Stochastic results and fan-chart findings
- Under the symmetric distribution of risk, there is a high level of certainty that debt will remain below 60 percent of GDP over the medium term.
- Under the asymmetric (restricted) distribution where no positive shocks to the primary balance are allowed, there is a 75 percent certainty that debt will not exceed 60 percent of GDP in the medium term.

### Stress test scenarios and outcomes
- Real GDP growth shock (standard):
  - Debt reaches about 55 percent of GDP by 2022.
  - Public gross financing needs increase markedly in 2017–2019, in excess of the 10 percent threshold.
- Recession (illustrative) scenario:
  - Assumes a drop in real GDP growth to 0.5 percent in 2018, with a gradual recovery thereafter.
  - Under this scenario, public debt reaches 60 percent in 2022.
  - Public gross financing needs average around 11 percent of GDP over the medium term.
- Combined shock (largest effects of individual shocks on all relevant variables: real GDP growth, inflation, primary balance, exchange rate and interest rate):
  - Debt would reach 60 percent of GDP in 2022 without showing signals of a declining trajectory.
  - Gross financing needs peak at around 13 percent of GDP in 2019, averaging 12 percent in the remaining years of the projection horizon.
- Other shocks reported:
  - Primary balance shock and real interest rate shock were analyzed; debt ratio remains under 60 percent under several single-shock scenarios (including contingent liability shock), but real GDP shocks and combined shocks produce the largest adverse effects.

### External debt and current account outlook
- Projected medium-term current account deficit: -2.7 percent of GDP in 2022.
- External debt-to-GDP ratio expected to continue to decline gradually through 2022.
- Historical context:
  - Current account deficit reduced from above 10 percent of GDP in 2008 to below 2 percent of GDP by 2013, driven by exports and import compression.
  - The current account deficit widened again more recently, with strong imports owing to improved consumption.
- Financing composition and outlook:
  - The current account deficit in the last two years was financed by a combination of private and public inflows.
  - Strong increase in FDI inflows helped finance the widening current account deficit in 2016; FDI net flows projected to continue contributing to financing the current account deficit.
  - Decline in external debt as share of GDP since 2012 partly reflects deleveraging in the banking sector.

### Key numeric highlights (selected)
- Public debt-to-GDP: 39.1 percent (current) → 44.8 percent (2022, baseline).
- Gross financing needs: around 9 percent of GDP (2016); projected to average around 8 percent of GDP and remain below 10 percent.
- Budget deficit: exceeds 3 percent every year until 2021; 2.9 percent of GDP in 2022.
- Real GDP growth: 4.2 percent (2017); 3.3 percent (medium term).
- Recession scenario growth assumption: 0.5 percent in 2018.
- Debt under real GDP growth shock: about 55 percent of GDP by 2022.
- Debt under recession and combined shocks: 60 percent of GDP by 2022.
- Gross financing needs under recession scenario: average around 11 percent of GDP over the medium term.
- Gross financing needs under combined shock: peak around 13 percent of GDP in 2019; average 12 percent thereafter.
- SOE debt: around 7 percent of GDP.
- Foreign-currency denominated public debt: about half of total public debt.
- Non-resident holdings of domestic public debt securities: 17.6 percent.
- Average maturity of domestic government securities: 3.5 years.
- Projected medium-term current account deficit: -2.7 percent of GDP (2022).

*Source: IMF staff.*

### 10.      The external debt sustainability analysis indicates that the projected current account

### 10. The external debt sustainability analysis indicates that the projected current account deficits remain sustainable

### External debt sustainability: main findings
- Gross external debt was 54.6 percent of GDP in 2016, 2.0 percentage points lower than 2015.
- In absolute euro terms, gross external debt was around EUR 2 billion higher in 2016 compared to the previous year.
- Around one-third of the external debt stock was public debt.
- Around 25 percent of the external debt was at short-term maturities, mainly on the non-bank sector.
- Short-term financing risk for non-bank private sector is expected to be limited as a substantial portion of the short-term debt is intra-company loans with relatively low rollover risks.
- Bound tests indicate vulnerability to sharp currency depreciation: a 30 percent currency depreciation shock would markedly increase the external-debt-to-GDP ratio over the medium term.
- A current account shock (excluding interest rate payments, average of 3.3 percent of GDP in the period 2018-2022) would maintain the external-debt-to-GDP ratio around current levels.
- Other standard shocks would only lead to a slower decline in the external-debt-to-GDP ratio.

