IMF Survey: Romania Poised For Growth
March 25, 2011
- Strong policies have set the stage for economic recovery in 2011
- New program to focus on unlocking Romania's growth potential
- Further reforms needed to boost investment in the economy
The IMF's Executive Board approved March 25 the final review of Romania's IMF-supported program, and agreed to the country's request for a new €3.6 billion Stand-By Arrangement, which will be precautionary in nature. As was the case with the expiring program, this new program will be supplemented by funds from the European Union (EU) and the World Bank.
The new IMF-supported program is intended to insure Romania’s economy against possible future shocks. Now that economic recovery is under way, the program will focus on boosting the economy’s underlying growth potential, while keeping an eye on the need for continued fiscal consolidation so that the 3 percent deficit limit set by the EU can be met in 2012.
Jeffrey Franks, IMF mission chief for Romania since the start of the first IMF-supported program in May 2009, gives his take on the achievements of the past two years and tells us what to expect next.
IMF Survey online: What are the economic prospects for Romania, now that the joint EU-IMF emergency loan package is winding down?
Franks: The crisis in Romania has been very severe and rather prolonged by comparison with some other countries in the region, but the good news is that economic prospects are looking much better now. We are expecting growth in the range of 1.5 percent in 2011, and we expect that to accelerate to somewhere in the range of 4 percent in 2012.
So the worst of the crisis is over. There are still some actions that the government needs to follow through on. But overall, we have a positive outlook for the years ahead.
IMF Survey online: The government has implemented some of the toughest austerity measures in Europe. Was that really necessary, and has it delayed economic recovery?
Franks: Unfortunately, Romania went into the crisis with severe imbalances. It had a fiscal deficit at more than 8 percent of GDP in structural terms, and a current account deficit of more than 13 percent of GDP. As a result, the size of the measures necessary to correct these imbalances was large, and that’s why the government had to take tough actions on the fiscal side.
"Actions were taken to make sure that the most vulnerable in society were protected. That was very important. "
The increases in taxes in the middle of 2010 together with cuts in public sector wages and social benefits were very difficult to do, but they were the only way, really, to make sure that the fiscal problem was resolved going forward. At the same time, actions were taken to make sure that the most vulnerable in society were protected. That was very important.
The measures were difficult but they have now set the stage for the strong growth we expect in 2011-2012.
IMF Survey online: Inflation reached 8 percent in December, the highest in Europe. How worried is the IMF about price developments in Romania?
Franks: Well, inflation is always a concern when it gets up to the levels that we currently see in Romania. However, we should recognize that most of this inflation is temporary as a result of an increase in the value-added tax in the middle of 2010. Again, a difficult but necessary measure, and a one-time increase in prices that we don’t expect will perpetuate itself in the future.
So although inflation remains quite high, we do see it coming down in the course of 2011. Having said that, the recent increases in world energy prices and world food prices are having an additional negative effect and we will have to watch that closely to make sure that it does not spill over into in a more general inflationary process.
IMF Survey online: The government has implemented a 25 percent cut to public wages and has pushed through a controversial revision of the country’s labor legislation. What is the IMF’s take on these reforms?
Franks: I think the public sector reforms were absolutely necessary, and again very difficult. What we see going forward is a gradual process whereby the lost wages can be recouped over time as activity and productivity increases. A wage increase of about 15 percent for public sector workers was granted in the 2011 budget, so a good proportion of that 25 percent cut has already been reclaimed.
As the government continues its process of streamlining and rationalizing public employment, that will make space for additional wage increases to bring workers back up to levels they saw in the past.
What was unsustainable was the sharp increase right before the crisis of both public sector wages and public sector employment, which outstripped private sector wages and employment. So we had to roll it back and then try to rationalize the public service and wage system. This has now been done, and sets the stage for more reasonable wage increases going forward.
The authorities are also pursuing labor market and social benefits reforms. While these are crucial to job creation and productivity, we have encouraged the government to take care to protect workers and their collective bargaining rights.
IMF Survey online: The government has requested a new precautionary loan arrangement. What prompted this request, and what will the new program achieve?
Franks: The way we have discussed it with the government is to move from crisis stabilization to a growth-oriented program with a focus on structural reforms. A precautionary arrangement will provide an insurance policy for Romania against further economic shocks as growth resumes.
We have to continue the process of fiscal consolidation because Romania still has to meet its European obligations to bring its deficit down to 3 percent by 2012, but most of the heavy lifting has been done by the tough measures that have already been taken. We will complement that process by looking at some of the key bottlenecks for economic growth going forward.
"A precautionary arrangement will provide an insurance policy for Romania against further economic shocks as growth resumes. "
Some of these bottlenecks are related to the absorption of structural funds from the European Union, which are aimed at improving infrastructure, education, and other areas that matter for economic growth. Currently, public spending is plagued by inefficiency, and under 3 percent of the €19 billion in available EU structural funds have been utilized. We need to make sure Romania makes the most of these funds in the future.
Related to this, there is a need to address inefficient state-owned enterprises―particularly in the energy and transport sectors. The overall idea is to make these two sectors work more efficiently. This will then spill over into all other sectors of the economy, and make them more competitive. Since the IMF does not have expertise in these two areas, we will be relying on our colleagues in the World Bank and the European Commission to develop the details.
IMF Survey online: What would you say are the main achievements of the expiring IMF-supported program?
Franks: The IMF-supported program has been very successful in restoring confidence in Romania’s economy. We have managed to largely resolve the enormous imbalances that the economy was facing going into the crisis. The fiscal deficit, without action, would have been well in excess of 10 percent of GDP. With our support, the government managed to keep it under control during the crisis and is now on track to making a 4.4 percent deficit in 2011.
"We have managed to largely resolve the enormous imbalances that the economy was facing going into the crisis."
The current account deficit, which at one point was as high as 14 percent of GDP, is now down below 5 percent of GDP. And the trade deficit, for the first time in many years, was in slight surplus in January, in part thanks to booming exports. So that shows a major adjustment of unsustainable imbalances in the economy.
We have also managed, under this IMF-supported program, to avoid major financial sector problems, which hit many other countries during this crisis. The financial sector has been stable, due in large part to the commitment of the banks themselves via the European Bank Coordination Initiative, and also to the timely and diligent action of the National Bank of Romania. The program also played a role by providing needed additional resources, and by giving impetus to reforms that improved banking regulation and resolution mechanisms.
So to sum up, the three major achievements under the expiring program have been the reversal of the large macroeconomic imbalances, kick-starting the reform process, and avoiding a banking crisis.
IMF Survey online: How confident are you about Romania’s economic future?
Franks: Romania is one of the poorer countries in the EU. But it stands a very good chance of being able to grow more quickly than the EU average in the coming years, which will help it catch up with living standards in the richer member countries.
We should recognize, however, that all the work has not been done. There still are major efforts that are needed to continue the process of structural reform so that Romania can take advantage of its growth potential.