Press Release No. 10/407

Press Release No. 10/407
November 1, 2010

A mission from the International Monetary Fund (IMF) visited Bucharest from October 20 to November 1. Mr. Jeffrey Franks, IMF Mission Chief for Romania, made the following statement at the end of the visit:

"We have reached agreement at staff level on the sixth review of the Stand-By Arrangement. Subject to approval by IMF Management and the Executive Board, the seventh disbursement (SDR 769 million or almost €0.9 billion) would become available.

"Preliminary data for the third quarter suggest that the performance criteria were met, with the exception of the ceiling on general government arrears. The government has promised that firm action will be taken to ensure that central government arrears are mostly eliminated for the remainder of the program.

"Economic activity is now stabilizing and we expect growth of 1½-2 percent in 2011 (compared to around -2 percent in 2010). Headline inflation has jumped in recent months due to the effects of the necessary July VAT increase and food price pressures. We expect inflation to peak at slightly above 8 percent at end 2010 before returning within the National Bank of Romania’s target range in the course of 2011. We project a current account deficit of 5-6 percent of GDP for 2010.

"The tough but necessary fiscal measures taken earlier this year are reducing Romania’s fiscal imbalances and helping to ensure macroeconomic stability, and they should be adequate to ensure that the 2010 budget deficit target (6.8 percent of GDP) will be met. However, spending pressures--particularly in health and social assistance programs--still need to be addressed, and improvements in tax collection remain a challenge. We have agreed with the government on the main components of a 2011 budget which should produce a deficit of 4.4 percent of GDP (in cash terms). We have also agreed on a timetable for action on key structural reforms, including approval of the new unitary public pay law and the enactment of the pension law.

"The banking system continues to weather the economic crisis well and banks remain well-capitalized and liquid. The capital adequacy ratio at end-September was 14.6 percent and all banks exceeded 11 percent (mandatory ratio is 8 percent). Non-performing loans are increasing and are causing losses, but there are sufficient buffers in place to cushion the impact. We have agreed that improvements in consumer protection are needed in the banking sector, but that actions in this area must respect EU directives and not endanger the stability of banks."

"The Board meeting will take place once agreed prior actions have been met, possibly in early January."

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/