Press Release: IMF Approves Stand-By Credit for Romania

August 5, 1999

The International Monetary Fund (IMF) today approved an eight-month Stand-By credit for Romania in an amount equivalent to SDR 400 million (about US$547 million) to support the government's economic stabilization and reform program. The loan will be made available in four installments. The first installment, which will be avilable immediately, will be in an amount equivalent to SDR 53 million (about US$73 million).

After the IMF Executive Board's discussion, Stanley Fischer, First Deputy Managing Director, said the following:

"Executive Directors welcomed the authorities' renewed commitment and effort to correct severe economic imbalances and long-existing structural weaknesses. Directors considered that the authorities' program, if fully implemented, would mark a major step forward in Romania's quest for financial stability and establish the basis for sustainable growth. They noted with satisfaction the authorities' recent up-front actions in several policy areas, including fiscal strengthening and progress in bank restructuring and privatization.

"However, against the background of the uneven implementation of previous Fund programs, and in light of the weakness of the economy, Directors urged the authorities to hold firm to their policy commitments, as this is essential to regaining market confidence. Directors stressed the importance for the recovery of the economy of persevering with both fiscal and structural adjustment, and cautioned against a premature relaxation of financial policies.

"Medium-term fiscal sustainability and structural reforms were seen as key for the establishment of sustained non-inflationary growth. Given the importance of enterprise restructuring in enhancing efficiency and financial discipline in the economy, Directors called on the authorities to intensify their efforts in enforcing budget constraints on state-owned enterprises. They also urged strict adherence to the incomes policy. Directors welcomed the enterprise and bank restructuring program agreed with the World Bank and urged that it be implemented vigorously.

"Directors regretted that, despite the authorities' efforts, it had not been possible for them to obtain the desired amount of private sector financing. They emphasized that it is vital that Romania continue to work vigorously towards obtaining additional private foreign financing in support of its reform program, and that implementation of their stabilization and structural reform program would contribute both to restoring access to capital markets and to economic recovery and growth," Fischer said.


Program Summary

Romania has lagged behind most other transition economies in Central and Eastern Europe in economic reform and stabilization, mainly because of a lack of sustained policy efforts. Although prospects improved in early 1997, when a coalition government tightened macroeconomic policies and implemented overdue reform measures, this latest effort proved short-lived as economic imbalances increased. Economic performance continued to worsen in 1998 and early 1999 as market sentiment toward Romania became less favorable following the Russian crisis in August 1998.

After a 7% fall in 1997, real GDP declined by 7.25% in 1998, led by a steep decline in industrial output. The unemployment rate reached 12% in early 1999, twice its level in 1996. The external current account deficit widened by US$0.5 billion to US$3.0 billion (8% of GDP) in 1998 and remained large in early 1999. Inflation, however, declined to 41% at end-1998 from 150% at end-1997.

The objectives of Romania's 1999 program1 are to narrow external imbalances on the basis of domestic demand restraint and improved competitiveness; contain inflation to about 40%; limit the decline in output in 1999 to 3.5%; and restructure the economy, with a view to setting the basis for sustainable growth.

Fiscal policy under the program targets a sizable reduction in the fiscal deficit through major tax increases and strict limits on discretionary spending. Unemployment benefits, severance payments and pensions, however, are not targeted to decline in real terms, reflecting concerns about the country's delicate social and political balance.

The goals of Romania's program are to reduce the general government deficit by nearly 2 percentage points to 3.9% of GDP in 1999; to contain nominal wage growth in the state sector to well below the rate of inflation and leu depreciation; to strengthen reserves and limit the leu's depreciation in the context of a managed float during the latter half of 1999; and to accelerate privatization and restructuring of the enterprise and banking sectors. A significant tightening of fiscal policy will help to reduce the current account deficit while also easing pressure on monetary policy. With the likely availability of foreign financing in the context of an IMF-supported program and the need to strengthen foreign reserves, the current account deficit is targeted to decline by US$0.8 billion to US$2.2 billion (about 7.5% of GDP) in 1999 and help restore Romania's access to foreign capital markets.

Monetary policy aims at containing inflation and achieving broad exchange rate stability. Credit policy will be tailored to stabilize broadly the exchange rate of the leu, while also preventing net foreign reserves from falling below their target. Monetary policy will have to remain tight, especially in the coming months, and bank restructuring will have to proceed carefully so as to contain adverse systemic and macroeconomic effects.

Structural reforms include restructuring the banking and enterprise sectors. Part of the bank restructuring program provides for orderly liquidation of Bancorex by the end of July, at an estimated fiscal cost equivalent to 2% of GDP (already included in the fiscal program). With assistance from the IMF and the World Bank, improvements in bank supervision and external audits of major state-owned banks will be key steps toward restructuring and privatization. The government's plan for restructuring the enterprise sector considers privatizing or liquidating a large number of companies as well as reducing losses in the economy through mine closings, layoffs and cuts in subsidies.

