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IMF Executive Board Concludes 2015 Article IV Consultation with Romania

Author(s):
International Monetary Fund. European Dept.
Published Date:
March 2015
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On March 25, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Romania.

Romania’s economic recovery has become more entrenched and broad-based, with private consumption picking up on the back of rising real disposable income. At the same time, inflation has decelerated substantially over the past two years and a negative output gap persists. The banking sector has considerably reduced non-performing loans, though they remain high, and private sector credit has fallen since 2013.

Growth is projected to remain robust in a low inflation environment. However, income convergence with the EU has been slow, youth unemployment remains elevated and weak public infrastructure has emerged as a bottleneck for faster growth. Increased volatility in the external environment and failure to implement a much needed infrastructure upgrade present downside risks to the outlook.

Romania has in large part addressed internal and external imbalances thanks to a significant reduction in the fiscal deficit as well as prudent monetary and financial sector policies. The structural reform momentum, however, has slowed amid elevated political uncertainty. Going forward, sound macroeconomic policies need to be combined with measures that boost the efficiency of public spending, re-invigorate delayed state-owned enterprise reforms, and further strengthen the financial sector.

Raising growth prospects over the longer term requires continuity of sustainable macroeconomic policies, underpinned by stronger fiscal and regulatory institutions, and a more stable and predictable business environment which is crucial for investor confidence. In addition, maintaining adequate reserve buffers and strengthening further public and private sector balance sheets would better position Romania to withstand shocks and respond with mitigating policies in case risks materialize.

Executive Board Assessment2

Executive Directors welcomed the economic recovery, and commended the authorities on the reduction of internal and external imbalances through significant fiscal consolidation and prudent monetary and financial sector policies. They encouraged the authorities to build on this progress and continue to rebuild buffers, further strengthen the resilience of the financial sector, and reinvigorate structural reforms to improve Romania’s growth potential.

Directors urged the authorities to maintain prudent fiscal policies in order to safeguard the fiscal consolidation gains and put public debt on a firm downward path. They cautioned that planned tax reductions should be accompanied by offsetting measures. They also recommended broadening the tax base and stepping up efforts to improve tax administration to help cover medium-term spending pressures. Directors underscored the importance of stronger public expenditure management and investment project planning to enhance spending efficiency and ensure the provision of high-quality infrastructure investments. They recommended better investment prioritization aligned with the budget cycle and improved EU funds absorption.

Directors agreed that there is room for further monetary easing given below-target inflation. They recommended strengthening the monetary policy framework with a view to gradually moving toward a full-fledged inflation targeting regime. Meanwhile, a number of Directors saw a transitory role for the exchange rate in the policy framework, given the still significant euroization in balance sheets and associated vulnerability. Directors noted that the objective of joining the euro area is an important anchor for economic policies, and advised that euro adoption should follow sufficient institutional and structural preparation and progress with real convergence.

Directors welcomed the significant efforts undertaken to reduce nonperforming loans and repair bank balance sheets, while calling for continued close supervision of the banking system to further improve asset quality. Strengthening nonbank supervision, setting up an effective resolution framework for insurance companies, and efforts to reinvigorate financial intermediation will also be important.

Directors underlined the need to revive structural reforms and address infrastructure gaps. Strong efforts are needed to restructure state-owned enterprises, improve their governance, and increase private ownership with the aim to improve service delivery, further reduce arrears through stronger financial performance, and generate resources for investment. Efforts to deregulate energy markets are welcome and should be sustained. Directors also encouraged continued efforts to increase labor market participation, in particular by the young, low-skilled, and women, which would also help boost medium-term growth.

Romania: Selected Economic and Social Indicators, 2009–15
20092010201120122013 Prelim.2014 Prelim.2015 Proj.
Output and prices(Annual percentage change)
Real GDP−7.1−0.81.10.63.42.92.7
Contributions to GDP growth
Domestic demand−14.0−0.71.1−0.5−0.92.83.1
Net exports6.9−0.1−0.11.14.30.1−0.2
Consumer price index (CPI, average)5.66.15.83.34.01.11.0
Consumer price index (CPI, end of period)4.88.03.15.01.60.82.2
Core price index (CPI, end of period)2.34.12.43.3−0.11.21.2
Producer price index (average)2.54.47.15.42.1−0.1
Unemployment rate (average)6.57.07.26.87.16.86.7
Nominal wages8.42.54.95.05.05.25.3
Saving and Investment(In percent of GDP)
Gross domestic investment27.126.827.927.024.523.023.7
Gross national savings22.622.323.222.523.722.522.6
General government finances 1/
Revenue30.631.632.132.431.431.932.0
Expenditure37.837.936.334.833.833.833.9
Fiscal balance−7.1−6.3−4.2−2.5−2.5−1.9−1.8
External financing2.62.82.73.22.11.90.8
Domestic financing4.63.51.5−0.81.41.21.5
Primary balance−5.9−4.9−2.6−0.7−0.8−0.3−0.4
Structural fiscal balance 2/−8.0−6.1−3.4−1.7−1.7−0.6−1.1
Gross public debt (including guarantees) 3/23.330.533.937.538.840.440.5
Money and credit(Annual percentage change)
Broad money (M3)9.06.96.62.78.88.17.5
Credit to private sector0.94.76.61.3−3.3−3.13.5
Interest rates, eop 4/(In percent)
NBR policy rate8.06.256.05.254.02.752.25
NBR lending rate (Lombard)12.010.2510.09.257.05.254.25
Interbank offer rate (1 week)10.73.66.05.91.80.70.6
Balance of payments(In percent of GDP)
Current account balance−4.5−4.6−4.6−4.5−0.8−0.5−1.1
Merchandise trade balance−7.2−7.1−6.7−6.7−3.8−3.7−4.5
Capital account balance0.50.20.51.42.12.62.3
Financial account balance2.1−0.8−1.0−1.7−3.00.10.9
Foreign direct investment balance−2.8−1.8−1.3−1.8−2.0−1.6−1.6
International investment position−62.1−62.3−64.2−67.7−61.7−56.6−52.4
Gross official reserves25.628.327.926.424.623.622.7
Gross external debt67.472.974.074.466.659.954.3
Exchange rates 4/
Lei per euro (end of period)4.24.34.34.44.54.54.4
Lei per euro (average)4.24.24.24.54.44.44.4
Real effective exchange rate
CPI based (percentage change)−7.51.92.9−6.04.71.0
GDP deflator based (percentage change)−8.31.21.8−4.64.1
Memorandum Items:
Nominal GDP (in bn RON)510.5533.9565.1596.7637.6669.5706.6
Potential output growth2.52.01.92.12.32.52.7
Social and Other Indicators
GDP per capita (current EUR, 2013): 7,100; GDP per capita, PPP (current international $, 2013): 18,635
People at risk of poverty or social exclusion: 40.4% (2013)
Sources: Romanian authorities; IMF staff estimates and projections; and World Development Indicators database, Eurostat.

General government finances refer to cash data.

Fiscal balance (cash basis) adjusted for the automatic effects of the business cycle and one-off effects.

Increase in ratio in 2015 relative to 2014 reflects projected debt financing of an increase in Treasury deposits of 0.5 percent of GDP.

For 2015: Latest available data.

Sources: Romanian authorities; IMF staff estimates and projections; and World Development Indicators database, Eurostat.

General government finances refer to cash data.

Fiscal balance (cash basis) adjusted for the automatic effects of the business cycle and one-off effects.

Increase in ratio in 2015 relative to 2014 reflects projected debt financing of an increase in Treasury deposits of 0.5 percent of GDP.

For 2015: Latest available data.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summing up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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