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Transcript of the IMF Conference Call on Romania


IMF Headquarters, April 1, 2014.
April 1, 2014

Andrea Schaechter, Mission Chief for Romania,
European Department, IMF
Silvia Zucchini, Senior Communications Officer,
Communications Department, IMF

MS. ZUCCHINI: My name is Silvia Zucchini from the IMF Communication's Department. Good morning and good afternoon for those who are connecting from Romania. Here with me is Andrea Schaechter, Mission Chief for Romania, from the European Department of the IMF.

This is conference call on Romania on the occasion of the release of the IMF Staff Report for the first and second reviews under the Stand-By Arrangement (SBA). Let me give the floor to Ms. Schaechter who will have some opening remarks and then I will open the floor for questions. Thank you very much. Ms. Schaechter.

MS. SCHAECHTER: Good morning from Washington and good afternoon to those in Bucharest. Thank you everyone for participating in this conference call. The IMF Executive Board approved last Wednesday the first and second reviews of the SBA with Romania. I would now like to focus on a few key aspects of the assessment laid out in the staff report, and elaborate on a few key policy priorities going forward. I'll be brief so this will leave some time to respond to your questions afterwards.

The Romania program is on track. Macroeconomic fundamentals have strengthened further last year, and economic growth, indeed, reached a post-crisis high. The current account deficit narrowed significantly in 2013. We've also seen inflation that has fallen to historical lows. As a consequence the government and the private sector can now borrow at record low interest rates.

It's also remarkable in that connection that Romanians for the first time pay less for bank loans in lei then in foreign currency.

These strong macroeconomic fundamentals have served Romania well during the recent volatilities in capital market flows. It was less impacted than other emerging economies.

As global uncertainties have continued to rise this anchor role that sound macroeconomic policies can play becomes even more important. Therefore, we caution against any fiscal initiatives that are not budget neutral, and which come outside the regular budget process.

The recent announcement by the government to provide exemptions to the excise increase for fuel products fall into this category unless there are strong off-setting fiscal measures that are being identified to meet the fiscal targets in this year and in the years to come.

Let me also summarize our assessment on the structural reform agenda. In some areas important strides were made, but in other areas progress was slower than envisaged under the program.

The initial public offerings for the two energy companies last year, and the full implementation of the road map for liberalizing the energy prices, are major accomplishments. Unfortunately however, these achievements have not been equally matched in other areas. The authorities did not manage to reduce arrears of state owned enterprises by end December as committed under the program.

While they have taken some corrective actions to remedy the shortfall a sustained effort is needed going forward. This includes restructuring of enterprise. In particular, the rail freight company, Marfa. Weak payment morale or weak payment ability in the public sector needs to be overcome once and for all. Otherwise the public sector holds back the prospects for broad economic growth in Romania.

So let me sum up. Romania is making good progress under the precautionary standby arrangements. Prudent macroeconomic policies have helped to reduce imbalances, and have also helped to further build buffers. These achievements need to be preserved especially now in times where capital flows to emerging markets have become uncertain. But this prudence on the macroeconomic policy side alone is not enough to raise Romania's income levels over the medium term. Without steadfast progress on the structural reform agenda, in particular the energy and the transportation sector, Romania risks to lose more time in its convergence process.

So let me stop here and hand it over to Silvia.

MS. ZUCCHINI: Okay. Thank you very much, Andrea for these opening remarks. Let's open the floor to question. I'll ask you that you please identify yourself and your affiliation, and be mindful of other colleagues. So please ask one question at a time, so we can be as efficient as possible.

QUESTIONER: You said that the energy market reforms in Romania have been receiving extremely well. I'd like to know what the IMF has made of the recent changes in draft amendment in Romanian Parliament to essentially add a .60 cent tax on income generated above the reference price for gas in Romania.

MS. SCHAECHTER: Thank you for this question. As I said earlier the reform in the energy sectors are progressing well. The price deregulation that the road map sets has been fully implemented as was laid out in the economic program that is supported by the SBA. I should also stress that the market for electricity for non-residents has already been fully deregulated, which is a major accomplishment. The road map for gas deregulation is also fully on track.

There have been some recent decisions by the government on the taxation. We have not had an opportunity to discuss those details with the authorities. But we are fully encouraged that the deregulation is on track.

QUESTIONER: I would like to ask what Romania has to do in the energy sector to boost income convergence. When do you think Romania will reach Western European living standards under the current scenarios, which is with structural reforms implemented thoroughly and without a delay?

