## _cr09183 - introduction of fiscal reforms to improve the budgeting process and reduce key

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### Macroeconomic context and recent developments
- Growth and overheating:
  - GDP growth averaged over 6½ percent per year (2003–08).
  - Real GDP growth slowed from an average of 9 percent (quarter-on-quarter, annualized) during the first three quarters of 2008 to a 13 percent decline in the fourth quarter of 2008.
- External imbalances and capital flows:
  - Current account deficits reached 14 percent of GDP by 2007 (other references cite 13½ percent in peaks).
  - REER appreciated by about 50 percent between mid-2004 and mid-2007; REER depreciated about 7 percent by end-2008 relative to its July 2007 peak and depreciated another 7 percent in January and February 2009.
  - Banks’ net foreign liabilities increased from -2 percent of GDP in 2003 to +19 percent in 2008.
  - Corporate net access to foreign credit rose from 4 percent of GDP in 2005 to nearly 11 percent in 2007.
  - Over half of domestic private credit is in foreign currency.
  - Coverage of gross international reserves to short-term external debt declined to about 75 percent in February 2009 from over 170 percent in 2003.
- Financial markets and inflation:
  - Bucharest stock market lost 65 percent of its value since the peak in August 2008.
  - Leu depreciated 15 percent against the Euro from October 2008.
  - Inflation peaked at 9.1 percent in July 2008 and remained near 7 percent thereafter.
  - NBR raised policy interest rates to 10.25 percent and minimum reserve requirements to 18 percent on local currency liabilities and 40 percent on foreign currency liabilities.
- Banking sector stresses:
  - Domestic credit growth averaged 50 percent per year over the past four years (pre-crisis surge).
  - Interbank market liquidity largely dried up after October 2008.
  - Nonperforming loans began to rise, especially those extended in foreign currencies; lending to the private sector began to shrink in Q4 2008.

### Objectives and design of the SBA-supported program
- Program objectives:
  - Reduce the fiscal imbalance to bring the deficit back under 3 percent of GDP by 2011.
  - Maintain adequate capitalization of banks and liquidity in domestic financial markets.
  - Bring inflation within the NBR’s target range and maintain it there.
  - Secure adequate external financing and improve confidence.
- Financial support and coordination:
  - EU support: €5 billion to complement Fund support.
  - Program combines strong, highly visible policy measures with sizeable financial support to stabilize expectations and support rollover rates for maturing external debt.
- Policy pillars:
  - Short-term budget cuts and fiscal policy reforms for medium-term sustainability.
  - Banking sector measures to ensure adequate strength and crisis management capacity.
  - Continued exchange rate flexibility and a large external financing package to minimize run risks and avoid destabilizing nominal exchange-rate overshooting.
- Conditionality and monitoring:
  - Quantitative performance criteria, indicative targets, structural benchmarks, and consultation clauses during quarterly reviews.
  - Prior actions included emergency government ordinance fiscal measures amounting to 1.1 percent of GDP and NBR completion of stress tests on banks with >1 percent of system assets.

### Macroeconomic projections and outlook (2009–11)
- Growth and demand projections:
  - Output expected to contract by about 4 percent in 2009 (staff projection: Real GDP growth 2009: -4.1).
  - Growth projected to remain near zero in 2010 and recover to 5 percent in 2011.
  - Domestic demand projected to plunge; net exports expected to contribute positively in 2009.
- Inflation:
  - Inflation expected to fall from 6.7 percent in March to within the official target band (3.5 percent, plus or minus 1 percent) by end-2009.
  - Table projections: CPI inflation, average 2009: 5.9; 2010: 3.9; 2011: 3.5.
- Selected key projections (Table 1 highlights):
  - Real GDP: 2006: 7.9; 2007: 6.2; 2008: 7.1; 2009: -4.1; 2010: 0.0; 2011: 5.0.
  - Unemployment rate: 2008: 4.0; 2009: 8.9; 2010: 9.7; 2011: 7.7.
  - Gross public debt (direct debt only): 2008: 20.1; 2009: 23.6; 2010: 25.7; 2011: 25.7.
  - Gross external debt: 2008: 53.4; 2009: 64.2; 2010: 68.5; 2011: 64.0.

### Fiscal policy stance, consolidation measures, and institutional reforms
- Fiscal deterioration and initial corrective steps:
  - Government deficit rose from under 1 percent of GDP in 2005 to near 5 percent of GDP by 2008.
  - Without policy change, 2009 fiscal deficit was set to rise to nearly 9 percent of GDP.
  - Authorities’ 2009 budget would reduce the deficit by about 3 percentage points.
- Key 2009 budget measures (selected):
  - Increase of 3.3 percentage points in social contributions.
  - Hike in excise taxes on alcohol and tobacco.
  - Increase in property taxes due to revaluation.
  - Significant cuts in the public wage bill through reductions of bonuses and other benefits and elimination of 137,000 vacancies.
  - Substantial reductions in goods and services spending as well as in subsidies.
- Program fiscal targets and outcomes:
  - Prior action measures yielding 1.1 percent of GDP in 2009 to lower the deficit to 4.6 percent of GDP in 2009.
  - Structural fiscal deficit expected to decline from 6.7 percent to 3.8 percent of GDP in 2009 (nearly 3 percentage points).
  - Authorities envisage additional adjustment in 2010 to bring the deficit to around 3⅔ percent of GDP in 2010, and below 3 percent in 2011.
- Fiscal reforms proposed:
  - Submission of draft fiscal responsibility law (FRL) with multiyear budgeting, limits on intrayear revisions, fiscal rules on expenditures/public debt/primary deficit, creation of an independent fiscal council, and framework for managing guarantees and contingent liabilities (structural benchmark by end-November 2009).
  - Tax and expenditure reforms with technical assistance from the Fund, World Bank, and European Commission in 2009 and 2010.
  - Public compensation reform: simplify wage structure; bonuses currently comprise more than 50 percent of total compensation; phase-in up to 3 years envisaged.
  - Pension reform to address projected pension deficit rising from 2 percent of GDP in 2011 to more than 6 percent of GDP by 2050 under current system.

### Financial sector measures, stress tests, and bank recapitalization
- Stress test results and recapitalization needs:
  - Stress tests indicated additional capital of about €1 billion (0.8 percent of GDP) needed to maintain solvency ratios above 10 percent throughout the program period.
  - NBR conducted stress tests on banks accounting for over 90 percent of banking system assets as a prior action.
  - Banks to secure sufficient resources by end-September 2009 to cover shortfalls revealed by stress tests.
- Eligible recapitalization instruments:
  - Increases in share capital.
  - Subordinated long-term (at least 5-year) loans and similar instruments qualifying as tier 2 capital and convertible into ordinary share capital; subordinated debt and similar instruments to be counted as tier 1 for monitoring compliance in the temporary preferential regime.
- Temporary preferential regime:
  - Banks whose owners commit to maintain or increase exposures and recapitalize subsidiaries in line with stress-test needs (LOI ¶21) eligible for exemption of new subordinated debt from NBR reserve requirements.
  - Preferential regime available to all banks established in Romania regardless of owner nationality; expires at end of program.
- Supervisory, resolution, and deposit insurance reforms:
  - Amend banking and winding-up laws to strengthen NBR remedial powers, strengthen special administrator authority, and streamline court-based winding-up proceedings (structural benchmarks with specified dates: e.g., banking law amendments by June 30, 2009; winding-up amendments by November 30, 2009).
  - Raise minimum capital adequacy ratio from 8 percent to 10 percent "at an appropriate time."
  - Bring Romanian financial accounting standards into line with IFRS.
  - Deposit coverage increased to €50,000 in 2008; RDGF to have access to government privatization receipts held in the Treasury account in the NBR (currently RON 11.6 billion); legal amendments to broaden activation grounds and accelerate payouts (structural benchmark).

### External financing needs, IMF exceptional access, and financing package
- Gross financing needs and financing gap:
  - Staff rollover assumptions: gross financing needs of €44 billion in 2009 produce a financing gap of approximately €11¾ billion.
  - For 2010 and Q1 2011, financing gap assumed to be about €8¼ billion; total financing gap under the program estimated at €19.95 billion.
- Multilateral and program financing:
  - Multilateral support assumed: €5 billion from the EU, €1 billion from the World Bank, roughly €1 billion incremental from EBRD/EIB/IFC.
  - Exceptional access from the Fund proposed at around €12.95 billion (SDR 11.443 billion, 1110.77 percent of quota), with €5 billion disbursed up front and the remainder in quarterly tranches over a 24-month SBA.
  - Total international financial support package: €19.9 billion (about US$26.4 billion) including IMF, EU, World Bank, and EBRD/EIB/IFC support.
- IMF arrangement phasing and access (Stand-By Arrangement summary):
  - Access: SDR 11.443 billion; Length: 24 months.
  - SDR 4.37 billion available upon Board approval; seven subsequent quarterly tranches totaling SDR 7.07 billion from September 15, 2009 to March 15, 2011.
  - If fully disbursed, Fund exposure projected to be about 10 percent of GDP and nearly 40 percent of gross reserves by end of arrangement.
  - Direct public indebtedness (outside Fund borrowing) expected to remain under 26 percent of GDP; public external debt peaking at around 10 percent of GDP at end-2010.
  - Total external debt projected to increase to about 68 percent of GDP at end-2010 from 53 percent at end-2008.

### Risks, scenario uncertainty, and program safeguards
- Key downside risks:
  - Further leu depreciation producing balance-sheet effects compressing output, especially if capital outflows exceed expectations.
  - A deeper or more protracted global downturn and the risk that foreign banks cannot maintain exposure despite commitments.
  - Potential adverse political developments (e.g., presidential elections) undermining implementation.
- Upside mitigants:
  - Rapid reestablishment of consumer and investor confidence and measures to strengthen the financial sector could accelerate recovery.
- Safeguards and monitoring:
  - Staff initiated a safeguards assessment of the NBR to be completed no later than the first review under the SBA (updating June 2004 assessment).
  - Close monitoring through quantitative performance criteria, structural benchmarks, and frequent data reporting by the Ministry of Finance and the NBR (detailed reporting schedules and TMU operational definitions specified).
  - Reserve-loss trigger: Reserve losses exceeding €2 billion in any 30-day period during the program will trigger consultation with IMF staff.
- Public debt and external vulnerability stress tests:
  - Public sector debt: projected to rise to 23.6 percent of GDP in 2009 and 25.7 percent in 2010 (direct debt only).
  - External debt (baseline): 2008: 53.4 percent of GDP; 2009: 64.2 percent; 2010: 68.5 percent; combined-shock and one-time real depreciation scenarios shown in external debt bound tests (e.g., real depreciation 30% shock yields external debt up to 66 percent in figures).

### Key structural benchmarks and timelines (selected)
- Prior actions and benchmarks:
  - Approval by emergency government ordinance of fiscal measures amounting to 1.1 percent of GDP (prior action).
  - NBR stress tests completion on banks >1% of assets and selected smaller banks (prior action).
  - Passage of amendments to the banking law to strengthen NBR’s power (by June 30, 2009).
  - Passage of amendments to deposit insurance legislation (by August 31, 2009).
  - Passage of amendments to banking and winding-up laws to enhance resolution framework (by November 30, 2009).
  - Presentation of fiscal responsibility legislation to parliament and implementation plan (by November 30, 2009).
  - Passage of revised pension legislation (by December 31, 2009).
  - Passage of revised public compensation legislation (by October 30, 2009).
- Banking recapitalization deadline:
  - Banks required to secure resources to cover stress-test shortfalls by end-September 2009.

*Source: IMF staff report (content unit: _cr09183 - introduction of fiscal reforms to improve the budgeting process and reduce key).*

### introduction of fiscal reforms to improve the budgeting process and reduce key

### _cr09183 - introduction of fiscal reforms to improve the budgeting process and reduce key

### Macroeconomic context and recent developments
- Romania experienced an economic boom from 2003-08 with GDP growth averaging over 6½ percent per year.
- Current account deficits reached 14 percent of GDP by 2007.
- The real effective exchange rate (REER) appreciated by about 50 percent between mid-2004 and mid-2007.
- Government deficit rose from under 1 percent of GDP in 2005 to near 5 percent of GDP by 2008.
- Domestic credit expansion and external borrowing:
  - Domestic credit growth averaged 50 percent per year over the past four years.
  - Banks’ net foreign liabilities increased from -2 percent of GDP in 2003 to +19 percent in 2008.
  - Corporate net access to foreign credit rose from 4 percent of GDP in 2005 to nearly 11 percent in 2007.
  - Over half of domestic private credit is in foreign currency.
  - Coverage of gross international reserves to short-term external debt declined to about 75 percent in February 2009 from over 170 percent in 2003.
- Inflation and monetary conditions:
  - NBR raised policy interest rates to 10.25 percent and minimum reserve requirements to 18 percent on local currency liabilities and 40 percent on foreign currency liabilities.
  - Inflation peaked at 9.1 percent in July 2008 and remained near 7 percent thereafter.
- Financial markets and balance sheets:
  - Bucharest stock market lost 65 percent of its value since the peak in August 2008.
  - The leu depreciated 15 percent against the Euro from October 2008.
  - REER depreciated by about 7 percent by end-2008 relative to its July 2007 peak and depreciated another 7 percent in January and February 2009.
  - Real GDP growth slowed from an average of 9 percent (quarter-on-quarter, annualized) during the first three quarters of 2008 to a 13 percent decline in the fourth quarter of 2008.
  - Import compression halved the current account deficit during January-February 2009 compared to the same period in the previous year.
- Banking sector stresses:
  - Interbank market liquidity largely dried up after October 2008, with activity limited to very short tenures.
  - Nonperforming loans began to rise, especially those extended in foreign currencies.
  - Lending to the private sector began to shrink in Q4 2008.

