Staff teams from the European Commission (EC) and the International Monetary Fund (IMF) visited Bucharest from July 20 until August 1, for the regular quarterly review of Romania’s economic program.1 The objectives of the program are to solidify economic growth while maintaining macroeconomic and financial stability.
The teams’ assessment is that the program remains on track. All performance criteria for end-June were met. The authorities have steadfastly implemented program policies. Continued strong policy implementation will be important to make optimal use of Romania’s growth potential. Policies are being strengthened to better position Romania to weather financial market volatility.
For 2011, we continue to project real GDP growth of about 1½ percent. While the contribution to growth by absorption of EU structural funds remains low, a good harvest is expected and exports remain strong. In 2012, we project growth of 3½ to 4 percent contingent on improved domestic demand, including better absorption of EU structural funds. Inflation is expected to come down, but will remain above the National Bank of Romania’s 2011 inflation target. It is projected to further decline to about 3½ percent in 2012. The current account deficit is expected to remain around 4½ percent of GDP.
Continued fiscal consolidation has improved Romania’s credibility and lowered financing costs. In 2011, Romania is on track to reach its general government budget deficit target of 4.4 percent of GDP (in cash terms) and below 5 percent of GDP in accrual (ESA) terms. In the first semester, VAT and excise duties were better than projected, but non-tax revenue disappointed. On the expenditure side, savings came notably from lower-than-projected capital expenditure, including absorption of EU funds.
The government remains committed to reducing the general government budget deficit to below 3 percent in both cash and accrual (ESA) terms in 2012. Over the coming months, the government will act to meet this challenge. Improvements in revenue collection, optimization of expenditures, including better targeted assistance to the poor and vulnerable, stringent expenditure controls and further measures will be critical to reach this objective.
State-owned enterprises need to be reformed to make them more efficient, so that they support growth rather than being a drag. These reforms include the sale of majority or minority stakes in some companies and the introduction of professional private management. Different strategies are being developed to address arrears to be implemented as soon as effective measures have been taken to stop the drain of resources and put the state-owned enterprises on a sound footing.
The banking sector remains well capitalized and liquid. The rise in non-performing loans slowed over the last quarter, reaching 13.4 percent of total loans at end-June. Bank lending to the corporate private sector picked up in the second quarter.
The next review of the program is scheduled for late October/early November 2011.