## 1. Benefits of Boosting Quality Public Infrastructure Spending in Romania

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### Background
- Romania reduced internal and external imbalances through "impressive fiscal consolidation and prudent monetary and financial policies," broadly in line with the 2012 Article IV recommendations and the 2011 and 2013 precautionary Stand-By Arrangements (SBA).
- Remaining challenges:
  - A negative output gap persists.
  - Inflation is well below target.
  - Income convergence with the EU has been slow.
  - Weak infrastructure is a bottleneck for higher growth, reflecting ineffective public spending, weak medium-term planning, delayed EU funds absorption, and slow SOE reforms.
  - Vulnerabilities remain from a relatively high level of external debt despite fiscal and foreign exchange reserves buffers and lower non-performing loans.
- Political context:
  - Reform momentum slowed amid elevated political uncertainty following government changes in February 2014 and presidential election outcomes in December 2014.
  - Implementation of structural reforms (SOEs, gas price deregulation) was affected, delaying the completion of the third review under the SBA (originally scheduled for June 2014).
  - Some progress on governance and anti-corruption is noted in the 2015 Correction and Verification Mechanism for Romania.

### Recent Economic Developments
- Growth and demand:
  - After robust growth in 2013–14, GDP almost returned to its pre-crisis level but a sizable output gap remains.
  - Recovery drivers: robust export growth initially; more recently a pick-up in private consumption supported by rising real disposable income and low interest rates.
  - Investment has remained subdued.
  - Labor market: unemployment declined to 6.8 percent in 2014; youth unemployment was 23.3 percent in 2014Q3 (about 6 percentage points above the pre-crisis level).
- Inflation:
  - Annual headline inflation entered the central bank’s new target range of 2.5 percent (±1 percent) in September 2013 and fell below the lower bound for most of 2014.
  - Headline average inflation was 1.1 percent in 2014; core inflation was 0.3 percent.
  - In January 2015, inflation dropped to 0.4 percent.
  - Contributing factors: reduction in VAT on flour and bakery products, low food prices, decline in oil prices, persistent output gap and absorption gap.
- Fiscal developments:
  - Fiscal deficit reduced to 1.9 percent of GDP in 2014, a 7 percentage point reduction in structural terms over six years.
  - 2014 budget outturn vs original (percent of GDP): Revenue 31.9 versus 32.6 (difference -0.7); Taxes 27.3 versus 27.6 (difference -0.3); Grants 1.7 versus 2.2 (difference -0.5); Other revenue 2.9 versus 2.8 (difference 0.1).
  - Expenditures 33.8 versus 34.8 (difference -1.0); Current 28.4 versus 28.4 (difference 0.2); Capital 5.2 versus 6.3 (difference -1.1); Other 0.0 versus 0.1 (difference -0.1). Deficit outturn -1.9 versus original -2.2 (difference 0.3).
  - Under-execution of the capital budget and current expenditures (until December) allowed accelerated payments for court-ordered wage claims, restitution, and clearance of most government arrears.
- External sector:
  - Current account deficit narrowed to ½ percent of GDP (the smallest in ten years), down from almost 13½ percent of GDP in 2007.
  - Exports grew faster than imports, supported by machinery and transport equipment sales; income balance deteriorated due to increased profit repatriation and interest payments.
  - Public sector capital inflows strong due to increased EU fund absorptions; private sector flows remained anemic amid Europe-wide deleveraging.
- Financial markets and banking:
  - Investor sentiment positive; Standard and Poor’s upgraded Romania to investment grade in May 2014.
  - Romania issued a ten-year €1.5 billion Eurobond in October 2014.
  - International reserves: €34.3 billion as of end-January 2015.
  - Bank credit growth turned negative in early 2013; credit-to-GDP ratio converging to a lower sustainable trend.
  - Banks shifting funding toward lei as foreign parent banks withdraw funds; solvency and liquidity positions remain appropriate though profitability is weighed down by provisioning.
- Social outcomes:
  - Romania remained one of the poorest EU members: at-risk-of-poverty or social exclusion rate 40.4 percent in 2013 (second highest in the EU).
  - Gini coefficient in 2012 was below its pre-crisis level, indicating fiscal progressivity.
  - Means-tested benefit program improvements supported by the World Bank, but merger of three programs was delayed and funding for means-tested programs remains tight relative to non-means-tested programs.

### Outlook and Risks
- Staff baseline projections:
  - Growth: 2.7 percent in 2015 and 2.9 percent in 2016. Private consumption expected to be the main driver; investment to gradually recover with greater EU fund absorption.
  - Potential growth: estimated to reach about 3 percent over the medium term, assuming higher EU funds absorption, recovery in credit growth, and improvements in infrastructure investment quality through institutional reforms.
  - Inflation: projected to remain low in 2015, with an annual average of about 1 percent; expected to return to the target range toward the end of 2015 and stay broadly within the target range in the medium term.
  - External position: current account deficit projected to widen to around 1 percent of GDP in 2015 and to rise to about 3–3½ percent of GDP over the medium term, consistent with the current account norm for emerging market economies.
  - Capital inflows: expected to pick up only gradually in 2015; higher EU fund absorptions to support public sector inflows while private sector net capital flows likely remain low.
- Infrastructure-specific projection:
  - Mission estimates that increasing EU funds absorption by 0.7 percent of GDP annually, if it leads to greater density and higher quality of infrastructure, could boost growth potential by about ½ percentage point annually over the medium term.
- Risks (tilted to the downside):
  - External: renewed global financial market volatility or euro area developments (including Greece) could affect portfolio flows and deposit stability.
  - A protracted period of slow growth and low inflation in the euro area could strain Romania’s economy.
  - Geopolitical risks: direct economic and financial implications from Ukraine and Russia expected to be contained given moderate trade and financial exposures and low energy dependency.
  - Domestic: continued underperformance in EU funds absorption and lack of structural reforms would delay infrastructure upgrades.
- Buffers and resilience:
  - Large fiscal buffers and a flexible exchange rate.
  - Adequate level of international reserves.
  - Public debt, after rising to 40 percent of GDP during 2007–14, is projected to decline gradually under unchanged policies.
  - Liquidity buffers nearly 5 percent of GDP, including FX holdings equivalent to four months of total gross financing needs and a year of FX financing needs; authorities plan to gradually reduce the FX buffer considering global financial market conditions and progress in deepening government securities markets.
- Authorities’ view:
  - Broadly shared staff’s 2015 assessment but saw risks as broadly balanced, citing upside potential from agricultural output and EU funds absorption.