### Assessment of policy constraints and authorities’ responses
- Policy constraints:
  - Fiscal easing to cushion the downturn was not feasible given high spending and limited ability to finance a large deficit.
  - Monetary easing was constrained by persistent inflation and balance of payment pressures; further exchange rate weakening would create severe balance sheet effects for the banking sector.
- Measures taken by authorities:
  - Implemented a restrictive 2009 budget to begin addressing fiscal imbalance.
  - NBR actions to support financial stability included increasing deposit insurance, enhancing monitoring and management of liquidity, reintroducing repo operations, conducting bilateral swaps against Euro, stepping up supervisory efforts, and facilitating capital increases in several banks.
  - Home-host supervisory coordination improved.

### Objectives and design of the SBA-supported program
- Program objectives:
  - Reduce the fiscal imbalance to bring the deficit back under 3 percent of GDP by 2011.
  - Maintain adequate capitalization of banks and liquidity in domestic financial markets.
  - Bring inflation within the NBR’s target range and maintain it there.
  - Secure adequate external financing and improve confidence.
- Financial support and coordination:
  - European Commission representatives worked jointly with Fund staff in program negotiations.
  - The EU will support the SBA with €5 billion in financial support.
- Program structure:
  - Combines strong, highly visible policy measures with sizeable financial support to stabilize expectations, support rollover rates for maturing external debt, and restore investor confidence.
  - Policy pillars include short-term budget cuts, fiscal policy reforms for medium-term sustainability, banking sector measures to ensure adequate strength and crisis management capacity, and continued exchange rate flexibility.
  - Large external financing assistance intended to minimize the risk of runs on debt and currency markets and to avoid destabilizing nominal exchange rate overshooting.
  - Private sector creditors, notably foreign parent banks of major banks, were encouraged to maintain exposures and had responded favorably.

### Macroeconomic projections and outlook (2009–11)
- Growth and demand:
  - Staff projects that growth will remain negative throughout 2009.
  - Output is expected to contract by about 4 percent in 2009.
  - Domestic demand is projected to plunge as private consumption and investment contract.
  - Net exports are expected to contribute positively to GDP growth due to import compression.
  - Growth is projected to remain near zero in 2010 and recover to 5 percent in 2011.
- Inflation:
  - Inflation is expected to fall from 6.7 percent in March to within the official target band (3.5 percent, plus or minus 1 percent) by end-2009 and remain there thereafter.

### Key vulnerabilities and regional implications
- External and banking-sector linkages:
  - Large external debt stock and high external borrowing by banks increase vulnerability to capital flow reversals.
  - Stabilizing Romania mitigates spill-over risks to other emerging European countries where banks from several European countries are active.
- Structural contributors to vulnerability:
  - Overheating from rapid capital inflows and procyclical fiscal and incomes policies (notably strong spending growth on wages and pensions).
  - High share of unhedged foreign-currency borrowing by households and corporates creates indirect foreign exchange risk for banks.

*Source: IMF staff report (content unit: _cr09183 - introduction of fiscal reforms to improve the budgeting process and reduce key).*

### 2010. Easing demand pressures as well as declining global food and energy prices,

### _cr09183 - 2010. Easing demand pressures as well as declining global food and energy prices,

### Macroeconomic outlook and inflation
- 2010 expectation: "Easing demand pressures as well as declining global food and energy prices, combined with a conservative monetary policy, are expected to outweigh any upward pressures on inflation arising from the recent depreciation of the exchange rate."
- GDP and inflation (table excerpt):
  - Real GDP growth: 2006: 7.9; 2007: 6.2; 2008: 7.1; 2009: -4.1; 2010: 0.0; 2011: 5.0
  - CPI inflation, average: 2006: 6.6; 2007: 4.8; 2008: 7.8; 2009: 5.9; 2010: 3.9; 2011: 3.5
- Gross international reserves (bn euros): 2006: 22.7; 2007: 28.7; 2008: 29.4; 2009: 29.4; 2010: 32.4; 2011: 34.9
- Balance-sheet risks: 55 percent of loans in Romania are denominated in foreign currency; NPLs rose from 10 percent to 12 percent in Q4 2008.

### External accounts and capital flows
- Current account deficit projections:
  - 2008: 12½ percent of GDP
  - 2009: 7½ percent of GDP (projected)
  - 2010: 6½ percent of GDP (projected)
  - Note: staff analysis suggests this level is sustainable over the medium term (including projected net EU capital transfers of about 1½-2 percent of GDP per year).
- Drivers of current account adjustment:
  - Near term: sharp import decline from drop in domestic demand and REER depreciation.
  - Medium term: renewed export growth and recovery in worker remittances.
- Capital and financial account:
  - 2008: surplus of €18.8 billion
  - 2009: expected €2.7 billion deficit
  - 2010: projected €3.8 billion surplus (following slight recovery in FDI and tamed capital outflows)
- Rollover assumptions for maturing external debt in 2009:
  - Non-financial corporates: overall rollover rates of about 75 percent during 2009.
  - Banking sector: overall rollover rates of just over 80 percent in early 2009; expected to rise to 90 percent for the year as a whole once the program takes effect (reflecting commitments by owners of the top nine foreign banks).

### Fiscal policy stance and fiscal framework
- Historical fiscal pressures:
  - Between 2005 and 2008, government spending doubled in nominal terms.
  - Public share of economic activity rose from 32 percent of GDP to 37 percent of GDP.
- 2009 budget and consolidation steps:
  - Without policy change, 2009 fiscal deficit was set to rise to nearly 9 percent of GDP.
  - Authorities’ 2009 budget would reduce the deficit by about 3 percentage points.
  - Key budget measures included:
    - increase of 3.3 percentage points in social contributions;
    - hike in excise taxes on alcohol and tobacco;
    - increase in property taxes due to revaluation;
    - significant cuts in the public wage bill through reductions of bonuses and other benefits and elimination of 137,000 vacancies;
    - substantial reductions in goods and services spending as well as in subsidies.
- Program fiscal targets and measures:
  - Prior action measures yielding 1.1 percent of GDP in 2009 to lower the deficit to 4.6 percent of GDP in 2009.
  - Structural fiscal deficit expected to decline from 6.7 percent to 3.8 percent of GDP in 2009 (nearly 3 percentage points).
  - Authorities envisage additional adjustment in 2010 to bring the deficit to around 3⅔ percent of GDP in 2010, and below 3 percent in 2011 to meet the Maastricht deficit criterion.
- Fiscal reforms proposed:
  - Submission of a draft fiscal responsibility law (FRL) and implementation plan.
  - Key FRL features: multiyear budgeting framework; limits on intrayear budget revisions; fiscal rules on expenditures, public debt, and the primary deficit; creation of an independent fiscal council; framework for managing guarantees and contingent liabilities.
  - Tax and expenditure reforms with technical assistance from the Fund, World Bank, and European Commission in 2009 and 2010, including revision of the tax code and tax procedures code.
  - Public enterprise oversight strengthening.
- Public compensation reform:
  - Passage of legislation to create a fairer, simpler, more easily administered wage structure.
  - Current bonuses comprise more than 50 percent of total compensation.
  - Phase-in period for restructuring may be up to 3 years.
- Pension system risks and reform:
  - Projected pension deficit: 2 percent of GDP in 2011, rising to more than 6 percent of GDP by 2050 under current system.
  - Proposed changes: gradual move of pension indexation to consumer prices; phased-in contributions for excluded groups; continued gradual adjustment of retirement age; continuation of the second pillar phased-in with scheduled increases in contributions.
- Social protection and capital spending safeguards:
  - Additional RON 250 million in social safety net spending in 2009 and RON 500 million in 2010 to expand the guaranteed minimum income scheme.
  - Priority on maintaining capital spending cofinanced by EU funds.

### Financial sector and financial markets
- NBR policy and liquidity:
  - NBR broadened accepted collateral and extended credit lines through emergency liquidity assistance in October 2008.
  - Market liquidity limited to very short tenures—not much beyond 10 days.
  - Access to domestic and external finance remains tight; lines of credit from abroad are, "at best, not being increased in 2009."
- Banking sector soundness and vulnerabilities:
  - Average capital adequacy ratio: 12.3 percent at end-2008.
  - NPLs increased from 10 percent to 12 percent in Q4 2008, prompting rapid increase in provisioning needs.
  - FSAP stress tests (November 2008) indicated several banks vulnerable to significant capital depletion under a sharp weakening of the economy and more depreciated exchange rate.
- Capital and recapitalization:
  - Recent capital increases by some banks; banking supervisors encouraged capital boosts in late 2008.
  - Most banks intend to add the majority of 2008 profits to local capital; further strengthening likely needed.
- Program financial sector measures:
  - Maintain strong capital buffers in commercial banks (LOI ¶19).
  - NBR conducted stress tests on banks accounting for over 90 percent of banking system assets as a prior action; tests used two macro scenarios (program assumptions and a more severe scenario).
  - Based on stress tests, NBR is estimating funds needed so each bank's capital adequacy ratio remains above 10 percent throughout the program; banks asked to strengthen own funds by end-September 2009 (LOI ¶20).
- Foreign ownership and commitments:
  - Majority foreign-owned banks account for 89.3 percent of loans, 88.0 percent of assets, and 85.2 percent of deposits (June 2008 distribution).
  - Parents of main banks pledged support, committing to maintain global exposures to Romania and recapitalize subsidiaries as needed.
  - Concluding statement from the March 26, 2009 Vienna meeting included:
    - expression of support for the program;
    - confirmation of long-term strategic investor approach while acknowledging possible need for additional capital for subsidiaries;
    - support for ongoing stress-tests by the NBR;
    - willingness to make bilateral commitments with NBR to maintain exposure and recapitalize subsidiaries as needed.
  - Follow-up meetings scheduled in May to secure individual commitments and additional capital in advance of stress-test needs.

### Risks and scenario uncertainty
- Near-term downside risks:
  - Further leu depreciation could produce balance-sheet effects compressing output, especially if capital outflows exceed expectations.
  - Further worsening of global growth prospects would deepen domestic deterioration.
- Upside mitigants:
  - Rapid reestablishment of consumer and investor confidence could mitigate domestic demand decline.
  - Measures to strengthen the financial sector could accelerate credit recovery.
- Baseline risk characterization: "Risks to the baseline scenario are large and tilted to the downside, reflecting unpredictability on the speed with which financial markets will stabilize and the depth of the external economic slowdown."

*IMF staff report content from _cr09183 - 2010. Easing demand pressures as well as declining global food and energy prices,*

### 30.      Banks’ commitment to maintain or increase exposures and to enhance capital as

### _cr09183 - 30.      Banks’ commitment to maintain or increase exposures and to enhance capital as

### Banking sector commitments and temporary preferential regime
- Banks committing to maintain exposures throughout the program period and increase the capital of their subsidiaries in Romania in line with potential needs assessed under the stress-testing exercise (LOI ¶21) will be eligible for a temporary preferential regime during the program period.
- For these banks, any new subordinated debt subscribed either by the owners or by the IFIs would be exempt from the NBR’s reserve requirements.
- This subordinated debt and similar instruments would be counted as tier 1 capital for the purposes of monitoring compliance, while existing capital adequacy rules will still apply.
- The preferential regime will be available to all banks established in Romania, regardless of the nationality of the owners.

### Strengthening resolution, remedial powers, and supervisory framework
- Program includes plans to amend banking and winding-up laws to respond more timely and effectively in the event of bank distress (LOI ¶22).
- Key objective: strengthen the special administrator’s ability to deal with banks in weak financial positions (structural benchmark).
- NBR’s remedial powers to be strengthened to:
  - Request significant shareholders to increase their share capital and financially support the bank (structural benchmark).
  - Prohibit or limit profit distributions (structural benchmark).
- Authorities intend to streamline and strengthen court-based winding-up proceedings for bank liquidation at a future stage.
- NBR will improve banking supervisory and regulatory framework (LOI ¶24), including:
  - More detailed reporting requirements on liquidity.
  - At an appropriate time, raising the minimum level of the capital adequacy ratio from 8 percent to 10 percent.
  - Bringing Romanian financial accounting standards into line with International Financial Reporting Standards (IFRS).

### Deposit insurance measures
- Romania raised the level of deposit coverage to €50,000 in 2008.
- To strengthen the RDGF, authorities will supplement existing RDGF funding with access, should the need arise, to government privatization receipts held in the Treasury account in the NBR (currently RON 11.6 billion).
- Legal amendments will be enacted to broaden the grounds for activation of deposit insurance and to accelerate payouts (structural benchmark).

### Monetary policy and exchange rate framework
- Monetary policy aims to gradually bring inflation within the official target range (3.5 percent + 1 percent) by end-2009.
- Authorities commit to retaining an inflation targeting framework under a floating exchange rate regime.
- Recent exchange rate depreciation will generate some additional inflationary pressures; pass-through to domestic prices expected to be reduced due to weak domestic demand.
- External financing constraints and banking system strains will tightly constrain monetary policy; easing of interest rates and reserve requirements permitted only to the extent exchange rate and the NFA target permit.
- Program includes an NFA target (including both NBR own reserves and banks’ foreign exchange reserve requirements) that contemplates an increase in gross reserves of €3.0 billion over the program period (LOI ¶26).
- Reserve coverage of short-term external liabilities targeted to improve from 76 percent at end-February 2009 to about 100 percent by end-2010.

### Exchange rate competitiveness assessment (Box 3 summary)
- At end-2008, REER had depreciated by about 13 percent relative to its peak in July 2007; prior appreciation of about 50 percent between mid-2004 and mid-2007.
- During 2000-08:
  - Total exports grew by an average of nearly 16 percent per year.
  - Non-textile manufacturing exports grew by over 20 percent per year.
- Staff analysis of 2008 REER misalignment:
  - Equilibrium REER: Broadly balanced
  - Macroeconomic Balance: Overvalued: 13½ percent
  - External Sustainability: Overvalued: 16percent
  - Overall assessment: Overvalued: 0-15 percent
- As of February 2009, the REER had depreciated by about 10 percent relative to the 2008 average.
- With continued exchange rate flexibility, expected decline in inflation, and productivity gains, competitiveness difficulties expected to ease under the program.

