Jeffrey Franks: Romania has honored its objectives

Romania has met all the performance criteria set by the stand-by agreement concluded with the IMF, but it must proceed with the reforms in order to achieve economic growth, Jeffrey Franks, the head of the IMF mission to Romania said yesterday.

He said that the economic growth rate for this year, which is expected to reach 1.5%, is still below the country"s potential. On the other hand, next year, the growth of 3.5%-4% predicted for the Romanian economy for next year is nearing the country"s real potential for economic growth, he considers.

The head of the IMF mission said: "The authorities were resolute in implementing the policies stipulated in the program. In order to make optimum use of Romania"s potential for growth it is essential to continue with the implementation of these policies. They are being strengthened in order to consolidate Romania"s position, which will allow it to handle the volatility of the financial markets".

The Romanian authorities need to continue the reform in the healthcare system, to lower the arrears of the state, to restructure state owned companies and to increase investments, including through the absorption of European funds.

Jeffrey Franks said: "The first challenge is the healthcare system. Unfortunately, the system is quite sick. Spending in the system exceeds the allocated resources, which weakens its financial health. These insufficient resources are inefficiently spent, depriving the needy. The healthcare system needs to undergo a complete reform".

He added that in the coming months, the government would draft a definitive reform, both of the revenue and the spending of the system. Arrears in the healthcare sector are currently near zero, but there is a risk that they would increase, according to him.

• Franks: Arrears may fall by 4-5 billion by the end of the year by the end of the year

Another path which Romania must focus on, is the continuation of the process to eliminate arrears.

Jeffrey Franks said: "The authorities have almost completely eliminated the arrears to the state and local budgets have performed a review. This exercise has shown that in the state owned companies alone, arrears exceed 20 billion lei. These unpaid invoices are major hurdle for growth".

He said that arrears could fall by the end of the year, by 4-5 billion lei.

Furthermore, raising spending on public investments should be done within the limits of the budget, the head of the IMF mission said.

He added: "The goal should be to stimulate the absorption of EU funds. The absorption of at least a part of them would provide an extraordinary boost to the economic activity".

• Franks: The government needs to be more ambitious

Concerning reform in the state owned companies, Jeffrey Franks said that significant progress has been made by many state owned companies, and in many cases the government has decided to go ahead with a total or partial privatization.

"I would encourage the government to be bolder in this respect", the IMF official said.

The list of companies that will have private management is set to include 15 companies operating in the energy and transportation sectors, which are not scheduled for privatization, according to Jeffrey Franks.

"We are still discussing the exact number of companies that will be included in this list, but on principle, what we are proposing to the government is for the largest state-owned companies which are not scheduled for privatization to have private management", he said.

The official of the IMF also said that inflation will gradually decrease, but will remain above the inflation target for this year, set by the Romanian National Bank (NBR).

Jeffrey Franks said: "Inflation has begun to decrease and we are expecting this drop to continue amid a good agricultural harvest. However, it is possible that inflation will remain above the range of targeted by the NBR, of 5% at the end of this year".

The head of the IMF mission said that Romania is on its way to meeting its target of 4.4% of the GDP, in terms of cash, and of less than 5% of the GDP in terms of commitments. The banking sector remains well capitalized and liquid, but there is still the danger of foreign turbulence, according to Jeffrey Franks.

Between July 20th and August 1st, a joint mission of the IMF, the European Commission and of the World Bank visited Bucharest, in order to perform the second evaluation of the stand-by cautionary agreement that they have concluded with Romania.