### Policy Discussions — Fiscal Policy: Budgeting and Building Institutions for the Future
- Fiscal achievements and vulnerabilities:
  - Sound fiscal policy has lowered vulnerabilities; projected gradual decline in public debt beginning this year under unchanged policies.
  - Solid debt management and falling gross financing needs provide room to absorb shocks, including underperformance of real GDP growth or realization of banking sector contingent liabilities.
- Institutional priorities:
  - Improve medium-term planning and effectiveness of public spending to address infrastructure weaknesses.
  - Increase absorption of EU funds (staff quantitative target: raise absorption by 0.7 percent of GDP annually).
  - Advance structural reforms including SOE reform and gas price deregulation to support investment efficiency and fiscal sustainability.
  - Maintain liquidity and reserve buffers while deepening government securities markets to allow gradual FX buffer adjustment.

### Box 1 — Benefits of Boosting Quality Public Infrastructure Spending in Romania
- Current situation and constraints:
  - Romania’s high capital spending has been relatively inefficient in the past; rail and road infrastructure is particularly deficient.
  - Lack of a robust framework and capacity for developing, vetting, prioritizing, and executing public-investment projects undermines EU-funds absorption.
  - Authorities aim to fully use the funds associated with the 2007–13 programming period.
- Staff simulations and growth impact:
  - Staff econometric analysis and simulations indicate that the GDP growth rate would be higher by ½ percentage point over the medium term, if available EU-funds were fully utilized.
  - Simulation results are highly dependent on reforms to improve the quality and management of national projects and absorption of EU-funded projects.
- Benefits from reallocating to EU-funded projects:
  - Reallocating budget resources toward EU-funded projects, which are subject to a more stringent project management process, could immediately boost efficiency and deliver a higher multiplier.
- Recommended reforms and sequencing:
  - Better align the prioritization calendar with the budget calendar so that prioritization informs budget preparation.
  - Publish the list of prioritized projects, including those identified in the Transport Master Plan currently under preparation.
  - Make better use of technical assistance to enhance Romania’s capacity to absorb EU-funds.
  - In the medium term, establish one project management process that encompasses all projects notwithstanding funding sources.
- Implementation challenges and caveats:
  - Faster EU funds absorption and more efficient public investment are required to support higher capital spending planned in the 2015 budget.
  - Simulation gains hinge on both full utilization of available EU-funds and reforms improving national project quality and management.

### Box 3 — Need for Reforms in the Insurance Sector
- Sector overview:
  - Non-systemic in magnitude but weak: total assets about 3 percent of GDP at end-2013; total gross underwritten premiums 1.3 percent of GDP.
  - 39 insurers; non-life business represents about 80 percent of total activity.
  - Weaknesses reflect a history of lax supervision and enforcement; intervention and resolution constrained by legal framework shortcomings.
- Failure of the largest insurer:
  - Price war in car and housing insurance led to low reserve coverage in some entities.
  - In February 2014, Astra (domestically owned non-life insurer with about 15 percent of market share) was put under special administration by KPMG.
  - Supervisor needs to ensure recapitalization or an orderly resolution.
- Required reforms:
  - Amend insurance law and legislation on the insurance guarantee fund to enhance resolution procedures and provide resolution financing.
  - Strengthen supervision and enforcement; provide non-bank financial sector supervision with resolution powers for insurance companies.
- Actions under way:
  - European Commission providing technical support.
  - FSA will engage in a comprehensive asset quality review with third party involvement later this year.

### Annex I — Implementation of the 2012 Article IV Key Recommendations
- Key actions:
  - Exited EDP in 2013 after reducing the headline deficit 3 percentage points of GDP in 2012 in ESA terms.
  - Established a structural deficit target rule; transposed EU fiscal compact into national legislation.
  - Implemented a basic health care package; proposed increase in retirement age for women to 65.
  - Raised EU-funds absorption sevenfold to 52 percent as of December 2014.
  - Reduced FX interventions; continued intensive bank supervision; implemented an NPL reduction plan from mid-2014.
  - Energy market deregulation implemented through end-2014; gas tariff deregulation for residential consumers postponed.
  - Held IPOs/secondary offerings in four energy companies and liquidated two others.
  - Failed to fully introduce professional managers in SOEs, particularly in the transportation sector.
  - Promulgated Apprenticeship Law to expand vocational training.
- Risk Assessment Matrix (selected risks and policy responses):
  - Surge in global financial market volatility (Relative Likelihood: High; Expected Impact: Medium): allow exchange rate flexibility, utilize fiscal financing buffer.
  - Shortfall in accelerating EU funds absorption (Relative Likelihood: High; Expected Impact: Medium): improve EU project implementation capacity, adhere to procurement rules.
  - Protracted slower growth/low inflation in euro area (Relative Likelihood: High; Expected Impact: Medium): allow automatic stabilizers, accelerate EU funds absorption, allow exchange rate flexibility.
  - Foreign banks rebalance portfolio exposure (Relative Likelihood: Medium; Expected Impact: High/Medium): reduce minimum reserve requirements, engage host supervisors, intensify liquidity monitoring.
  - Sustained tensions surrounding Russia/Ukraine (Relative Likelihood: Medium; Expected Impact: Low): communicate limited links, ease monetary policy if low inflation entrenches.