### External financing needs, exceptional access, and capacity to repay
- Staff rollover assumptions: gross financing needs of €44 billion in 2009 produce a financing gap of approximately €11¾ billion.
- For 2010 and Q1 2011, financing gap assumed to be about €8¼ billion; total financing gap under the program estimated at €19.95 billion.
- Multilateral support assumed: €5 billion from the EU, €1 billion from the World Bank, roughly €1 billion incremental from EBRD/EIB/IFC.
- Exceptional access from the Fund proposed at around €12.95 billion (SDR 11.443 billion, 1110.77 percent of quota), with €5 billion disbursed up front and the remainder in quarterly tranches over a 24-month SBA.
- By end of arrangement, Fund exposure projected to be about 10 percent of GDP and nearly 40 percent of gross reserves.
- Direct public indebtedness (outside Fund borrowing) expected to remain under 26 percent of GDP; public external debt peaking at around 10 percent of GDP at end-2010.
- Total external debt projected to increase to about 68 percent of GDP at end-2010 from 53 percent at end-2008.
- Risks to repayment include adverse political developments (e.g., potential strains from October presidential elections), incomplete adjustment provoking capital flight, deeper or more protracted global downturn, and foreign banks being unable to maintain exposure despite commitments.

### Program design to mitigate risks
- Prior actions for Board consideration included:
  - Approval by emergency government ordinance of fiscal measures amounting to 1.1 percent of GDP.
  - NBR completion of stress tests on banks with system assets greater than 1 percent and selected smaller banks to assess need for additional capital.
- Final parliamentary approval of the fiscal measures for 2009 to be obtained by the first review under the SBA.
- Structural benchmarks for 2009 include (selected):
  - Final parliamentary approval of fiscal measures amounting to 1.1 percent of GDP by first review.
  - Passage of amendments to the banking law to strengthen NBR’s power (June 30, 2009).
  - Passage of amendments to deposit insurance legislation to broaden activation grounds, expedite payouts and provide RDGF access to privatization receipts (August 31, 2009).
  - Passage of amendments to banking and winding-up laws to enhance the bank resolution framework, in consultation with the IMF (November 30, 2009).
  - Passage of revised pension legislation (December 31, 2009).
- Meetings with most foreign banks with subsidiaries in Romania secured agreement to maintain exposures and recapitalize subsidiaries as needed.
- Close monitoring of NBR’s foreign assets and liabilities and a consultation clause on reserve losses to enable early policy discussions if pressures emerge.

*Source: _cr09183 - 30.      Banks’ commitment to maintain or increase exposures and to enhance capital as*

### 43.      Staff has initiated a safeguards assessment of the NBR, which will be completed

### _cr09183 - 43.      Staff has initiated a safeguards assessment of the NBR, which will be completed

### Safeguards assessment
- Staff has initiated a safeguards assessment of the NBR, which will be completed no later than the first review under the SBA.
- The assessment will update the assessment completed in June 2004, which concluded that the safeguards in place at the NBR "appear generally adequate," but recommended measures to address certain weaknesses identified in the internal audit and controls system.
- Staff has requested the documentation from the authorities necessary to complete the update assessment and will hold initial discussions with the central bank's external auditors.

### Staff appraisal — macroeconomic context and policy stance
- Romania’s macroeconomic policy stance has deteriorated sharply since 2007, particularly in the public finances.
- Monetary policy attempted to cope with inflationary pressures from the boom in growth and associated massive capital inflows, while fiscal policy turned sharply procyclical.
- This policy mismatch contributed to missing the NBR’s inflation targets and worsened the current account deficit, setting the stage for financing difficulties as capital inflows slowed sharply in recent months.
- Structural reform efforts slowed in the post-accession period, leaving Romania far from attaining the objectives under its EU convergence program.
- The government that took office in December 2008 moved quickly to address the fiscal imbalance, but their adjustment plans proved insufficient in the face of a rapidly worsening macroeconomic outlook and capital flight.

### Financing, policy objectives, and program support
- Returning Romania to fiscal and external sustainability requires both financing and a high degree of policy discipline.
- Staff supports the authorities’ objective of cushioning the country against the worst effects of the global economic and financial crisis while implementing policies to permit a speedy return to sustainable economic growth once the downturn passes.
- The multilateral financing package will boost confidence that short-term obligations can be met without resorting to unsustainable or damaging policies.
- Strong policies—both in the fiscal and financial sector—are intended to ensure the banking system is solid and that the public finances will remain under control over the medium term.

### Stand-By Arrangement (Box 5)
- Access: SDR 11.443 billion.
- Length: 24 months.
- Phasing:
  - SDR 4.37 billion will be made available upon the Board’s approval of the arrangement to address the large balance of payments need in the second quarter of 2009 and to replenish reserves.
  - The seven subsequent quarterly tranches, starting from September 15, 2009 and ending on March 15, 2011, will equal SDR 7.07 billion.

- Conditionality:
  - Quantitative Performance Criteria
    - A floor on the change in net foreign assets.
    - A ceiling on general government domestic arrears.
    - A floor on the overall general government cash balance.
    - A ceiling on general government guarantees.
    - Non-accumulation of external debt arrears.
  - Quantitative Indicative Target
    - General government primary spending (excluding EU funds).
  - A consultation band around the 12-month rate of inflation of consumer prices.
  - Prior Actions
    - Approval by emergency government ordinance of fiscal measures amounting to 1.1 percent of GDP. Prior action for Board consideration of SBA request.
    - Conducting stress tests on banks with >1% of system assets and certain smaller banks to assess the need for additional capital. Prior action for Board consideration of SBA request.
  - Structural Benchmarks
    - Parliamentary ratification of the fiscal measures amounting to 1.1 percent of GDP.
    - Passage of amendments to the banking law to strengthen NBR’s power to request bank shareholders an increase in their share capital and limit profit distribution. By June 30, 2009.
    - Passage of amendments to deposit insurance legislation to broaden grounds for activation of deposit insurance, expedite payouts and provide for access to government privatization receipts. By August 30, 2009.
    - Passage of revised public compensation legislation. By October 30, 2009.
    - Presentation of fiscal responsibility legislation to parliament and preparation of an implementation plan. By November 30, 2009.
    - Passage of amendments to the banking and winding-up laws to enhance the bank resolution framework, in consultation with the IMF. By November 30, 2009.
    - Passage of revised pension legislation. By December 31, 2009.

### Program risks and monitoring
- The authorities’ program delivers a strong policy anchor, but significant risks remain.
- Measures aim to set public finances on a path of fiscal adjustment and to assure the banking system remains well-capitalized and liquid while fortifying the safety net.
- Remaining risks include:
  - A more serious economic deterioration than underlying the macroeconomic framework projections.
  - A slower recovery of global financial markets.
  - The possibility of flagging political support as presidential elections approach.
- To minimize risks, continued and careful program monitoring and an ongoing policy dialogue with the Fund will be essential, along with the commitment to make policy adjustments as necessary.

### Fiscal policy package
- The fiscal package balances a needed short-term fiscal adjustment with longer-term reforms to make public finances sustainable beyond the program period.
- Initial adjustment is concentrated on reducing current expenditure to reverse recent sharp, unsustainable increases.
- Fiscal reforms target public wage structure, pensions, and public enterprises to address the largest public spending pressures.
- Efforts will be combined with improvements in tax and expenditure efficiency to result from technical assistance from the Fund, the World Bank, and the European Commission.
- Engagement with social partners and building consensus on these critical measures is identified as critical.

### Financial sector measures
- Measures aim to preserve the strong condition of the banking system and avoid worst effects of the global crisis.
- Securing commitments to maintain liquidity for the main foreign bank subsidiaries operating in Romania helps reduce the external financing gap while anchoring the system.
- Steps to conduct stress tests and recapitalize banks in advance of significant shortfalls should reinforce confidence and minimize the risk of bank failures.
- Strengthening deposit insurance and the resolution framework is intended to reduce the risk that problems in individual banks lead to systemic difficulties.
- Supporting improvements in supervision and central bank liquidity management will enhance banking sector stability and support continued access to global financial markets.
- Specific recommended actions for authorities include:
  - Boost access to liquidity for banks, including by expanding the range of assets that can be used as collateral for NBR lending to banks.
  - Remove constraints to providing temporary guarantees for interbank lending.

### Monetary policy considerations
- Prudent management of monetary policy is crucial to support the overall policy package.
- Reducing inflation and keeping it within the NBR’s target is critical for the sustainability of the reform package.
- The NBR must carefully calibrate any policy easing to ensure it does not facilitate capital flight or induce undue pressure on the exchange rate.
- Conversely, the NBR must guard against an overly tight policy, which could worsen balance sheet difficulties in the banking sector.

*Source: IMF staff appraisal and Stand-By Arrangement summary as provided in the source content.*

### 50.      With the consistent implementation of the program, staff expects that the

### With the consistent implementation of the program, staff expects that the Romanian economy will weather the current difficulties and could emerge stronger from the downturn

### Program support and outlook
- Staff supports the authorities’ request for a 24 month SBA arrangement.
- With consistent implementation of the program, staff expects that the Romanian economy will weather the current difficulties and could emerge stronger from the downturn.

### Financial markets (selected indicators shown in Figure 1)
- FX reserves: plotted between 23 and 28 Billions of Euro (Apr-08 to Apr-09).
- New LEU exchange rate (leu per euro): values plotted between 3.0 and 4.5 (3-Apr to 3-Apr).
- Leu per euro 3m forward: plotted on the same 3.0–4.5 scale.
- Interbank rates (Percent): Overnight Offer, 3M Offer, Overnight bid, 3M bid plotted on a 0–60 scale (3-Apr to 3-Apr).
- Stock market index (Today of last year = 100) and trade volume: index plotted between 20 and 120; volume (RHS) up to 2,500 (3-Apr to 3-Apr).
- Euro EMBIG Sovereign Spreads (Basis points): 0–1000 (3-Apr to 3-Apr).
- 5YR Credit Default Swap Spreads (Basis points): 0–900 (3-Apr to 3-Apr).

### Public debt sustainability (Figure 2: Bound Tests)
- Public debt presented as percent of GDP under:
  - Baseline and historical scenarios (2003–2013).
  - Individual permanent one standard deviation shocks to primary balance, growth, and interest rate.
  - Combined shock and contingent liabilities scenario (one-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2009).
- Selected scenario box figures and lines:
  - Baseline: -2.3 (No policy change: constant primary balance) and Baseline:2.7 (Gross financing need, right scale) as highlighted.
  - Scenario: -3.4 and Scenario:1.1.
  - Historical: -0.2 and Historical:6.1.
  - Baseline:-5.3; Scenario:-0.6; Historical:-9.5.

### External debt sustainability (Figure 3: Bound Tests)
- External debt presented as percent of GDP under:
  - Baseline and historical scenarios (2003–2013).
  - Individual shocks: interest rate and growth; non-interest current account; permanent 1/4 standard deviation shocks; one-time real depreciation of 30 percent in 2009.
- Selected scenario box figures:
  - Baseline: 52 (multiple panels use Baseline:52 as reference).
  - Historical: 30.
  - Interest rate shock panel shows i-rate shock with Baseline 52 and scenario ranges up to 54.
  - Combined shock: 57 (combined shock panel).
  - Real depreciation shock (30%): 66 (panel).
- Additional summarized metrics (Figure 3 boxes):
  - Baseline : 3.8; Scenario: 4.3; Historical: 4.2.
  - Baseline : 2.7; Scenario: 1.1; Historical: 6.1.
  - Baseline : -4.3; Scenario : -6.0; Historical : -6.8.

### Macroeconomic projections (Table 1: Selected Economic and Social Indicators, 2005–11)
- Output and prices (annual percentage change):
  - Real GDP: 4.1 7.9 6.2 7.1 -4.1 0.0 5.0
  - Domestic demand: 8.3 12.8 14.3 8.9 -8.2 -2.7 5.7
  - Net exports (contribution): -6.1 -10.2 -16.6 -6.3 7.8 3.9 -2.6
  - CPI (average): 9.0 6.6 4.8 7.8 5.9 3.9 3.5
  - CPI (end of period): 8.6 4.9 6.6 6.3 4.5 3.5 3.5
  - Unemployment rate: 5.8 5.4 4.3 4.0 8.9 9.7 7.7
  - Nominal wages: 17.0 18.9 22.6 23.6 5.9 3.8 5.2
  - Public sector wages: 25.9 27.3 18.5 31.0 5.1 3.9 3.5
  - Private sector wages: 14.7 16.5 23.2 21.2 6.2 3.8 5.7
- Saving and investment (percent of GDP):
  - Gross domestic investment: 23.3 26.5 31.1 31.4 30.8 29.9 31.9
  - Gross national savings: 14.4 16.0 17.3 19.0 23.2 23.4 25.7
- General government finances (percent of GDP):
  - Revenue: 31.4 32.3 32.5 32.6 33.0 33.4 33.1
  - Expenditure: 32.1 33.7 35.6 37.5 37.5 37.0 35.8
  - Fiscal balance: -0.7 -1.4 -3.1 -4.9 -4.6 -3.6 -2.7
  - Privatization proceeds: 1.3 0.4 0.1 0.1 0.0 0.0 0.0
  - External financing: 0.5 0.2 0.1 0.5 2.8 1.1 0.2
  - Domestic financing: -1.1 0.7 2.9 4.4 1.8 2.4 2.5
  - Structural fiscal balance 1/: -0.6 -2.1 -4.2 -6.7 -3.8 -1.7 -1.2
  - Gross public debt (direct debt only): 15.6 15.4 17.5 20.1 23.6 25.7 25.7
- Money and credit:
  - Broad money (M3): 36.5 28.1 33.7 17.6 6.6 6.5 11.5
  - Credit to private sector: -54.5 60.4 33.7 16.4 4.8 3.3 .
- Interest rates, eop:
  - Euribor, six-months: 2.79 3.23 4.79 3.52 - - -
  - NBR policy rate: 7.50 8.75 8.75 10.25 - - -
  - NBR lending rate (Lombard): 14.00 14.00 12.00 14.25 - - -
  - Interbank offer rate (1 week): 7.00 7.42 7.81 15.95 - - -
- Balance of payments (percent of GDP and levels):
  - Current account balance: -8.9 -10.4 -13.8 -12.4 -7.5 -6.5 -6.2
  - Merchandise trade balance: -9.9 -12.0 -14.4 -13.3 -7.1 -6.3 -6.4
  - Capital and financial account balance: 15.6 15.7 17.3 13.7 -2.3 3.2 7.4
  - Foreign direct investment balance: 6.6 8.9 5.8 6.6 2.9 3.5 3.5
  - International investment position: -29.2 -35.3 -39.8 -52.9 -55.6 -54.6 -53.0
  - Gross official reserves: 22.9 23.2 23.2 21.5 24.6 27.3 26.7
  - Gross external debt: 39.0 42.9 47.1 53.4 64.2 68.5 64.0
- Exchange rates:
  - Lei per euro (end of period): 3.7 3.4 3.5 4.0 - - -
  - Lei per euro (average): 3.6 3.5 3.3 3.7 - - -
  - Real effective exchange rate CPI based (depreciation -): 17.9 7.6 9.0 -4.2 - - -
- Memorandum:
  - Nominal GDP (in bn RON): 289.0 344.7 412.8 504.0 531.3 568.5 634.1
  - Nominal GDP (in bn euros): 79.7 97.8 123.6 136.8 119.7 118.8 130.7
- Social indicators (reference years as indicated):
  - Per capita GNI (Atlas method, 2005): US $4445
  - Income distribution (GINI index, 2000): 30.3
  - Poverty rate (2005): 13 p.c.
  - Primary education completion rate (2004): 94 percent
  - Gender pay gap (2003): 18 percent
  - Life expectancy at birth (2004): 71.3
  - Infant mortality per 1000 live births (2004): 16.8

