Public Information Notice: IMF Concludes Article IV Consultation with Romania

October 6, 1998

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On September 15, 1998, the Executive Board concluded the Article IV consultation with Romania.1


Inflation has declined steadily since the beginning of 1998, from more than 5 percent to less than 1 percent per month in August. Important in this regard has been the fact that monetary policy has been consistent with a depreciation of the leu of only 1–2 percent per month. Net foreign assets of the National Bank of Romania have remained largely unchanged, while the foreign exchange market has functioned properly.

With a further real appreciation of the leu and upward pressure on the fiscal deficit, exports have remained stagnant while imports have continued to rise, and the external current account deficit has increased from an already high level. Under these circumstances, preservation of overall balance of payments equilibrium has required tight monetary conditions, entailing relatively high interest rates. This has been a reason for the continued decline in output. GDP is set to contract by about 4 percent in 1998, having fallen by nearly 7 percent in 1997.

Fiscal policy has come under increasing pressure during the first half of 1998. A transfer of government securities to two banks in late 1997 has caused a significant rise in budgetary interest payments, an increase projected to amount to 1.7 percent of GDP in 1998. Changes in the tax system that took effect in early 1998—involving reductions in wage and profit taxes and increases in value added and excise taxes—will entail a net revenue loss of about 1.5 percent of GDP in 1998. By assuming that these changes would be mostly offset by higher privatization proceeds and better revenue collections, the 1998 budget approved in May targets a general government deficit of 3.6 percent of GDP, unchanged from 1997. This revenue increase has, however, failed to materialize, and expenditures have had to be kept well below appropriations in order to prevent a significant increase in the deficit during the first half of 1998.

Reflecting the weaker than expected fiscal revenue performance, the Romanian authorities have recently rectified the 1998 budget, reducing appropriations by about 2 percent of GDP compared to the original budget. The rectified budget targets a deficit of 4 percent of GDP in 1998. This target assumes a considerable improvement in revenues during the second half of 1998, by about 2 percent of GDP.

As to structural reform, the liberalization of the foreign exchange and treasury bill markets, the closure of the NBR’s rediscount window, and the attendant shift to market-based reserve money management, and the considerable price and trade liberalization in the agricultural sector have resulted in an increased reliance on market mechanisms. This is an indispensable step towards improving the resource allocation.

Considerably less progress has been made in advancing reforms aimed at restructuring state-owned enterprises and state banks. Plans for privatization of banks and large enterprises, restructuring or closure of loss-making enterprises, reform of state banks, and restructuring of régies autonomes are well behind schedule. Moreover, policies for enforcement of financial discipline have not been effective, causing an increase in enterprise arrears, especially to the utilities and the budget. As a result of the slow progress in these areas, scarce resources have continued to be channeled mainly to cover losses in ailing state enterprises, a major reason for the considerable decline in credit to the non-government sector.

Executive Board Assessment

Executive Directors welcomed the focus of the National Bank of Romania on inflation control, but warned that the underlying policy mix was unsustainable, primarily because lack of fiscal support was overburdening monetary policy. Directors also welcomed the increased reliance on market forces. They found, however, that structural reforms had generally not been advanced since the Executive Board's review of the Stand-by Arrangement last year, in particular in the enterprise and banking sectors.

As to macroeconomic policies, Directors noted that the exchange rate policy had served the authorities well in bringing down inflation. However, in the face of an increase in the current account deficit from an already high level, that policy had required high real interest rates. In order to prevent a third year of economic recession in 1999, it was now a matter of urgency to unburden monetary policy, which would require a fiscal tightening. In this regard, there was a general consensus that the current turmoil in international capital markets had significantly limited the authorities' room for maneuver. While the current evidence on competitiveness was unclear, Directors noted that structural reforms would be crucial in allowing productivity increases.

Directors noted that the proposed rectified budget for 1998 would likely lead to a relaxation—rather than a tightening—of fiscal policy. The assumption of a major increase inrevenues, including privatization proceeds, was at odds with the fact that the economy was contracting, and with the state of the privatization program. They urged the authorities to base the rectified budget on realistic revenue assumptions. It should also be calibrated with a view to ensuring a sustained reduction in the fiscal deficit in the coming years in order to reduce the current account deficit to a sustainable level.

Directors stressed that fiscal policies in 1999 should be formulated in a medium-term framework, taking account of the objectives of stabilization and reform. In their view, a significant increase in revenues would be essential. Directors recognized that there was considerable scope for improving tax collections. They doubted, however, that the needed strengthening of revenue could be secured without an increase in tax rates, although they did call on the authorities to reconsider their decision to introduce a temporary import surcharge. Directors also underscored that the policy of relying on ad hoc expenditure cuts was not viable—the burden had fallen mainly on capital expenditure and reform-related outlays—and that several costly programs and policies currently in the pipeline were incompatible with fiscal constraints. Emphasizing the need to improve the quality of fiscal adjustment, some Directors also urged the authorities to curtail some planned military expenditures.