### Debt dynamics and fiscal risks
- Public debt and projections:
  - Public debt, including guarantees, projected to peak in 2015 at 40.4 percent of GDP.
  - Without the projected increase in Treasury deposits of 0.5 percent of GDP, public debt would have peaked in 2014 at 40.2 percent of GDP.
  - Gross financing needs projected to decline from 9 percent of GDP in 2014 to below 6 percent of GDP by 2020.
  - Stress test scenario with weaker GDP growth could push public debt to nearly 50 percent of GDP in 2017 in the DSA scenario.
  - A banking sector contingent liability shock (one-time bailout increasing non-interest expenditure by 10 percent of banking sector assets) would increase debt to 45.4 percent of GDP in 2015 (the peak under this shock).
  - SOE debt estimated at around 7 percent of GDP (including SOEs under insolvency procedures or in liquidation).
- Baseline macro and fiscal assumptions:
  - Output gap expected to close by 2020.
  - Real GDP growth expected to reach 3½ percent (3.5 percent).
  - Fiscal policy assumes authorities reach a cash deficit target of 1.8 percent of GDP in 2015 (-1.45 percent of GDP in ESA terms).
  - Projected primary balances are greater than the debt-stabilizing balance in the baseline.
- Public debt composition and exposures:
  - Foreign currency-denominated debt accounts for about 60 percent of public debt.
  - About 28 percent of total public debt is official financing.
  - Average maturity of government securities issued on the domestic market is about 3 years.
  - Non-resident holdings of domestic debt securities are about 20 percent.
  - Authorities maintain a foreign-currency financing buffer that was four months of gross financing needs in January 2015 and signaled a desire to reduce the buffer gradually to three months.
- Selected DSA baseline projections (percent of GDP, as presented):
  - Nominal gross public debt: 2013 22.5; 2014 38.8; 2015 40.4; 2016 40.4; 2017 39.7; 2018 38.8; 2019 38.3; 2020 37.4; 2020 36.6.
  - Public gross financing needs: 2013 9.6; 2014 11.6; 2015 9.1; 2016 8.2; 2017 8.2; 2018 6.1; 2019 6.4; 2020 6.2; 2020 5.9.
  - Real GDP growth (selected years): 2013 3.3; 2014 3.4; 2015 2.9; 2016 2.7; 2017 2.9; 2018 3.4; 2019 3.5; 2020 3.5.
  - Inflation (GDP deflator, in percent): 2013 9.6; 2014 3.4; 2015 2.1; 2016 2.8; 2017 2.5; 2018 2.5; 2019 2.5; 2020 2.5.
  - Effective interest rate (in percent): 2013 7.9; 2014 5.1; 2015 4.4; 2016 4.1; 2017 4.1; 2018 4.2; 2019 3.9; 2020 4.0; 2020 4.2.
- External vulnerabilities:
  - Gross external debt about 66 percent of GDP at end-2013, around one-third public.
  - Almost one-fifth of external debt is at short-term maturities, mainly of the non-bank private sector.
  - Projected medium-term current account deficit is 3.6 percent of GDP.
  - Baseline external debt (percent of GDP, selected): 2014 59.9; 2015 54.3; 2016 52.9; 2017 50.7; 2018 48.5; 2019 45.9; 2020 43.6.
  - Gross external financing need (percent of GDP): 2014 32.3; 2015 21.6; 2016 18.6; 2017 17.8; 2018 18.3; 2019 17.7; 2020 17.0.

### New information since the Staff Report (March 11, 2015)
- Statement does not alter the thrust of the staff appraisal.
- Fiscal and cash developments (first two months of 2015):
  - Cash budget recorded a surplus of 0.3 percent of GDP for the first two months of 2015 compared to a deficit of 0.5 percent of GDP during the same period of 2014.
  - Spending was lower by 0.6 percentage points of GDP relative to last year; total revenues were higher by 0.2 percentage points of GDP.
- Proposed tax changes:
  - Staff estimate of net loss in budget revenues in 2016 from the proposed tax changes: 2.2 percent of GDP, accounting for projected impact on revenues from stronger economic activity: 0.7–1.0 percent higher nominal GDP in 2016.
- Inflation (February 2015):
  - Headline annual inflation 0.4 percent; core inflation declined to 1 percent.
  - CPI dropped from 6.3 percent at end-2008 to 0.41 percent in January 2015; end-2014 annual CPI 0.83 percent.
- IMF Executive Board assessment (summary of Directors' views):
  - Maintain prudent fiscal policies and ensure planned tax reductions are accompanied by offsetting measures.
  - Strengthen public expenditure management and investment project planning; improve EU funds absorption.
  - Room for further monetary easing given below-target inflation; recommend strengthening the monetary policy framework toward full-fledged inflation targeting.
  - Continue close supervision of the banking system; strengthen nonbank supervision and establish effective resolution framework for insurance companies.
  - Reinvigorate structural reforms, restructure SOEs, improve governance, and increase labor market participation, particularly among the young, low-skilled, and women.
- Selected indicators (2009–15, as presented):
  - Real GDP (Annual percentage change): -7.1; -0.8; 1.1; 0.6; 3.4; 2.9; 2.7.
  - CPI (average): 5.6; 6.1; 5.8; 3.3; 4.0; 1.1; 1.0.
  - Unemployment rate (average): 6.5; 7.0; 7.2; 6.8; 7.1; 6.8; 6.7.
  - Gross public debt (including guarantees, percent of GDP): 23.3; 30.5; 33.9; 37.5; 38.8; 40.4; 40.5.
  - Current account balance (percent of GDP): -4.5; -4.6; -4.6; -4.5; -0.8; -0.5; -1.1.
  - Gross external debt (percent of GDP): 67.4; 72.9; 74.0; 74.4; 66.6; 59.9; 54.3.
  - Nominal GDP (in bn RON, memorandum): 510.5; 533.9; 565.1; 596.7; 637.6; 669.5; 706.6.
  - Potential output growth (percent): 2.5; 2.0; 1.9; 2.1; 2.3; 2.5; 2.7.
  - People at risk of poverty or social exclusion: 40.4% (2013).
- Monetary and financial sector developments:
  - NBR policy rate lowered to 2.25 percent in February 2015.
  - NPLs declined in 2014 by about 8 percentage points to 13.9 percent; IFRS provisioning ratio increased to 68.9 percent; capitalization increased above 17 percent.
  - Domestic currency loan growth recovered; NBR commitments include continued supervision, stress tests, strengthen non-bank supervision, and provide resolution powers for insurance companies.
- Structural reforms and SOE progress:
  - Central government-owned SOE arrears reduced by 1.5 percent of GDP over the past two years; local government-owned SOE arrears around 1 percent of GDP at end-2014.
  - Landmark IPO of Romgaz launched; 10 percent of shares in Nuclearelectrica sold.
  - Transport sector lagging, especially SOE corporate governance; CFR Marfa downsized staff by more than one fourth after a failed privatization.

