IMF Executive Board Concludes 2008 Article IV Consultation with Romania

Public Information Notice (PIN) No. 08/76
June 27, 2008

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 June 25, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Romania.1


Underpinned by massive capital inflows, GDP growth has remained strong. In 2007, real GDP grew by 6 percent, but agriculture was adversely affected by a drought (non-agricultural output expanded at a robust 7.4 percent). Despite healthy export growth, the current-account deficit widened markedly from 10.4 percent of GDP in 2006 to 14 percent of GDP in 2007, reflecting booming domestic demand, strong credit growth, and procyclical fiscal and incomes policies.

The fiscal deficit (cash basis) in 2007 increased to 2¼ percent of GDP, sharply up from a deficit of ½ percent of GDP. The government has reduced its original fiscal deficit target for 2008 to close to 2 percent of GDP. Higher agricultural and energy prices as well as excess demand contributed to more than a doubling of headline inflation from May 2007 (3.8 percent, year-on-year) to May 2008 (8.5 percent, year-on-year). The exchange rate depreciated sharply after the turmoil in international financial markets started in August 2007, but has stabilized since February 2008. In response to inflation rising well above its target range, the National Bank of Romania (NBR) increased its policy rate several times from October (7.0 percent) to May (9.75 percent).

Recent indicators suggest continued strong growth during the first half of 2008. The current account deficit, however, is expected to increase to 14½ percent in 2008.

Executive Board Assessment

Executive Directors welcomed the strong growth of the Romanian economy in 2007 and 2008, with unemployment falling and external competitiveness preserved, as seen in rising exports and gains in export market shares. These positive developments have contributed to an impressive increase in per capita income. At the same time, Directors observed that large capital inflows related to Romania's accession to the EU, compounded by procyclical fiscal policies, have contributed to booms in domestic demand and credit and emerging capacity constraints. The current account deficit has also increased to unsustainable levels. Directors expressed concern about underlying inflation pressures, as the first-round effects of food and energy price increases have already pushed headline inflation above the National Bank of Romania's (NBR) target range. They noted that world financial market tensions contributed to a sharp nominal depreciation of the Romanian currency, and cautioned that Romania remains vulnerable to additional adverse spillovers from events in global markets.

Against that background, Directors considered that the key challenge for the authorities in the period ahead will be to strengthen policies and enhance structural reforms to support convergence to EU levels, consistent with the authorities' ambition to adopt the euro by 2014. This will require a better balance between fiscal and monetary policies to counteract private sector-driven macroeconomic imbalances.

In assessing fiscal policy, Directors agreed that a much less procyclical fiscal stance would have been appropriate given growing imbalances, even though the public sector balance sheet remains sound. Looking ahead, Directors supported targeting a fiscal deficit of about 1½ percent of GDP in 2008. Also in view of upcoming parliamentary elections, Directors underscored the importance of maintaining wage discipline in the public sector and resisting pressures to increase social spending or cut taxes.

Directors urged the authorities to strengthen fiscal institutions. A more medium-term-oriented fiscal policy would not only help Romania maintain sound public finances but also would mitigate procyclical fiscal policy biases and increase the efficiency of public spending. A medium-term fiscal framework would also enhance Romania's capacity to absorb EU transfers. Directors considered that improving Romania's budget culture will require increasing fiscal expertise at all government levels, modifying present short-term-oriented budget rules and procedures, and making more use of independent expert panels to mitigate biases in budget forecasts.

Turning to monetary policy, Directors welcomed the NBR's commitment to price stability in a challenging environment, and stressed the need to firmly anchor inflation expectations. The NBR has appropriately tightened the monetary stance since mid-2007, but additional tightening may be needed to bring inflation back into the target range set for 2009. Directors encouraged the NBR to continue to strengthen its capacity to implement and communicate to the public its inflation targeting framework. They agreed that Romania's flexible exchange rate policy has served the country well, operating as a self-correcting mechanism during the current imbalances. Directors took note of the staff assessment that the real effective exchange rate is close to its equilibrium level.