### Key statistics and projections (selected figures from the External Debt Sustainability Framework, 2012–2022)
- Baseline: External debt (percent of GDP): 2012: 74.6; 2013: 68.0; 2014: 63.0; 2015: 56.5; 2016: 54.6; 2017: 52.9; 2018: 49.8; 2019: 47.3; 2020: 44.9; 2021: 43.6; 2022: 41.2.
- Change in external debt (percent of GDP): 2012: 1.7; 2013: -6.6; 2014: -5.0; 2015: -6.5; 2016: -2.0; 2017: -1.6; 2018: -3.2; 2019: -2.4; 2020: -2.5; 2021: -1.3; 2022: -2.4.
- Identified external debt-creating flows (percent of GDP): 2012: -1.0; 2013: -6.4; 2014: -3.8; 2015: -4.3; 2016: -3.1; 2017: -1.6; 2018: -1.2; 2019: -1.0; 2020: -1.0; 2021: -0.6; 2022: -0.4.
- Current account deficit, excluding interest payments (percent of GDP): 2012: 2.3; 2013: -1.6; 2014: -1.6; 2015: -0.6; 2016: 0.9; 2017: 0.9; 2018: 0.7; 2019: 0.8; 2020: 0.7; 2021: 1.0; 2022: 1.3.
- Deficit in balance of goods and services (percent of GDP): 2012: 5.1; 2013: 0.8; 2014: 0.4; 2015: 0.6; 2016: 0.9; 2017: 1.2; 2018: 1.0; 2019: 0.9; 2020: 0.6; 2021: 0.9; 2022: 1.0.
- Net non-debt creating capital inflows (negative, percent of GDP): 2012: -2.1; 2013: -1.9; 2014: -1.7; 2015: -1.8; 2016: -2.2; 2017: -2.1; 2018: -2.0; 2019: -1.9; 2020: -1.8; 2021: -1.8; 2022: -1.7.
- Automatic debt dynamics (percent of GDP): 2012: -1.2; 2013: -2.9; 2014: -0.5; 2015: -2.0; 2016: -1.8; 2017: -0.4; 2018: 0.1; 2019: 0.1; 2020: 0.1; 2021: 0.1; 2022: 0.0.
  - Contribution from nominal interest rate (percent): 2012: 2.5; 2013: 2.6; 2014: 2.3; 2015: 1.8; 2016: 1.4; 2017: 1.8; 2018: 1.7; 2019: 1.7; 2020: 1.6; 2021: 1.5; 2022: 1.4.
  - Contribution from real GDP growth (percent): 2012: -1.2; 2013: -2.4; 2014: -2.0; 2015: -2.3; 2016: -2.6; 2017: -2.2; 2018: -1.7; 2019: -1.5; 2020: -1.5; 2021: -1.4; 2022: -1.4.
  - Contribution from price and exchange rate changes (percent): 2012: -2.5; 2013: -3.1; 2014: -0.7; 2015: -1.5; 2016: -0.6; (table continues).
- Residual, incl. change in gross foreign assets (percent of GDP): 2012: 2.7; 2013: -0.2; 2014: -1.2; 2015: -2.1; 2016: 1.1; 2017: 0.0; 2018: -1.9; 2019: -1.4; 2020: -1.4; 2021: -0.7; 2022: -2.0.
- External debt-to-exports ratio (in percent): 2012: 200.2; 2013: 171.1; 2014: 153.0; 2015: 137.6; 2016: 131.8; 2017: 113.1; 2018: 105.2; 2019: 99.2; 2020: 92.6; 2021: 88.5; 2022: 82.3.
- Gross external financing need (in billions of Euros): 2012: 42.0; 2013: 45.6; 2014: 41.9; 2015: 43.9; 2016: 38.7; 2017: 40.7; 2018: 42.8; 2019: 39.1; 2020: 39.7; 2021: 40.5; 2022: 41.1.
- Gross external financing need (in percent of GDP): 2012: 31.4; 2013: 31.6; 2014: 27.9; 2015: 27.4; 2016: 22.8; 2017: 22.8; 2018: 22.3; 2019: 19.2; 2020: 18.3; 2021: 17.6; 2022: 16.8.

