IMF Announces Staff Level Agreement with Romania on New €3.6 billion Precautionary Stand-By Arrangement and on the Seventh and Final Review of the Current Stand-By Arrangement

Press Release No. 11/32
February 8, 2011

An International Monetary Fund (IMF) mission for the seventh and final review under the Stand-By Arrangement with Romania visited Bucharest from January 25 to February 8. The mission was joined by representatives from the European Commission (EC) and the World Bank.

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

“The mission has reached agreement at staff level on the seventh and final review of the current Stand-By Arrangement (SBA). Subject to approval by the Executive Board, tentatively scheduled for late March, the eighth disbursement (SDR 874 million or about
€1 billion) will become available for the Romanian authorities shortly after the Board meeting. The authorities, however, have decided not to draw the funds under the seventh review. The total disbursements under the current SBA amount to SDR 10.569 billion (about €12.44 billion).

“The mission has also reached agreement at staff level on a new 24-month precautionary SBA in the amount equivalent to SDR 3.090 billion (about €3.6 billion, 300 percent of quota). The meeting of the Executive Board to discuss the new arrangement is planned for late March. The authorities have informed the mission that they intend to treat the new arrangement as precautionary and do not plan to draw under the SBA. The SBA will be in conjunction with precautionary support from the European Union of €1.4 billion and a loan from the World Bank of €0.4 billion.

“Economic activity is now stabilizing and we expect growth of 1½ percent in 2011 rising to 4-4½ percent in 2012, based on continued strong exports complemented by gradually improving domestic demand. While inflation is high now due to the effects of the necessary July VAT increase and higher global food and energy prices, the mission believes it has peaked and will return within the National Bank of Romania’s target range during the second half of 2011. We project a current account deficit of around 5 percent of GDP for 2011 and 2012. Preliminary end-December data suggest that the program performance criteria were met with a margin, with the exception of the ceiling on general government arrears for which a waiver was already granted.

“The current SBA has been focused on addressing unsustainable imbalances and has succeeded in ensuring macroeconomic and financial stability in very difficult circumstances. The new agreement will concentrate on promoting growth and employment while maintaining that stability. The fiscal cash deficit targets will remain unchanged at 4.4 percent of GDP in 2011 and 3.0 percent of GDP in 2012. Current policies put these deficit objectives well within reach. However, reforms must be continued, particularly in improving collection of existing taxes and in health sector and capital spending. To generate higher sustainable growth, we need to improve the operations of the public sector, particularly in State Owned Enterprises (SOEs), while creating conditions for great private sector investment. In the public sector, the focus will be on boosting absorption of EU funds and on restructuring (as well as bringing private investment into) the transport and energy SOEs to turn them from being a drag on the economy to become an engine of growth. Efforts to cut bureaucracy, improve regulators’ effectiveness, and open markets will help improve the business climate for foreign and domestic investors.

“The banking system continues to weather the economic crisis well and banks remain well-capitalized and liquid. The capital adequacy ratio at end-December was 14.7 percent and all banks exceeded 11 percent (mandatory ratio is 8 percent). Non-performing loans are increasing and are causing some losses, but there are sufficient buffers in place to cushion the impact. In March, the authorities will discuss an extension of the Bank Coordination Initiative with the largest foreign banks with a view toward continuing the stabilizing effects of the agreement”.



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