### Balance of payments and financing (Table 2 and Table 3 highlights)
- Balance of payments (2005–2011, in billions of euros and percent of GDP):
  - Current account balance (in percent of GDP, Table 2 top): -7.1 -10.2 -17.1 -17.0 -9.0 -7.8 -8.2
  - Merchandise trade balance: -7.9 -11.8 -17.8 -18.2 -8.6 -7.5 -8.3
  - Exports (f.o.b.): 22.3 25.9 29.5 33.6 30.5 32.6 35.0
  - Imports (f.o.b.): -30.2 -37.6 -47.4 -51.8 -39.1 -40.1 -43.3
  - Gross international reserves (in billions of euros, Table 2 memo): 18.1 22.7 28.7 29.4 29.4 32.4 34.9
  - GDP (in billions of euros): 79.7 97.8 123.6 136.8 119.7 118.8 130.7
- Gross financing requirements and sources (Table 3, in billion of Euro):
  - I. Total financing requirements (2009 Q1–Q4 and 2009–11 totals): 11.7 10.1 9.4 12.7 43.9 40.4 38.9 123.2
  - I.A. Current account deficit (quarterly and totals): 1.5 2.7 2.4 2.4 9.0 7.8 8.2 25.0
  - I.B. Short-term debt: 8.4 4.3 4.5 5.3 22.5 18.6 18.6 59.7
    - Banks: 5.5 1.4 1.8 1.8 10.6 9.6 9.6 29.7
    - Corporates: 2.9 2.7 2.6 3.4 11.6 8.7 8.7 29.0
  - I.C. Maturing medium- and long-term debt: 1.3 2.0 1.6 4.4 9.3 11.7 12.2 33.2
  - II. Total financing sources: 9.2 6.3 6.8 9.9 32.2 36.3 40.3 108.8
    - II.A. Foreign direct investment, net: 1.2 0.9 0.7 0.7 3.5 4.2 4.6 12.2
    - II.C. Short-term debt (rollover and inflows): 6.8 3.2 3.9 4.6 18.6 18.6 18.6 55.8
  - III. Increase in gross reserves: -3.0 1.1 0.9 1.0 0.0 3.0 2.5 5.5
  - IV. Financing gap: -0.5 5.0 3.5 3.8 11.8 7.0 1.1 19.9
  - V. Prospective financing: -0.5 5.0 3.5 3.8 11.8 7.0 1.1 19.9
    - IMF: 0.0 5.0 1.9 1.6 8.5 3.5 1.0 12.9
    - European Commission: 0.0 0.0 1.5 0.1 2.5 2.3 0.1 5.0
    - World Bank: 0.0 0.0 0.0 0.5 0.5 0.5 0.0 1.0
    - EIB/EBRD: 0.0 0.0 0.1 0.2 0.3 0.7 0.0 1.0
- Memorandum:
  - Rollover rates for amortizing debt (in percent) for banks and corporates shown (e.g., Banks 2/ 87 89 96 96 97 69 100 100 ...; Corporates 3/ 69 69 81 81 76 100 100 ...).
  - Coverage of gross international reserves: Months of imports of GFNS (next year) 7.4 7.5 7.2 ...
  - Share of short-term external debt (in percent): 83 87 89 93 93 107 114 ...

### Fiscal projections and public debt details (detailed fiscal table)
- Revenue and expenditure (percent of GDP):
  - Revenue: 31.4 32.3 32.5 32.6 32.7 33.0 33.4 33.1
  - Taxes: 27.3 28.2 28.1 28.3 27.9 28.1 28.1 27.9
    - VAT: 7.8 8.1 7.6 8.1 7.4 7.4 7.5 7.6
    - Social security contributions: 9.5 9.6 9.6 9.6 10.3 10.3 10.0 9.8
  - Nontax revenue: 3.2 3.3 3.4 3.3 3.1 3.1 3.3 3.3
  - Grants, including EU disbursements: 0.6 0.5 0.8 0.6 1.6 1.6 1.6 1.7
  - Expenditure: 32.1 33.7 35.6 37.5 38.6 37.5 37.0 35.8
    - Current expenditure: 29.1 29.4 30.9 33.0 35.0 34.1 33.3 31.8
      - Compensation of employees: 7.4 8.0 8.2 8.6 8.1 7.8 7.2 6.7
      - Interest: 1.2 0.8 0.7 0.8 1.8 1.6 1.7 1.4
      - Transfers 2/: 12.0 12.2 14.2 15.5 18.0 17.7 17.7 16.8
        - Pensions: 5.8 5.4 5.5 6.6 7.4 7.4 7.3 7.0
    - Capital expenditure 4/: 3.0 4.3 4.8 4.6 3.5 3.5 3.7 4.0
  - Fiscal balance: -0.7 -1.4 -3.1 -4.9 -5.9 -4.6 -3.6 -2.7
  - Primary balance: 0.5 -0.6 -2.4 -4.1 -4.1 -3.0 -1.9 -1.3
  - Financing: 0.7 1.4 3.1 4.9 5.9 4.6 3.6 2.7
  - Privatization proceeds: 1.3 0.4 0.1 0.1 0.0 0.0 0.0 0.0
  - Gross public debt 5/: 20.3 18.4 19.8 21.8 26.6 25.3 27.2 27.1
  - Gross public debt excl. guarantees: 15.6 15.4 17.5 20.1 25.0 23.6 25.7 25.7
    - External: 10.6 7.9 7.1 7.0 6.6 9.4 9.9 9.1
    - Domestic: 5.0 7.5 10.4 13.1 18.3 14.2 15.8 16.7
- Memoranda:
  - Output gap 6/: -0.4 2.2 3.2 5.4 -2.4 -2.4 -5.7 -4.6
  - Conventional structural fiscal balance: -0.6 -2.1 -4.2 -6.7 -5.1 -3.8 -1.7 -1.2
  - Nominal GDP (in billions of RON): 289.0 344.7 412.8 504.0 531.3 531.3 568.5 634.1

*Source: IMF staff estimates, projections, and Romanian authorities data as presented in the document.*

### 7.0 percent of GDP in the authorities' 2009 budget.

### _cr09183 - 7.0 percent of GDP in the authorities' 2009 budget.

### Fiscal outcomes and projections
- General government/ public sector primary deficit and debt dynamics (Table 7 baseline):
  - Public sector debt: 2003: 25.8; 2004: 17.4; 2005: 15.6; 2006: 15.4; 2007: 17.5; 2008: 20.1; 2009: 23.6; 2010: 25.7; 2011: 25.7; 2012: 24.2; 2013: 22.6 (In percent of GDP).
  - o/w foreign-currency denominated: 2003: 13.2; 2004: 10.1; 2005: 8.8; 2006: 7.2; 2007: 6.5; 2008: 6.7; 2009: 6.9; 2010: 6.3; 2011: 5.7; 2012: 5.2; 2013: 4.8 (In percent of GDP).
  - Change in public sector debt: 2003: -2.7; 2004: -8.4; 2005: -1.8; 2006: -0.2; 2007: 2.1; 2008: 2.6; 2009: 3.5; 2010: 2.0; 2011: 0.0; 2012: -1.4; 2013: -1.6 (In percent of GDP).
  - Primary deficit: 2003: 0.2; 2004: -0.2; 2005: -0.4; 2006: 0.6; 2007: 2.5; 2008: 4.5; 2009: 4.1; 2010: 3.1; 2011: 2.2; 2012: 1.3; 2013: 0.7 (In percent of GDP).
  - Revenue and grants: 2003: 28.7; 2004: 29.9; 2005: 31.4; 2006: 32.3; 2007: 32.5; 2008: 32.6; 2009: 33.0; 2010: 33.4; 2011: 33.1; 2012: 32.9; 2013: 32.7 (In percent of GDP).
  - Primary (noninterest) expenditure: 2003: 28.9; 2004: 29.7; 2005: 31.0; 2006: 32.9; 2007: 35.0; 2008: 37.1; 2009: 37.1; 2010: 36.5; 2011: 35.3; 2012: 34.2; 2013: 33.3 (In percent of GDP).
- Identified debt-creating flows (4+7+12): 2003: -4.8; 2004: -6.1; 2005: -2.5; 2006: -2.8; 2007: 0.1; 2008: 1.7; 2009: 3.5; 2010: 2.0; 2011: 0.0; 2012: -1.4; 2013: -1.6 (In percent of GDP).
- Debt-stabilizing primary balance (Table 7): -2.2 (In percent of GDP).

### Monetary aggregates, bank credit, and interest rates (Table 5)
- Broad Money (M3), end-period levels (millions of lei): Dec-05: 86,526; Dec-06: 110,821; Dec-07: 148,116; Dec-08: 174,136; Dec-09: 184,992; Dec-10: 196,942; Dec-11: 219,669.
- Net foreign assets (banking system), end-period (millions of lei): Dec-05: 41,501; Dec-06: 38,734; Dec-07: 29,076; Dec-08: 13,050; Dec-09: -28,834; Dec-10: -35,534; Dec-11: -26,713.
- Net domestic assets (banking system), end-period (millions of lei): Dec-05: 45,025; Dec-06: 72,087; Dec-07: 119,039; Dec-08: 161,085; Dec-09: 213,826; Dec-10: 232,476; Dec-11: 246,382.
- Private sector credit (millions of lei): Dec-05: 59,806; Dec-06: 92,379; Dec-07: 148,181; Dec-08: 198,086; Dec-09: 235,515; Dec-10: 245,109; Dec-11: 254,098.
- Public sector credit, net (millions of lei): Dec-05: 3,297; Dec-06: 3,546; Dec-07: 9,571; Dec-08: 17,268; Dec-09: 27,152; Dec-10: 41,093; Dec-11: 56,756.
- Reserve money (millions of lei, National Bank of Romania): Dec-05: 22,212; Dec-06: 34,580; Dec-07: 48,873; Dec-08: 50,468; Dec-09: 56,921; Dec-10: 60,598; Dec-11: 63,665.
- Annual percentage change:
  - Broad money (M3): 2005: 36.5; 2006: 28.1; 2007: 33.7; 2008: 17.6; 2009: 6.2; 2010: 6.5; 2011: 11.5.
  - Reserve money (annual % change): 2005: 62.1; 2006: 55.7; 2007: 41.3; 2008: 3.3; 2009: 12.8; 2010: 6.5; 2011: 5.1.
- Interest rates (rates for new local currency denominated transactions where indicated):
  - Policy interest rate: 2005: 7.50; 2006: 8.75; 2007: 7.50; 2008: 10.25 (percent).
  - Interbank offer rate, 1 week: 2005: 7.00; 2006: 7.42; 2007: 7.81; 2008: 15.95 (percent).