### Bound tests and scenarios (summary)
- Individual shocks presented include permanent one-half standard deviation shocks to interest rate, growth, and current account, and a one-time real depreciation of 30 percent occurring in 2018.
- A 30 percent real depreciation shock in 2018 notably raises external-debt-to-GDP in the medium term.
- Non-interest current account shock scenario shows average projections for variables; current account shocks and combined shocks are illustrated alongside baseline and historical scenarios in the analysis.

### External Sector Assessment: key findings and numbers
- Staff’s overall assessment: Romania’s external position in 2016 was broadly in line with fundamentals.
- Net international investment position (IIP): -48.6 percent of GDP in 2016.
  - The net position improved as a share of GDP in 2016 relative to prior years but deteriorated in absolute euro terms because foreign liabilities rose faster than foreign assets.
- Current account (CA):
  - CA deficit narrowed since 2008 (from above 10 percent of GDP in 2008 to below 2 percent in 2013).
  - More recently the CA deficit deteriorated due to increased imports from higher domestic demand.
  - EBA-lite estimates: cyclically-adjusted CA norm = -3.3 percent of GDP; cyclically-adjusted CA = -2.1 percent of GDP in 2016; model estimated CA gap = 1.2 percent of GDP.
  - The estimated CA gap includes a policy gap of 1.0 percent (mainly due to the fiscal gap in the rest of the world).
- Real effective exchange rate (REER) and gaps:
  - The REER (CPI-based) depreciated by around 2.3 percent in 2016 (using period averages); most depreciation occurred late in the year and was largely due to US dollar appreciation while EUR/RON remained almost flat.
  - EBA-Lite CA model: an appreciation of around 4.7 percent would be needed to close the gap between the underlying cyclically-adjusted CA and the norm.
  - EBA-Lite REER index model suggests an undervaluation of 6.0 percent.
  - EBA-Lite External Sustainability Approach suggests an undervaluation of around 6.8 percent (benchmark: net IIP stabilizing at 2016 level of -48.6 percent of GDP).
  - Staff assessment: real exchange rate is broadly in line with its equilibrium level, noting recent wage growth has exceeded productivity gains and unit labor costs have risen.

### Risk Assessment Matrix (selected risks and policy responses)
- Risk: Significant further strengthening of the US dollar and/or higher rates
  - Relative likelihood: Medium
  - Transmission: Investors may sell Romanian financial assets after reassessment of risks and increases in U.S. term premia; increase in borrowing costs; risk of exchange rate overshooting and financial instability.
  - Expected impact if realized: Increase in borrowing costs; risk of exchange rate overshooting and financial instability.
  - Policy response: Utilize some of fiscal financing buffer until markets settle down; allow for exchange rate flexibility while offsetting excessive market volatility.
- Risk: Policy uncertainty and divergence
  - Relative likelihood: High/Medium
  - Transmission: Heightened political tensions may lead to economic disruption and adverse market sentiment affecting consumption and investment; increase in borrowing costs; sudden capital outflows; slower growth.
  - Policy response: Preemptively increase FX reserves; maintain adequate fiscal buffers.
- Risk: Weaker-than-expected global growth
  - Relative likelihood: Medium
  - Transmission: Exports could fall, particularly if the euro area enters protracted slower growth; FDI could drop.
  - Expected impact: Lower growth, higher unemployment, potential widening of current account deficit.
  - Policy response: Allow limited use of automatic stabilizers; improve competitiveness through strengthening structural reforms.
- Risk: Continued fiscal relaxation
  - Relative likelihood: High/Medium
  - Transmission: Loss of recently built fiscal credibility; Romania could enter EU's Excessive Deficit Procedure; public debt rises; borrowing costs increase and private investment is crowded out.
  - Policy response: Restrain future wage increases; cut lower priority expenditure; improve tax administration to raise more revenues.
- Risk: Slippages in structural reforms
  - Relative likelihood: High/Medium
  - Transmission: Bottlenecks in public administration hamper public investment and EU funds absorption; delays in infrastructure upgrades constrain growth.
  - Policy response: Improve EU projects implementation capacity; improve investment prioritization and public investment review process; improve procurement framework; strengthen anti-corruption efforts.

