Press Release: IMF Completes Fourth Review Under Stand-By Arrangement for Romania, Approves US$158 Million Disbursement and Grants Waivers

October 15, 2003

The Executive Board of the International Monetary Fund (IMF) today completed the fourth and final review of Romania's economic performance under a Stand-By Arrangement, which will enable Romania to draw the remaining SDR 110.2 million (about US$158 million) from the IMF immediately. The Executive Board also approved Romania's request for waivers on non-observance of four performance criteria.

The 18-month Stand-By Arrangement was approved on October 31, 2001 (see Press Release No. 01/43) for a total amount of SDR 300 million (about US$431 million). On April 25, 2003, the Board extended the arrangement through October 15, 2003 (see Press Release No. 03/60). So far, Romania has drawn SDR 189.8 million (US$273 million) under the arrangement from the IMF.

Following the Executive Board discussion, Anne Krueger, First Deputy Managing Director and Acting Chair, said:

"The Romanian authorities are to be commended for the broadly satisfactory implementation of their IMF-supported program. Sound macroeconomic policies and progress in structural reforms have contributed to continuing disinflation and robust economic growth, despite economic weakness in Romania's main trading partners. However, the current account deficit, albeit still within acceptable limits, has widened, reflecting expansion in credit to the private sector, the effects on household demand of the substantial minimum wage increase, and investment activity accompanying the pick-up in foreign direct investment. Looking ahead, it will be important to contain the strong growth in domestic demand, including through strict wage control in the state-owned enterprises (SOEs) and by avoiding a further real increase in the statutory minimum wage in 2004. Steadfast implementation of the remaining reform agenda will also be crucial for ensuring a fully-functioning market economy and prospects for sustainable growth.

"Prudent budgetary policy has contributed to achieving the authorities' current account and disinflation targets, and a relaxation of the budget stance in 2004 should be avoided unless accompanied by strong and credible measures to improve the saving-investment balance of SOEs. It will also be important to resist measures that could erode the success of the recent profit tax and VAT reforms.

"To resume the earlier significant reduction in energy sector losses, the authorities are committed to gradually increase gas prices to import parity levels by 2007, while at the same time ensuring regular quarterly adjustments in other energy prices to keep them at cost-recovery levels. The improved collection performance in the gas and electricity sectors will need to be sustained, including the collection of heating bills which has so far remained weak.

"Notable progress has been made on the reform of SOEs, including the downsizing of large lossmaking SOEs, the completion of a number of difficult privatization projects, the decision to abandon or scale down conditions imposed on investors to preserve employment and commit to investment, and the agreement on the acquisition by the European Bank for Reconstruction and Development and International Finance Corp. of a minority share in Romania's largest bank, BCR, with a view to preparing this bank for the sale to a strategic investor. Progress in completing privatization projects in the energy sector has, however, remained slow, and the authorities will need to expedite the implementation of the reform agenda in this area, along with sustained further efforts to improve the business and investment climate.

"Monetary policy continues to pursue gradual disinflation while preserving external competitiveness. To fend off inflation risks posed by the rapid growth in credit to the private sector, the National Bank of Romania has appropriately increased the main policy interest rate and stands ready to tighten monetary policy further if needed," Ms. Krueger said.


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