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Public Information Notice (PIN) No. 04/44
April 23, 2004
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Reviews Romania's Performance Under Past Fund-Supported Programs

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for for Romania is also available.

On April 12, 2004, the Executive Board of the International Monetary Fund (IMF) reviewed Romania's experience with Fund-supported programs since the early 1990s, under the new guidelines on assessments of countries with a longer-term program engagement.1

Background

Romania's approach to its transition to a market economy had initially been hesitant and piecemeal. Macroeconomic policies oscillated dramatically in the 1990s between periods of tightening and relaxation, while the inherited unfavorable structure of the economy and lack of sustained reform efforts resulted in weak progress in restructuring and enforcing financial discipline. Nevertheless, some key structural reforms were achieved in 1997-2000, in particular in reducing the scope of quasi-fiscal activities and resolving the banking crisis. The gradual accumulation of a critical mass of reforms and more consistent macroeconomic policy implementation under the most recent program supported by a Stand-By Arrangement have resulted in a period of strong real GDP growth and steady disinflation since mid-2001. Moreover, the quasi-fiscal losses declined further, and privatization accelerated. Despite progress, soft budget constraints remain a problem, as evidenced by large arrears and wage settlements in state-owned enterprises and an inflation rate that is in double digits.

Executive Board Assessment

Executive Directors welcomed the opportunity to review Romania's experience with Fund-supported programs under the guidelines on assessments of countries with longer-term program engagement. Since the beginning of Romania's transition in 1991, Fund program engagement has comprised six Stand-By Arrangements, the first five of which went off track, reflecting slow overall progress in structural reform and macroeconomic stabilization. Directors commended the authorities for improvement in policy implementation under the last Stand-By Arrangement, completed at end-2003, which helped to usher in strong economic growth and steady disinflation, though they noted that progress on structural reform remained uneven.

Directors acknowledged that the Fund's longer-term program engagement with Romania reflected several factors, including unfavorable starting conditions and recurrent balance of payments needs, but it was also a response to the authorities' willingness to accept progressively tougher up-front conditionality in each successive program as a means to facilitate the implementation of reforms and to boost their credibility.

At the same time, Directors recognized that mixed ownership of reform elements and some aspects of program engagement may have also contributed to the slow pace of reform. They observed that the Fund initially conditioned its engagement on macroeconomic reforms and was slow to require deep-seated structural reforms, despite an awareness that such reforms were critical to macroeconomic stabilization. Directors concurred that the Fund should have emphasized containing losses from quasi-fiscal activities sooner, given their importance to program success. Finally, they stressed that earlier consultation between the Fund and the World Bank on medium-term strategies for reforming large loss-making sectors such as mining, district heating, and railway transportation, would have increased the pace of reform. A few Directors referred to the Fund's Private-Sector-Involvement initiative of 1999 in Romania, and agreed that the Fund's conditioning of its support on the securing of money by the authorities from private creditors exacerbated the difficulty Romania had in obtaining new loans on appropriate terms.

Most Directors considered that despite Romania's repeated slippages in policy implementation, Fund engagement had been beneficial for promoting good policies. Directors broadly agreed that the Fund's strategy of linking its program engagement to critical structural reforms that would be difficult to reverse, such as in the areas of bank restructuring and enterprise privatization, had been appropriate. Overall, they concluded that, given the authorities' mixed ownership of the programs, the use of comprehensive program conditionality, particularly prior actions, had been effective in moving reforms forward and that the Fund had limited its exposure appropriately in the face of program slippages. A few Directors noted that granting multiple waivers, as was done during the most recent Stand-By Arrangement, contributed to program flexibility, while a number of others viewed it as having lessened the authorities' resolve to implement program commitments.

Directors observed that the overlap in the coverage of World Bank and Fund programs had been substantial under the most recent arrangements. Against this background, Directors underscored that close coordination in the Bank and Fund's respective conditionalities had helped to move reforms forward, and that the involvement of both on some key reforms, such as in the banking and energy sectors and privatization, had been essential for their success.

Directors welcomed Romania's recent economic progress, but agreed that Romania still faced considerable challenges to complete structural reforms and to sustain macroeconomic stabilization in the run-up to EU accession. They saw the need to ensure further disinflation to EU levels and to reverse the recent widening of the current account deficit, via further fiscal consolidation, prudent monetary policy including measures to contain rapid credit growth in a consistent monetary framework, and a tighter incomes policy, including moderation in public and state enterprise sector wages.

