{
  "title": "Romania -- 2007 Article IV Consultation, Concluding Statement of the Mission",
  "publication": "IMF News, March 13, 2007",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs031307a",
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  "summary": "Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries).",
  "publishDate": "2007-03-13",
  "sections": [
    {
      "heading": "Recent Developments",
      "content": "- Accession milestone and past performance\n  - Per capita GDP measured in Euro rose by 130 percent during 2000-06, the fastest among the 27 EU countries.\n  - Real GDP growth was 7.7 percent in 2006.\n  - CPI inflation was 4.9 percent y-o-y at end-2006, against the NBR's 5 percent central target.\n- Demand, credit, and external balances\n  - Real domestic credit is estimated to have grown by 66 percent in 2006.\n  - The current account deficit widened to 10.3 percent of GDP in 2006, compared with 8.7 percent in 2005.\n  - FDI covered 91 percent of the current account deficit.\n- Fiscal developments\n  - A sharp rise in government spending in December led to an annual deficit of 1.7 percent of GDP compared with a surplus of 1.2 percent of annual GDP during January-November.\n  - For the year, government expenditure rose by 20 percent in real terms.\n  - More than 40 percent of the capital budget was spent in December alone.\n  - The government revised the budget four times, increasing the deficit target from 0.5 percent of GDP to 2.5 percent.\n- Wages and employment\n  - Government employment increased by almost 30,000 (3⅓ percent).\n  - The government's wage bill increased by 36 percent last year.\n  - Average statutory wage increases of 9-15 percent (in two rounds) and a minimum wage increase of 6½ percent were implemented.\n- Monetary policy and exchange rate\n  - The NBR unified official policy and effective rates at 8.75 percent in 2006, then reduced the policy rate to 8 percent on February 9.\n  - Under partial sterilization, the effective rate is about 6-7 percent.\n- Structural reform progress\n  - Privatization: BCR privatization completed; CEC privatization postponed.\n  - Domestic gas producer price is only 47 percent of the international import price.\n  - Judicial reform progressed in line with EU commitments, but questions remain on implementation."
    },
    {
      "heading": "Macroeconomic Outlook and Policy Recommendations",
      "content": "- Baseline 2007 projection and risks\n  - Mission's baseline scenario for 2007 projects continued strong growth, a widening in the current account deficit to 12 percent of GDP, and an inflation outcome outside the target band at end-2007.\n  - A delay in strengthening macroeconomic policies increases the risk of a change in market sentiment and sudden capital outflows, with consequent exchange rate pressures and banking-system strain.\n- Policy guidance\n  - A clear and coherent set of policies is required to minimize external and financial-system vulnerabilities and to retain positive foreign investor sentiment.\n  - Tightening of policies (fiscal and incomes) will relieve some burden on monetary policy and help contain the external current account deficit while meeting the NBR's inflation target.\n  - Convergence requires increased investment (including efficient government spending) and industry restructuring to sustain productivity gains."
    },
    {
      "heading": "Fiscal and Incomes Policies",
      "content": "- Assessment of the approved budget\n  - The approved budget targets a deficit of 2.8 percent of GDP.\n  - The mission projects that, on current policies, the underlying budget deficit is about 3.7 percent of GDP.\n  - Recognition of additional claims related to the Property Fund and possible use of National Development Fund resources would add further to the deficit.\n- Recommended fiscal stance\n  - The mission strongly urges tightening fiscal policy and favors aiming for a general government deficit of below 1 percent of GDP this year, with a smooth path for medium-term fiscal consolidation.\n  - Given limited scope for revenue measures this year, the majority of adjustment should fall on the expenditure side.\n  - Potential savings: capital spending (given last December's sharp increase), goods and services, and transfers.\n- Public-sector wage policy recommendations\n  - Reduce envisaged wage increases, impose strict control on bonuses, and closely monitor additional hirings.\n  - Public sector wages should increase once a year and be incorporated in the budget to anchor inflation expectations in single digits.\n  - Wages need to better reflect skill needs to avoid undermining civil service reform and absorption of EU funds.\n- Revenue and expenditure reform\n  - Resist calls for further tax reduction under the flat tax (except the social contributions tax) and avoid distortionary exemptions (e.g., a reduced VAT rate or exemption of reinvested profits).\n  - Increase revenue ratio toward EU levels and prioritize structural expenditure reforms: civil service, health, education, pensions, and infrastructure.\n- Institutional improvements\n  - Improve transparency, monitoring, and establish a credible medium-term fiscal framework that fully incorporates post-accession EU receipts and expenditure.\n  - Avoid multiple budget revisions and improve public-spending management to ensure a uniform spending pattern over the year."
