Romania Must Improve Tax Collections, Slash Arrears, Costs To Lower Deficit - IMF

Continued efforts to improve tax collections, tackling expenditure pressures, particularly in the health sector, and reducing arrears will be crucial to sustain the Romanian budget deficit's reduction, said the International Monetary Fund (IMF).

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Imaginea articolului Romania Must Improve Tax Collections, Slash Arrears, Costs To Lower Deficit - IMF

Romania Must Improve Tax Collections, Slash Arrears, Costs To Lower Deficit - IMF

"Fiscal adjustment will continue. The difficult fiscal measures enacted in 2010, complemented with continued prudent expenditure policies, put the fiscal cash deficit targets of 4.4 percent in 2011 and 3.0 percent in 2012 well within reach," said an IMF press release.

Romania's future stand-by agreement with the IMF "will focus on boosting potential growth through structural reforms," as "structural deficiencies in key economic areas weigh heavily on economic growth," the IMF said.

"Improved efficiency of the public sector will reduce bureaucratic barriers to economic efficiency and will increase the absorption of EU structural funds to boost capital spending to improve the country's infrastructure. The new program also aims at deep-rooted reforms in the energy and transport sectors, including pricing reforms, improved regulation, and the restructuring and privatization of energy and transport state owned enterprises. Fund and EU precautionary support will reassure private markets and provide a cushion against future shocks, should they materialize," said the press release.

John Lipsky, IMF First Deputy Managing Director, said the Romanian authorities "are seeking a follow-up precautionary arrangement to signal their commitment to continued reform."

"The fiscal and structural measures already implemented are yielding results. The economy has stabilized and growth is resuming. The new program appropriately focuses on building on achievements to date with additional fiscal consolidation and structural reforms to boost growth and improve private sector participation in the economy," said Lipsky, cited in the press release.

The IMF notes that the Romanian banking sector has coped with the crisis well, and remained well-capitalized and liquid. "Non-performing loans continue to increase, but at a declining pace and are expected to peak in mid-2011."

"The banking system is liquid and well-capitalized, but vigilance remains warranted, in light of rising non-performing loans and the potential for adverse regional spillovers," said Lipsky.

The IMF official believes the government's financial sector and monetary policies have been "prudent and proactive, helping preserve financial stability during the crisis."

"Monetary policy should continue to strike a balance between the need to address inflation risks and the need to support the recovery," he said.

The IMF's Executive Board on Friday approved the final review of a EUR13 billion stand-by arrangement with Romania, and the terms of a new, precautionary deal that will start on March 31.

Romania and the IMF agreed on a two-year precautionary arrangement worth 3.09 billion Special Drawing Rights (some EUR3.5 billion). In addition to the new agreement, Romania can count on precautionary support from the European Union of EUR1.4 billion and a loan from the World Bank of EUR0.4 billion.

The IMF forecasts Romania's GDP will grow by 1.5% this year and by 4.4% in 2012. It expects domestic demand to climb 1.2% this year, having dropped 1% in 2010 and 12.9% in 2009, while the net exports contribution should be 0.2%

Nominal wages will grow this year by 4.7%, having increased 2.6% in 2010, while the average unemployment rate will go down slightly, to 5.4% from 6.1%. The IMF expects a 3.7% consumer price index at the end of the year.

The IMF estimates credit to the private sector will grow 7.7% this year and 8.7% in 2012, having climbed 4.7% last year.

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