### Implementation of the 2016 Article IV key recommendations (selected)
- Anchor fiscal policy on a debt reduction path (including by repealing/postponing planned tax reductions and gradually reduce deficits)
  - 2016 deficit outturn was in line with IMF-recommended target mostly due to under-execution of the EU-funded capital budget and public debt as a share of GDP declined. However, the 2017 budget envisages a substantially higher deficit raising the public debt ratio.
- Improve revenue administration
  - Authorities undertook a TADAT assessment and requested follow up TA on the large tax payers' unit. The tax compliance gap (particularly for VAT) remains substantial.
- Strengthen fiscal institutions and public administration efficiency
  - An expenditure review at the Ministry of Transport (with FAD technical assistance) was completed; government plans a pilot review at the Ministry of Health.
- Maintain policy stance but signal a tightening bias
  - Policy rate was kept unchanged in 2016. Interventions in the foreign exchange market became limited.
- Safeguard financial stability in face of legislative initiatives
  - Constitutional court rulings limited adverse impact from legislation on mortgage debt conversion. The Swiss Franc conversion law was declared unconstitutional.
- Continue reducing non-performing loans (NPL)
  - Central bank efforts continued; NPL ratio fell to below 10 percent from 22 percent in 2014.
- Raise quality of public investment and increase EU funds absorption
  - EU funds absorption accelerated towards end of the commitment program but there was a very slow start into the new programming period.
- Improve SOE performance through governance and restructuring
  - Law 111 on SOE corporate governance was passed. Progress on restructuring, privatization, and IPOs was limited.
- Avoid minimum wage increases beyond productivity gains
  - Minimum wage increased by about 19 percent in 2016 and by about 16 percent in 2017, surpassing productivity gains.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 4.      Reserve Adequacy. Reserve coverage in

### 4.      Reserve Adequacy. Reserve coverage in

### Reserve adequacy assessment
- Reserve level at end-December 2016: €37.9 billion.
- The reserve level is above the standard rules of thumb:
  - three months coverage of prospective imports;
  - 20 percent of broad money.
- The reserve level is in line with the reserve adequacy metric for emerging markets developed by Fund staff (New ARA-metric).
- Comparing with the 100 percent short-term debt (at remaining maturity) benchmark, reserves are slightly above full coverage in 2016.
- Chart context (as presented): Gross International Reserves vs. Traditional Metrics (Billions of U.S. dollars) showing comparisons with:
  - New ARA-metric (100-150 percent)
  - 3 months of prospective imports
  - 100 percent of short-term debt
  - 20 percent of M2

### Short-term financing risk and composition
- Short-term financing risk for the non-bank private sector is expected to be limited because a substantial portion of the short-term debt is intra-company loans with relatively low rollover risks.

### Policy implications and recommendation
- In light of downside external and domestic risks, a prudent stance with moderate reserve accumulation remains appropriate.

*Source: IMF staff analysis presented in the chapter "Reserve Adequacy. Reserve coverage in" (figures and comparisons as cited in the original content).*

### 15. Monitoring of

### cr17133 - 15. Monitoring of

### EU Funds Absorption and Potential Growth
- Chart labels and indicators presented:
  - Potential Growth (In percent)
  - 2007-16
  - 2022
  - 95 percent of 2014-20 allocation
  - 80 percent of 2014-20 allocation - Staff's baseline
  - 2007-16 Absorption
- Caption: Romania: EU Funds Absorption and Potential Growth
- Source noted: IMF staff calculations / IMF's Regional Economic Issues Report, November 2016, European Department.

### Fund Relations and Membership
- Membership Status: Joined 12/15/72; Article VIII.
- General Resources Account:
  - Quota: 1,811.40 SDR million = 100.00 percent.
  - Fund holdings of currency: 1,811.40 = 100.00 percent.
  - Reserve Tranche Position: 0.00 = 0.00 percent.
- SDR Department:
  - Net cumulative allocation: 984.77 SDR million = 100.00 percent.
  - Holdings: 988.04 = 100.33 percent.
- Outstanding Purchases and Loans (Stand-By Arrangements listed with Approval Date, Expiration Date, Amount Approved (SDR million), Amount Drawn (SDR million)):
  - Stand-By 09/27/13 — 09/26/15 — 1,751.34 — 0.00
  - Stand-By 03/31/11 — 06/30/13 — 3,090.6 — 0.00
  - Stand-By 05/04/09 — 03/30/11 — 11,443.00 — 10,569.00
  - Stand-By 07/07/04 — 07/06/06 — 250.00 — 0.00
  - Stand-By 10/31/01 — 10/15/03 — 300.00 — 300.00
  - Stand-By 08/05/99 — 02/28/01 — 400.00 — 139.75
  - Stand-By 04/22/97 — 05/21/98 — 301.50 — 120.60
  - Stand-By 05/11/94 — 04/22/97 — 320.50 — 94.27
  - Stand-By 05/29/92 — 03/28/93 — 314.04 — 261.70
  - Stand-By 04/11/91 — 04/10/92 — 380.50 — 318.10
- Overdue Obligations and Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs):
  - Charges/interest: 2017 — 0.03; 2018 — 0.03; 2019 — 0.03; 2020 — 0.03; 2021 — 0.03
  - Total: 2017 — 0.03; 2018 — 0.03; 2019 — 0.03; 2020 — 0.03; 2021 — 0.03