Directors were encouraged by the authorities' efforts to manage proactively and contain the present financial stability risks, as evidenced by the rising level of nonperforming loans and shrinking capital and liquidity buffers during a period of rapid credit growth. They welcomed recent measures to raise provisioning for unhedged foreign exchange borrowing and to require banks to improve their liquidity management. Additional preemptive measures to increase cushions for more risky credit exposures may be needed, particularly in the real estate sector. Directors welcomed the authorities' commitment to conduct an Financial Sector Assessment Program update later this year.

Directors recommended that structural reform efforts be relaunched to support per capita income convergence to EU levels. Foreign investor interest in Romania remains strong, but looming structural bottlenecks will need to be addressed if this interest is to be preserved or even expanded. Further emphasis will need to be placed on structural reforms with a view to raising energy efficiency, developing public infrastructure, liberalizing further the labor markets, and strengthening the judicial system.

Romania: Selected Economic and Social Indicators, 2005-09
  2005 2006 2007 2008

Output, prices and labor market

(Annual percentage change)

Real GDP

4.2 7.9 6.0 6.8 5.8

Real GDP excluding agricultural sector

6.4 7.6 7.4 6.5 5.6

Real domestic demand (absorption)

8.8 14.5 16.4 9.3 9.9

Consumer price index (CPI, average)

9.0 6.6 4.8 8.2 6.6

Consumer price index (CPI, end of period)

8.6 4.9 6.6 7.9 6.2


-0.7 0.7 1.4 0.9 0.6

Nominal wages

17.0 18.9 22.6 20.5 16.9

Public sector wages

25.9 27.3 18.5 17.4 14.4

Private sector wages

14.8 16.6 23.7 21.4 17.6

Nominal unit labor cost

11.5 11.0 17.2 13.8 11.2

General government finances

(In percent of GDP)


30.2 31.0 31.4 34.7 35.2


31.0 31.6 33.7 36.8 38.2

Fiscal balance

-0.8 -0.6 -2.3 -2.1 -2.9

Structural fiscal balance 1/

-1.3 -1.8 -3.9 -3.4 -3.8

Gross public debt

15.8 12.4 12.1 11.4 11.5

Net financial worth

16.2 12.4 8.2 8.2 8.6

Money and credit

(Annual percentage change)

Broad money (M3)

36.5 28.1 33.5 36.4 25.7

Domestic credit

43.7 52.0 64.5 32.8 24.9

Interest rates

(In percent)

Euro, six-month LIBOR

2.2 3.1 4.3 4.2 4.0

Interbank rate

... 8.2 7.6 ... ...

Lending rate

21.0 14.8 13.3 ... ...

Real lending rate (CPI adjusted)

12.0 8.3 8.5 ... ...

Balance of payments

(In percent of GDP)

Current account balance

-8.9 -10.4 -14.0 -14.4 -14.0

Merchandise trade balance

-9.9 -12.0 -14.6 -14.9 -14.4

Capital and financial account balance

15.6 15.7 17.6 16.1 16.8

Foreign direct investment balance

6.6 8.9 5.9 5.6 5.0

Net international investment balance

-29.2 -35.3 -42.1 -49.3 -53.5

Gross official reserves

18.4 18.6 16.2 14.2 13.7

Gross external debt

39.1 42.9 48.5 49.4 49.7

Exchange rates


Lei per euro (end of period)

3.66 3.41 3.53 ... ...

Lei per euro (average)

3.63 3.52 3.34 ... ...

Real effective exchange rate


CPI based (percentage change)

17.9 7.6 9.0 1.3 6.5

GDP deflator based (percentage change)

21.4 11.9 15.2 5.9 10.5

Social Indicators (reference year in parentheses)


Per capita GNI (Atlas method, 2006): US $4,850; Income distribution (GINI index, 2003): 31.1;

Poverty rate (2005): 13 percent; Primary education completion rate (2005): 99.4 percent;

Life expectancy at birth (2005): 71.7; Infant mortality per 1000 live births (2005): 16.


Sources: Romanian authorities; Fund staff estimates and projections; and World Development Indicators database
1/ Actual fiscal balance adjusted for the automatic effects of output gap and absorption gap on the fiscal position. See IMF Country Report No. 07/390, Chapter III.

1 Under 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 Executive Directors, and this summary is transmitted to the country's authorities.


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