Romania and the IMF
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The International Monetary Fund (IMF) has approved a 13-month stand-by credit for Romania, equivalent to SDR 301.5 million (about US$414 million), to support the government’s 1997-98 economic program. Of the total, SDR 60.3 million (about US$83 million) is available immediately.
Romania’s macroeconomic situation began to deteriorate in late 1994 and became seriously unstable in 1996. The country also moved slowly in the area of structural reforms, and the economy continued to be heavily influenced by state ownership and control. Output and employment have in many instances been supported only through large subsidies.
Recognizing that Romania was on the verge of a financial crisis, the government that came into office following the November 1996 elections has embarked on a bold program to address the problems that have caused previous programs to fail.
The 1997-98 Program
The economic program for 1997-98, supported by the new stand-by credit, seeks a decline in the external current account deficit to 4.5 percent of GDP in 1997 from 6.6 percent in 1996, and a sharp cut in the monthly rate of inflation to about 2 percent by the end of 1997, from a monthly rate of 10 percent at end-1996. Real GDP, however, is expected to decline by 1.5 percent in 1997, in part due to a drop in output at a large number of state enterprises as subsidies are withdrawn and input prices are increased.
To these ends, the authorities are undertaking a major fiscal adjustment, reducing the combined total of the general government deficit and quasi-fiscal subsidies from 8.3 percent of GDP in 1996 to 3.7 percent of GDP in 1997. On the expenditure side, support to industrial enterprises and agriculture, including quasi-fiscal subsidies previously provided by the National Bank of Romania (NBR), will be reduced by 5.1 percent of GDP in 1997 on an accruals basis. Measures expected to yield revenues equivalent to 2.3 percent of GDP include increases in taxes on domestic crude oil and natural gas production, and increases in certain excise and value-added tax rates. The program is predicated on a flexible exchange rate policy, where the exchange rate will be determined by supply and demand in the interbank market for foreign exchange. Monetary policy has been sharply tightened and will be guided primarily by a reserve money target. Theprogram will also be supported by wage limits for loss-making state-owned commercial companies and Régies Autonomes.
An ambitious program of structural reforms under the program will focus, in the enterprise sector, on restructuring--involving liquidation or privatization--of many state-owned farms, and of industrial and commercial enterprises. Reform of the financial sector will center on improving prudential supervision, strengthening the legal framework governing banks and other financial intermediaries, and privatizing the banks. The program also envisages a continuation of the far-reaching price and trade liberalization that has already been undertaken.
Addressing Social Costs
The government will rely on the extension and improved targeting of existing social programs to guarantee timely assistance to the most vulnerable groups. Child allowances, which have been eroded in recent years, have recently been increased substantially. To soften the impact of enterprise restructuring, severance pay packages will be used selectively to support workers affected by layoffs in economically depressed regions.
The Challenge Ahead
Romania has decided to break with its past hesitant and piecemeal approach to reform by launching a comprehensive program. The large degree to which policies have been front-loaded augurs well for overall implementation. Nevertheless, challenges lie ahead, and sustained implementation of both stabilization and structural reforms will be required to pave the way for the high-quality growth needed to raise living standards over the medium term.
Romania joined the IMF on December 15, 1972; its quota1 is SDR 754.1 million (about US$1,035 million); and its outstanding use of IMF credit currently totals SDR 424 million (about US$581 million).
1 A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.
IMF EXTERNAL RELATIONS DEPARTMENT