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Transcript of a Conference Call on the 2015 Article IV Consultation with Romania

Washington, D.C. Friday, March 27, 2015

Andrea Schaechter, Mission Chief for Romania, European Department Olga Stankova, Senior Communications Officer, Communications Department

MS. STANKOVA: Hello, everybody. Welcome to the conference call on the release of the 2015 Article IV Consultations with Romania. You have, I hope, the documents that were posted under embargo yesterday, which is a press release on the Executive Board decision, the staff report on the Article IV consultations, and the selected issues paper. These documents are under embargo until 10 a.m. Washington time as well as the conference call.

With this, I will pass the microphone to my colleague, Andrea Schaechter, mission chief for Romania, who will give some introductory remarks and key messages from the staff report and the selected issues paper and then we will take your questions.

MS. SCHAECHTER: Good morning everyone, and good afternoon to those who are calling from Bucharest. Thank you for participating in this conference call. I would like to give some key aspects of the staff report before responding to your questions.

Romania has come a long way since the crisis. Economic growth has become more entrenched and more broad-based. The prospects for this year and the next are of continued robust growth driven mostly by strong private consumption. At the same time Romania has in large part addressed internal and external imbalances thanks to prudent fiscal and monetary policies.

Nevertheless, the economy remains vulnerable to shocks. Nonperforming loans have come down substantially, but they’re still high. The same applies to external debt and loans denominated in foreign currency. Also Romania’s public debt to GDP ratio is three times what it was before the crisis. Based on this, it’s therefore important to continue to rebuild buffers and further strengthen the resilience of the financial sector.

This also implies the need to preserve fiscal discipline. This year’s deficit target would help achieve putting public debt on a gradual downward path. In this context, the government’s proposed tax cuts in their current scope and with the currently proposed timing would put the fiscal consolidation gains of the past years at risk unless they are accompanied by offsetting measures.

It is critical to preserve sufficient budgetary resources for the many demands that the Romanian economy faces. There is a pressing need to upgrade the country’s infrastructure, as we also lay out in the report. While there’s plenty of room to use the available resources more efficiently, infrastructure gaps are large and the government plans are ambitious. Better use of EU fund absorption is one important way to invest in the economy and boost medium-term growth. We estimate that higher absorption could help Romania grow about half a percent faster every year over the medium term.

But this by itself is not enough. Reinvigorating structural reforms, in particular those related to state-owned enterprises, is key. Many state-owned enterprises continue to make losses. Many do not pay all their taxes or their suppliers. At the same time, some do not have sufficient resources to make necessary investments that would allow providing the public with reliable and modern services.

The recommended policies to address these problems are not new, but we think they need to be or they should be filled with new life. This includes the strict implementation of Government Ordinance 109 on state-owned enterprise governance, as well as further strengthening the legal framework for this ordinance, as well as putting in place an enforcement mechanism. Improving the operational efficiency of many large state-owned enterprises will require aggressive restructuring and in some cases liquidation. Private sector involvement through majority or minority ownership is also a useful tool. It can bring an expertise, as well as funding, and it can raise transparency.

And, finally, Romania should build on the good progress it has already made in improving the pricing in the energy sector by restarting the gas price deregulation also for households. At the same time this should be accompanied by a protection for the most vulnerable consumers.

So let me summarize and leave you with one key message. Currently, Romania’s growth outlook is good thanks to sound macroeconomic policies in recent years. Going forward, maintaining fiscal discipline, upgrading public infrastructure, and reinvigorating structural reforms will be key for Romania’s medium-term prospects to remain good and get even better.

And with this I will take your questions.

MS. STANKOVA: Thank you very much, Andrea. And now we will take your questions.

QUESTIONER: Hello, Ms. Schaechter. I want to ask you, the government still wants to cut VAT over half of the year and to put on the road the fiscal policy next year. What’s your opinion about the reduction of VAA this year?

MS. SCHAECHTER: Thank you for the question. As I mentioned in my introductory remarks, it’s very important that the fiscal gains that have been made over the past years will be maintained. This has served Romania well. It has helped the confidence in the economy. So any tax cut plans should be accompanied by better achievement in terms of tax compliance, revenue collection, or offsetting measures.

So we think that at this stage the deficit target that is laid out in the budget is well in line with the targets that were also set out under the Standby Arrangement. For any additional tax cuts, offsetting measures need to be carefully considered so that these budget targets, which are a priority, can be achieved.

QUESTIONER: Excuse me, I didn’t understand. Maybe I can ask. I would like to insist on this proposal, on a lot of proposals, the local fiscal code proposal to hold. So we can in Romania that from VAT, for example, it is too high because they collect only half of it. Isn’t it a sign that the tax burden is too high and a realistic cap could be very good for the budget, not the dramatic gap in the budget?

