The report notes Romanian has in large part reduced internal and external imbalances but reforms have been slowed due to political uncertainty. At the same time, the country remains vulnerable to external shocks and the repair of balance sheets is not yet complete, the report notes.
Regarding the new Tax Code prepared by the government, the IMF believes tax cuts could endanger fiscal discipline. The government wants to lower VAT, excises, dividend tax and eliminate a tax on special constructions, estimated to have a direct impact of 2.2% of GDP.
The IMF’s scenario does not include the proposed tax changes since the authorities’ plans have not yet sufficiently taken shape but any tax reduction plans should go hand-in-hand with stronger revenue administration, better compliance—the VAT collection gap is the highest in the EU at 44%—and formalizing the economy.
“Until such reforms deliver results, there is no room to lower tax rates unless fully offset by other fiscal measures, including possibly lower in efficient capital spending until the absorption capacity improves,” the report notes.
Romania’s reform momentum has slowed amid elevated political uncertainty, the IMF notes, adding general elections in December 2012 resulted in a period of political stability that lasted until February 2014 when the ruling social democratic-liberal alliance broke down. Since then, two new cabinets were formed with changes in key economic ministries that have complicated policy continuity.
The surprising win by the center-right President Iohannis in the December presidential elections has raised near-term political uncertainty as the opposition is striving to form a new government through changing the parliamentary majority.
The political uncertainty has affected the implementation of structural reforms, in particular as regards state-owned enterprises and gas price deregulation, which has delayed the completion of the third review under the stand-by agreement (scheduled originally for June 2014).
The IMF notes Romania’s GDP almost returned to its pre-crisis level but a sizable output gap remains. Robust export growth was the initial driver of economic recovery while domestic demand an investments remained weak. Experts expect a real GDP growth of 2.7% in 2015 and 2.9% in 2016, driven by private consumption.
Despite reforms under the stand-by agreement with the IMF, local government continues to undermine the absorption of EU funds, the report notes.
The IMF recommends Romania should the fiscal adjustment achievements, put public debt on a firm downward path, ensure provision of higher quality public infrastructure, and improve revenue administration and public expenditure management including through higher absorption of EU funds.
In terms of monetary policy, the country should keep the easing bias as inflation has fallen below the target band and support a private credit rebound.
The banking system should be kept under intense watch, focusing on asset quality and the reduction of non-performing loans reduction. Romania should also further strengthen non-bank supervision, develop capital markets, and create effective insolvency frameworks.
Regarding structural reforms, the IMF recommends Romania should improve financial performance and generate resources for investment of state-owned companies by implementing good governance principles, restructuring and increased private ownership; further deregulate energy markets.
Romania has a EUR2 billion stand-by agreement which expires in September.