The International Monetary Fund has reiterated its recommendations for fiscal consolidation in Romania, calling on the government to avoid fiscal slippage.

In its conclusions to Article IV Consultations issued on March 14, the Fund recommended that the central bank keep monetary policy unchanged for the moment but narrow the differential between market and policy rates. The Fund also expressed concerns about the “legislative initiatives that could undermine financial stability” – mentioning in this regard the draft giving-in law (datio in solutum) intended to support distressed mortgage borrowers.

In the fiscal policy area, the IMF recommends the government postpone the planned tax reductions on VAT and excises scheduled to come into effect next year and use the supplementary 0.75% of GDP revenues in other key areas such as in the health and education sectors or for the gradual implementation of the unified wage law.

Gradual fiscal adjustment to reach a deficit of 1.5% of GDP under cash basis in 2018 will achieve this goal and protect against downside risks, the Fund estimates. The deficit should be kept under 2.5% of GDP this year (versus 2.8% under cash base targeted by the government) and further below 2% of GDP in 2017.

Other recommendations on the fiscal procedures are to better integrate better the work of the Fiscal Council into the parliament’s decision-making, to make the fiscal administration more business friendly, to prioritise public spending especially on large investment projects, to approve new legislation on natural resources taxation and to pass the public procurement law.

In the monetary policy area, the IMF recommends that the central bank maintain the monetary policy rate at the current level. Given the current negative headline inflation, the low imported inflation ahead, and the uncertainty around inflation expectations, the policy rate can be left unchanged until projected inflation moves more clearly above target. Nonetheless, the NBR should consider signalling a tightening bias and begin to reduce the gap between the market and policy rates by absorbing liquidity from the market and narrowing the interest rate corridor.

The recommendations for the banking sector mainly concern legislation. The giving-in law (datio in solutum) is mentioned as possible threat to the “hard-won achievements” of a low non-performing loan (NPL) ratio and financial stability. The mission is similarly concerned about the forced conversion of foreign-currency denominated loans being considered in parliament that would also entail a retroactive change in contracts.

The mission encourages the authorities to also revisit some elements of existing legislation on abusive clauses in order to dispel another important source of uncertainty, while securing fairness for all stakeholders. Finally, the mission recommends putting in place the prerequisites for implementing the recently adopted personal insolvency law.