### Exchange Rate Arrangement and Safeguards
- Exchange rate arrangement: de jure managed floating; Romania has accepted obligations of Article VIII and maintains an exchange rate system free of restrictions on current international transactions (with specified security-related exceptions).
- Safeguards Assessment:
  - Update of 2011 safeguards assessment completed January 10, 2014.
  - Findings: overall governance at the NBR remains robust; legal framework needs update to strengthen NBR’s financial autonomy.
  - Accountability and transparency practices are strong; annual financial statements are independently audited and published.
  - Robust controls maintained over foreign reserves management, government banking, and vault operations.
  - Romania fully repaid the Fund on January 11, 2016 and therefore will no longer be subject to monitoring under the safeguards policy.

### Technical Assistance (selected entries)
- General note: Almost 30 technical assistance missions and expert visits since 2012; expert Fund assistance focused on modernizing tax administration, strengthening public financial management, and reviewing tax policy options.
- Tax Administration (FAD):
  - March–April 2012 — Strengthening the capacity of the National Agency for Fiscal Administration (ANAF).
  - July–August 2012 — Organizational reforms, strategic direction, plan for restructuring of ANAF and implementation of a compliance strategy.
  - August–September 2012 — Follow-up on the reorganization of ANAF.
  - November–December 2012 — Follow-up with ANAF, particularly on the antifraud unit.
  - March–April 2013 — Training to improve high net wealth individual compliance.
  - April, September, November 2013, January 2014 — Follow-up with ANAF.
  - April 2014 — Assistance to ANAF on pilot structural compliance project targeted at undocumented labor. Training on payroll audit.
  - April 2014 — Stock taking on assistance and identification of future TA focus: compliance risk management, reorganization of ANAF, pilot projects.
  - January–February 2015 — Follow-up and training to improve high net wealth individual compliance.
  - July–August 2015 — Review of the performance of the large taxpayer office and tax compliance management concerning high wealth individuals.
  - April 2016 and November 2016 — Tax compliance risk analysis related to large businesses. ANAF performance outcomes compare to international best practice.
- Tax Policy (FAD):
  - September 2013 — Strengthening the property tax and natural resource tax regime.
  - September 2014 — Follow-up assistance with creating a new natural resource tax regime.
  - June 2015 — Workshop on petroleum tax regime design.
- Public Financial Management (FAD):
  - March 2012 — Setting up commitment control and fiscal reporting systems.
  - October 2012 — Follow-up assistance in setting up commitment control and fiscal reporting systems.
  - April 2013 — Follow-up assistance including methodology to verify arrears of local government.
  - December 2013 — Follow-up assistance including requirements from decentralization plans.
  - February 2014 — Fiscal Transparency Evaluation.
  - January 2015 — Follow-up assistance: commitment control and fiscal reporting systems, review of public investment practices and program budgeting.
  - June 2015 — Follow-up assistance on strengthening public investment management and implementing public expenditure reviews.
  - June 2016 — Assistance on institutionalizing spending reviews and preparing spending review reports.
  - October 2016 — Follow-up assistance to advise on piloting spending reviews.