Directors emphasized that completing the task of macroeconomic stabilization hinges critically on completing structural reform of state-owned enterprises. They stressed that transparent privatization of state-owned enterprises and efforts to eliminate quasi-fiscal losses and implicit subsidies, particularly in the energy sector, need to proceed quickly. To mitigate the social impact of these reforms, Directors urged further strengthening of the social safety net. They also emphasized the importance of strengthening public administration and banking supervision, continuing restructuring of the tax and pension systems, and in particular, improving governance and the business environment to sustain robust economic growth and attract foreign direct investment.

While Directors agreed that the progress achieved under past programs could in principle make a surveillance-based relationship feasible now, they nevertheless supported the view that a strong precautionary Stand-By Arrangement with low access would help to strengthen the momentum for structural reforms in the run-up to elections later in the year, support the authorities in paving the way for EU accession, and facilitate a credible exit from the Fund's program support. They emphasized that a follow-up program should reflect the lessons from the ex-post assessment and stressed the importance of strong ownership and a front-loaded conditionality, supported by prior actions in critical reform areas. Directors agreed that a surveillance-based relationship would be preferable if agreement on a strong program cannot be reached.

Directors welcomed the authorities' reactions to the staff's assessment and shared their view that the assessment was an important basis for transparent cooperation between the Fund and Romania.



Selected Economic Indicators


 

1999

2000

2001

2002

2003

2004
Proj.


Real economy (change in percent)1

           

Real GDP

-1.2

2.1

5.7

5.0

4.9

5.0

Final domestic demand

-2.9

2.1

6.9

3.4

7.3

5.5

CPI (end of period)

54.8

40.7

30.3

17.8

14.1

9.0

CPI (period average)

45.8

45.7

34.5

22.5

15.3

12.0

Unemployment rate (end of period; percent)

11.8

10.5

8.6

8.1

7.2

6.5

Gross national saving (percent of GDP)

11.9

15.6

17.0

20.1

20.6

21.3

Gross domestic investment (percent of GDP)

16.1

19.5

22.6

23.5

26.5

26.5

             

Public finance (general government, percent of GDP)

           

Overall balance

3.6

-4.0

-3.2

-2.6

-2.3

-1.9

Primary balance

2.4

0.9

0.6

0.4

-0.2

0.2

Total public debt (in percent of GDP) 2

30.5

29.9

27.4

26.8

26.2

27.4

             

Money and credit (end of year, percent change)

           

Real domestic credit3

-7.9

7.9

28.0

33.1

54.9

21.6

Broad money

44.9

38.0

46.2

38.1

25.0

26.0

           

Interest rates (percent)

           

NBR interest rates (end of period)4

88.7

60.1

39.9

21.5

23.4

...

Treasury bill rate (end of period)

104.8

59.4

38.4

17.4

18.4

...

             

Balance of payments (percent of GDP)

           

Trade balance

-3.5

-4.5

-7.4

-5.7

-8.0

-7.0

Current account balance

-4.0

-3.9

-5.5

-3.4

-5.9

-5.2

External debt

25.6

28.7

30.7

34.3

34.6

33.1

Official reserves (end-year, US$ million)

2,472

3,466

5,090

6,975

7,994

9,610

Reserve cover (months of prospective imports)

2.1

2.5

3.2

3.5

3.3

3.7

             

Exchange rate

           

Lei per U.S. dollar (end of period)

18,250

25,926

31,597

33,500

33,019

...

NEER appreciation (+) (annual average in percent)

-39.8

-22.8

-22.3

-14.4

-11.1

...

REER appreciation (+) (CPI-based, annual average in percent

-15.1

9.3

1.5

2.6

0.4

...

REER appreciation (+) (CPI excl. admin prices, annual average in percent

...

6.0

1.8

1.0

0.0

...

REER appreciation (+) (ULC-based, annual average in percent)

-21.8

-0.3

-0.9

-6.7

-5.6

...


Sources: Romanian authorities and IMF Staff estimates.

1In 2002, national accounts data starting 1998 have been revised due to methodological change (adoption of ESA95 guidelines).

2Including domestic public debt and external public debt (public and publicly guaranteed).

3Credit to the nongovernment sector. Weighted average of real lei credit growth and U.S. dollar-measured foreign currency credit growth.

4NBR's deposit auction interest rate, compounded.


1 This PIN summarizes the views of the Executive Board as expressed during the April, 12, 2004 Executive Board discussion based on the staff report.




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