MS. SCHAECHTER: Thank you for your question. Let me clarify what I meant with the importance of reforms in the energy and transportation sector.

These are both areas which can become motors of growth for Romania, especially given the abundance of energy that Romania has. But to fully exploit the potential for these two sectors, investment is much needed.

This is the case for the transportation sector. Let me just give you one example that is always quoted. That is the average speed of trains which is far below the average of the EU in Romania. So investment is much needed.

Similarly, this applies to the energy sector. One way of actually attracting funds is to get the price setting right, namely to have prices in line with market prices to actually attract both domestic and foreign investment. So the deregulation that is currently ongoing is exactly a step in the right direction. It will be an incentive for investment going forward.

Indeed, Romania had high growth last year of 31/2 percent, which was one of the highest in the EU. To close the income gap between the EU it will need to continue to grow at higher levels than the EU average for years to come. So laying the groundwork is really important to achieve this objective.

QUESITONER: Hello and thanks for this call. I wanted to ask you, considering that the (inaudible) of the Romanian president and the government continue to differ on issues like the excise tax, and in the following months there will be elections in Romania, how much of a risk to the IMF-supported program are political issues in Romania?

MS. SCHAECHTER: You will see in the staff reports that we do see political risks as important implementation risks. But at the same time, we do have the full commitment from the Romanian authorities to implement the program and go forward with the reforms that were just approved by the IMF Executive Board.

QUESTIONER: Have there been setback for the program so far?

MS. SCHAECHTER: The second review of the program was completed on time, as scheduled in the program timeline. However, the first review that was scheduled to be completed earlier was delayed due to the differences or the dispute between the president and the government in terms of the implementation of the excise increase. This issue was overcome. So the second review then combined both the first and the second review. So the program is fully on track.

QUESTIONER: I have a question regarding monetary policy, as I read in your report that you advise the central bank not to ease the monetary policy further. Similarly you have recommendations regarding the reserve requirement. Do you think that the central bank's objectives to bring this reserve requirement towards EU levels is not such a good decision given the current turmoil in the financial markets?

MS. SCHAECHTER: As you point out, in the staff report we do caution about further easing in the monetary policy stance. The policy rate now is at a record low. Inflation is also a record low, but I think consensus forecast, the forecast of the central bank, and our forecast, all show that inflation is projected to rise later in the year. With monetary policy being a forward looking policy, we don't think it's opportune to lower the policy rate further. You also rightly point out that there are other considerations that need to be taken into account, including the volatile global environment at this stage.

The other part of your question refers to the lowering of the reserve requirement. Indeed, the minimum reserve requirements in Romania are far above the levels in most other countries in the EU. So we understand the motivation of the central bank to lower these requirements over time, but we also point out in the report that this should be done in a gradual way, taking the external environment into consideration. In our understanding, this also factored into the decision making of the central bank.

QUESTIONER: Hello. I just want to be clarified on one thing. You said at the beginning of this conference that the government should be very prudent regarding the fiscal policies. Just to be clear I just want to know if you think that it was a good decision taken by the Romanian government to allow exemption for transporters from the new excise. The government decided to allow exemption for the transporters in order not to pay seven Euro cents per litter, but four Euro cents to be given back to them.

MS. SCHAECHTER: What I wanted to highlight is that the main objective of the government for the 2014 budget is to achieve a fiscal deficit target of 2.2 percent. When the budget was decided a number of revenue measures were adopted to achieve this target. And the excise tax is an important element to achieve this.

Any decisions like the one that you just mentioned on exemptions for transport or for large trucks would, indeed, create a fiscal gap that would need to be off-set with strong measures so that the budget objective for this year, as well as the fiscal objectives for the next years, can be achieved.

I wanted to highlight that this is particularly important in an environment where the global uncertainties have risen, and where markets have actually shown a lot of confidence into Romania and the decision making of the government. Romania has benefited, particularly from its strong fiscal policy.

So any exemptions that you are referring to should be fully off-set with other measures, so that the overall fiscal targets are not being put into jeopardy.

QUESTIONER: You said in the staff report that the IMF is concerned that electoral pressures, particularly those related to the presidential elections later in the year, as they could lead to decisions to reduce taxes, increase expenditures, and loosen the fiscal target at the time of the budget bill consideration. Could you be more specific about what taxes could be reduced because of this election pressure and what expenditure increased? What are your concerns?

MS. SCHAECHTER: As I already responded to the earlier question on this, 2014 is a year with elections. There are a number of initiatives which are being discussed in the public. What the staff reports points out is that the overriding objective of the government and its commitment in 2014 is a fiscal target of a 2.2 deficit.