As unemployment is expected to rise significantly by the end of the year, the government has intensified a dialogue with its social partners to win support for the program. Social transfers targeting vulnerable groups will total 10.5% of GDP in 1999. The government plans to keep unemployment benefits and child allowances stable, provide severance payments, introduce retraining programs, and expand wage subsidies. It has also taken initiatives to improve the pension system and health services.

Romania joined the IMF on December 15, 1972 and its quota2 is SDR 1.03 billion (about US$1.4 billion). Its outstanding use of IMF financing currently totals SDR 319 million (about US$437 million).

Romania: Selected Economic Indicators, 1995-2000

1995 1996
1998 1999 2000
Prog. Outturn Rv.
Outturn Est. Prop.

(Annual percentage change)
Real economy
      Real GDP rates. The comparable
   1998 figure for velocity is 6.3.
7.1 4.0 3.9 -1.5 -6.6 -7.3 -3.5 2.5
    Industrial production (period
9.5 ... 9.8 -2.2 -5.6 -17.3 ... ...
    Real wages in economy-wide (period
   average, deflated by CPI)
17.3 ... 9.3 -20.0 -21.9 0.6 ... ...
    Real wages economy-wide (period
   average, deflated by PPI)
14.7 ...
1.5 ...
-22.1 19.5 ...
    Unemployment rate (e.o.p.; percent) 8.9 ... 6.3 ... 8.8 11.0 ... ...
    Consumer prices (Dec./Dec.) 27.8 19.0 56.9 130.3 151.4 40.6 38.3 15.0
                                   (period average) 32.3 23.0 38.8 150.0 154.8 59.1 41.4 18.6
(In percent of GDP)
Public finance; central government budget
    Revenues 17.8 19.4 16.8 15.3 17.6 19.6 22.8 ...
    Expenditures 21.9 22.9 21.7 20.3 21.2 22.7 25.0 ...
    Balance -4.1 -3.5 -4.9 -5.0 -3.6 -3.1 -2.2 ...
Public finance; general government budget
    Revenues 31.9 33.5 30.1 27.0 30.7 35.0 37.7 36.6
    Expenditures 34.5 35.7 34.1 31.5 34.3 38.3 40.4 37.7
    Balance -2.6 -2.2 -4.0 -4.5 -3.6 -3.3 -2.7 -1.1
    excluding privatization receipts -2.6 ... -4.0 ... -4.6 -5.7 -3.9 -2.1
(12-month percentage change)
Money and credit
    Broad money (e.o.p.)1 71.6 30.0 66.0 59.0 75.9 48.9 34.6 ...
         NFA contribution -1.9 ... -6.7 40.6 48.3 -1.9 12.4 ...
         NDA contribution 73.5 ... 72.7 18.4 27.5 50.8 22.2 ...
    Velocity (level)2 4.5 4.5 4.6 6.7 6.0 4.1 4.0 ...
    Real domestic credit (e.o.p) 50.1 6.0 15.5 ... -52.5 21.8 -7.1 ...
    Arrears (e.o.p; percent of GDP)3 22.7 ... 27.3 ... ... ... ... ...
    NBR interest rates (e.o.p; in
   percent) 4
67.0 ... 66.9 ... 138.8 105.0 ... ...
(In billions of U.S. dollars)
Balance of payments
    Current account balance (percent
   of GDP)
-3.2 -7.4 -3.6 -6.2 -7.9 -7.5 -7.0
    Exports 7.9 8.7 8.1 8.5 8.4 8.3 8.6 9.2
    Imports 9.5 9.8 10.6 9.9 10.4 10.9 10.5 11.0
    Gross external debt 6.9 ... 8.6 10.4 9.5 9.6 11.0 12.0
         Of which IMF 1.0 ... 0.7 0.8 0.6 0.5 0.8 0.8
    Gross reserves (in months of
   imports of G&S)5
2.8 ... 3.0 4.2 4.6 3.6 3.9 4.3
         Of which NBR 1.5 1.0 1.5 3.0 3.0 2.2 2.6 3.1
    External debt/GDP (in percent) 19.2 ... 25.2 ... 27.3 25.2 37.7 41.0
    Debt service ratio 10.1 ... 12.8 ... 17.0 21.5 29.4 23.3
Exchange rate
    REER (e.o.p; CPI-based 12/1996=100) 91 ... 100 ... 126 128 106 ...

Sources: Romanian authorities; and IMF staff estimates.
1 For 1996 and 1997 program exchange rates used. The 1996 and 1997 program targets exclude end-year interest payments by the Savings Bank; these payments added 6 percent in 1995.
2 Annualized GDP at end-period prices divided by end-period broad money. The 1997-98 figures are not comparable as 1997 figures are at program exchange rates. The comparable 1998 figure for velocity is 6.3.
3 Total arrears to suppliers, budgets, and banks. 1995 increase in arrears is understated because of debt conciliation for FESAL enterprises.
4 Weighted NBR average interest rate; from 1997 interbank rate.
5 Including gold, and excluding Bancorex deposits. Imports of goods and services of the following year.

1 Details of the program are available via the IMF website:
2 A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.


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