*Source: IMF staff report excerpt and related boxes/annexes titled "Benefits of Boosting Quality Public Infrastructure Spending in Romania" and accompanying sections (content unit: _cr1579).*

### 1. Benefits of Boosting Quality Public Infrastructure Spending in Romania ________________________9

### 1. Benefits of Boosting Quality Public Infrastructure Spending in Romania

### Background
- Romania has reduced internal and external imbalances through "impressive fiscal consolidation and prudent monetary and financial policies," broadly in line with the 2012 Article IV recommendations and the 2011 and 2013 precautionary Stand-By Arrangements (SBA).
- Remaining challenges:
  - A negative output gap persists.
  - Inflation is well below target.
  - Income convergence with the EU has been slow.
  - Weak infrastructure is a bottleneck for higher growth, reflecting ineffective public spending, weak medium-term planning, delayed EU funds absorption, and slow SOE reforms.
  - Vulnerabilities remain from a relatively high level of external debt despite fiscal and foreign exchange reserves buffers and lower non-performing loans.
- Political context:
  - Reform momentum slowed amid elevated political uncertainty following government changes in February 2014 and presidential election outcomes in December 2014.
  - Implementation of structural reforms (SOEs, gas price deregulation) was affected, delaying the completion of the third review under the SBA (originally scheduled for June 2014).
  - Some progress on governance and anti-corruption is noted in the 2015 Correction and Verification Mechanism for Romania.

### Recent Economic Developments
- Growth and demand:
  - After robust growth in 2013–14, GDP almost returned to its pre-crisis level but a sizable output gap remains.
  - Recovery drivers: robust export growth initially; more recently a pick-up in private consumption supported by rising real disposable income and low interest rates.
  - Investment has remained subdued.
  - Labor market: unemployment declined to 6.8 percent in 2014; youth unemployment was 23.3 percent in 2014Q3 (about 6 percentage points above the pre-crisis level).
- Inflation:
  - Annual headline inflation entered the central bank’s new target range of 2.5 percent (±1 percent) in September 2013 and fell below the lower bound for most of 2014.
  - Headline average inflation was 1.1 percent in 2014; core inflation was 0.3 percent.
  - In January 2015, inflation dropped to 0.4 percent.
  - Contributing factors: reduction in VAT on flour and bakery products, low food prices, decline in oil prices, persistent output gap and absorption gap.
- Fiscal developments:
  - Fiscal deficit reduced to 1.9 percent of GDP in 2014, a 7 percentage point reduction in structural terms over six years.
  - 2014 budget outturn vs original: Revenue 31.9 versus 32.6 (difference -0.7); Taxes 27.3 versus 27.6 (difference -0.3); Grants 1.7 versus 2.2 (difference -0.5); Other revenue 2.9 versus 2.8 (difference 0.1).
  - Expenditures 33.8 versus 34.8 (difference -1.0); Current 28.4 versus 28.4 (difference 0.2); Capital 5.2 versus 6.3 (difference -1.1); Other 0.0 versus 0.1 (difference -0.1). Deficit outturn -1.9 versus original -2.2 (difference 0.3).
  - Under-execution of the capital budget and current expenditures (until December) allowed accelerated payments for court-ordered wage claims, restitution, and clearance of most government arrears.
- External sector:
  - Current account deficit narrowed to ½ percent of GDP (the smallest in ten years), down from almost 13½ percent of GDP in 2007.
  - Exports grew faster than imports, supported by machinery and transport equipment sales; income balance deteriorated due to increased profit repatriation and interest payments.
  - Public sector capital inflows strong due to increased EU fund absorptions; private sector flows remained anemic amid Europe-wide deleveraging.
- Financial markets and banking:
  - Investor sentiment positive; Standard and Poor’s upgraded Romania to investment grade in May 2014.
  - Romania issued a ten-year €1.5 billion Eurobond in October 2014.
  - International reserves: €34.3 billion as of end-January 2015.
  - Bank credit growth turned negative in early 2013; credit-to-GDP ratio converging to a lower sustainable trend.
  - Banks shifting funding toward lei as foreign parent banks withdraw funds; solvency and liquidity positions remain appropriate though profitability is weighed down by provisioning.
- Social outcomes:
  - Romania remained one of the poorest EU members: at-risk-of-poverty or social exclusion rate 40.4 percent in 2013 (second highest in the EU).
  - Gini coefficient in 2012 was below its pre-crisis level, indicating fiscal progressivity.
  - Means-tested benefit program improvements supported by the World Bank, but merger of three programs was delayed and funding for means-tested programs remains tight relative to non-means-tested programs.

### Outlook and Risks
- Staff baseline projections:
  - Growth: 2.7 percent in 2015 and 2.9 percent in 2016. Private consumption expected to be the main driver; investment to gradually recover with greater EU fund absorption.
  - Potential growth: estimated to reach about 3 percent over the medium term, assuming higher EU funds absorption, recovery in credit growth, and improvements in infrastructure investment quality through institutional reforms.
  - Inflation: projected to remain low in 2015, with an annual average of about 1 percent; expected to return to the target range toward the end of 2015 and stay broadly within the target range in the medium term.
  - External position: current account deficit projected to widen to around 1 percent of GDP in 2015 and to rise to about 3–3½ percent of GDP over the medium term, consistent with the current account norm for emerging market economies.
  - Capital inflows: expected to pick up only gradually in 2015; higher EU fund absorptions to support public sector inflows while private sector net capital flows likely remain low.
- Infrastructure-specific projection:
  - Mission estimates that increasing EU funds absorption by 0.7 percent of GDP annually, if it leads to greater density and higher quality of infrastructure, could boost growth potential by about ½ percentage point annually over the medium term.
- Risks (tilted to the downside):
  - External: renewed global financial market volatility or euro area developments (including Greece) could affect portfolio flows and deposit stability.
  - A protracted period of slow growth and low inflation in the euro area could strain Romania’s economy.
  - Geopolitical risks: direct economic and financial implications from Ukraine and Russia expected to be contained given moderate trade and financial exposures and low energy dependency.
  - Domestic: continued underperformance in EU funds absorption and lack of structural reforms would delay infrastructure upgrades.
- Buffers and resilience:
  - Large fiscal buffers and a flexible exchange rate.
  - Adequate level of international reserves.
  - Public debt, after rising to 40 percent of GDP during 2007–14, is projected to decline gradually under unchanged policies.
  - Liquidity buffers nearly 5 percent of GDP, including FX holdings equivalent to four months of total gross financing needs and a year of FX financing needs; authorities plan to gradually reduce the FX buffer considering global financial market conditions and progress in deepening government securities markets.
- Authorities’ view:
  - Broadly shared staff’s 2015 assessment but saw risks as broadly balanced, citing upside potential from agricultural output and EU funds absorption.