### Relations with the World Bank Group (selected facts)
- World Bank Group CPS covering 2014–18 presented May 22, 2014; three pillars: (i) Creating a 21st Century Government; (ii) Growth and Private Sector Job Creation; (iii) Social Inclusion.
- IBRD portfolio:
  - Seven active investment projects amount to US$1.7 billion and one Development Policy Loan (DPL), complemented by three country-executed trust funds over US$10 million and 10 Bank-funded analytical pieces.
  - Ten Reimbursable Advisory Services (RAS) worth US$19 million; since 2010, 52 RAS agreements totaling US$73.41 million (data as of March 31, 2017).
  - Active investment projects listed with amounts: Justice Services Improvement Project ($67), Integrated Nutrient Pollution Control (US$120.5 million), Romania Secondary Education Project (US$243 million), Health Sector Reform Project (US$339 million), Results-Based Project for Social Assistance System Modernization (US$710 million), Revenue Administration Modernization Project (US$92 million), Judicial Reform Project (US$130 million) closing end of March, 2017.
  - Second Fiscal Effectiveness and Growth DPL is the 2nd DPL in a programmatic series of two supporting structural reforms across multiple areas.
- IFC engagement:
  - Since 1990 through FY2017, IFC invested approximately US$2.5 billion in long-term finance in 85 projects, including over US$600 million in mobilization.
  - From FY2009 to FY2017, IFC invested approximately US$1041 million of its own funds.
  - Outstanding investment portfolio of $372 million (as of March 27, 2017).
  - FY17 target commitments of around $100 million.

### Statistical Issues — Assessment and Data Standards
- Assessment of Data Adequacy for Surveillance: General: Data provision is adequate for surveillance (as of April 18, 2017).
- National accounts: Quarterly and annual national accounts produced by the National Institute for Statistics (INS) using ESA 2010; estimates methodologically sound and timely for IFS publication.
- Prices: Consumer Price Index subject to standard annual reweighting and considered reliable. PPI coverage changed in January 2004 to include domestic and export sectors; PPI weights revised every five years with revisions finalized three years after new base year.
- Labor market: Broadly adequate; employment definition consistent with ESA 2010.
- Public finances: Annual GFS data for general government reported on an accrual basis derived from cash data using adjustment methods; accrual data available quarterly three months after quarter end. EUR receives monthly cash budget execution data. Consolidated general government operations reported for GFS Yearbook inclusion.
- Monetary and financial statistics: NBR reports monthly using Standardized Report Forms (SRFs) including Other Financial Corporations; published beginning September 2006.
- Financial Soundness Indicators (FSIs): NBR reports all core and most encouraged FSIs for Deposit Takers quarterly beginning 2010 Q1; also reports FSIs for nonfinancial corporations and households and those concerning real estate markets.
- Balance of payments: NBR reports quarterly and annual external sector statistics timely; implemented BPM6 since September 2014; participates in CPIS and CDIS.
- Data Standards: Romania subscriber to SDDS since August 4, 2005. A Data ROSC published November 2001.

### Romania: Table of Common Indicators Required for Surveillance (as of April 12, 2017) — selected entries
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities:
  - Date of latest observation: Apr 2017; Date received: Apr 2017; Frequency of Data: D and M; Frequency of Reporting: D and M; Frequency of Publication: M.
- Reserve/Base Money:
  - Date of latest observation: Jan 2017; Date received: Feb 2017; Frequency of Data: D and M; Frequency of Reporting: W and M; Frequency of Publication: M.
- Broad Money:
  - Date of latest observation: Jan 2017; Date received: Feb 2017; Frequency: M / M / M.
- Central Bank Balance Sheet; Consolidated Balance Sheet of the Banking System; Interest Rates; Consumer Price Index; Revenue, Expenditure, Balance and Composition of Financing – General Government; External Current Account Balance; Exports and Imports of Goods and Services; Gross External Debt:
  - Latest observation: Jan 2017 for many series; Date received: Mar 2017 for several; Frequency: M / M / M.
- Stocks of Central Government and Central Government-Guaranteed Debt:
  - Latest observation: Q4 2016; Date received: Mar 2017; Frequency: Q / Q / Q.
- International Investment Position:
  - Latest observation: Q4 2016; Date received: Feb 2017; Frequency: Q / Q / Q.

### Supplementary Information — Fiscal and Wage Measures (supplement to staff report)
- Authorities considering a change in the social security contribution system to require workers to pay the employer share of contributions, which would reduce government payments of social security contributions for public employees.
- Fiscal cost estimates for the draft unified wage law:
  - Net cost of draft unified wage law (staff estimate): 2.6 percent of GDP.
  - If the planned change (workers pay employer share) is implemented, estimated reduction in fiscal cost: to 1.5 percent of GDP.
- Note: The supplement states "The fiscal impact of the draft law would still be significant. In staff’s estimate and taking into account other recent wage increases, the public wage bill would rise from" — text truncated at this point in the source.

