IMF warns: Hard won gains, at risk. Law on debt discharge jeopardizes property rights


Romania has made important progress in addressing economic imbalances and restoring growth, International Monetary Fund (IMF) representatives concluded on Monday at the end of the official staff visit in Bucharest started on March 2.

However, macroeconomic policies have weakened recently and hard won gains are at risk of being reversed.

“The 2016 budget inappropriately gives stimulus when consumption growth is already strong. If no measures are taken, next year’s fiscal deficit will exceed the authorities’ target and there is a risk that further deficit-increasing measures may be passed in an election year that would put debt on an upward trajectory. Legislative initiatives in the financial sector, such as the current version of the giving-in-payment law (ed. note ‘law on debt discharge’ or datio in solutum), contain provisions that could threaten private property rights, undermine investor sentiment, and curtail credit provision to households and businesses,” Reza Baqir, head of the IMF mission to Romania stated, adding that there are better ways to target relief to distressed borrowers.

The mission recommends stronger efforts to maintain prudent policies and resume the structural reform momentum in order to safeguard hard won gains.

As regards Romania’s economy, IMF appreciates that it is on a cyclical upswing supported by strong domestic demand. Private consumption has been boosted by recent hikes in minimum and public wages, record low interest rates, low fuel prices, and a VAT reduction on food items. Investment has recently shown some signs of a pick-up, partly related to a catch-up in EU funds absorption.

“On the basis of the largely one-off stimulus to consumption, the mission expects real GDP growth of 4.2 percent in 2016, decelerating to 3.6 percent in 2017. Notwithstanding this cyclical performance, raising Romania’s potential output growth will hinge on strong progress on structural reforms,” IMF notes.

Further fiscal stimulus in an election year may boost consumption in the short-term but will undermine sustainability of public finances and could dent market sentiment. Measures targeting the financial sector lacking proper impact analysis and consultation could harm credit intermediation and investment and undermine financial stability. On the external side, an abrupt deterioration in emerging market risk perception could trigger currency depreciation and raise the external debt ratio.

On the other hand, IMF said that the fiscal stimulus is difficult to justify at a time when economic growth is already strong. In light of this expansion, the fiscal deficit is projected to exceed the authorities’ target by ½ percent of GDP in 2017 unless further measures are taken. “Even if the deficit is kept at the authorities’ target of 2.8 percent of GDP (in cash terms, equivalent to about 3 percent in ESA terms), public debt will exceed 40 percent of GDP and continue to gradually rise,” the international financial institution warns.

Anchoring fiscal policy on a debt-reduction path

Gradual fiscal adjustment to reach a deficit of 1.5 percent of GDP in 2018 will achieve this goal and protect against downside risks. The effort should start this year with spending discipline and better tax administration to find and preserve savings to keep the deficit at 2.5 percent of GDP. For 2017, the mission recommends a deficit of 2 percent of GDP. Postponing the further tax reductions on VAT and excises scheduled to come into effect next year would generate savings of ¾ percent of GDP. According to IMF, it’s important to integrate better the work of the Fiscal Council into Parliament’s decision-making, which will strengthen the credibility of the budget process.

As regards the tax administration agency (ANAF), IMF says that should become more business friendly, focus more on high revenue potential taxpayers by strengthening its risk-based audit system, and enhance efforts to reduce tax evasion and avoidance. “Progress in prioritization of large public investment projects is welcome”.

The mission recommends extending this to other projects and making greater use of EU-funded projects. The mission welcomes plans to carry out a spending review. It should start with a few pilot sectors to identify room for efficiency gains.

Gap between the policy and interbank market rates to be reduced

The mission recommends leaving the policy rate unchanged for now but to begin to reduce the gap between the policy and interbank market rates.

“BNR should consider signaling a tightening bias and begin to reduce the gap between the market and policy rates by absorbing liquidity from the market and narrowing the interest rate corridor. Given the large pro-cyclical fiscal impulse, monetary policy may need to shoulder some of the burden for managing domestic demand,” IMF notes.

The mission encourages the authorities to also revisit some elements of existing legislation on abusive clauses in order to dispel another important source of uncertainty, while securing fairness for all stakeholders. Finally, the mission recommends putting in place the prerequisites for implementing the recently adopted personal insolvency law.

Not least, the mission recommends the adoption and steadfast implementation of the draft legislation on improving corporate governance for SOEs. IMF also advises to aggressively restructure the SOEs in dire financial situation and adopt a focused list of potential IPOs and privatizations.

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