### Policy Discussions — Fiscal Policy: Budgeting and Building Institutions for the Future
- Fiscal policy achievements and vulnerabilities:
  - Sound fiscal policy has lowered vulnerabilities; projected gradual decline in public debt beginning this year under unchanged policies.
  - Solid debt management and falling gross financing needs provide room to absorb shocks, including underperformance of real GDP growth or realization of banking sector contingent liabilities.
- Institutional priorities implied by the assessment:
  - Improve medium-term planning and effectiveness of public spending to address infrastructure weaknesses.
  - Increase absorption of EU funds (noted quantitative target: raise absorption by 0.7 percent of GDP annually in staff estimate as a scenario to boost potential growth).
  - Advance structural reforms including SOE reform and gas price deregulation to support investment efficiency and fiscal sustainability.
  - Maintain liquidity and reserve buffers while deepening government securities markets to allow gradual FX buffer adjustment.

*Source: IMF staff report excerpt titled "1. Benefits of Boosting Quality Public Infrastructure Spending in Romania."*

### Box 1. Benefits of Boosting Quality Public Infrastructure Spending in Romania

### Box 1. Benefits of Boosting Quality Public Infrastructure Spending in Romania

### Current situation and constraints
- Romania’s high capital spending has been relatively inefficient in the past; rail and road infrastructure is particularly deficient.
- A key factor is the lack of a robust framework and capacity for developing, vetting, prioritizing, and executing public-investment projects.
- Despite some reforms under the current SBA, domestic governance and capacity issues continue to undermine absorption of EU-funds.
- The authorities aim to fully use the funds associated with the 2007–13 programming period.

### Staff simulations and growth impact
- Staff econometric analysis and simulations indicate that the GDP growth rate would be higher by ½ percentage point over the medium term, if available EU-funds were fully utilized.
- Simulation results are highly dependent on reforms to improve the quality and management of national projects and absorption of EU-funded projects.

### Benefits from reallocating to EU-funded projects
- An immediate boost to efficiency could come from a reallocation of budget resources toward EU-funded projects, which are subject to a more stringent project management process than those funded solely from the state budget.
- Shifting more projects toward EU funding should ensure more scrutiny and a higher multiplier.

### Recommended reforms and sequencing
- Advance initial efforts to improve prioritization of significant projects by better aligning the prioritization calendar with the budget calendar so that the prioritization process informs budget preparation.
- Publish the list of prioritized projects to inform the broader public about the allocation of resources to national priorities, including those identified in the Transport Master Plan currently under preparation.
- Make better use of technical assistance to enhance Romania’s capacity to absorb EU-funds.
- In the medium term, aim to establish one project management process that encompasses all projects notwithstanding funding sources.

### Implementation challenges and caveats
- Faster EU funds absorption and more efficient public investment are required to support higher capital spending planned in the 2015 budget.
- The simulation gains hinge on both full utilization of available EU-funds and reforms improving national project quality and management.

*Source: IMF staff box titled "Benefits of Boosting Quality Public Infrastructure Spending in Romania" in the IMF Romania report (content unit: _cr1579).*

### Box 3. Need for Reforms in the Insurance Sector

### Box 3. Need for Reforms in the Insurance Sector

### Overview of the insurance sector
- The sector is non systemic in magnitude but plagued by weaknesses.
- Total assets stood at about 3 percent of the GDP at end-2013.
- Total gross underwritten premiums reached 1.3 percent of GDP.
- There are 39 insurers in the industry, many of which are foreign subsidiaries.
- Non-life business represents about 80 percent of total activity.
- Sector weaknesses reflect a history of lax supervision and enforcement.
- Intervention and resolution are constrained by shortcomings in the legal framework.
- Risks for the overall financial sector derive mostly from reputational risks as direct linkages are limited.

### Failure of the largest insurer and immediate implications
- A price war in the car and housing insurance lines led to low levels of reserve coverage in some entities.
- In February 2014, the largest insurance company (Astra, a domestically owned non-life insurer with about 15 percent of market share and mostly in the motor vehicle insurance business) was put under special administration by KPMG.
- The supervisor needs to move decisively to ensure recapitalization or an orderly resolution.

### Required legal, regulatory, and supervisory reforms
- The insurance law and the legislation on the insurance guarantee fund need to be urgently amended to:
  - Enhance the resolution procedures.
  - Provide resolution financing.
- Strengthening supervision and enforcement is necessary to address legacy weaknesses.
- Providing the non-bank financial sector supervision with resolution powers for insurance companies is a priority (noted elsewhere in the report).

### Actions under way and planned reviews
- The European Commission is providing technical support.
- The FSA will engage in a comprehensive asset quality review with third party involvement later this year.

*IMF staff summary based on Box 3, "Need for Reforms in the Insurance Sector."*

### Annex I. Implementation of the 2012 Article IV Key

### Annex I. Implementation of the 2012 Article IV Key Recommendations

### Key recommendations and policy actions
- Exit EU Excessive Debt Procedure (EDP)
  - Exited EDP in 2013 after reducing the headline deficit 3 percentage points of GDP in 2012 in ESA terms.
- Establish framework to anchor fiscal policies
  - Established a structural deficit target rule; transposed EU fiscal compact into national legislation.
- Manage fiscal impact of ageing population
  - Implemented a basic health care package; proposed increase in retirement age for woman to 65.
- Increase EU funds absorption
  - Raised EU-funds absorption sevenfold to 52 percent as of December 2014.
- Maintain exchange rate flexibility
  - Reduced FX interventions, though the exchange rate has continued to play an important role in monetary policy.
- Continue intensive bank supervision
  - Undertook several collateral audits, on-site visits, and stress tests of banks and required capital injections where necessary.
- Mitigate rise in nonperforming loans (NPL)
  - Implemented an NPL reduction plan from mid-2014, including facilitating the sale and writeoff of fully provisioned NPLs.
- Modernize key network sectors
  - Implemented energy market deregulation through end-2014; however, gas tariff deregulation for residential consumers was postponed.
- Privatize public enterprises
  - Held initial or secondary public offerings in four energy companies and liquidated two others.
- Improve corporate governance of SOEs
  - Failed to fully introduce professional managers in SOEs, particularly in the transportation sector.
- Address labor market inefficiencies
  - Promulgated Apprenticeship Law to expand vocational training.
- Strengthen fiscal discipline (policy objective listed)
- Limit financial sector vulnerability (policy objective listed)
- Accelerate EU convergence through structural reforms (policy objective listed)

### Risk Assessment Matrix — main risks, transmission channels, expected impact, and policy responses
- Surge in global financial market volatility (Relative Likelihood: High; Expected Impact: Medium)
  - Transmission channels / expected impact:
    - Investors may sell Romanian financial assets after reassessing risks in light of rise in volatility.
    - Increase in borrowing costs which could depress GDP growth.
    - Risk of overshooting with implications for ability to service FX loans (57 percent of total bank loans).
  - Policy response:
    - Allow for exchange rate flexibility while offsetting excessive market volatility.
    - Utilize some of fiscal financing buffer until markets settle down.

