IMF view of Romania: Internal imbalances corrected, but vulnerability to external shocks remains

The Romanian economy has largely corrected internal and external imbalances with a mix of sound macroeconomic policies, following the global crisis, the International Monetary Fund’s (IMF) representatives concluded after the mission they recently finished in Romania. “However, convergence has stalled and weak public infrastructure has emerged as a key bottleneck for a higher growth trajectory. At the same time, Romania remains vulnerable to external shocks and the repair of balance sheets is not yet complete,” IMF representatives warned. The IMF mission was in Bucharest in the first part of February to assess Romania’s progresses under the stand-by agreement with the IMF, signed in September 2013. The mission ended without a letter of intent from Romania to the IMF, just like the one in June 2014, as the fund’s representatives couldn’t reach an agreement with the Government on several issues, including the gas price liberalisation and the restructuring of Romania’s largest thermal power producers. Romania’s stand-by agreement with the IMF continues formally, but is technically suspended, which means that Romania can’t draw any money. The IMF mission made a few conclusions after their visit to Bucharest, which they published in a document on the IMF website. According to this document, Romania still needs sustainable macroeconomic policies, combined with measures that boost the efficiency of public spending, in particular, an acceleration of EU-funds absorption to upgrade public infrastructure. The country still has to re-invigorate delayed state-owned enterprise reforms, and resolve crisis legacies in the financial sector. Here are some of IMF’s conclusions: Economic outlook: GDP recovered in 2014 to its pre-crisis level, and the growth momentum is becoming more entrenched. Real GDP will grow by 2.7 percent in 2015 and 2.9 percent in 2016. Potential growth is currently projected at around 3 percent in the medium term. However, renewed volatility in the global financial market or the euro area as well as a protracted period of slow growth and low inflation in the eurozone could put strains on the Romanian economy. Fiscal policy: Romania relied primarily on expenditure cuts to bring the budget deficit to 1.9% of GDP in 2014, a 7 percentage point reduction in structural terms. However, more efficient public investment, driven by greater EU funds absorption, is needed to address a rising infrastructure gap. In particular, revenue mobilization is still far below potential despite some efforts to improve tax administration. Structural reforms: Mixed progress in structural reforms is holding back Romania’s medium-term growth prospects. The dominance of inefficient state-owned enterprises (SOEs) in the transportation and energy sectors has hindered higher quality public service delivery and modernization of the infrastructure. Gas and electricity market deregulation for non-residential consumers is a significant achievement that should be followed by restarting the gas tariff deregulation for households.