### Banking system soundness and risk indicators (Table 6)
- Capital buffers:
  - Capital adequacy ratio: 2004: 20.6; 2005: 21.1; 2006: 18.1; 2007: 13.8; 2008: 12.3 (percent).
  - Own capital ratio: 2004: 8.9; 2005: 9.2; 2006: 8.6; 2007: 7.3; 2008: 7.0 (percent).
- Credit risk and exposures:
  - Assets, in percent of GDP: 2004: 37.1; 2005: 45.2; 2006: 50.9; 2007: 63.1; 2008: 66.2.
  - Domestic credit, in percent of GDP: 2004: 17.8; 2005: 21.9; 2006: 27.8; 2007: 38.2; 2008: 42.7.
  - Private sector credit, in percent of GDP: 2004: 16.6; 2005: 20.8; 2006: 26.8; 2007: 35.9; 2008: 39.3.
  - Credit to households, in percent of GDP: 2004: 4.8; 2005: 7.4; 2006: 11.4; 2007: 17.3; 2008: 19.7.
  - Lending for real estate purchase, in percent of GDP: 2004: 1.9; 2005: 2.7; 2006: 3.9; 2007: 3.2; 2008: 4.1.
  - Medium and long term credits, in percent of non-gov. credit: 2004: 58.4; 2005: 63.9; 2006: 68.4; 2007: 76.0; 2008: 76.9.
- Asset quality and provisioning:
  - Non-performing loans, in percent of loans: 2004: 8.1; 2005: 8.3; 2006: 8.0; 2007: 9.7; 2008: 13.8.
  - Specific provisions, in percent of non-performing loans: 2004: 16.1; 2005: 14.4; 2006: 18.2; 2007: 25.7; 2008: 28.7.
- Liquidity and funding:
  - Liquidity ratio (effective over required): 2004: 2.3; 2005: 2.6; 2006: 2.3; 2007: 2.1; 2008: 2.6.
  - Liquid assets, in percent of total assets: 2004: 63.6; 2005: 61.8; 2006: 54.4; 2007: 48.3; 2008: 47.2.
  - Loan-to-deposit ratio, in percent: 2004: 72.1; 2005: 80.0; 2006: 95.8; 2007: 114.8; 2008: 130.8.
- Profitability and concentration:
  - Return on average assets: 2004: 2.5; 2005: 1.9; 2006: 1.7; 2007: 1.3; 2008: 1.7.
  - Return on average equity: 2004: 19.3; 2005: 15.4; 2006: 13.6; 2007: 11.5; 2008: 18.1.
  - Market share (assets) of five largest banks: 2004: 59.2; 2005: 58.8; 2006: 60.3; 2007: 56.3; 2008: 54.4.
- Foreign exchange exposures:
  - Lending in foreign exchange, in percent of non-gov. credit: 2004: 61.8; 2005: 54.7; 2006: 47.3; 2007: 54.3; 2008: 54.3; 2008 (another column): 57.8 (percent).

### Debt sustainability (public and external) — key metrics (Tables 7 and 8)
- Public sector:
  - Public sector debt-to-revenue ratio: 2003: 89.8; 2004: 58.0; 2005: 49.6; 2006: 47.6; 2007: 53.8; 2008: 61.6; 2009: 71.7; 2010: 76.9; 2011: 77.6; 2012: 73.8; 2013: 69.3.
  - Gross financing need (percent of GDP): 2003: 3.3; 2004: 1.8; 2005: 1.6; 2006: 1.8; 2007: 3.8; 2008: 5.6; 2009: 5.5; 2010: 4.9; 2011: 3.5; 2012: 2.4; 2013: 1.6.
  - Gross financing need (in billions of U.S. dollars): 2003: 2.0; 2004: 1.4; 2005: 1.6; 2006: 2.2; 2007: 6.4; 2008: 11.3; 2009: 8.6; 2010: 7.6; 2011: 5.9; 2012: 4.9; 2013: 3.7.
- External:
  - Baseline external debt (percent of GDP): 2003: 33.7; 2004: 35.6; 2005: 39.0; 2006: 42.9; 2007: 47.1; 2008: 53.4; 2009: 64.2; 2010: 68.5; 2011: 64.0; 2012: 57.1; 2013: 52.5.
  - Change in external debt: 2003: 0.5; 2004: 1.9; 2005: 3.4; 2006: 3.9; 2007: 4.2; 2008: 6.4; 2009: 10.7; 2010: 4.3; 2011: -4.4; 2012: -7.0; 2013: -4.6.
  - Gross external financing need (in billions of euros): 2003: 6.5; 2004: 9.8; 2005: 14.0; 2006: 21.6; 2007: 35.8; 2008: 45.8; 2009: 42.0; 2010: 36.3; 2011: 35.4; 2012: 37.9; 2013: 40.4.
  - Gross external financing need (percent of GDP): 2003: 12.4; 2004: 16.1; 2005: 17.5; 2006: 22.1; 2007: 28.9; 2008: 33.5; 2009: 35.1; 2010: 30.5; 2011: 27.1; 2012: 24.7; 2013: 23.1.
  - External debt-to-exports ratio (percent): 2003: 97.0; 2004: 99.7; 2005: 118.7; 2006: 133.9; 2007: 156.6; 2008: 170.9; 2009: 196.4; 2010: 194.5; 2011: 184.5; 2012: 173.5; 2013: 165.7.

### External vulnerability indicators (Table 9 highlights)
- M3, end-of-period percent change: 2005: 36.5; 2006: 28.1; 2007: 33.7; 2008: 17.6; 2009 latest: 19.4.
- Private sector credit, percent change: 2005: 45.8; 2006: 54.5; 2007: 60.4; 2008: 33.7; 2009 latest: 33.8.
- Share of foreign currency deposits in private deposits (percent): 2005: 34.6; 2006: 32.3; 2007: 32.1; 2008: 34.8; 2009 latest: 37.9.
- Share of foreign currency loans in total loans (percent): 2005: 54.7; 2006: 47.3; 2007: 54.3; 2008: 54.3; 2009 latest: 57.8; breakdowns to corporates and households also reported.
- Current account balance, percent of GDP (excluding interest payments): 2003: -4.5; 2004: -7.1; 2005: -7.7; 2006: -9.3; 2007: -12.7; 2008: -10.2; 2009: -5.1; 2010: -4.1; 2011: -3.9; 2012: -4.0; 2013: -4.1.
- Gross official reserves (billions of euros): 2005: 18.1; 2006: 22.7; 2007: 28.7; 2008: 29.4; 2009 latest: 26.5.
- Total external debt (billions of euros): 2005: 31.1; 2006: 42.0; 2007: 58.2; 2008: 73.1.

### IMF arrangement, proposed access, and schedule (Tables 10–12)
- Proposed Stand-By Arrangement (Table 10 and Table 11):
  - Total proposed access in millions of SDRs: 11,443.
  - Total (percent of quota): 1,110.77 (Table 12 total).
  - Proposed average annual access (SDR, percentile metrics provided in Table 10).
- Schedule of reviews and purchases (Table 12):
  - May 6, 2009 — 4,370 millions of SDRs — Approval of arrangement.
  - September 15, 2009 — 1,718 millions of SDRs — First review and end-June 2009 performance criteria.
  - December 15, 2009 — 1,409 millions of SDRs — Second review and end-September 2009 performance criteria.
  - March 15, 2010 — 766 millions of SDRs — Third review and end-December 2009 performance criteria.
  - June 15, 2010 — 768 millions of SDRs — Fourth review and end-March 2010 performance criteria.
  - September 15, 2010 — 769 millions of SDRs — Fifth review and end-June 2010 performance criteria.
  - December 15, 2010 — 769 millions of SDRs — Sixth review and end-September 2010 performance criteria.
  - March 15, 2011 — 874 millions of SDRs — Seventh and end-December 2010 performance criteria.
  - Total scheduled purchases listed: 11,443 millions of SDRs.

### Key macroeconomic assumptions underlying projections (Table 7 and Table 8)
- Real GDP growth (percent): 2003: 5.8; 2004: 8.5; 2005: 4.1; 2006: 7.9; 2007: 6.2; 2008: 7.1; 2009: -4.1; 2010: 0.0; 2011: 5.0; 2012: 7.2; 2013: 5.4.
- Inflation rate (GDP deflator, percent): 2003: 23.2; 2004: 15.5; 2005: 12.2; 2006: 10.5; 2007: 12.8; 2008: 14.0; 2009: 10.0; 2010: 7.0; 2011: 6.2; 2012: 6.2; 2013: 6.2.
- Average nominal interest rate on public debt (percent): 2003: 9.3; 2004: 6.2; 2005: 7.0; 2006: 6.0; 2007: 5.2; 2008: 3.0; 2009: 2.5; 2010: 2.1; 2011: 1.8; 2012: 1.6; 2013: 1.4.
- Growth of real primary spending (percent): 2003: 4.4; 2004: 11.6; 2005: 8.7; 2006: 14.4; 2007: 13.0; 2008: 13.5; 2009: -4.2; 2010: -1.5; 2011: 1.6; 2012: 3.8; 2013: 2.7.

*Source: IMF staff estimates and tables as provided in the document.*

### 51.      Economic conditions in the region have worsened sharply in recent months as a result

### Economic conditions in the region have worsened sharply in recent months as a result

### Program request and objectives
- Request for Fund support: Stand-By Arrangement (SBA) for a period of 24 months in the amount equivalent to SDR11.443 billion (€12.95 billion).
- Complementary support: €5 billion under the EU’s balance of payment financing facility and other multilateral commitments of some €2 billion.
- Program aims:
  - Cushion effects of the sharp drop in private capital inflows.
  - Address external and fiscal imbalances.
  - Strengthen the financial sector.
  - Immediate objective: facilitate an orderly adjustment of the external deficit to ease pressures on the exchange rate and avoid severe balance sheet effects on corporate and household sectors.
  - Specific program intentions: (i) strengthen fiscal policy to reduce government financing needs and improve long-term fiscal sustainability; (ii) maintain adequate capitalization of banks and liquidity in domestic financial markets; (iii) bring inflation within the NBR’s target range and maintain it there; and (iv) secure adequate external financing and improve confidence.

### Program design and monitoring
- Monitoring framework:
  - Quantitative performance criteria and indicative targets, structural benchmarks and consultation clauses during quarterly reviews.
  - Prior actions: implementation of another 1.1 percent of GDP in fiscal consolidation measures before program consideration.
  - Prior action by NBR: complete by April 30 stress testing of all banks with more than 1 percent share (by assets) in the Romanian market, plus selected smaller banks, according to risk parameters agreed with IMF staff.
  - Review schedule: first review by September 15, 2009; second review by December 15, 2009.
- Targets and instruments:
  - Quarterly targets for overall general government balance, change in arrears for the general government, CPI inflation, net foreign assets, issuance of new government contingent liabilities, and indicative targets on primary expenditure net of EU structural fund disbursements.
  - Cash balance of the general government (as defined in the TMU) as the primary monitoring variable (quarterly performance criterion).
  - Adjustor: if nongrant revenues exceed program projections, the deficit target will be adjusted downward by one half the surplus.

### Recent economic performance and outlook (2003–2011 context)
- Past boom and imbalances:
  - GDP growth averaged over 6½ percent per year during 2003-08.
  - Current account deficits peaked at 13½ percent of GDP in 2007.
  - Credit growth averaged 50 percent per year in 2006-7.
  - Government deficit rose from under 1 percent of GDP in 2005 to near 5 percent of GDP by 2008.
- Recent deterioration:
  - GDP fell by 3.9 percent (q-on-q seasonally adjusted) in the fourth quarter of 2008.
  - Outlook: sharp drop in GDP anticipated in 2009; recovery expected to begin in 2010 but growth likely to remain near zero through 2010.
  - Inflation expectations: CPI inflation expected to move within the NBR target band by late 2009 and remain there throughout 2010.
- External financing needs:
  - Resulting external financing need of some €20 billion over the period 2009-2011.
  - Coverage plan: drawing on resources from the IMF, support under the EU’s balance of payment facility, and from other official creditors.
  - Assumptions: pre- and post-accession EU structural funds as a stable source of inflows; already committed FDI inflows; cautious assumption of net outflows from the non-financial private sector.
  - Policy aim: gradually increase the NBR’s foreign reserves as a precaution against unexpected outflows.

### Fiscal policy measures and targets
- Fiscal deterioration and initial corrective measures:
  - Government spending doubled between 2005 and 2008 in nominal terms; public share of economic activity rose from 32 percent of GDP to 37 percent of GDP.
  - Fiscal deficit was about 5 percent of GDP in 2008.
  - 2009 budget measures already approved yield around 3 percent of GDP.
- Prior-action and additional adjustments:
  - Prior action: package of fiscal measures designed to yield 1.1 percent of GDP RON 5.9 billion before IMF Executive Board consideration; final approval required for the first review.
  - Under the IMF-supported program, additional fiscal adjustment to bring the deficit down another 1.1 percent of GDP to 4.6 percent of GDP in 2009.
  - Primary government expenditure to be reduced by an additional 0.85 percentage point of GDP compared to the 2009 budget.
- Specific measures to achieve 2009 adjustment:
  - Foregoing public sector wage increases (totaling 5 percent) scheduled for 2009 or equivalent further cuts in employment.
  - Reducing public employment, including by replacing only 1 of 7 departing employees.
  - Reductions in capital spending (e.g., vehicles and office equipment) and a more realistic timetable for EU supported investment projects.
  - Additional cuts in spending on goods and services; further reductions in subsidies to public entities.
  - Parliamentary ratification of these measures by the first review (structural benchmark).
  - Allocate an additional RON 250 million to improving social protection for the most vulnerable during the downturn.
  - Revenue measures: eliminate certain tax deductions and allowances (in particular on company cars, and depreciation of revalued assets) expected to generate an additional 0.25 percent of GDP.
- Medium-term fiscal path:
  - Envisage further reduction in the general government deficit to around 3⅔ percent of GDP in 2010.
  - For 2011, plan to move the general government deficit below 3 percent of GDP (under both national and ESA 95 definitions); passage of a 2011 budget designed to achieve this will be a structural benchmark for the sixth review (scheduled by December 15, 2010).
- Fiscal rules and institutions:
  - Plan to submit a new fiscal responsibility law to parliament and prepare an implementation plan by end-November 2009 (structural benchmark). Law to include: (i) procedures for improved multiyear budgeting; (ii) limits on budget revisions during the year; (iii) fiscal rules on expenditures, public debt and the primary deficit; (iv) creation of a fiscal council; and (v) framework for issuance and management of guarantees and other contingent liabilities.
- Public financial management reforms:
  - Requested technical assistance from the IMF, the World Bank, and the European Commission in 2009.
  - Implement comprehensive reviews of the fiscal code and the fiscal procedures code in 2009–2010.
  - Improved financial monitoring of decentralized fiscal entities and tighter control on their expenditures and reduced subsidies.
  - In 2010, include an indicative target on the financial balance of the largest public enterprises in program conditionality.
  - Public enterprises: not allowed to accumulate new arrears; those making losses must restructure; profit-making enterprises may increase compensation only in line with inflation and productivity growth.
- Public sector wage reform:
  - Legislation to restructure public compensation to be approved during 2009 (structural benchmark).
  - Establish a unified, simplified pay scale and reform bonuses.
  - Ceiling of under 30 percent phased-in on the share of all non-wage personnel expenditures as a share of total public compensation.
  - Creation of non-monetary bonuses prohibited; monetary bonuses consolidated—eliminating the large majority or rolling them into base wage; total bonuses for any given public servant legally capped; all bonuses remain fully taxable.
  - Law could provide for a phasing-in period of up to 3 years; efforts to safeguard real incomes of the lowest paid workers during the process.
- Pension reform measures:
  - Reform key parameters of the pension system in coordination with the World Bank (structural benchmark).
  - Changes include: move toward indexing public pensions to consumer prices rather than to wages; limit scope for discretionary pension increases; phase-in pension contributions for groups currently excluded; continue gradual adjustment of retirement age beyond currently agreed schedule (particularly for women) taking into account life expectancies.
  - Continue to phase in the second pillar of the pension system with regularly scheduled increases in contributions as originally envisaged.
  - Objective: eventually attain a 45 percent replacement ratio for retirees on average.

