{
  "title": "Romania: Staff Concluding Statement of the 2018 Article IV Mission",
  "publication": "IMF News, March 16, 2018",
  "sourceUrl": "https://www.imf.org/en/news/articles/2018/03/16/mcs03162018-romania-staff-concluding-statement-of-the-2018-article-iv-mission",
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  "summary": "The Romanian economy grew to 7 percent in 2017—the highest in the EU.",
  "publishDate": "2018-03-16",
  "sections": [
    {
      "heading": "Key findings and near-term outlook",
      "content": "- The Romanian economy grew to 7 percent in 2017—the highest in the EU.\n- Growth in 2017 was fuelled by domestic consumption, a multi-year fiscal expansion, and minimum wage hikes.\n- The current account deficit widened as expanding imports offset improving export demand.\n- Private sector wages are growing at double-digit rates in a tight labor market.\n- Inflation: the National Bank of Romania (NBR) target was met in 2017, but inflation rose to 4.7 percent in February.\n- IMF projection: GDP growth of about 5 percent in 2018 and slowing towards 3 percent over the medium term.\n- Risks are tilted to the downside: global financial volatility, deterioration in fiscal and external balances, or weakening of institutions could dent investor confidence.\n- Continued expansionary policies would undermine capacity to withstand a severe shock."
    },
    {
      "heading": "Fiscal and monetary policy recommendations",
      "content": "- Prefer a combination of fiscal moderation and monetary tightening to avert overheating and enhance macro-financial stability.\n- Monetary policy: continue raising the policy rate and manage liquidity to align market and policy rates to rein in inflation and anchor expectations.\n- Fiscal policy:\n  - Adopt a more conservative fiscal stance to reduce the burden on monetary policy and re-balance consumption and investment.\n  - 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.\n  - 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.\n  - These measures should be high quality, avoid further deterioration of the budget structure, and protect capital spending.\n- Rationale: relying solely on monetary tightening would require interest rates to rise to levels that increasingly weigh on investment and competitiveness."
    },
    {
      "heading": "Governance, public finance, and structural reform priorities",
      "content": "- Key principles: predictability, prioritization, efficiency; medium-term oriented, rules-based governance; continued fight against corruption; resilient financial sector.\n- Revenue mobilization:\n  - Romania has comparatively low (and declining) tax revenue as a share of GDP.\n  - Tax changes should be more predictable and less frequent; avoid further tax rate cuts.\n  - Conduct a comprehensive review of the tax system given multiple recent changes.\n  - Improve tax collection efficiency by rationalizing exemptions and reforming tax administration, especially for the value-added tax (VAT).\n  - Implement and operationalize new IT infrastructure in revenue administration (priority given outdated and fragile systems).\n- Expenditure efficiency:\n  - Prioritize large investment projects and reflect prioritization in annual budgets.\n  - Conduct expenditure reviews for key sectors to identify efficiency gains.\n  - Adopt a centralized procurement system to generate savings on goods and services spending.\n  - The Ministry of Finance plans to make progress in these areas.\n- EU funds absorption:\n  - Improve absorption of EU funds for large investment projects to address infrastructure gaps and create space for other essential spending.\n  - Improve management at line ministries and prepare new projects timely for the next EU funds programming period.\n  - Efforts by the Ministry of EU funds and Ministry of Finance to facilitate faster absorption and reduce administrative burdens are encouraging.\n- Fiscal responsibility law (FRL):\n  - Romania has a sound FRL but fiscal rules have not been observed.\n  - Better enforcement would increase fiscal discipline and predictability.\n  - Integrate the Fiscal Council’s work into the budget process.\n- State-owned enterprises (SOEs) and governance:\n  - Re-energize structural reforms to improve service and financial performance of many SOEs via strong corporate governance.\n  - Preserve Law 111 and avoid weakening existing corporate governance legislation.\n  - Resume restructuring and privatization of SOEs.\n  - 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.\n- Fight against corruption:\n  - Continue progress on corruption reduction to improve revenue, enhance spending efficiency, and strengthen competitiveness.\n  - Uphold judicial independence and the rule of law as cornerstones of anti-corruption efforts."
    },
    {
      "heading": "Financial sector: resilience and supervisory recommendations",
      "content": "- Banking sector metrics and vulnerabilities:\n  - NPLs declined to 6.4 percent of total loans in December 2017, close to the EU average.\n  - 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.\n  - About 40 percent of banks’ liabilities and assets remain FX-denominated.\n- Recommended measures:\n  - 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.\n  - Calibrate capital surcharges—preferably the Systemic Risk Buffer—to increase resilience against potential losses from sovereign exposures while avoiding unintended market impacts.\n  - Manage FX liquidity risks proactively: monitor a currency-differenciated Net Stable Funding Ratio and impose a currency differenciated Liquidity Coverage Ratio.\n  - Continue bolstering supervisory practices and finalize and implement the framework for Emergency Liquidity Assistance.\n  - The central bank should establish liquidity facilities for the Bank Deposit Guarantee Fund.\n  - Strengthen supervision of non-bank financial lenders to reduce regulatory arbitrage, mitigate credit risks, and avoid reputational risks to the financial system.\n- Legislative caution:\n  - 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."
    },
    {
      "heading": "Mission and process",
      "content": "- An IMF staff team visited Bucharest during March 6-16 to conduct the 2018 Article IV consultation discussions.\n- The team thanked the authorities and counterparts for hospitality and constructive dialogue.\n\nRomania: Staff Concluding Statement of the 2018 Article IV Mission (March 16, 2018).\n\n---\n\n\n References\n\n- Romania and the IMF\n- IMF Policy Advice -- A Factsheet\n- The IMF and Good Governance -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2018/03/16/mcs03162018-romania-staff-concluding-statement-of-the-2018-article-iv-mission"
    }
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    "Published: March 16, 2018",
    "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.",
    "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:",
    "Rationale: relying solely on monetary tightening would require interest rates to rise to levels that increasingly weigh on investment and competitiveness.",
    "Key principles: predictability, prioritization, efficiency; medium-term oriented, rules-based governance; continued fight against corruption; resilient financial sector.",
    "Revenue mobilization:",
    "Expenditure efficiency:",
    "EU funds absorption:",
    "Fiscal responsibility law (FRL):",
    "State-owned enterprises (SOEs) and governance:",
    "Fight against corruption:",
    "Banking sector metrics and vulnerabilities:",
    "Recommended measures:",
    "Legislative caution:",
    "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 and the IMF](http://www.imf.org/external/country/ROU/index.htm)",
    "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)",
    "[The IMF and Good Governance -- A Factsheet](https://www.imf.org/en/about/factsheets/sheets/2023/the-imf-and-good-governance)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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