Press Release: IMF Approves US$367 Million Stand-By Arrangement with Romania

July 7, 2004

The Executive Board of the International Monetary Fund (IMF) today approved a 24-month Stand-By Arrangement for an amount equivalent to SDR 250 million (about US$367 million) for Romania. The Romanian authorities do not intend to make any drawings since they are treating the arrangement as precautionary.

Romania's previous Stand-By Arrangement with the IMF for a total amount equivalent to SDR 300 million (about US$440 million) expired on October 15, 2003 (see Press Release No. 03/171). On April 12, 2004, the Executive Board reviewed Romania's experience with Fund-supported programs since the early 1990s, under the new guidelines on assessments of countries with a longer-term program engagement (see Public Information Notice No. 04/44).

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

"The Romanian authorities are to be commended for their sound macroeconomic policies and progress in structural reforms, which have contributed to continued disinflation and robust GDP growth in 2003. The authorities' program—supported by a new Fund arrangement, which the authorities intend to treat as precautionary—aims at strengthening the external current account balance, further reducing inflation, sustaining rapid GDP growth, and preparing the economy for EU accession. The program emphasizes continued prudent macroeconomic policies and progress with wide-ranging structural reforms.

"Key stabilization policies are a reduction in the general government budget deficit, a strengthening of the finances of state-owned enterprises through energy price adjustments and wage restraint, and measures to contain credit growth. Wage restraint by state-owned companies and a prudent statutory minimum wage policy will help to keep economy-wide wage growth in line with productivity growth. The program includes efficiency-enhancing adjustments in fiscal revenue and expenditure. Further cuts in social security taxes are envisaged, together with measures to broaden the tax base and improve tax administration. However, the successful VAT and profit tax reforms would be put at risk by introducing exemptions, which would create new distortions and undermine tax administration. Prioritization of expenditure will help finance investment in infrastructure.

"Monetary and exchange rate policies will continue to aim at striking a balance between reducing inflation and maintaining Romania's external competitiveness. The authorities are intensively preparing for the introduction of inflation targeting, and an important step in this direction was the approval of the new central bank law strengthening the central bank's independence. Supervisory procedures and regulation have been strengthened to stem the risks arising from rapid growth in credit to households, and the authorities stand ready to take further measures if necessary.

"The authorities are confronting the long-standing issues of tax arrears and nonpayment of utility bills by large loss-making state-owned enterprises. The largest loss-makers will be downsized, and employees will be assisted in retraining and relocation. Notable progress has been made in privatization, with future efforts concentrating on the energy sector. Particularly encouraging is the authorities' strong commitment to privatize Petrom, the largest company in the country.

"With the passage of a number of new and amended laws, the authorities have started an overhaul of the judicial system, which will contribute to improving the business climate, strengthening the judicial system's independence, and improve the capacity to address the problem of corruption," Ms. Krueger said.


Recent Economic Developments

Under the most recent Stand-By Arrangement, macroeconomic imbalances were reduced through tight fiscal policy, strong measures to improve the financial performance of state-owned enterprises, and accelerated privatization. Between 2000-03, Romania's GDP growth averaged about 4.5 percent and is estimated to reach 5 percent in 2004. The National Bank of Romania (NBR) gradually reduced the depreciation rate and achieved substantial disinflation, lowering the annual inflation rate to 12.3 percent in May 2004 from 40 percent in early 2001.

Macroeconomic stabilization, which preserved the competitiveness achieved with the 1999 depreciation, and improved prospects for EU accession created a positive supply response, strengthening industrial production and exports. In 2003, however, domestic demand strengthened and the current account deficit widened to almost 5.9 percent of GDP. Fiscal policy provided continued support for macroeconomic stabilization. The successful value-added tax (VAT) and profit tax reforms, improvements in tax administration, and savings on interest payments helped reduce the budget deficit relative to GDP to 2.3 percent in 2003 from 2.6 percent in 2002.

Improved confidence of banks and households, and a lower perception of country risk premium led to very rapid credit growth of about 55 percent in real terms in 2003. Consumer and mortgage credit tripled in real terms, albeit from a low base, while corporate credit also remained strong. However, the tightening of eligibility criteria for consumer and mortgage credit in early 2004 was successful in mitigating credit expansion.

Following a decade of slow privatization, the privatization of large state-owned companies accelerated in 2003 and 2004, following the implementation of a large-scale employment reduction program to attract investor interest. Moreover, after several delays, a number of important privatization projects in the energy sector are now close to completion, including the privatization of Petrom, the largest company in the country.

Program Summary

The Romanian government aims at strengthening macroeconomic stabilization and structural reforms in the run-up to EU accession in 2007. The program is designed to address the recent surge in the current account deficit, rapid credit growth, and the need to bring inflation to single digits. Fiscal consolidation and measures to contain credit growth will be crucial for containing domestic demand.

The fiscal stance of the broad public sector (general government and state-owned enterprises) will be tightened relative to GDP by 1¼ percentage points compared with the 2003 outcome. Credit growth is expected to slow to about 35 percent in real terms on average, which will help moderate domestic demand. As a result, the external current account deficit in 2004 is projected to decline by ¾ percentage points to 5¼ percent of GDP relative to 2003, while end-2004 inflation would be lowered to 9 percent from 14.1 percent at the end of 2003.

The authorities will reduce the 2004 general government deficit ceiling to 2.1 percent of GDP, compared to 3 percent of GDP in the approved budget. Owing to very strong revenue performance, this reduction can be achieved exclusively by saving surplus revenue, which the authorities estimate at 0.9 percent of GDP. Energy price adjustments and wage policy will be the main instruments for improving the state-owned enterprises' financial position.

Monetary policy will focus on lowering inflation to single digits in 2004. The current exchange-rate-based framework remains appropriate, and the NBR will use both interest rate policy and selective market interventions to steer the exchange rate consistent with the inflation target and a modest real appreciation. However, the authorities will need to remain vigilant in keeping the current account deficit well within safe margins. While fiscal policy would have to lead this process, the NBR would closely watch credit growth and implement additional measures if necessary.

On the structural side, the priorities are accelerated privatization—including the privatization of Petrom, measures to arrest the accumulation of arrears, and improved governance. The authorities are intensifying efforts to improve collections of the main utilities. The program provides for further decisive steps to increase domestic gas producers' price toward import parity by 2007 and adjust electricity prices. The authorities will initiate decisive restructuring in the large loss-making mining and railway sectors, responsible for the build of arrears to the budget and energy suppliers.

The authorities are making significant efforts to improve governance and the agreed program includes conditionality for judicial reform, including the strengthening of judicial independence. Further measures aim at improving the business climate by strengthening the office of the special anticorruption prosecutor, increasing transparency on issues of privatization and financial disclosure, and enforcing tax collections.

Romania: Main Economic Indicators, 2000-2004Q1






2004 Q1 1/


(year-on-year real growth unless indicated otherwise)









Final domestic demand






Total consumption






Gross fixed capital formation







Net exports (contribution)






Exports of goods and services






Imports of goods and services







Current account






(percent of annual GDP)


12-month inflation (eop)







Official reserves (eop, US$ million)






Sources: National Institute for Statistics; Ministry for Economic Development and Forecasting; and IMF Staff projections.
1/ Preliminary data and staff estimates.


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