## Romania -- 2007 Article IV Consultation, Concluding Statement of the Mission _IMF News, March 13, 2007_ ## Source details **Canonical URL:** [Romania -- 2007 Article IV Consultation, Concluding Statement of the Mission](https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs031307a) ## Other formats - [Markdown version](/en/news/articles/2015/09/28/04/52/mcs031307a/index.md) - [Structured JSON version](/en/news/articles/2015/09/28/04/52/mcs031307a/index.json) - [Bundle manifest](/en/news/articles/2015/09/28/04/52/mcs031307a/bundle-manifest.json) ## Bibliographic details - Published: March 13, 2007 --- ### Recent Developments - Accession milestone and past performance - Per capita GDP measured in Euro rose by 130 percent during 2000-06, the fastest among the 27 EU countries. - Real GDP growth was 7.7 percent in 2006. - CPI inflation was 4.9 percent y-o-y at end-2006, against the NBR's 5 percent central target. - Demand, credit, and external balances - Real domestic credit is estimated to have grown by 66 percent in 2006. - The current account deficit widened to 10.3 percent of GDP in 2006, compared with 8.7 percent in 2005. - FDI covered 91 percent of the current account deficit. - Fiscal developments - 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. - For the year, government expenditure rose by 20 percent in real terms. - More than 40 percent of the capital budget was spent in December alone. - The government revised the budget four times, increasing the deficit target from 0.5 percent of GDP to 2.5 percent. - Wages and employment - Government employment increased by almost 30,000 (3⅓ percent). - The government's wage bill increased by 36 percent last year. - Average statutory wage increases of 9-15 percent (in two rounds) and a minimum wage increase of 6½ percent were implemented. - Monetary policy and exchange rate - 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. - Under partial sterilization, the effective rate is about 6-7 percent. - Structural reform progress - Privatization: BCR privatization completed; CEC privatization postponed. - Domestic gas producer price is only 47 percent of the international import price. - Judicial reform progressed in line with EU commitments, but questions remain on implementation. ### Macroeconomic Outlook and Policy Recommendations - Baseline 2007 projection and risks - 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. - 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. - Policy guidance - A clear and coherent set of policies is required to minimize external and financial-system vulnerabilities and to retain positive foreign investor sentiment. - 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. - Convergence requires increased investment (including efficient government spending) and industry restructuring to sustain productivity gains. ### Fiscal and Incomes Policies - Assessment of the approved budget - The approved budget targets a deficit of 2.8 percent of GDP. - The mission projects that, on current policies, the underlying budget deficit is about 3.7 percent of GDP. - Recognition of additional claims related to the Property Fund and possible use of National Development Fund resources would add further to the deficit. - Recommended fiscal stance - 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. - Given limited scope for revenue measures this year, the majority of adjustment should fall on the expenditure side. - Potential savings: capital spending (given last December's sharp increase), goods and services, and transfers. - Public-sector wage policy recommendations - Reduce envisaged wage increases, impose strict control on bonuses, and closely monitor additional hirings. - Public sector wages should increase once a year and be incorporated in the budget to anchor inflation expectations in single digits. - Wages need to better reflect skill needs to avoid undermining civil service reform and absorption of EU funds. - Revenue and expenditure reform - 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). - Increase revenue ratio toward EU levels and prioritize structural expenditure reforms: civil service, health, education, pensions, and infrastructure. - Institutional improvements - Improve transparency, monitoring, and establish a credible medium-term fiscal framework that fully incorporates post-accession EU receipts and expenditure. - Avoid multiple budget revisions and improve public-spending management to ensure a uniform spending pattern over the year. ### Monetary and Exchange Rate Policies - Strategy and timeline - NBR's guidelines call for entry into ERM II by 2012; the timetable is described as feasible and appropriate. - The NBR faces the dilemma where higher interest rates to meet inflation goals may increase nominal appreciation pressure. - Policy recommendations - The long-run solution is to lower nominal interest rates by firmly anchoring inflationary expectations through a solidly-credible IT framework. - The NBR needs to make clear that inflation, not the exchange rate, is its primary objective and to employ interest-rate policy effectively. - 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. - If fiscal and incomes policies are not tightened, an additional hike in interest rates would most likely be needed. - Credit and reserve considerations - Maintain vigilance on rapid credit growth; overly-rapid credit growth magnifies distortions and raises medium-term vulnerabilities. - Administrative measures on lending are generally ill-suited to macro stabilization; effective supervision is essential following relaxation of some administrative measures. - Reserve requirements are significantly higher than in other EU members; efforts to lower them should proceed cautiously to avoid adding to macroeconomic imbalances. ### Financial Sector and Capital Market Issues - Soundness and resilience - Financial soundness indicators suggest the banking sector is well-positioned: high rates of return on equity, high capital adequacy ratios, and moderate NPL ratios. - NBR stress tests suggest resilience to direct interest rate and exchange rate movements and to a slowdown in growth. - Vigilance and prudential policy - Rapid credit growth increases indirect exposures through loan portfolios, requiring high capital ratios and conservative provisioning. - An FSAP update is welcomed given the changed environment since the 2003 FSAP. ### Structural Reforms - Key reform priorities - Announce a schedule for increased domestic producer gas prices to achieve import parity. - Improve efficiency of government spending to support private sector activity. - Increase labor supply through education, training, and enhanced labor-market flexibility. - Strengthen efforts to introduce the second pillar on January 1, 2008, while revisiting some parameters of the first pillar. - Maintain momentum on privatization, including companies in the energy sector and smaller companies. - Forcefully implement the government's judicial reform agenda to strengthen public administration, reduce corruption, and improve financial discipline and the business climate. ### Euro Adoption - Approach and risks - Authorities emphasize real convergence prior to euro adoption; this underscores the urgency of structural reforms. - The envisaged timetable for euro adoption is pragmatic but risks leading to a more gradual implementation of required convergence policies. - Recommendation: adopt a balanced approach that contains the right incentives for accelerated reform. *Concluding statement of the IMF mission, March 7, 2007.* --- ## References - [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) _Source: https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs031307a_