So any initiatives, fiscal initiatives that are being contemplated need to be taken very carefully, especially with the view of reaching this target. So any changes in taxation would have to be fully off-set so that this target is not endangered.

QUESTIONER: You mentioned that state owned enterprise was one of the areas where Romania has not performed especially well. As for Transgaz, we know that was taken under the Ministry of Economy recently. Is that also one of the organizations that are looking to be restructured?

MS. SCHAECHTER: Under the Memorandum of Economic and Financial Policies, the program has focused on only a limited number of companies for which the government is foreseeing initial public offerings. Transgaz is not one of those.

QUESTIONER: I just have a very quick question. It's related to the statement after the Board approved the two reviews. Actually I just wanted to ask you to detail a bit the following statement from the press release that was published on March 26. “The evaluation drew several lessons for fund engagements with Romania. First, program conditionality, particularly with regard to complex structural reforms, is no substitute for country ownership.” Could you detail that statement a bit if possible? Thank you.

MS. ZUCCHINI: That part of the press release refers to the ex-post evaluation of exceptional access under the 2011 SBA with Romania. I'm afraid we can't discuss this today because the IMF staff who conducted that review is traveling at the moment and could not be with us today. So as Ms. Schaechter did not conduct that evaluation, she will not be able to discuss that today. Rather, she will focus on the first and second reviews under the current SBA. If you want to send me questions in writing I can follow-up with the staff at the IMF who conducted that assessment, and we can send you answers.

QUESTIONER: I would like to talk a bit about the revenue collection. In the first months of this year we've seen revenues dropping by 0.1 percent of GDP. We've also seen that, as you've pointed out, the government making exemptions from transport companies from the additional excise duty. Do you believe that we can still speak about the fiscal relaxation promised by the government, such as the reduction in the social contributions and BAP for the second half of the year? Also, how do you look at the collection side? How do you see this ongoing weakness with the revenue collection? Thank you.

MS. SCHAECHTER: So we are still in the process of looking at the numbers. Again, it's only two months in the year, but we will look at the numbers carefully.

We will also assess the impact of the reform progress in the revenue administrator. As we all know, good efforts have been made there, but it also takes time until such reforms actually bear fruit.

On the second part of your question, the reduction of the social security contribution rates is one of the objectives of the government. We do share the objective that is behind it, which is to lower the burden on labor that is particularly high for those with low incomes.

There are various options to make it more attractive for employers to hire people, but also to make it more attractive for those who either are not in the labor market right now or who are, maybe informally in the labor market, to become part of the formal labor market.

Reduction in social security contribution rates is definitely one avenue to go. But I think it's also very clear if we're talking about a rate cut of say 5 percentage points this will cost a substantial amount of money. So that means it will reduce the revenue collection by a substantial amount.

To achieve that, and this was always the plan of the government I believe, one would have to also look at off-setting measures. One of the areas is what we call base broadening. That means that for those who are currently contributing to it, exemptions need to be reevaluated. One also needs to carefully assess if those with higher incomes are currently contributing sufficiently to the social security contribution system.

But to come back to your question of whether this is realistic for the summer? I think clearly this is a very serious effort. It means that all options need to be considered and difficult choices need to be made. And that this should be done in a very careful way.

We've always said that the best timing for this would be the 2015 budget discussions. But if an assessment is done at an earlier stage and involves all stakeholders, and a policy change that is budget neutral can be achieved earlier we are open to discussions already at the time of the summer.

This has a very important impact also for the pension system. We don't want to endanger future pension or healthcare payments. So this is a very serious and careful reform that needs to be conducted. The 2015 budget discussions are probably the most appropriate timing for that.

QUESTIONER: My question refers to Hidroelectrica, the state-owned company that recently reentered insolvency and was among the companies in the list to have IPOs this year. How lenient or flexible will it be in re-discussing the calendar for planned IPOs?

MS. SCHAECHTER: Let me step back a little back and come back to my statement at the beginning. So it's very clear that the reform of state-owned enterprises is a key pillar of this economic reform program, and steadfast implementation of reforms is needed. The reentrance of Hidroelectrica into the insolvency process was not under the control of the government, so we do expect as soon as Hidroelectrica re-exits insolvency the initial public offering will be conducted as soon as possible.

But indeed, structural reform agenda is very important. We expect to see progress on a number of fronts.

MS. ZUCCHINI: Thank you. This concludes our conference call for today. Let me just thank you and Ms. Schaechter for being with us today.