MS. SCHAECHTER: I think you point out one important issue in the Romanian economy, and that is indeed the compliance gap, especially for VAT is very high. Indeed, it’s actually the highest in the EU. So only about half of VAT is collected of what should be collected. So we are very supportive of measures that help reduce this compliance gap. But we also would like to caution that reducing this compliance gap takes time. So there’s a tradeoff here of going ahead with a very aggressive large reduction in a tax cut as long as maybe not all conditions are yet in place; at the same time to improve the compliance and the tax collections. So one would have to very carefully balance these. And this has to go hand in hand.

So more generally, we see the proposed scope or the size of the tax cuts as something that should be carefully reconsidered given that it will take some time to make the offsetting improvements in the revenue collection and tax compliance.

QUESTIONER: Thank you. Can I ask you another question, please?

MS. STANKOVA: Yes, go ahead.

QUESTIONER: Well, my other question is about state-owned companies. You mentioned reforms, continuation of reforms, and so on. But you didn’t mention anything on the privatization program, which I think it was postponed. IMF didn’t say anything about this. Do you reconsider your initial advice on privatization of state-owned companies on the stock exchange, for instance?

MS. SCHAECHTER: I did mention that part of the aspects that can help the operational performance and the service delivery of state-owned enterprises is also a greater role of the private sector. And that can be in the form, as I said, of minority or majority privatization. So we do, indeed, think it is very important to continue with the government’s plans of getting a greater role of the private sector into these companies, including getting Oltania ready for an initial public offering, which is part of the Standby Arrangement, as well as to continue the process of getting the freight railway company, Marfa, ready for private investors.

QUESTIONER: Hello. I would like to ask you if -- because we are talking about fiscal changes. The budget execution for the first two months is looking kind of encouraging. We’ve seen quite a big increase in revenue and a decrease in spending. Do you think that the government may have a good arguing point in pushing forward these tax cuts and, as you said, they need to reconsider the tax cuts? So if we are to understand, you don’t support tax cuts in general or do you think they should do it in smaller steps and then assess the impact on the budget? Thank you.

MS. SCHAECHTER: So as you said, tax cuts are important changes to the fiscal environment, so these are changes that are to be there a while and also improve the predictability of the economic actors. So making that decision based on two months of data, we would think that is premature. Nevertheless, we do see that indeed in the first two months of the year the cash deficit recorded a surplus. We would also have to caution that most of the surplus was registered because spending was much lower as laid out in the budgetary plans. So what would be important for tax cuts would be to see that indeed these gains that are also -- we see some improvements on the revenue collection side -- that these are indeed permanent improvements.

And then we do understand that indeed the crisis left Romania with a relatively high VAT rate. And, indeed, one can consider what can be done to lower that tax rate over time. But as you said, it is I think an issue of the size of the tax cuts that have to be weighed against the current environment, and it also has to be considered in terms of the timing of those tax cuts.

QUESTIONER: If I can ask you one more question. What do you think will happen in case you don’t reach an accord and you again have to leave without a letter of intent because of these planned tax cuts with the government? Because Prime Minister Ponta says you’re really determined to do this and that he will try to convince you that these cuts are sustainable.

MS. SCHAECHTER: Just for clarification, the report that we have now prepared is a staff report for the Article IV Consultation. Our discussions as regards to the Standby Arrangements, they are ongoing. And we do understand from the government that it is committed to meet the commitment and the objectives under the program.

At this state, indeed, we need to better understand how the tax cuts in their current form and their current size and timing, how that would fit in with the commitments that the government also has under the Stability and Growth Pact, under its own fiscal rule, and what are the expected offsetting effects or measures that it plans to take.

QUESTIONER: Yes, hello. I also have a question about the tax cuts. From what I understand the government has already approved them and they’re now moving on to Parliament where they will be debated and changed and presumably approved by June. Doesn’t that mean that the government -- the tax cuts already left the government’s purview and they’re now moving on to Parliament? So basically I guess my question is can they be brought back to government and have them negotiate with you?

MS. SCHAECHTER: I guess you do describe the process accurately. I think what we are doing in this report is that we do make a recommendation of reconsidering the scope and the timing of those tax cuts. And we’re asking the question of what offsetting measures could be arranged to meet the fiscal targets over the medium term. And I think this is an issue that probably will be discussed also during the Parliamentary debate.

OPERATOR: We have no further questions at this time.

MS. STANKOVA: Very good. It means that we have addressed all questions today. Thank you very much, everyone, for coming to the press call and have a good day.