### Financial sector measures and resilience
- Banking sector position entering crisis:
  - All 32 banks compliant with capital adequacy requirement of 8 percent.
  - Average capital adequacy ratio was 12.3 percent at the end of 2008.
  - Foreign ownership: 87 percent of assets foreign owned; main parent banks based in the Euro area with access to ECB liquidity facilities.
  - Parent banks pledged to maintain exposures to Romania and to recapitalize subsidiaries as needed; reaffirmed in a joint statement issued in Vienna on March 26, 2009.
- Policy measures and stress testing:
  - NBR expanded liquidity support to banks; several banks have boosted capital adequacy while others are in the process of doing so.
  - Program to use NBR stress testing capability: stress tests of individual bank balance sheets and lending portfolios under different scenarios to assess potential increases in own funds needed to ensure solvency ratios remain above 10 percent throughout the program period (prior action).
  - NBR, in conjunction with home country banking supervisors, to monitor parent bank commitments closely.

*IMF staff report / government letter contained in the provided PDF content.*

### 70.      Once stress tests are completed, banks will be required to secure, by the end of

### _cr09183 - 70.      Once stress tests are completed, banks will be required to secure, by the end of

### Bank recapitalization following stress tests
- Banks must, by the end of September 2009, secure sufficient resources to cover potential shortfalls revealed by stress tests.
- Eligible forms of resources:
  - Increases in share capital.
  - Subordinated long-term (at least 5-year) loans and similar instruments, qualifying as tier 2 capital and convertible into ordinary share capital at the holders’ discretion or at the request of the NBR.
- Primary source of these resources: owners of the banks.
- Authorities will encourage bank owners to actively explore cofinancing opportunities with IFIs under their February 2009 Joint Action Plan in support of banking systems in the CEE region.

### Temporary preferential regime for majority-owner commitments
- A temporary preferential regime will be established for banks whose majority owner signs a commitment to:
  - (i) maintain overall exposure to Romania throughout the period of the program; and
  - (ii) increase the capital of its bank in Romania in line with potential needs as assessed under the stress-testing exercise.
- Features of the regime:
  - Any new subordinated debt subscribed by owners or IFIs would be exempt from the NBR’s reserve requirements.
  - For monitoring compliance with (ii), this subordinated debt and similar instruments would be counted as tier 1 capital, while existing capital adequacy rules will still apply.
  - The preferential regime will expire at the end of the program period.
  - Available to all banks established in Romania, regardless of the nationality of the owners.
- Policy intent: strengthen financial stability and monetary conditions; NBR may gradually ease reserve requirements if monetary conditions evolve favorably.

### Banking law and bank resolution reforms
- Commitments to amend banking and winding-up laws, in consultation with the IMF, to respond timely and effectively to bank distress.
- Key objectives and milestones:
  - Strengthen the special administrator’s ability to deal with banks in weak financial positions (end-November 2009 structural benchmark).
  - Strengthen NBR’s remedial powers to request significant shareholders to increase share capital and financially support the bank, and to prohibit or limit profit distributions (end June 2009 structural benchmark).
- Authorities intend to streamline and strengthen court-based proceedings for winding-up of banks at a future stage.

### Deposit insurance enhancements
- In 2008, deposit coverage was raised to at least €50,000 across Europe, including Romania.
- Measures to strengthen the RDGF:
  - Supplement existing funding with access to government privatization receipts held in the Treasury account in the NBR (currently RON 11.6 billion).
  - Modify procedures for activation of deposit insurance to simplify and accelerate payouts.
  - Under modified legislation, deposit insurance will be paid within the 20 working day period authorized in the EU directive on deposit guarantee schemes (structural benchmark).

### Supervisory framework, capital adequacy, and accounting standards
- NBR will continue to improve banking supervisory and regulatory framework and consult Fund staff prior to introducing new/revised prudential regulations.
- Planned measures include:
  - More detailed reporting requirements on liquidity.
  - At an appropriate time, raising the minimum level of the capital adequacy ratio from 8 percent to 10 percent.
- Commitment to bring Romanian financial accounting standards into line with International Financial Reporting Standards (IFRS).
  - Adoption of IFRS to follow a timetable to be determined by the NBR, recognizing that a rapid transition could be disruptive in current circumstances.

### Restructuring of household foreign-currency debt
- Authorities will seek agreement with commercial banks to facilitate restructuring of household debt contracted in foreign currency by:
  - Adjusting maturity and repayment schedules.
  - Offering the option to voluntarily convert into domestic currency.
- Banks will be allowed to continue to rely on their own in-house expertise for collection of claims.

### Monetary and exchange rate policy stance
- Monetary objective: gradually bring inflation down to the official target of 3.5 percent (plus or minus 1 percent).
- Monitoring and instruments:
  - Progress monitored using an inflation consultation clause (see TMU).
  - Monetary policy will remain vigilant; any easing of reserve requirements or policy interest rate calibrated to assure attainment of the inflation objective by end-2009.
- Inflation and exchange rate interactions:
  - Economic slowdown likely to put downward pressure on inflation, but exchange rate depreciation could boost inflation.
  - NBR will consider effects on capital flows and the exchange rate when calibrating policy.

### Reserves, Net Foreign Assets (NFA) targets, and intervention policy
- Planned Gross International Reserves changes:
  - Increase of 0 in 2009 (implying a recovery of all reserves lost before the program takes effect).
  - Increase of €3.0 billion in 2010.
- Reserve-loss trigger:
  - Reserve losses exceeding €2 billion in any 30-day period during the program will trigger consultation with IMF staff.
- NFA policy:
  - A performance criterion will be established on Net Foreign Assets consistent with gross reserves accumulation objective.
  - Within inflation targeting, NBR’s intervention policy will be applied consistently with the target for net foreign assets under the program.
- Collateral and toolkit:
  - NBR will widen the range of assets acceptable as collateral for its facilities and stands ready to expand its toolkit as needed.

### External payments, import restrictions, and safeguards
- Commitment during Stand-by arrangement:
  - Not to introduce or intensify restrictions on payments and transfers for current international transactions without Fund approval.
  - Not to introduce or modify multiple currency practices or conclude bilateral payments agreements inconsistent with Article VIII of the Fund’s Articles of Agreement.
  - Not to introduce or intensify import restrictions for balance of payments reasons.
- Safeguards assessment:
  - Importance recognized of completing a safeguards assessment by the first review under the Stand-By Arrangement.
  - NBR will provide required information and will receive a safeguards mission from the IMF as necessary.

### Quantitative and structural program highlights (selected figures and timelines)
- Capital and reserve timelines:
  - Banks to secure resources by end-September 2009.
- RDGF government privatization receipts currently: RON 11.6 billion.
- Inflation targets and bands (12-month CPI rate):
  - Center point end-2009: 4.5; end-2010: 2.5.
  - Inner band (upper limit) end-2009: 5.5; end-2010: 3.5.
  - Outer band (upper limit) end-2009: 6.5; end-2010: 4.5.
  - Inner band (lower limit) end-2009: 2.5; end-2010: 0.5.
  - Outer band (lower limit) end-2009: 3.5; end-2010: 1.5.
- Capital adequacy ratio targeted increase:
  - From 8 percent to 10 percent (timing: “at an appropriate time”).
- NFA floor on cumulative change (mln euros):
  - 2008 December (stock): 25,532.
  - End-March 2009 (PC): -3,500.
  - End-June 2009 (PC): -7,600.
  - End-September 2009 (PC): -8,720.
  - End-December 2009 (IT): -9,000.
  - End-December 2010 (IT): -500.
- Gross Foreign Assets memorandum (mln euros):
  - 2008 December: 26,220.
  - End-March 2009: -3,500.
  - End-June 2009: -2,300.
  - End-September 2009: -1,200.
  - End-December 2009: 0.
  - End-December 2010: 3,000.
- External program disbursements – baseline projections (mln euros, cumulative flows from end-December 2008):
  - March 2009: 0.
  - June 2009: 0.
  - September 2009: 1,500.
  - December 2009: 3,000.
  - December 2010: 2,350 (note: placement in table corresponds to continued projection).

### Technical Memorandum of Understanding (TMU) operational definitions (selected)
- Program exchange rates (as of December 31, 2008):
  - RON 3.9852 = €1.
  - RON 2.8342 = $1.
  - RON 3.1419 = ¥100.
  - RON 4.1169 = ₤1.
- Definition of Net Foreign Assets (NFA) of the NBR:
  - Euro value of gross foreign assets of the NBR (including reserve requirements of the commercial banking system held at the NBR) minus gross foreign liabilities; measured on the basis of the NBR’s operational definitions.
  - Non-euro denominated foreign assets and liabilities converted into euro at program exchange rates.
- Gross foreign assets exclude:
  - (i) gold and other precious metals;
  - (ii) assets in nonconvertible currencies;
  - (iii) illiquid assets;
  - (iv) any assets that are pledged, collateralized, or otherwise encumbered;
  - (v) claims on residents;
  - (vi) claims in foreign exchange arising from derivatives in foreign currencies vis-à-vis domestic currency (such as futures, forwards, swaps, and options).
- Gross foreign liabilities exclude:
  - (i) banks’ foreign currency deposits against reserve requirements; and
  - (ii) government foreign currency deposits at the NBR.
- Adjustments to NFA targets:
  - Upward (downward) by surplus (shortfall) in program disbursements relative to baseline projection (external disbursements from official creditors usable for financing the central government).
  - Upward by increase in commercial bank reserve requirements held with the NBR relative to end-December, 2008 (€13,038 million), measured at program exchange rates.

*Source: IMF document text as provided in the content unit.*

### 12.      In the event that non-grant revenues exceed those projected under the program, the

### _cr09183 - 12.      In the event that non-grant revenues exceed those projected under the program, the

### Revenue adjustor and projected non-grant revenues (2009)
- If non-grant revenues exceed projections under the program, the deficit target will be adjusted downward by one half of the surplus to allow for additional capital spending while reducing the deficit further.
- Cumulative projected revenue of general government, net of EU funds (In millions of lei):
  - December 31, 2008 (actual) 161,650
  - End-March 2009 (actual) 36,951
  - End-June 2009 (forecast) 77,351
  - End-September 2009 (forecast) 120,145
  - End-December 2009 (forecast) 166,722

### Performance criterion limiting issuance of government guarantees
- The issuance of general government guarantees to the non-financial private sector and public enterprises will be limited during the program period.
- Ceiling on new general government guarantees issued from end-2008 until (In billions of lei):
  - End-March 2009 (actual) ...
  - End-June 2009 (performance criterion) 6.0
  - End-September 2009 (performance criterion) 6.0
  - End-December 2009 (indicative target) 6.0

### Performance criterion on non-accumulation of domestic arrears
- The program contemplates no accumulation of new arrears and their elimination during the program period; arrears are defined as accounts payable past due date by 90 days (in line with ESA95 definitions for expenditures).
- Cumulative change in general government arrears (In billions of lei):
  - December 31, 2008 (stock, actual) 0.3
  - End-March 2009 (projected) 0.0
  - End-June 2009 (performance criterion) 0.0
  - End-September 2009 (performance criterion) 0.0
  - End-December 2009 (indicative target) -0.15
  - End-December 2010 (indicative target) -0.15

### Continuous performance criterion on external debt payment arrears
- The general government will not accumulate external debt arrears during the program period.
- External debt payment arrear defined as a payment by the general government not made within seven days after falling due.
- The performance criterion applies on a continuous basis.

### Indicative target on general government primary spending
- The indicative target on primary expenditure (overall spending excluding interest payments), net of disbursements of pre-accession and post-accession EU funds, will be subject to the same adjustor as applied to the deficit target.
- Cumulative change in general government primary expenditures, net of EU funds (In millions of lei):
  - December 31, 2008 (actual) 182,411
  - End-March 2009 (actual) 44,120
  - End-June 2009 (indicative target) 87,505
  - End-September 2009 (indicative target) 132,356
  - End-December 2009 (indicative target) 182,723

### Monitoring of public enterprises
- The Ministry of Public Finance, the Ministry of Labor and Social Protection, and other pertinent institutions will provide information to document that a monitoring system of public enterprises is in place by the time of the first review.
- During the program period, information will document that sanctions—decline in remuneration and dismissal of management according to Ordinances 37/2008 and 79/2008—are imposed if budgets and company targets for restructuring are not observed.
- During the second review, after refinement of the Ministry of Public Finance monitoring system, quarterly indicative targets for 2010 will be established on the operating balance (earnings before interest and tax), net of subsidies, of the 30 largest enterprises by total expenditures (as of 2009).