- Shortfall in accelerating EU funds absorption (Relative Likelihood: High; Expected Impact: Medium)
  - Transmission channels / expected impact:
    - Weak capacity and complex bureaucracy continue to hamper EU funds absorption.
    - Delay in much-needed infrastructure upgrade would lower actual and potential economic growth.
    - Weaker quality of public outlays as budgeted co-financing could be redirected to current spending.
  - Policy response:
    - Redouble efforts to improve EU project implementation capacity.
    - Strictly adhere to national procurement rules to reduce regulatory arbitrage between spending on EU-funded projects and other items.

- Protracted period of slower growth or low inflation in the euro area (Relative Likelihood: High; Expected Impact: Medium)
  - Transmission channels / expected impact:
    - Exports could fall; in the short run, the substitution effect mitigates against this risk (i.e., shift in euro area demand toward cheaper products produced in Romania).
    - FDI could drop as investors reassess future euro area demand for Romanian exports.
    - Import low inflation from euro zone, reducing inflation expectations.
    - Lower actual and potential growth.
    - Potential widening of the current account deficit, possibly offset in part through substitution effect of shift in EU demand toward lower cost products.
  - Policy response:
    - Allow automatic stabilizers to work.
    - Accelerate absorption of EU funds.
    - Allow for exchange rate flexibility while offsetting excessive market volatility.

- Foreign banks rebalance portfolio exposure (Relative Likelihood: Medium; Expected Impact: High/Medium)
  - Transmission channels / expected impact:
    - Foreign parent banks accelerate ongoing deleveraging of remaining stock of funding (stock estimated at EUR 11.6 billion).
    - Reduction in credit supply.
    - Exchange rate pressure and possible deterioration in bank balance sheets given that FX loans comprise 57 percent of bank loans.
    - Other commercial banks may seek to grow market share, offsetting potential reduction in credit.
  - Policy response:
    - Reduce minimum reserve requirements.
    - Engage host country supervisors to develop a coordinated response to deleveraging.
    - Intensify liquidity monitoring.
    - Stand ready to provide liquidity support.

- Sustained tensions surrounding Russia/Ukraine (Relative Likelihood: Medium; Expected Impact: Low)
  - Transmission channels / expected impact:
    - Lower investor risk appetite for emerging Europe assets.
    - Disruption of normal trade relations through sanctions.
    - Interruption of Russian gas supply.
    - Increase in borrowing costs, but conversely potential for safe haven inflows in emerging Europe.
    - Modest direct financial and trade linkages limit potential impact.
    - Possible rationing of gas for some industrial users during winter months, though stored gas is likely sufficient to cover a large portion of domestic demand.
  - Policy response:
    - Communicate clearly limited economic and financial links with Russia/Ukraine.
    - Ease monetary policy in case low inflation becomes entrenched.

- Notes on the RAM
  - 1/ The RAM shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks is staff's subjective assessment of risks surrounding the baseline. Non-mutually exclusive risks may interact and materialize jointly.
  - 2. Shortfall in accelerating EU funds absorption
  - 3. Protracted period of slower growth or low inflation in the euro area
  - 4. Foreign banks rebalance portfolio exposure.
  - 5. Sustained tensions surrounding Russia/Ukraine

*Source: Annex I. Implementation of the 2012 Article IV Key Recommendations (_cr1579).*

### 8.2 percent of GDP in 2015. The main risks arise from underperformance of GDP growth and a

### _cr1579 - 8.2 percent of GDP in 2015. The main risks arise from underperformance of GDP growth and a

### Debt dynamics and fiscal risks
- Public debt, including guarantees, is projected to peak in 2015 at 40.4 percent of GDP.
- Without the projected increase in Treasury deposits of 0.5 percent of GDP, public debt would have peaked in 2014 at 40.2 percent of GDP.
- Gross financing needs are projected to decline from 9 percent of GDP in 2014 to below 6 percent of GDP by 2020.
- The stress test scenario with weaker GDP growth could push the public debt ratio to nearly 50 percent of GDP in 2017 in the DSA scenario, but still below the 60 percent threshold under the Stability and Growth Pact.
- A banking sector contingent liability shock (one-time bailout increasing non-interest expenditure by 10 percent of banking sector assets) would increase debt to 45.4 percent of GDP in 2015 (the peak under this shock).
- SOE debt is estimated at around 7 percent of GDP (including SOEs under insolvency procedures or in liquidation).
- Contingent liabilities are largely contained because all outstanding guarantees are already included in public debt.

### Baseline macroeconomic and fiscal assumptions
- Output gap expected to close by 2020.
- Real GDP growth is expected to reach 3½ percent (3.5 percent), more than 3 percentage points below the pre-crisis boom period average.
- Fiscal policy assumes authorities reach a cash deficit target of 1.8 percent of GDP in 2015 (-1.45 percent of GDP in ESA terms), consistent with the medium-term budgetary objective and new fiscal rules under the Fiscal Compact.
- Projected primary balances are greater than the debt-stabilizing balance in the baseline.
- A zero primary balance (rather than a small surplus) is included as a possible scenario in assessing the distribution of debt dynamics in the fan chart to reflect risks of adjustment fatigue.

### Public debt composition, exposures, and risk management
- Foreign currency-denominated debt accounts for about 60 percent of public debt, exposing public debt to exchange rate risk.
- About 28 percent of total public debt is official financing (longer-term).
- Average maturity of government securities issued on the domestic market is about 3 years.
- Non-resident holdings of domestic debt securities are about 20 percent, increasing exposure to shifts in international capital flows after strong portfolio investment by non-residents over the past 12 months.
- Authorities maintain a foreign-currency financing buffer (excluding privatization proceeds) that was four months of gross financing needs in January 2015; authorities signaled a desire to reduce the buffer gradually to three months, depending on market conditions.
- Authorities are addressing rollover risks by issuing longer-term securities and lengthening the yield curve.