    },
    {
      "heading": "Monetary and Exchange Rate Policies",
      "content": "- Strategy and timeline\n  - NBR's guidelines call for entry into ERM II by 2012; the timetable is described as feasible and appropriate.\n  - The NBR faces the dilemma where higher interest rates to meet inflation goals may increase nominal appreciation pressure.\n- Policy recommendations\n  - The long-run solution is to lower nominal interest rates by firmly anchoring inflationary expectations through a solidly-credible IT framework.\n  - The NBR needs to make clear that inflation, not the exchange rate, is its primary objective and to employ interest-rate policy effectively.\n  - Reunify the headline and effective policy interest rates as soon as possible; bring the effective rate in line with the headline policy rate of 8 percent.\n  - If fiscal and incomes policies are not tightened, an additional hike in interest rates would most likely be needed.\n- Credit and reserve considerations\n  - Maintain vigilance on rapid credit growth; overly-rapid credit growth magnifies distortions and raises medium-term vulnerabilities.\n  - Administrative measures on lending are generally ill-suited to macro stabilization; effective supervision is essential following relaxation of some administrative measures.\n  - Reserve requirements are significantly higher than in other EU members; efforts to lower them should proceed cautiously to avoid adding to macroeconomic imbalances."
    },
    {
      "heading": "Financial Sector and Capital Market Issues",
      "content": "- Soundness and resilience\n  - Financial soundness indicators suggest the banking sector is well-positioned: high rates of return on equity, high capital adequacy ratios, and moderate NPL ratios.\n  - NBR stress tests suggest resilience to direct interest rate and exchange rate movements and to a slowdown in growth.\n- Vigilance and prudential policy\n  - Rapid credit growth increases indirect exposures through loan portfolios, requiring high capital ratios and conservative provisioning.\n  - An FSAP update is welcomed given the changed environment since the 2003 FSAP."
    },
    {
      "heading": "Structural Reforms",
      "content": "- Key reform priorities\n  - Announce a schedule for increased domestic producer gas prices to achieve import parity.\n  - Improve efficiency of government spending to support private sector activity.\n  - Increase labor supply through education, training, and enhanced labor-market flexibility.\n  - Strengthen efforts to introduce the second pillar on January 1, 2008, while revisiting some parameters of the first pillar.\n  - Maintain momentum on privatization, including companies in the energy sector and smaller companies.\n  - Forcefully implement the government's judicial reform agenda to strengthen public administration, reduce corruption, and improve financial discipline and the business climate."
    },
    {
      "heading": "Euro Adoption",
      "content": "- Approach and risks\n  - Authorities emphasize real convergence prior to euro adoption; this underscores the urgency of structural reforms.\n  - The envisaged timetable for euro adoption is pragmatic but risks leading to a more gradual implementation of required convergence policies.\n  - Recommendation: adopt a balanced approach that contains the right incentives for accelerated reform.\n\nConcluding statement of the IMF mission, March 7, 2007.\n\n---\n\n\n References\n\n- Romania and the IMF\n- Mission Concluding Statements\n- PRESS CENTER\n- Article IV\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs031307a"
    }
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    "Published: March 13, 2007",
    "Accession milestone and past performance",
    "Demand, credit, and external balances",
    "Fiscal developments",
    "Wages and employment",
    "Monetary policy and exchange rate",
    "Structural reform progress",
    "Baseline 2007 projection and risks",
    "Policy guidance",
    "Assessment of the approved budget",
    "Recommended fiscal stance",
    "Public-sector wage policy recommendations",
    "Revenue and expenditure reform",
    "Institutional improvements",
    "Strategy and timeline",
    "Policy recommendations",
    "Credit and reserve considerations",
    "Soundness and resilience",
    "Vigilance and prudential policy",
    "Key reform priorities",
    "Approach and risks",
    "[Romania and the IMF](http://www.imf.org/external/country/ROU/index.htm)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
  ],
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