### Reporting requirements (data provision to the IMF)
- Performance will be monitored from data supplied by the NBR and the Ministry of Finance; authorities will transmit promptly any data revisions and other necessary information.
- Select items to be provided by the Ministry of Finance (periodicity as stated):
  - Preliminary monthly data on general government accounts: Monthly, on the 25th day of the following month
  - Quarterly final data on general government accounts: Quarterly cash data, on the 35th day past the test date; Quarterly accrual data, on the 55th day past test date
  - The budget deficit of the general government using ESA95 definition: Quarterly, with a lag of three months
  - Preliminary data on below-the-line financing for the general government: Monthly, with a lag of no more than 35 days past the test date
  - Final quarterly data on below-the-line financing for the general government: Quarterly, no later than 45 days past the test date
  - Total accounts payable and arrears of the general government: Quarterly, within 55 days
  - Total accounts payable and arrears of the central government and social security funds: Monthly, within the next month
  - Stock of the central government external arrears: Daily, with a lag of not more than seven days
  - Public debt and new guarantees issued by the general government: Monthly, within one month
  - Preliminary monthly data on general government primary spending, net of EU disbursements: Preliminary monthly data will be reported to the IMF staff within 25 days
  - Final quarterly data on general government primary spending, net of EU disbursements: Quarterly, within 35 days from the test date
  - From 2010, operating balance, profits, arrears, and personnel expenditures of 30 largest public enterprises by total expenditures: Quarterly, within three months of the test date
  - Data on EU project grants (reimbursements and advances), capital expenditures and subsidies covered by EU advances or eligible for EU reimbursement on EU supported projects specifically agreed with the EU: Monthly, within three weeks of the end of each month
- Select items to be provided by the National Bank of Romania (periodicity as stated):
  - NFA data, by components, in both program and actual exchange rates: Weekly, each Monday succeeding the reporting week and with a 3 working day lag in the case of end-quarter data
  - Monetary survey data in the format agreed with IMF staff: Monthly, within 30 days of the end of the month
  - The schedule of contractual external payments of the banking sector falling due in the next four quarters, interest and amortization (for medium and long-term loans): Monthly, 45 days after the end of each month
  - The schedule of contractual external payments of the corporate sector falling due in the next four quarters interest and amortization (for medium and long-term loans): Monthly, 45 days after the end of each month
  - The stock of short-term external debt of banks and corporates: Monthly, 45 days after the end of each month
  - Balance of payments in the IMF format currently used to report: Monthly, 45 days after the end of each month
  - Exposure (deposits, loans, subordinated loans) of (i) foreign parent banks to their subsidiaries in Romania; (ii) IFI and (iii) other creditors to banks in Romania (by national and foreign currency): Monthly, 20 days after the end of each month

### Structural conditionality: capital adequacy and stress testing
- Stress tests features:
  - Applied to all banks with assets greater than 1 percent of total bank assets plus a number of smaller banks selected on basis of loan portfolio quality and vulnerability, evolution of non-performing loans over the past year, and current level of bank solvency.
  - Two macroeconomic scenarios to be developed: a baseline consistent with program assumptions and a more severe scenario reflecting potential for a sharper weakening of growth and the external value of the leu. The NBR macroeconomic forecasting model will generate internally consistent scenarios.
  - Conducted by the NBR, using stress testing methods employed in the IMF FSAP update in 2008, employing macroeconomic scenarios and most recently available bank and corporate balance sheet data to project balance sheets over the program period under both scenarios.
  - Results used to assess additional own funds required at the outset to ensure each bank’s solvency ratio remains above 10 percent throughout the program period.
  - Stress tests and assessment of prudential increases in own funds on a bank-by-bank basis to be completed by end-April. General approach to be shared with banks by late March; detailed assessments communicated by end-April.
  - Stress testing analysis and assessment of prudential capital needs to be carried out in consultation with IMF staff; NBR to provide a note detailing design, scenarios, key assumptions, data, and key findings.

### Structural conditionality: bank resolution
- Legal amendments enacted by Parliament to the banking and winding-up laws will include:
  - Specification of a clear trigger for early and mandatory appointment of a special administrator based on a regulatory threshold.
  - Granting the special administrator authority to implement a broad range of restructuring measures, including purchase and assumptions, sales of assets, transfer of deposits, and write downs of capital to absorb losses.
  - Authority for appointment of the special administrator with the powers of all of the banks’ decision-making bodies, including the bank’s general assembly of shareholders.
  - Carve out of burdensome provisions inconsistent with prompt implementation of restructuring measures (e.g., transfer of substantial assets and reduction of capital to absorb all existing losses).
  - Legal protection for the special administrator's good faith actions in performance of duties.
  - Greater legal certainty for bank resolution measures during special administration so they may not be suspended or reversed by litigation; clarification that restructuring measures are not subject to creditors' consent.
  - Initiation of winding up proceedings under the winding-up law and of liquidation proceedings under the companies law will require the NBR’s prior approval.
  - Provision of seniority in insolvency to depositors’ claims and the same priority ranking to the Deposit Guarantee Fund.

### Structural conditionality: deposit insurance
- Legislation will be modified by Parliament to extend grounds for activation of deposit insurance to include activation upon the NBR’s determination that a credit institution appears unable to repay a deposit and has no current prospect of being able to do so.
- The conversion of foreign currency denominated deposits into lei will be determined as of the date of activation of the deposit insurance.
- The time limit for beginning payouts will be cut from the current 3 months (which can be extended to 9 months) to 20 working days consistent with the March 2009 amendments to the EU directive on deposit guarantee schemes.

### IMF assessment excerpt: proposed Stand-By Arrangement (SBA) access and phasing
- Authorities request a 24-month SBA with access of SDR 11,443 million (1,114 percent of quota).
- Arrangement front-loaded with a first purchase of SDR 4,370 million (424.2 percent of quota) available upon approval, followed by seven purchases as shown in Table 1:
  - 2009 May (approval): Purchase 4,370 SDR mn — Percent of quota 424.2 — Cumulative 424.2
  - 2009 September: Purchase 1,718 SDR mn — Percent of quota 166.8 — Cumulative 591.0
  - 2009 December: Purchase 1,409 SDR mn — Percent of quota 136.8 — Cumulative 727.7
  - 2010 March: Purchase 766 SDR mn — Percent of quota 74.4 — Cumulative 802.1
  - 2010 June: Purchase 768 SDR mn — Percent of quota 74.5 — Cumulative 876.6
  - 2010 September: Purchase 769 SDR mn — Percent of quota 74.6 — Cumulative 951.3
  - 2010 December: Purchase 769 SDR mn — Percent of quota 74.6 — Cumulative 1,025.9
  - 2011 March: Purchase 874 SDR mn — Percent of quota 84.8 — Cumulative 1,110.8
  - Total: 11,443 SDR mn — Percent of quota 1,110.8
- Note: Starting in September 2009, purchases will depend on the completion of a review.

### IMF assessment excerpt: Romania’s external and public debt (selected figures)
- At end-2008, Romania’s total external debt stood at 53.4 percent of GDP, of which over 85 percent was owed by the private sector.
- Table 3. Romania: Total External Debt, 2005–2009 (In Millions of U.S. Dollars and In Percent of GDP)
  - Total External Debt:
    - 2005 38,735
    - 2006 52,722
    - 2007 79,768
    - 2008 107,547
    - 2009 100,681 2/
  - Of which Public:
    - 2005 14,091
    - 2006 13,819
    - 2007 14,629
    - 2008 15,083
    - 2009 27,938
  - Public Loans:
    - 2005 8,201
    - 2006 8,265
    - 2007 8,816
    - 2008 10,550
    - 2009 24,534
    - Multilateral:
      - 2005 5,870
      - 2006 5,934
      - 2007 6,291
      - 2008 7,849
      - 2009 22,130
    - Bilateral:
      - 2005 2,331
      - 2006 2,331
      - 2007 2,525
      - 2008 2,700
      - 2009 2,404
  - Public Bonds:
    - 2005 5,890
    - 2006 5,554
    - 2007 5,813
    - 2008 4,533
    - 2009 3,404
  - Private:
    - 2005 24,643
    - 2006 38,903
    - 2007 65,140
    - 2008 92,465
    - 2009 72,743
  - Short-term:
    - 2005 8,017
    - 2006 16,854
    - 2007 27,054
    - 2008 34,746
    - 2009 21,363
  - Long-term:
    - 2005 16,627
    - 2006 22,048
    - 2007 38,085
    - 2008 57,718
    - 2009 51,380
  - Total External Debt (in percent of GDP):
    - 2005 39.0
    - 2006 42.9
    - 2007 47.1
    - 2008 53.4
    - 2009 64.2
  - Of which Public (percent of GDP):
    - 2005 14.2
    - 2006 11.3
    - 2007 8.6
    - 2008 7.5
    - 2009 17.8
  - Private (percent of GDP):
    - 2005 24.8
    - 2006 31.7
    - 2007 38.4
    - 2008 45.9
    - 2009 46.4
- At end-2008, composition of total external debt (In percent):
  - Private Non-Monetary Institutions, 69%
  - Private Monetary Institutions, 17%
  - Other Multilateral, 5%
  - Bonds, 4%
  - IBRD/IDA, 2%
  - Bilateral, 3%
- Romania’s external medium and long-term debt service ratio about 25 percent of exports of goods and services (noted as high vis-à-vis most recent exceptional access cases).
- Total public debt stable in the 15–17 percent of GDP range over the past four years, estimated at about 20 percent of GDP at end-2008.

_International Monetary Fund — Romania: Assessment of the Risks to the Fund and the Fund’s Liquidity Position; Prepared by the Finance and Strategy, Policy, and Review Departments; Approved by Andrew Tweedie and Philip Gerson; April 28, 2009._

### 5.      Access under the proposed arrangement would exceed by far that in previous

### _cr09183 - 5.      Access under the proposed arrangement would exceed by far that in previous

### Access, projected Fund credit outstanding, and peak exposure
- If all purchases were to be made as scheduled, Romania’s outstanding use of GRA resources would rise to 424 percent of quota upon approval, to just over 800 percent of quota during the first year of the arrangement, and then peak at over 1,100 percent of quota in March 2011.
- In terms of quota, this projected peak exposure would be the third highest after Latvia (Figure 4).
- If the SBA is fully disbursed:
  - GRA credit outstanding to Romania would be equivalent to just over 10 percent of GDP by end-2011 and almost 40 percent of gross international reserves (Table 4).
  - Outstanding use of GRA resources would represent about 16 percent of total external debt, and about 48 percent of public external debt.
  - Peak Fund exposure ratios, particularly with regard to GDP, would be higher than in most recent exceptional access SBAs (Figure 5).
- In terms of SDRs, the projected peak GRA exposure of SDR 11,443 million would be about ten times higher than Romania’s previous peaks in Fund credit outstanding reached in 1984 and 1994, and the highest among recent exceptional access cases (Figure 6, Panel A).

### Debt service to the Fund and external debt service implications
- If all purchases under the proposed SBA were to take place as scheduled, Romania’s projected debt service to the Fund would peak at about SDR 4,580 million in 2013.
- Peak debt service to the Fund as a share of exports of goods and services, at just over 9 percent, would be the second highest among recent exceptional access cases (see Figure 5).
- Peak total external debt service in percent of exports of goods and services, at just over 34 percent, would be relatively large.
- Notes on debt service calculation:
  - Debt service to the Fund is calculated assuming that all repurchases are made as scheduled, i.e., each purchase is repurchased in eight quarterly installments, beginning in 3¼ years after each purchase and ending after 5 years.
  - Level-based surcharges are calculated according to the current schedule: 100 basis points for credit outstanding over 200 percent of quota and 200 basis points for credit outstanding above 300 percent of quota.
  - The new system of surcharges, which applies to credit outstanding above 300 percent of quota, will go into effect on August 1, 2009, subject to grandfathering at the member’s request.

### Table 4 — Key exposure and repayment figures (selected, in SDR millions and percent metrics)
- GRA credit to Romania (SDR millions):
  - May-09: 4,370.0
  - 2009: 7,497.0
  - 2010: 10,569.0
  - 2011: 11,443.0
  - 2012: 10,135.8
  - 2013: 5,811.9
  - 2014: 1,506.9
  - 2015: 109.3
- GRA credit to Romania (In percent of quota):
  - (424.2), (727.7), (1,025.9), (1,110.8), (983.9), (564.2), (146.3), (10.6)
- Charges due on GRA credit (SDR millions): 94.3; 248.5; 335.6; 341.2; 255.9; 98.7; 16.1
- Debt service due on GRA credit (SDR millions): 94.3; 248.5; 335.6; 1,648.5; 4,579.8; 4,403.7; 1,413.7
- Selected debt and debt service ratios (In percent of GDP):
  - Total external debt: 53.4; 64.2; 68.5; 64.0; 57.1; 52.5; 48.2; 44.3
  - External debt, public: 7.5; 17.8; 23.1; 21.5; 18.8; 17.0; 14.8; 12.9
  - GRA credit to Romania: 3.3; 7.3; 10.4; 10.3; 7.8; 3.9; 0.9; 0.1
  - Total external debt service (percent of GDP): 7.8; 10.0; 12.4; 11.6; 11.5; 11.5; 10.2; 9.1
- Selected ratios (In percent of Gross International Reserves):
  - GRA credit to Romania: 15.3; 29.6; 38.1; 38.4; 31.7; 17.2; 4.2; 0.3
- Selected ratios (In percent of Exports of Goods and Services):
  - Debt service due on GRA credit: 0.3; 0.7; 0.8; 3.6; 9.1; 8.5; 2.6

### Impact on the Fund’s liquidity position and risk exposure
- The proposed arrangement would reduce Fund liquidity by more than 15 percent (Table 5).
- Commitments under the proposed arrangement would reduce the one-year forward commitment capacity (FCC), which currently stands at SDR 66,704.8 million, by about SDR 11,443.0 million.
- If the first purchase is made, Fund credit to Romania would represent 17.6 percent of total GRA Fund credit, making Romania the third largest user of Fund resources (Figure 5, Panel B).
- The share of the top five users of Fund resources of total outstanding credit would increase slightly to about 86 percent.
- If Romania were to fully draw and incur arrears on charges accruing to its GRA obligations:
  - Charges on the GRA obligations would equal about SDR 94 million in 2009, almost 5 times the current estimated residual burden-sharing capacity.
  - The capacity of the Fund’s burden sharing mechanism would be exceeded.
- Potential GRA exposure to Romania would be large relative to the Fund’s precautionary balances:
  - After the first purchase, Fund credit to Romania would be about 63.0 percent of the Fund’s current precautionary balances.
  - The total access amounts to more than one-and-a-half times current precautionary balances.

