## Romania: Staff Concluding Statement of the 2018 Article IV Mission _IMF News, March 16, 2018_ ## Source details **Canonical URL:** [Romania: Staff Concluding Statement of the 2018 Article IV Mission](https://www.imf.org/en/news/articles/2018/03/16/mcs03162018-romania-staff-concluding-statement-of-the-2018-article-iv-mission) ## Other formats - [Markdown version](/en/news/articles/2018/03/16/mcs03162018-romania-staff-concluding-statement-of-the-2018-article-iv-mission/index.md) - [Structured JSON version](/en/news/articles/2018/03/16/mcs03162018-romania-staff-concluding-statement-of-the-2018-article-iv-mission/index.json) - [Bundle manifest](/en/news/articles/2018/03/16/mcs03162018-romania-staff-concluding-statement-of-the-2018-article-iv-mission/bundle-manifest.json) ## Bibliographic details - 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).* --- ## References - [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) _Source: https://www.imf.org/en/news/articles/2018/03/16/mcs03162018-romania-staff-concluding-statement-of-the-2018-article-iv-mission_