*Prepared By European Department — ROMANIA STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION — INFORMATIONAL ANNEX (May 5, 2017).*

### 7.5 percent of GDP in 2016 to 10 percent of GDP in 2018, placing it in the upper quartile

### cr17133 - 7.5 percent of GDP in 2016 to 10 percent of GDP in 2018, placing it in the upper quartile

### Wage bill and public sector pay
- The wage bill rose from 7.5 percent of GDP in 2016 to 10 percent of GDP in 2018, placing it in the upper quartile of the wage bill for emerging economies.
- The Ministry of Finance plans to support further amendments to the draft law to keep the wage bill around 8 percent of GDP in 2018 and beyond; details regarding these measures are not yet available.
- A government-proposed change envisions similar amendments for private sector employees to strengthen compliance with social security contributions.

### Convergence Program 2017–2020: revenue and expenditure measures
- Revenue-side major elements in the updated Convergence Program:
  - introduce employer social security contributions for part-time workers;
  - change the VAT payment modality for public institutions;
  - maintain higher dividend distribution rates from state-owned enterprises (SOEs) as in the 2017 budget (at 90 percent).
- Expenditure-side measures aim to:
  - reprioritize spending;
  - reduce maintenance costs;
  - generate savings on goods and services through centralized procurement;
  - restrict some pensions and allowances.
- The authorities estimate these measures will yield around 0.2 percent of GDP in 2017 and 0.6 percent of GDP in 2018.
- Staff’s preliminary assessment finds the yield for measures with available information is lower than the authorities’ estimates.

### Fiscal assessment and recommendations
- Staff view: additional high-quality measures will be needed to reduce the deficit to well under the EDP threshold of 3 percent of GDP over the medium-term.
- Some measures are welcome (broadening the tax base, extending centralized procurement); some may be less desirable ways to achieve the deficit target.
- Authorities’ medium-term fiscal strategy:
  - hold the ESA budget deficit slightly below the limit of 3 percent of GDP in 2017-2018;
  - fiscal consolidation to 2 percent by 2020.
- To mitigate fiscal risks from a unified wage law, authorities will adopt gradual and flexible implementation considering fiscal space constraints.

### Recent macroeconomic data (2017 developments)
- Growth:
  - GDP growth accelerated to 5.6 percent (y/y) in Q1 2017 from 4.8 percent in the previous quarter (flash estimates).
  - High-frequency indicators show continued strong retail sales and industrial production and a widening trade deficit based on rising imports.
- Inflation:
  - Headline inflation jumped from 0.2 percent (y/y) in March 2017 to 0.6 percent (y/y) in April 2017.
  - Core inflation has averaged around 1 percent (y/y) in March and April 2017.
- Budget execution:
  - Preliminary data through April show a small budget surplus (below 0.1 percent of GDP), broadly similar to the surplus recorded over the same period in 2016.
  - Investment spending has remained weak while personnel and social assistance spending continue to grow strongly.
  - Overall revenue broadly in line with targets through April, but a decrease in VAT refunds has occurred.

### Growth dynamics and outlook
- 2016 outcomes:
  - Annual growth accelerated to 4.8 percent, one of the fastest in the EU post-crisis.
  - Average annual unemployment rate dropped to 5.9 percent.
  - Private consumption contributed strongly, reaching a nine-year high of 7.3 percent.
- Outlook drivers:
  - Additional stimulus measures, recovery of consumer confidence, and upward trend in consumer credit expected to support consumption expansion at a slowing pace.
  - Investment suffered a temporary setback in 2016; expected to resume in 2017 and gradually accelerate over the medium term driven by credit expansion, growth-friendly tax cuts, and improved EU funds absorption.
- Government projects growth one percentage point higher in 2017 than staff’s baseline and a moderately accelerating medium-term path; staff expects a decelerating path.

### External position and balance of payments
- The current account deficit widened in 2016 by 1.1 percent of GDP due to buoyant consumption and a higher primary income deficit.
- The current account deficit was fully matched by net FDI inflows in 2016, driven mainly by reinvested earnings and intra-company loans.
- External financing expected to come mainly from non-debt-generating flows (FDI and EU funds); external debt-to-GDP ratio projected to continue downward in the medium term.
- Share of short-term debt in total external debt is relatively low (around 25 percent).
- International reserves coverage is adequate according to all reserve adequacy metrics.
- External position may be vulnerable to a sharp depreciation of the domestic currency from a sudden worsening of market sentiment.

