Romania and the IMF
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The Executive Board of the International Monetary Fund (IMF) today approved an 18-month stand-by credit for SDR 300 million (about US$383 million) to Romania. The decision will enable Romania to draw SDR 52 million (about US$66 million) immediately from the IMF.
Following the Executive board discussion, Anne Krueger, First Deputy Managing Director and Acting Chair, said:
"Reflecting their commitment to accelerate EU accession, the Romanian authorities have initiated a program aimed at ensuring macroeconomic stability, high sustainable growth, and effective transition to a market-based economic structure. With several previous programs having gone off track before completion, the authorities indicated their very strong commitment to realize all the components of the proposed program. The program comprises comprehensive policies for fiscal, quasi-fiscal, and wage restraint. The structural adjustment policies mostly reflect the need to move ahead as quickly as possible with privatization and put the energy sector on the road to profitability. Important macroeconomic and structural measures, including recent fiscal measures and submission of the 2002 budget to Parliament, have been implemented up front. Further timely implementation of scheduled measures along with resolve to engage in a vigorous and sustained strategy of stabilization and structural reform will be important to the success of the program.
"A crucial component of the program is the reduction in the quasi-fiscal deficit and particularly in the large losses in the state-owned energy sector. The government's program therefore includes adjustments in energy prices, measures to improve the collection rates of the main utilities, and containment of wage growth as well as lower employment in state-owned companies in 2002. The implementation of these measures will be of critical importance both for enterprise profitability and for the success of the disinflation strategy.
"Monetary policy, implemented in a framework centered on a managed floating exchange rate, will balance the objectives of reducing inflation and protecting external sustainability. The authorities' choice of a gradual disinflation strategy reflects the difficulties in eliminating the backward-looking wage indexation mechanism and imposing firm financial discipline in public enterprises.
´The government is firmly committed to reducing the size of the state sector and moving ahead with several major privatization projects. It has already approved the privatization strategy for the largest state-owned bank, BCR, which will involve the complete sale of the state's capital share and transfer of control to a strategic investor. Privatization in the gas and electricity distribution sectors planned for the program period, as well as foreign direct investment, will be essential in stemming financial losses and improving real performance in those sectors. It is important that privatization take place according to fully transparent procedures," Ms. Krueger said.
Recent Economic Developments
During the first half of 2001, GDP growth of 5 percent was driven mainly by domestic demand. The current account deficit widened and inflation declined somewhat less than targeted. Although export growth remained robust, imports grew by 30 percent in U.S. dollar terms, and as a result, the current account deficit more than doubled relative to the same period of 2000. Inflation slowed, but less than initially targeted. The fiscal deficit in the first eight months of 2001 amounted to 2.4 percent of GDP, up slightly from the same period of the previous year, despite stronger growth and a lower deficit target for the year as a whole. The National Bank of Romania continued to conduct monetary policy in the framework of a managed float, with the objective of avoiding excessive real effective appreciation.
The program aims at gradual disinflation and containing the external current account deficit, while accelerating structural reforms and strengthening growth prospects. The gradual approach to disinflation-the inflation rate is targeted to fall from 40 percent in early 2001 to 22 percent at end-2002 and to single-digit inflation rates in the medium term-reflects difficulties in eliminating the inflation inertia in the presence of established backward-looking wage indexation, as well as the need for the adjustment of relative prices. The targeted decline in the external current account deficit in 2002 reflects the expectation that growth will remain strong, primarily on account of an expected pickup in private investment.
To achieve these goals, the key points of the program are as follows: (i) a fiscal adjustment equivalent to ½ percentage point of GDP in 2002; (ii) a reduction in the energy sector losses of about 1½ percent of GDP, which will improve the saving/investment balance of public sector enterprises by at least ¾ percentage point of GDP; (iii) public sector wage policy consistent with the disinflation target and, together with employment cuts, lower labor costs in state-owned enterprises; (iv) a monetary program consistent with the inflation target and balance of payments developments; (v) structural reforms that include an ambitious privatization agenda to downsize the public sector and measures to improve the business climate; and (vi) strengthening of the regulatory framework and supervision in the financial system.
On exchange rate policy, the authorities will maintain the current framework of managed float for achieving further disinflation and preserving the external equilibrium. The monetary program reflects money demand projections consistent with targeted inflation, GDP growth, and continuing gradual remonetization. Broad money is projected to increase by 5½ percent in real terms and private sector credit by about 7 percent in real terms. Aided by the strict implementation of wage and fiscal policies, the NBR in its monetary and exchange rate management, will increase the weight attached to the inflation objective, while not putting external viability at risk. The weight of the euro in the notional basket used by the NBR to decide on interventions will be gradually increased, to provide more stability vis-à-vis the main trading partners. The measures to strengthen the supervisory and regulatory framework of the financial sector would move Romania closer to best international practices, as defined in the Basel Core Principles, and toward European Union harmonization, and bolster confidence in the financial system.
With the implementation of the program's policies, the medium-term outlook is favorable. Continued strong export growth and real exchange rate developments suggest that competitiveness remains sound. With effective policy implementation over the program period and the medium term, the current account deficit is projected to decline to 5 percent of GDP, a level consistent with the projected pickup in private sector investment, foreign direct investment, and GDP growth. The projected current account deficits also imply only a small increase in the gross foreign debt relative to GDP, to a still moderate level of 32 percent, while net external debt will decline.
Romania became a member of the IMF on December 15, 1972. Its quota1 is SDR 1.03 billion (about US$1.3 billion), and its outstanding use of IMF credit currently totals SDR 185 million (about US$236 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