Romania is at risk of the government facing increased pressure to relax fiscal policy before parliamentary elections this year as the cabinet needs to speed up reforms, the International Monetary Fund said.
Political pressures in the country will remain “strong” in the coming months, according to the Washington-based lender, which published a country report after a review of Romania’s 5 billion-euro ($6.3 billion) international bailout loan. The IMF, which provided the loan with the European Union, said Romania’s continued fiscal discipline is “essential” to contain spending pressures and meet a budget deficit target.
“Domestic political risks remain and the authorities will have to firmly resist pressure for fiscal loosening or further delays in structural reforms,” the IMF said. “While the first-quarter deficit target was met, underlying spending pressures have intensified. For the first time in this arrangement, arrears for the central and local governments have increased and the targets have been breached.”
The government of Prime Minister Victor Ponta, Romania’s third Cabinet this year, pledged to continue the precautionary loan agreement as it negotiated a looser budget-deficit target for this year to allow for an increase in public wages. The IMF board on June 22 approved Romania’s letter of intent and granted a waiver after the country failed to meet a target for unpaid debt to private companies.
Following the board approval, the IMF made an additional amount of about $651 million available for disbursement, bringing the total resources reachable for Romania under the stand-by arrangement to about $3.35 billion. The country hasn’t drawn any more from the accord so far.
The Finance Ministry plans to “strictly” meet its end-June budget-deficit target of as much as 8.8 billion lei ($2.5 billion) agreed with the lenders, it said on June 29. The government seeks to narrow the gap to about 2.2 percent of the gross-domestic product at the end of this year from 4.35 percent last year.
“Strict spending discipline will remain paramount to achieve the new target,” the IMF said today.
Romania also plans to improve the functioning of state-owned companies, especially in the energy industry, and pledged to sell minority stakes in natural-gas company Romgaz SA and hydro-power generator Hidroelectrica SA, which entered an insolvency procedure last month, this year. It will also seek to sell majority stakes in chemical company Oltchim SA and mining company Cuprumin SA.
Ponta said June 22 that a planned 15 percent share sale in natural-gas grid operator Transgaz SA by the end of June will probably be delayed “by a short time period,” because of political disputes.
“The calendar for privatization continues to slip and several tenders have failed for reasons that could have been prevented,” the IMF said today. “This sends a poor signal of Romania’s commitment to structural reforms and undermines its growth potential. The new government will have to firmly resist pre-election political pressures from within its own coalition to achieve this objective.”
The IMF also urged “cautious” monetary-policy easing, citing risks to inflation and the leu. The Banca Nationala a Romaniei kept its benchmark rate unchanged for a second meeting on June 27 at a record low of 5.25 percent.
The banking industry, which has solid liquidity and capital buffers, is facing “high risks,” the IMF said. The ratio of non-performing loans in total credits increased to 15.9 percent at the end of March, while “the authorities must continue to closely monitor bad-loans and remain aggressive in asking for additional provisions and capital when needed.”
Romania’s banking industry is 90 percent owned by international lenders as Erste Group Bank AG’s Banca Comericiala Romana SA and BRD Group Societe Generale SA are the country’s biggest lenders. Austrian banks have a market share of about 38 percent, while Greek banks control 13 percent of the market, according to central bank data.