### Monetary policy and liquidity management
- NBR monetary policy stance through 2016 and early 2017:
  - monetary policy rate kept at 1.75 percent;
  - amplitude of symmetrical corridor around the policy rate kept at ±1.50 percentage points.
- Required reserve ratios:
  - required reserve ratio on leu-denominated liabilities maintained at 8 percent;
  - required reserve ratio on forex-denominated liabilities cut twice (most recently on May 5, 2017) down to 8 percent.
- With persistent excess liquidity, the NBR managed money market liquidity and published minutes of NBR Board monetary policy meetings starting September 2016 to increase transparency.
- The central bank aims to bring and maintain annual inflation in line with the flat target in the medium run, while emphasizing the need for a balanced macroeconomic policy mix and structural reforms.

### Financial sector resilience and risks
- Banking-sector capital and performance:
  - average total capital ratio 18.3% as at December 2016, situating the sector in the lowest EBA risk bucket;
  - ROA 1.1 percent and ROE 10.7 percent at year end 2016, above EU averages.
- Nonperforming loans (NPLs):
  - overall NPL ratio declined from 21.5 percent in September 2014 to less than 10 percent presently;
  - NPLs are well provisioned; EBA Risk Dashboard lists Romania’s coverage ratio the highest in EU as of Q4 2016.
  - NPL ratios for corporates and SMEs remain high and require further efforts.
- Liquidity and credit:
  - liquidity is abundant; credit to households advanced rapidly in 2016;
  - credit to non-financial corporations remained subdued through 2016 but recently showed signs of recovery.
- Legal-initiative risks abated:
  - Constitutional Court rulings limited negative impacts of laws on mortgages and conversion of Swiss franc loans.
- Macroprudential framework:
  - National Committee for Macroprudential Supervision (NCMS) established to formulate and coordinate macroprudential policies and issue warnings and recommendations.
- Authorities welcome the forthcoming FSAP programmed for 2017-2018.

### Structural reforms and EU funds absorption
- Improving EU funds absorption is a top priority to finance investment; initial weaknesses in 2014-2020 framework absorption are being addressed.
- Progress made in designating managing authorities, compliance with ex-ante conditionality, and limiting domestic financing of EU-eligible projects.
- Programmed reforms to enhance expenditure efficiency include:
  - reducing number of agencies and institutions subordinated to government;
  - rationalizing public spending via auditing, digitization, prioritization, and performance assessment;
  - improving corporate governance of SOEs;
  - centralizing public procurement;
  - creating a national database for public administration employment records.
- SOE reform: steps taken to restructure major energy producers and prepare IPOs; Sovereign Fund for Development and Investment envisaged to be launched in July 2017.
- Labor and education measures:
  - grants for hiring, settlement and relocation to stimulate labor mobility;
  - significant salary increases for educators and promotion of vocational training to increase education quality.

- Key statistics and figures:
  - wage bill: 7.5 percent of GDP in 2016; 10 percent of GDP in 2018; target around 8 percent of GDP from 2018 onward (authorities’ plan).
  - Convergence Program yields: around 0.2 percent of GDP in 2017 and 0.6 percent of GDP in 2018.
  - GDP growth: 4.8 percent in 2016; 5.6 percent (y/y) in Q1 2017.
  - Private consumption contribution: 7.3 percent in 2016.
  - Unemployment rate: 5.9 percent (average annual).
  - Inflation: 0.2 percent (y/y) in March 2017; 0.6 percent (y/y) in April 2017; core inflation ~1 percent (y/y) in March–April 2017.
  - Monetary policy rate: 1.75 percent; corridor ±1.50 percentage points.
  - Required reserve ratios: leu-denominated liabilities 8 percent; forex-denominated liabilities 8 percent (after cuts, most recently May 5, 2017).
  - Current account widening in 2016: +1.1 percent of GDP.
  - External short-term debt share: around 25 percent.
  - Banking sector capital ratio: 18.3% as at December 2016.
  - NPL ratio: from 21.5 percent in September 2014 to less than 10 percent presently.
  - ROA: 1.1 percent (2016); ROE: 10.7 percent (2016).

*International Monetary Fund, Romania, May 18 and May 22, 2017.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17133.pdf_