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May 16, 2021

IMF recommends 1.5 percent of GDP deficit on medium-term to rebuild buffers

The International Monetary Fund (IMF) recommends the revenue envelope be protected, wage and pension growth be moderated, and the authorities aim for a medium-term deficit of 1.5 percent of GDP to rebuild buffers.

These goals can be achieved by reducing the 2017 deficit to around 2.3 percent of GDP, and to 2 percent in 2018, reads an IMF release on Friday.

Medium term consolidation should be supported by reforms to enhance the effectiveness of the public sector, the IMF says.

Achieving higher sustainable growth will be difficult without stronger efforts to increase efficient investment and reform state-owned enterprises (SOEs). The quality of infrastructure in Romania is amongst the lowest in the EU, the IMF finds. There is a critical need to strengthen public investment institutions to fully utilize European funds and improve the quality of domestically financed investment.

Recent efforts to complete the designation of managing authorities, comply with ex-ante conditionality, and advance eligibility checks on EU-financed projects are welcome and should continue, read the international financial institution’s staff’s conclusions of the periodic mission of evaluation carried out in Romania. In this sense, the IMF recommends to strengthen the preparation of large infrastructure projects.

Furthermore, improving the performance of SOEs is also essential to raise economic efficiency and enhance the quality of public investment. The authorities should reenergize the stalled program for privatization and restructuring of SOEs to help improve overall SOE financial performance and reduce arrears, the IMF believes.

A few successful privatizations and initial public offerings (IPOs) – such as Hidroelectrica which is awaiting appointment of a Supervisory Board – would also help raise Romania’s international profile as an investment destination.

In addition, the IMF says, the appointment of professional board members and managers should continue in accordance with the principles of the recently adopted corporate governance law. Banks should be excluded from this law because banks are already subject to a specialized corporate governance law.

The government envisages creating a sovereign fund to support investment. The mission recommends that this fund be based on best international practices related to the appointment of management, transparency, auditing, selection of investment projects, and use of state guarantees to minimize potential fiscal risks, the IMF release also shows.

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