Turning to structural reforms, Directors welcomed the liberalization of the foreign exchange market and the switch to market-based instruments for reserve money management and placement of treasury bills. They noted that this had resulted in a much increased reliance on market forces, and had unburdened monetary and exchange rate policies of quasi-fiscal functions. They also commended the authorities for the important price and trade liberalization measures they had taken in the agricultural sector, and welcomed the acceptance of the obligations of Article VIII, Sections 2, 3, and 4 of the Articles of Agreement.

Apart from these market liberalization efforts, Directors found, however, that little progress had been made in advancing other structural reforms, in particular reforms aimed at ailing state enterprises. Noting that the Romanian economy was burdened by a relatively large number of heavily loss-making enterprises, Directors emphasized that an early reduction in the claim on resources by such enterprises would be necessary to enable the emergence of a dynamic small- and medium-sized enterprise sector. The reform program should, therefore, give priority to the privatization of large enterprises, the restructuring or closure of unviable entities, and the enforcement of financial discipline, including by addressing the problem of enterprise arrears. It was also pointed out that the correction of enterprise problems was a necessary prerequisite for tackling the difficulties of the banking sector.

Directors were particularly concerned about the failure to come to grips with problems of ailing state banks. Directors stressed the importance of developing a restructuring plan for the banking sector. They noted that implementation of such a plan would be key to the sustainability of macroeconomic stabilization.

Looking ahead, Directors underscored that the Fund stood ready to continue to support Romania, but reiterated that such support would require up-front structural reforms and adequate fiscal consolidation. Directors noted that, in setting policies, due regard would need to be paid to the ongoing contraction of GDP. Directors were encouraged by the fact that the new government appeared to recognize that reforms had been lacking, and that its broad objectives and priorities for reforms were mostly in line with what was required. The key issue now facing the government was, first, to develop concrete plans for achieving these objectives and priorities, and, second, tomobilize the political resolve required to implement these plans in the face of what undoubtedly would be fierce resistance from vested interests. While recognizing that the reform process would necessarily have to be protracted because of the attendant social costs, Directors noted that the deep-seated nature of the structural problems made it necessary to move boldly ahead. In this regard, they emphasized the considerable potential for foreign direct investment, which could facilitate the reform process once a critical mass of reforms had been put in place.

Romania: Selected Economic Indicators, 1993–97

  1993 1994 1995 1996 1997

  (Percentage growth)
Real economy  
  Real GDP 1.5 3.9 7.1 3.9 -6.6
  Consumer prices (Dec./Dec.) 295.5 61.7 27.8 56.9 151.6
  (period average) 256.1 136.7 32.3 38.8 154.8
  Unemployment rate (e.o.p. in percent) 10.4 10.9 8.9 6.3 8.8
  (Percent of GDP)
Public finance; general government budget  
  Balance -0.4 -1.9 -2.6 -4.0 -3.6
  Revenues 33.9 32.1 31.9 30.1 30.7
  Expenditures 34.2 33.9 34.5 34.1 34.3
  (Percentage growth, unless otherwise indicated)
Money and credit  
  Broad money1 141.0 138.1 71.6 66.0 75.9
  NBR interest rates (e.o.p; in percent)2 416.0 78.0 67.0 66.9 138.8
  (Billions of US$, unless otherwise indicated)
Balance of payments  
  Current account balance (percent of GDP) -4.7 -1.7 -4.9 -7.4 -6.7
  Exports 4.9 6.1 7.9 8.1 8.4
  Imports 6.0 6.6 9.5 10.6 10.4
  Gross external debt 4.3 5.5 6.9 8.8 10.3
  Gross reserves (in months of imports) 2.0 3.8 2.0 2.4 4.4
  Of which NBR 0.1 1.1 0.4 0.6 2.5
  External debt/GDP (in percent) 16.1 18.4 19.2 25.2 29.8
  Debt service ratio (in percent) 6.2 9.2 10.6 13.7 20.2
Exchange rate  
  Lei per US$ (e.o.p) 1,141 1,774 2,558 3,750 7,985
  REER (e.o.p; CPI-based191=100) 102 106 93 101 119
  REER (e.o.p; ULC-based191=100) 84 81 72 72 66

Sources: Romanian authorities; and Fund staff estimates.

1 For 1997, foreign currency components are valued at end-1996 exchange rates.
2 Weighted NBR average
interest rate; from 1997 interbank rate.

1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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