### Table 5 — Impact on GRA finances (as of 04/23/2009)
- One-year Forward Commitment Capacity (FCC) (in millions of SDRs): 66,704.8
- Japan borrowing agreement, available resources (in millions of SDRs): 67,324.7
- Romania's impact on FCC: (11,443.0)
- Fund GRA credit outstanding to Romania (percent of current precautionary balances): 63.0
- Romania's annual GRA charges (percent of Fund's residual burden sharing capacity): 471.4
- Fund GRA credit outstanding to Romania (percent of total GRA credit outstanding): 17.6
- Fund's precautionary balances (in millions of SDRs): 6,938.6
- Fund's residual burden sharing capacity (in millions of SDRs): 20.0
- Fund GRA credit outstanding to five largest debtors (percent of total GRA credit outstanding): 86.4

### Assessment: program purpose, risks, and authorities’ stance
- The Fund-supported program aims to support confidence during a period of large external adjustment by providing substantial and front-loaded financing to strengthen confidence in Romania’s ability to address the effects of global deleveraging, and to provide breathing space for necessary adjustment.
- Significant risks that could undermine Romania’s expected capacity to repay:
  - The October presidential election could undermine implementation of the program.
  - A deeper or more protracted global downturn would exacerbate pressures in the external accounts and raise the risk that foreign banks cannot maintain their exposure to Romania, with attendant risk of capital flight.
- Overall financial risk assessment:
  - Potential Fund exposure to Romania will be the highest among recent SBA-supported programs.
  - In metrics such as economic size, stock of reserves, exports of goods and services, and total debt and debt service, Fund exposure and debt service to the Fund will peak at higher levels than in most recent exceptional access cases, though the relatively low level of public debt is a mitigating factor.
  - Authorities’ readiness to take additional measures as appropriate is essential to mitigate risks to capacity to repay and to safeguard Fund resources.
  - Romania’s excellent track record servicing external obligations provides comfort that financial obligations to the Fund will be met in a timely manner.

### Supplementary information on recent developments (April–May 2009)
- Financial markets and banking sector:
  - The leu appreciated somewhat in April amid calm regional markets.
  - Banks’ cost of funding eased in domestic and external markets; interbank market rates converged towards monetary policy rates and the CDS premium declined some 300 basis points from its early-March peak.
  - Lending to the private sector declined sharply in March, by 2.6 percent in real terms relative to February, with foreign currency and corporate credit declining faster than leu and household credit, respectively.
- Fiscal position and policy actions:
  - Preliminary data show the overall fiscal deficit widened to 1½ percent of estimated 2009 GDP in Q1, compared to near zero in 2008 and 1⅓ percent anticipated by staff; revenues declined by 12 percent in real terms relative to the same quarter of last year.
  - The government prepared contingency plans should the shortfall persist.
  - The authorities adopted agreed fiscal measures and secured parliamentary approval ahead of schedule: on April 14 the government adopted an emergency ordinance amending the budget and introducing fiscal adjustment measures of 1.1 percent of GDP; the ordinance was ratified by parliament at end-April.
  - A separate emergency ordinance was issued to cap public sector bonuses prior to full wage reform legislation.
- Central bank policy:
  - Effective May 2009, the NBR eased foreign currency reserve requirements on long-term liabilities: minimum reserve requirements on foreign currency liabilities with remaining maturity over 2 years were reduced from 40 percent to zero; reserve requirements on remaining liabilities remained unchanged.

*Source: IFS, Finance Department, Romanian authorities, World Economic Outlook, and IMF staff estimates as presented in the provided document.*

### 5.      Stress tests have identified the need for further capital increases in the banking

### 5. Stress tests have identified the need for further capital increases in the banking system

### Stress test findings and immediate implications
- The national bank completed stress tests to determine banking system resiliency under the program’s macroeconomic scenario and a more severe scenario, meeting the related prior action.
- Stress test result: additional capital of about €1 billion (0.8 percent of GDP) would be needed to maintain all banks' solvency ratios above 10 percent throughout the program period, despite an expected strong increase in non-performing loans.
- On the basis of the stress tests, authorities initiated discussions with banks about preemptive capital increases; full capital injections are expected by end-September 2009.
- Under the adverse scenario, recapitalization needs for the banking system were seen to be manageable, particularly given the capital cushion foreseen under the program.

### IMF Stand-By Arrangement and international financing package
- IMF approval: 24-month SDR 11.4 billion (about €12.9 billion or US$17.1 billion) Stand-By Arrangement for Romania.
- Amount immediately available: SDR 4.37 billion (about €4.9 billion or US$6.6 billion); remainder available in installments subject to quarterly reviews.
- Exceptional access: amounting to 1,111 percent of Romania’s quota.
- Total international financial support package: €19.9 billion (about US$26.4 billion).
  - European Union: €5 billion (or about US6.6 billion).
  - World Bank: €1 billion (or about US$1.3 billion).
  - EBRD, EIB, and IFC combined: €1 billion (or about US$1.3 billion).

### Policy assessment and program aims
- IMF statement highlights:
  - Need for orderly correction of large external imbalances and vulnerabilities accumulated during boom years.
  - Recognition that excessive public spending, notably on wages and pensions, produced sizeable fiscal deficits.
  - Program combines significant expenditure cuts and additional revenues to reverse deteriorating fiscal path.
  - Action plan to maintain confidence in the banking system includes preemptive bank recapitalization, agreements to maintain foreign banks’ exposure in the country, and efforts to strengthen bank supervision and resolution.
- Specific program objectives:
  - Reduce the fiscal imbalance to bring the deficit back under 3 percent of GDP by 2011.
  - Maintain adequate capitalization of banks and liquidity in domestic financial markets.
  - Bring inflation within the target range of the National Bank of Romania (NBR) by end-2009 and maintain it there.
  - Secure adequate external financing and improve confidence.

### Recent economic developments and outlook (selected projections)
- Growth and demand:
  - Real GDP: 4.1 (2005); 7.9 (2006); 6.2 (2007); 7.1 (2008); -4.1 (2009, Proj.); 0.0 (2010, Proj.); 5.0 (2011, Proj.).
  - Domestic demand: 8.3 (2005); 12.8 (2006); 14.3 (2007); 8.9 (2008); -8.2 (2009, Proj.); -2.7 (2010, Proj.); 5.7 (2011, Proj.).
  - Net exports (contribution): -6.1 (2005); -10.2 (2006); -16.6 (2007); -6.3 (2008); 7.8 (2009, Proj.); 3.9 (2010, Proj.); -2.6 (2011, Proj.).
- Prices and labor:
  - Consumer price index (CPI, average): 9.0 (2005); 6.6 (2006); 4.8 (2007); 7.8 (2008); 5.9 (2009, Proj.); 3.9 (2010, Proj.); 3.5 (2011, Proj.).
  - Consumer price index (CPI, end of period): 8.6 (2005); 4.9 (2006); 6.6 (2007); 6.3 (2008); 4.5 (2009, Proj.); 3.5 (2010, Proj.); 3.5 (2011, Proj.).
  - Unemployment rate: 5.8 (2005); 5.4 (2006); 4.3 (2007); 4.0 (2008); 8.9 (2009, Proj.); 9.7 (2010, Proj.); 7.7 (2011, Proj.).
- Wages:
  - Nominal wages: 17.0 (2005); 18.9 (2006); 22.6 (2007); 23.6 (2008); 5.9 (2009, Proj.); 3.8 (2010, Proj.); 5.2 (2011, Proj.).
  - Public sector wages: 25.9 (2005); 27.3 (2006); 18.5 (2007); 31.0 (2008); 5.1 (2009, Proj.); 3.9 (2010, Proj.); 3.5 (2011, Proj.).
  - Private sector wages: 14.7 (2005); 16.5 (2006); 23.2 (2007); 21.2 (2008); 6.2 (2009, Proj.); 3.8 (2010, Proj.); 5.7 (2011, Proj.).
- Saving and investment:
  - Gross domestic investment (percent of GDP): 23.3 (2005); 26.5 (2006); 31.1 (2007); 31.4 (2008); 30.8 (2009, Proj.); 29.9 (2010, Proj.); 31.9 (2011, Proj.).
  - Gross national savings (percent of GDP): 14.4 (2005); 16.1 (2006); 17.3 (2007); 19.0 (2008); 23.2 (2009, Proj.); 23.4 (2010, Proj.); 25.7 (2011, Proj.).
- Public finances (percent of GDP):
  - Revenue: 31.4 (2005); 32.3 (2006); 32.5 (2007); 32.6 (2008); 33.0 (2009, Proj.); 33.4 (2010, Proj.); 33.1 (2011, Proj.).
  - Expenditure: 32.1 (2005); 33.7 (2006); 35.6 (2007); 37.5 (2008); 37.5 (2009, Proj.); 37.0 (2010, Proj.); 35.8 (2011, Proj.).
  - Fiscal balance: -0.7 (2005); -1.4 (2006); -3.1 (2007); -4.9 (2008); -4.6 (2009, Proj.); -3.6 (2010, Proj.); -2.7 (2011, Proj.).
  - Privatization proceeds: 1.3 (2005); 0.4 (2006); 0.1 (2007); 0.1 (2008); 0.0 (2009, Proj.); 0.0 (2010, Proj.); 0.0 (2011, Proj.).
  - Structural fiscal balance 1/: -0.6 (2005); -2.1 (2006); -4.2 (2007); -6.7 (2008); -3.8 (2009, Proj.); -1.7 (2010, Proj.); -1.2 (2011, Proj.).
  - Gross public debt (direct debt only): 15.6 (2005); 15.4 (2006); 17.5 (2007); 20.1 (2008); 23.6 (2009, Proj.); 25.7 (2010, Proj.); 25.7 (2011, Proj.).
- Money, credit, and interest rates:
  - Broad money (M3) (annual percentage change): 36.5 (2005); 28.1 (2006); 33.7 (2007); 17.6 (2008); 6.6 (2009, Proj.); 6.5 (2010, Proj.); 11.5 (2011, Proj.).
  - Credit to private sector (annual percentage change): 54.5 (2005); 60.4 (2006); 33.7 (2007); 16.5 (2008); 5.2 (2009, Proj.); 3.1 (2010, Proj.).
  - Euribor, six-months (end of period): 2.79 (2005); 3.23 (2006); 4.79 (2007); 3.52 (2008).
  - NBR policy rate: 7.50 (2005); 8.75 (2006); 7.50 (2007); 10.25 (2008); - (2009, Proj.); - (2010, Proj.); - (2011, Proj.).
  - NBR lending rate (Lombard): 14.00 (2005); 14.00 (2006); 12.00 (2007); 14.25 (2008); - (2009, Proj.); - (2010, Proj.); - (2011, Proj.).
  - Interbank offer rate (1 week): 7.00 (2005); 7.42 (2006); 7.81 (2007); 15.95 (2008); - (2009, Proj.); - (2010, Proj.); - (2011, Proj.).
- External sector (percent of GDP):
  - Current account balance: -8.9 (2005); -10.4 (2006); -13.8 (2007); -12.4 (2008); -7.5 (2009, Proj.); -6.5 (2010, Proj.); -6.2 (2011, Proj.).
  - Merchandise trade balance: -9.9 (2005); -12.0 (2006); -14.4 (2007); -13.3 (2008); -7.1 (2009, Proj.); -6.3 (2010, Proj.); -6.4 (2011, Proj.).
  - Capital and financial account balance: 15.6 (2005); 15.7 (2006); 17.3 (2007); 13.7 (2008); -2.3 (2009, Proj.); 3.2 (2010, Proj.); 7.4 (2011, Proj.).
  - Foreign direct investment balance: 6.6 (2005); 8.9 (2006); 5.8 (2007); 6.6 (2008); 2.9 (2009, Proj.); 3.5 (2010, Proj.); 3.5 (2011, Proj.).
  - International investment position: -29.2 (2005); -35.3 (2006); -39.8 (2007); -52.9 (2008); -55.6 (2009, Proj.); -54.6 (2010, Proj.); -53.0 (2011, Proj.).
  - Gross official reserves: 22.9 (2005); 23.2 (2006); 23.2 (2007); 21.5 (2008); 24.6 (2009, Proj.); 27.3 (2010, Proj.); 26.7 (2011, Proj.).
  - Gross external debt: 39.0 (2005); 42.9 (2006); 47.1 (2007); 53.4 (2008); 64.2 (2009, Proj.); 68.5 (2010, Proj.); 64.0 (2011, Proj.).
- Exchange rates and GDP nominal values:
  - Lei per euro (end of period): 3.7 (2005); 3.4 (2006); 3.5 (2007); 4.0 (2008).
  - Nominal GDP (in bn RON): 289.0 (2005); 344.7 (2006); 412.8 (2007); 504.0 (2008); 531.3 (2009, Proj.); 568.5 (2010, Proj.); 634.1 (2011, Proj.).
  - Nominal GDP (in bn euros): 79.7 (2005); 97.8 (2006); 123.6 (2007); 136.8 (2008); 119.7 (2009, Proj.); 118.8 (2010, Proj.); 130.7 (2011, Proj.).

### Policy implications and measures for the banking sector
- Preemptive bank recapitalization is part of the program’s action plan to maintain confidence in the banking system.
- Authorities engaged banks in discussions about capital increases following stress-test results; full injections expected by end-September 2009.
- Strengthening bank supervision and resolution frameworks is emphasized alongside measures to maintain foreign banks’ exposures.

*Source: IMF Press Release No. 09/148, May 4, 2009, and Annex: Recent Economic Developments (Romania).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09183.pdf_