Press Release No. 10/307

Press Release No. 10/307
August 4, 2010

A mission from the International Monetary Fund (IMF), joined by representatives from the European Commission and the World Bank, visited Bucharest from July 26 to August 4.

Mr. Jeffrey Franks, IMF Mission Chief for Romania, made the following statement at the conclusion of the visit:

“We have reached agreement at staff level on the fifth review of the Stand-By Arrangement. Subject to approval by IMF Management and the Executive Board, the sixth disbursement (SDR 769 million or around €0.9 billion) would become available. The Board meeting is tentatively scheduled for late September.

“Preliminary data for the second quarter suggest that the performance criteria were observed, with the exception of the ceiling on government arrears and the indicative target of current primary spending.

“Weak domestic demand and economic uncertainties in the region continue to weigh on economic growth, though signs of recovery are being observed in some sectors. We now expect Gross Domestic Product (GDP) to contract by 2 percent in 2010, but growth should turn positive later in the year, leading to an increase of GDP of about 1½ percent in 2011 and even faster growth in 2012 and beyond. Headline inflation (CPI) will increase temporarily to 7-8 percent due to the adjustment in the Value Added Tax (VAT). This increase is not monetary in nature, and as a result we expect inflation to fall back into the National Bank of Romania’s target range during 2011.

“Romania’s fiscal imbalances are being addressed by the appropriately ambitious measures taken in June, which included increasing the VAT rate to 24 percent, cutting public wages by 25 percent, and cuts in certain transfer payments. These measures—together with improved revenue collection and continued expenditure constraint—should be sufficient to keep the budget deficit below 6.8 percent of GDP in 2010. If the measures are carried through into the future, Romania should also be well-placed for reaching its deficit objectives in 2011 and 2012 without the need for a large additional fiscal effort.

“The key to future sustained growth in Romania is to pursue structural reforms forcefully to ensure a more efficient public sector and to boost investment and productivity. The pension reform and implementing legislation to the unified public pay law, both to be adopted by Parliament in September, are critical. Labor market reforms envisaged by end-2010, as well as a broad political commitment to provide a stable policy environment and to tackle corruption will be crucial for the Romanian economy to fully reach its potential. Finally, the poor absorption of EU funds, which could have alleviated the recession, is of great concern. We urge the authorities to take forceful actions to reverse this situation.

“The Romanian banking system remains well capitalized. The capital adequacy ratio at end-June was 14.3 percent and all banks had a ratio exceeding 10 percent compared to the mandatory ratio of 8 percent. Obviously, the recession adversely affects the level of non-performing loans but provisions are increasing accordingly to cushion the impact.”

For information on the Stand-By Arrangement, please see the following links:

Romania and the IMF: http://www.imf.org/external/country/ROU/index.htm

Key documents are also available in Romanian: http://www.fmi.ro/