13 October 2012

IMF: Romania - Staff Report for the 2012 Article IV Consultation and Sixth Review under the Stand-By Arrangement

Significant progress has been made in macro-economic stabilisation under two successive SBAs but the economic recovery remains fragile. Growth is expected to remain subdued in the near term and to recover only gradually over the medium term, with risks to the outlook mostly on the downside.

With strong trade and financial sector linkages, Romania is exposed to the euro area crisis. Fiscal and external reserves provide a buffer and the banking sector remains well-capitalised. At the same time, the political situation has become more unsettling with three governments in 2012, uneasy cohabitation between the President and the governing coalition that has sought to remove him, and parliamentary elections to be held in the fall. The political uncertainty has contributed to accelerated exchange rate depreciation and higher financing costs, and has dented confidence

Romania’s overall track record under the programme continues to be good. All performance criteria for the sixth programme review were met except the one on reducing central government arrears, which was missed by a small margin. All indicative targets, except the ceiling on the stock of local government arrears, were met. Corrective actions are being taken to reduce the stock of arrears and prevent accumulation of new arrears. The structural benchmarks on increasing electricity prices, integrating the accounting reporting system with the Treasury payment system, and preparing comprehensive amendments to the health care legislation were met. However, progress on the structural agenda, in particular privatisation of public enterprises, has remained slow. As prior actions for completion of this review, the government has committed to undertake public offerings of shares in two public enterprises where preparations are more advanced.

A prudent fiscal and monetary policy stance and decisive implementation of the structural reform agenda are needed to ensure macro-economic stability and increase growth.

• Strong fiscal discipline will be needed, especially ahead of the upcoming parliamentary elections, to meet the fiscal programme targets and achieve fiscal sustainability.
• The monetary policy stance should lean towards tightening in light of risks to inflation as well as potential capital outflows and exchange rate pressures.
• In the financial sector, where vulnerability to spillovers from euro area parent banks to Romanian subsidiaries is high, measures are needed to ensure adequate capital and liquidity buffers, mitigate the rise in non-performing loans, and finalise contingency plans.
• Pressing ahead with structural reforms, in particular in the energy and transport sectors and of public enterprises, would provide a much-needed impetus for investment and growth.

Improving EU funds absorption is a priority to unlock significant resources that would help further real convergence with other European countries.

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