### Stress tests, scenarios, and projections
- Baseline public DSA projections (selected figures, in percent of GDP): Nominal gross public debt: 2013 22.5; 2014 38.8; 2015 40.4; 2016 40.4; 2017 39.7; 2018 38.8; 2019 38.3; 2020 37.4; 2020 36.6 (table entries preserved as presented).
- Public gross financing needs: 2013 9.6; 2014 11.6; 2015 9.1; 2016 8.2; 2017 8.2; 2018 6.1; 2019 6.4; 2020 6.2; 2020 5.9 (table entries preserved as presented).
- Real GDP growth (selected years): 2013 3.3; 2014 3.4; 2015 2.9; 2016 2.7; 2017 2.9; 2018 3.4; 2019 3.5; 2020 3.5.
- Inflation (GDP deflator, in percent): 2013 9.6; 2014 3.4; 2015 2.1; 2016 2.8; 2017 2.5; 2018 2.5; 2019 2.5; 2020 2.5.
- Effective interest rate (in percent): 2013 7.9; 2014 5.1; 2015 4.4; 2016 4.1; 2017 4.1; 2018 4.2; 2019 3.9; 2020 4.0; 2020 4.2 (table entries preserved as presented).
- Stress tests conducted include: Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, and Customized shocks; scenarios show varying peaks in debt but baseline sustainability maintained under most single shocks.

### External vulnerabilities and external debt sustainability
- Gross external debt was about 66 percent of GDP at end-2013, around one-third of which was public debt.
- Almost one-fifth of external debt is at short-term maturities, mainly of the non-bank private sector.
- Around half of the short-term external debt of the non-bank private sector is intra-company loans with relatively low rollover risks.
- Projected medium-term current account deficit is 3.6 percent of GDP and is in line with a declining external debt-to-GDP ratio.
- Bound tests indicate a 30 percent depreciation would substantially increase the external debt-to-GDP ratio over the medium term; other standard shocks would lead to a slower decline in the external debt-to-GDP ratio.
- Baseline external debt (percent of GDP, selected): 2014 59.9; 2015 54.3; 2016 52.9; 2017 50.7; 2018 48.5; 2019 45.9; 2020 43.6.
- Gross external financing need (in percent of GDP): 2014 32.3; 2015 21.6; 2016 18.6; 2017 17.8; 2018 18.3; 2019 17.7; 2020 17.0.

### Policy implications and authorities’ actions
- Continued fiscal adjustment in the baseline is identified as ensuring debt sustainability.
- Authorities maintain a foreign-currency financing buffer and plan to manage it (signal to reduce from four months to three months of gross financing needs depending on market conditions).
- Debt management strategy focuses on lengthening maturities, issuing longer-term securities, and addressing rollover risks.
- Structural reforms and accelerated EU funds absorption are noted as upside potential for medium-term growth if pace accelerates substantially.

### Data, governance, and technical assistance (selected)
- Data provision is adequate for surveillance; national accounts, price, fiscal, and balance of payments data judged adequate.
- National accounts produced using ESA 2010; CPI subject to standard annual re-weighting.
- Romania is a subscriber to the Fund’s Special Data Dissemination Standard (SDDS) since August 4, 2005.
- The Fund provided about 20 technical assistance missions and expert visits since 2012 in areas including tax administration, public financial management, monetary policy, contingency planning, and NPLs.
- Fiscal Transparency Evaluation pilot took place in February 2014; findings published in March 2015.

*Source: IMF staff report and Public Sector Debt Sustainability Analysis (DSA), Romania — as presented in the supplied content.*

### 1.      This statement provides information that has become available since the

### 1.      This statement provides information that has become available since the

### New information since the Staff Report (March 11, 2015)
- The information summarized does not alter the thrust of the staff appraisal.

### Fiscal developments and cash budget (first two months of 2015)
- Cash budget recorded a surplus of 0.3 percent of GDP for the first two months of 2015 compared to a deficit of 0.5 percent of GDP during the same period of 2014.
- Drivers of the first-two-months 2015 surplus:
  - Spending was lower by 0.6 percentage points of GDP relative to last year, with lower subsidies and spending on goods, services, and capital accounting for most of the drop.
  - Total revenues were higher by 0.2 percentage points of GDP, driven mostly by higher VAT and non-tax revenue receipts and reflecting base effects as well as stronger domestic demand.

### Proposed tax changes and revenue implications
- Authorities are considering reduction of tax rates; plans are still evolving, including how to offset revenue loss.
- Staff estimate of net loss in budget revenues in 2016 from the proposed tax changes: 2.2 percent of GDP.
- This estimate accounts for projected impact on revenues from stronger economic activity: 0.7–1.0 percent higher nominal GDP in 2016.
- Staff note: the revenue shortfall would widen further from 2017 with proposed additional tax rate reductions.
- At this stage, staff does not have information about potential measures authorities may take to offset the proposed tax changes.

### Inflation (February 2015 and recent evolution)
- In February, headline annual inflation was at 0.4 percent, unchanged from the previous month.
- Core inflation declined to 1 percent.
- Additional context from authorities' statement:
  - CPI inflation dropped from 6.3 percent at end-2008 to 0.41 percent in January 2015.
  - At end-2014, annual CPI inflation was 0.83 percent.
  - Inflation is projected to remain low in 2015, reaching an annual average of about 1 percent.

### IMF Executive Board assessment (summary of Directors' views)
- Directors welcomed the economic recovery and commended reduction of internal and external imbalances through significant fiscal consolidation and prudent monetary and financial sector policies.
- Key Director recommendations and cautions:
  - Maintain prudent fiscal policies to safeguard fiscal consolidation gains and put public debt on a firm downward path.
  - Planned tax reductions should be accompanied by offsetting measures.
  - Broaden the tax base and step up efforts to improve tax administration to help cover medium-term spending pressures.
  - Strengthen public expenditure management and investment project planning to enhance spending efficiency and ensure high-quality infrastructure investments.
  - Better investment prioritization aligned with the budget cycle and improved EU funds absorption.
  - There is room for further monetary easing given below-target inflation; recommend strengthening the monetary policy framework toward full-fledged inflation targeting.
  - Some Directors see a transitory role for the exchange rate given significant euroization in balance sheets.
  - Euro adoption should follow sufficient institutional and structural preparation and progress with real convergence.
  - Continue close supervision of the banking system to further improve asset quality; strengthen nonbank supervision and set up effective resolution framework for insurance companies.
  - Reinvigorate structural reforms, restructure state-owned enterprises (SOEs), improve governance, increase private ownership, and sustain energy market deregulation.
  - Increase labor market participation, particularly among the young, low-skilled, and women.

