Romania: Staff Concluding Statement of the 2018 Article IV Mission
IMF News, March 16, 2018
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- Published: March 16, 2018
Key findings and near-term outlook
- The Romanian economy grew to 7 percent in 2017—the highest in the EU.
- Growth in 2017 was fuelled by domestic consumption, a multi-year fiscal expansion, and minimum wage hikes.
- The current account deficit widened as expanding imports offset improving export demand.
- Private sector wages are growing at double-digit rates in a tight labor market.
- Inflation: the National Bank of Romania (NBR) target was met in 2017, but inflation rose to 4.7 percent in February.
- IMF projection: GDP growth of about 5 percent in 2018 and slowing towards 3 percent over the medium term.
- Risks are tilted to the downside: global financial volatility, deterioration in fiscal and external balances, or weakening of institutions could dent investor confidence.
- Continued expansionary policies would undermine capacity to withstand a severe shock.
Fiscal and monetary policy recommendations
- Prefer a combination of fiscal moderation and monetary tightening to avert overheating and enhance macro-financial stability.
- Monetary policy: continue raising the policy rate and manage liquidity to align market and policy rates to rein in inflation and anchor expectations.
- Fiscal policy:
- Adopt a more conservative fiscal stance to reduce the burden on monetary policy and re-balance consumption and investment.
- Reduce the deficit below a cyclically neutral level in the short run and further to 1.5 percent of GDP by 2020, contributing to a smooth return to Romania’s medium-term budgetary objective (MTO) under EU commitments.
- Estimated measures: relative to current policies, measures amounting to 0.6 percent of GDP are needed to meet the government’s 3 percent of GDP deficit target for 2018; a smaller deficit target would be desirable.
- These measures should be high quality, avoid further deterioration of the budget structure, and protect capital spending.
- Rationale: relying solely on monetary tightening would require interest rates to rise to levels that increasingly weigh on investment and competitiveness.
Governance, public finance, and structural reform priorities
- Key principles: predictability, prioritization, efficiency; medium-term oriented, rules-based governance; continued fight against corruption; resilient financial sector.
- Revenue mobilization:
- Romania has comparatively low (and declining) tax revenue as a share of GDP.
- Tax changes should be more predictable and less frequent; avoid further tax rate cuts.
- Conduct a comprehensive review of the tax system given multiple recent changes.
- Improve tax collection efficiency by rationalizing exemptions and reforming tax administration, especially for the value-added tax (VAT).
- Implement and operationalize new IT infrastructure in revenue administration (priority given outdated and fragile systems).
- Expenditure efficiency:
- Prioritize large investment projects and reflect prioritization in annual budgets.
- Conduct expenditure reviews for key sectors to identify efficiency gains.
- Adopt a centralized procurement system to generate savings on goods and services spending.
- The Ministry of Finance plans to make progress in these areas.
- EU funds absorption:
- Improve absorption of EU funds for large investment projects to address infrastructure gaps and create space for other essential spending.
- Improve management at line ministries and prepare new projects timely for the next EU funds programming period.
- Efforts by the Ministry of EU funds and Ministry of Finance to facilitate faster absorption and reduce administrative burdens are encouraging.
- Fiscal responsibility law (FRL):
- Romania has a sound FRL but fiscal rules have not been observed.
- Better enforcement would increase fiscal discipline and predictability.
- Integrate the Fiscal Council’s work into the budget process.
- State-owned enterprises (SOEs) and governance:
- Re-energize structural reforms to improve service and financial performance of many SOEs via strong corporate governance.
- Preserve Law 111 and avoid weakening existing corporate governance legislation.
- Resume restructuring and privatization of SOEs.
- Design of any sovereign investment fund and development bank should reflect international experience on risks and best practices on governance, reporting, and fiscal risk management.
- Fight against corruption:
- Continue progress on corruption reduction to improve revenue, enhance spending efficiency, and strengthen competitiveness.
- Uphold judicial independence and the rule of law as cornerstones of anti-corruption efforts.
Financial sector: resilience and supervisory recommendations
- Banking sector metrics and vulnerabilities:
- NPLs declined to 6.4 percent of total loans in December 2017, close to the EU average.
- Potential new risks: high bank exposure to the Romanian sovereign and real estate sector; banks’ funding in foreign exchange (FX); fast growth of non-bank financial lenders.
- About 40 percent of banks’ liabilities and assets remain FX-denominated.
- Recommended measures:
- Impose a Debt-Service-to-Income (DSTI) limit on mortgage lending (including mortgages under the Prima Casa program) to mitigate real estate exposure and boost borrower resilience; the government’s strategy to gradually scale back Prima Casa is welcome.
- Calibrate capital surcharges—preferably the Systemic Risk Buffer—to increase resilience against potential losses from sovereign exposures while avoiding unintended market impacts.
- Manage FX liquidity risks proactively: monitor a currency-differenciated Net Stable Funding Ratio and impose a currency differenciated Liquidity Coverage Ratio.
- Continue bolstering supervisory practices and finalize and implement the framework for Emergency Liquidity Assistance.
- The central bank should establish liquidity facilities for the Bank Deposit Guarantee Fund.
- Strengthen supervision of non-bank financial lenders to reduce regulatory arbitrage, mitigate credit risks, and avoid reputational risks to the financial system.
- Legislative caution:
- Avoid legislative initiatives that would reduce credit to the real economy and slow NPL resolution; examples include proposals to cap interest rates for household lending and to cap prices at which individuals re-purchase debts acquired by third parties.
Mission and process
- An IMF staff team visited Bucharest during March 6-16 to conduct the 2018 Article IV consultation discussions.
- The team thanked the authorities and counterparts for hospitality and constructive dialogue.
Romania: Staff Concluding Statement of the 2018 Article IV Mission (March 16, 2018).