### Macroeconomic outlook and country context (Executive summary points)
- Romania’s recovery described as more entrenched and broad-based, with private consumption pickup on rising real disposable income.
- Persistent features and risks:
  - Inflation has decelerated substantially over the past two years and a negative output gap persists.
  - Banking sector has reduced non-performing loans though they remain high; private sector credit has fallen since 2013.
  - Income convergence with the EU has been slow; youth unemployment remains elevated; weak public infrastructure is a bottleneck.
  - Increased volatility in the external environment and failure to implement infrastructure upgrades present downside risks.
- Policy priorities emphasized: combine sound macroeconomic policies with measures to boost public spending efficiency, re-invigorate SOE reforms, and strengthen the financial sector; maintain adequate reserve buffers and stronger public and private balance sheets.

### Selected economic and social indicators (2009–15, as presented)
- Real GDP (Annual percentage change): -7.1; -0.8; 1.1; 0.6; 3.4; 2.9; 2.7
- Contributions to GDP growth — Domestic demand: -14.0; -0.7; 1.1; -0.5; -0.9; 2.8; 3.1
- Contributions to GDP growth — Net exports: 6.9; -0.1; -0.1; 1.1; 4.3; 0.1; -0.2
- Consumer price index (CPI, average): 5.6; 6.1; 5.8; 3.3; 4.0; 1.1; 1.0
- CPI (end of period): 4.8; 8.0; 3.1; 5.0; 1.6; 0.8; 2.2
- Core price index (CPI, end of period): 2.3; 4.1; 2.4; 3.3; -0.1; 1.2; 1.2
- Producer price index (average): 2.5; 4.4; 7.1; 5.4; 2.1; -0.1; ...
- Unemployment rate (average): 6.5; 7.0; 7.2; 6.8; 7.1; 6.8; 6.7
- Nominal wages: 8.4; 2.5; 4.9; 5.0; 5.0; 5.2; 5.3
- Gross domestic investment (percent of GDP): 27.1; 26.8; 27.9; 27.0; 24.5; 23.0; 23.7
- Gross national savings (percent of GDP): 22.6; 22.3; 23.2; 22.5; 23.7; 22.5; 22.6
- General government revenue (percent of GDP): 30.6; 31.6; 32.1; 32.4; 31.4; 31.9; 32.0
- General government expenditure (percent of GDP): 37.8; 37.9; 36.3; 34.8; 33.8; 33.8; 33.9
- Fiscal balance (percent of GDP): -7.1; -6.3; -4.2; -2.5; -2.5; -1.9; -1.8
- External financing (percent of GDP): 2.6; 2.8; 2.7; 3.2; 2.1; 1.9; 0.8
- Domestic financing (percent of GDP): 4.6; 3.5; 1.5; -0.8; 1.4; 1.2; 1.5
- Primary balance (percent of GDP): -5.9; -4.9; -2.6; -0.7; -0.8; -0.3; -0.4
- Structural fiscal balance (percent of GDP): -8.0; -6.1; -3.4; -1.7; -1.7; -0.6; -1.1
- Gross public debt (including guarantees, percent of GDP): 23.3; 30.5; 33.9; 37.5; 38.8; 40.4; 40.5
- Broad money (M3, annual % change): 9.0; 6.9; 6.6; 2.7; 8.8; 8.1; 7.5
- Credit to private sector (annual % change): 0.9; 4.7; 6.6; 1.3; -3.3; -3.1; 3.5
- NBR policy rate (end of period, percent): 8.0; 6.25; 6.0; 5.25; 4.0; 2.75; 2.25
- Interbank offer rate (1 week, end of period, percent): 10.7; 3.6; 6.0; 5.9; 1.8; 0.7; 0.6
- Current account balance (percent of GDP): -4.5; -4.6; -4.6; -4.5; -0.8; -0.5; -1.1
- Gross official reserves: 25.6; 28.3; 27.9; 26.4; 24.6; 23.6; 22.7
- Gross external debt (percent of GDP): 67.4; 72.9; 74.0; 74.4; 66.6; 59.9; 54.3
- Lei per euro (end of period): 4.2; 4.3; 4.3; 4.4; 4.5; 4.5; 4.4
- Nominal GDP (in bn RON, memorandum): 510.5; 533.9; 565.1; 596.7; 637.6; 669.5; 706.6
- Potential output growth (percent): 2.5; 2.0; 1.9; 2.1; 2.3; 2.5; 2.7
- GDP per capita (current EUR, 2013): 7,100
- GDP per capita, PPP (current international $, 2013): 18,635
- People at risk of poverty or social exclusion: 40.4% (2013)

### Monetary and financial sector developments (authorities' statement)
- NBR lowered the policy rate to 2.25 percent in February 2015.
- Measures included narrowing of the interest rate corridor and lowering the rate of minimum reserve requirement.
- Banking sector improvements:
  - NPLs declined in 2014 by about 8 percentage points to 13.9 percent.
  - IFRS provisioning ratio increased to 68.9 percent.
  - Capitalization of the banking sector increased above 17 percent.
- Domestic currency loan growth recovered, aided by policy rate cuts and easing money market liquidity conditions.
- NBR commitments: continue close supervision, conduct top-down and bottom-up solvency and liquidity stress tests, strengthen non-bank supervision, and provide resolution powers for insurance companies.
- Authorities drafting a new personal insolvency law; commit to adopt only after thorough impact assessment and broad stakeholder consultations.

### Structural reforms and SOE progress
- Central government-owned SOE arrears reduced by 1.5 percent of GDP over the past two years.
- Local government-owned SOE arrears at around 1 percent of GDP at end-2014.
- SOE sector became profitable following several years of aggregate losses.
- Privatization and market developments:
  - Landmark IPO of Romgaz launched; 10 percent of shares in Nuclearelectrica sold.
  - Energy regulator advanced liberalization calendars; deregulation of gas and electricity markets for non-residential consumers.
  - Romania removed obstacles to gas exports and linked electricity grid to four neighbors.
- Transport sector lagging, especially SOE corporate governance:
  - Rail freight operator CFR Marfa downsized staff by more than one fourth after a failed privatization.
  - Marfa’s privatization process stalled and further restructuring is needed.
- Authorities committed to improve SOE governance, prepare restructuring plans, work with the World Bank on legislative framework, focus on job creation, remove barriers to employment, reduce skill mismatches (especially for the young), and prioritize transport sector investments via a Transport Master Plan sent to the European Commission for consultation.

*Source: IMF staff statement and Executive Board documentation (March 2015).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1579.pdf_