Public Information Notice: IMF Concludes Article IV Consultation with Romania

December 12, 2000

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On November 29, 2000, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Romania.1


Romania has made important progress in stabilization and reform over the past two years, and in December 1999 was invited to begin accession negotiations with the European Union. However, Romania’s economic and policy performance still compares unfavorably to that of other EU accession economies in Central and Eastern Europe: its inflation rate is by far the highest, while its rankings in terms of other key indicators (per capita income, change in real GDP during the 1990s, and progress in structural reform) are among the lowest. This situation is in part attributable to difficult initial conditions, but more importantly, it reflects a gradualist approach to structural reform and a stop-and-go pattern of macroeconomic policies over much of the last decade.

In early 1999, confronted with the threat of an impending crisis, the authorities took decisive policy measures to stabilize the economy, which were supported by a stand-by arrangement with the IMF. The economic program encompassed strong fiscal correction, an improvement in external cost competitiveness, tight monetary and incomes policies, and the closure of a large insolvent state bank.

These policies succeeded in averting a crisis in mid-1999, reducing the current account deficit to a sustainable level (US$1.3 billion or 3.8 percent of GDP compared with US$3.1 billion or 7.5 percent in 1998) and strengthening foreign reserves since mid-1999. They have thus helped restore market confidence. Meanwhile, output declined by a further 3.2 percent in 1999, and CPI inflation rose to 55 percent toward the end of 1999 owing mainly to the “pass through” effect of the large downward exchange rate re-alignment.

In 2000, on the back of the previous year’s policy corrections, Romania has witnessed an export-led economic recovery. Following output declines of 5.4 percent in 1998 and 3.2 percent in 1999, real GDP grew by 2.1% in the first half of 2000. Notwithstanding the effects of the drought on agricultural production, real GDP growth is expected to reach 1.5 percent for the whole year and prospects for the recovery in output to continue in 2001.

Exports rose by 25½ percent in dollar terms, reflecting strong foreign demand and the lagged effects of last year’s improvement in cost competitiveness. Gross official foreign reserves reached US$3.1 billion (2.7 months of total imports or about 120 percent of short-term debt by remaining maturity) at end-July 2000. However, the 12-month CPI inflation rate amounted to 45½ percent in August, well above targeted levels, owing to the effects of a drought on food prices as well as policy slippage in the areas of state sector wages and domestic arrears. Inflation is expected to decelerate only slightly, if at all, in the remainder of the year, implying that the official end year target of 27 percent will be exceeded by a large margin.

Romania made important progress in structural reforms supported by the World Bank’s Private Sector Adjustment Loan (PSAL) since 1998, as privatization effort were accelerated significantly. The PSAL was thus successfully completed in June 2000 when the second (and last) PSAL tranche of US$150 million was disbursed. However, delays and procedural problems in bank restructuring and privatization initiated under the PSAL have occurred since mid-2000, and a follow-up adjustment loan (PSAL2) has been postponed.

Executive Board Assessment

Executive Directors were encouraged by Romania’s significant progress in stabilization and reform since the completion of the previous Article IV consultation in September 1998. Directors commended the authorities for their decisive steps to stabilize the economy, including a significant fiscal adjustment, which, together with the depreciation of the exchange rate in 1999, had helped narrow the current account deficit to a sustainable level and averted an imminent financial crisis. They also welcomed the measures taken to restructure the banking system and the initial acceleration in enterprise privatization after a long period of neglect.

Directors expressed concern that more recent developments risk putting in jeopardy the good performance achieved in the last two years. They regretted Romania’s lack of success in reducing domestic arrears and the policy slippages that had occurred in the area of state sector wages.

Directors observed that Romania’s stabilization and reform efforts still lag behind those of most other transition countries in Central and Eastern Europe, reflecting mainly the “stop-and-go” approach to reform and macroeconomic stability pursued for much of the past 11 years. They therefore urged the authorities to break decisively with the previous pattern of policymaking and to engage in a sustained and vigorous strategy of stabilization and structural reform, so as to at last achieve a sustainable improvement in living standards and improve prospects for a smooth integration into the European Union (EU).

Directors considered that progress in disinflation and strengthening the external position in Romania will require continued fiscal consolidation combined with the pursuit of a prudent monetary policy as well as wage and financial discipline in the state-owned enterprises. Given that most large companies still remain under state control and suffer from weak corporate governance, they stressed the critical importance of controlling wage costs in these companies and of intensifying efforts to reduce domestic arrears. In order to enhance economic efficiency, the above policies will need to be accompanied by strong reform measures, including accelerated restructuring of the enterprise and banking sectors and an improvement in the business environment.

While welcoming the narrowing of the budget deficit in recent years, Directors cautioned that the fiscal position remains precarious and will need to be strengthened to achieve stabilization. They urged the authorities to treat their medium-term fiscal deficit target of 3 percent of GDP as an upper limit. Directors expressed concern that recent changes in the structure of public expenditure—involving significant real expenditure increases on personnel and transfers and subsidies—were steps in the wrong direction, marking a relaxation of fiscal policy. In addition, they noted that the budget will come under increasing pressure in the coming years owing to additional claims stemming from the EU accession process and the accelerated restructuring of the economy. Against this background, Directors considered it urgent for Romania to reform government expenditure and the pension system through improved targeting of social spending, reduction of excess staffing, and further tightening of the eligibility requirements for pensions. They noted that these issues will be addressed extensively at an early date in the context of a Public Expenditure Review to be conducted with World Bank assistance.

Directors emphasized the importance of a prudent monetary policy, along with financial discipline for the budget and state-owned companies, in reducing inflation and containing the growth in domestic demand. They considered the current level of external competitiveness to be adequate. On the monetary policy framework, Directors noted that the managed float aims at striking a balance between inflation and external objectives. Looking forward, they agreed that a more transparent monetary policy framework—involving an explicit target for the exchange rate or inflation—could facilitate disinflation. However, implementation of such a framework will require improved financial discipline and fiscal reform.

Directors welcomed the authorities’ efforts with regard to bank restructuring in the last two years, but noted that a great deal remains to be done, as underscored by the lingering presence of unresolved problem banks in the system and the continuing appearance of new cases. Besides a stable macroeconomic environment, the creation of an efficient and healthier banking system will require privatization of the banks remaining under state control through transparent procedures aimed at enhancing the prospects for their sound management. In this context, Directors regretted the authorities’ decision to recapitalize Banca Agricola in the absence of firm prospects for its privatization. They also noted that recent events in the banking system underscore the urgency of further enhancing the legal and regulatory framework as well as improving supervisory practices and regulations. Directors pointed out that the circumstances of the collapse of a mutual fund earlier this year had highlighted serious weaknesses in the regulation and supervision of the nonbank financial sector as well as broader governance problems. They called on the authorities to hold those involved accountable and to proceed expeditiously with the required institutional reforms in this area.

Directors reiterated that progress in enterprise privatization is key to enhancing financial discipline as well as efficiency. They considered that, with 80 percent of pre-transition state-owned large companies still remaining under state control, the authorities face a considerable task, but that the gains from the success of privatization and the restructuring of these companies could be very large. In this regard, Directors urged the authorities to proceed expeditiously with the privatization of the 63 large commercial enterprises on the basis of the transparent procedures envisaged under the World Bank’s Private Sector Adjustment Loan. They also advised the authorities to prepare the privatization of the national companies (former régies autonomes), which should contribute significantly to economic efficiency and financial discipline owing to their pervasive role in the economy and their financing of domestic arrears.

Directors observed that Romania’s statistical base is of adequate quality, but encouraged the authorities to make further improvements, in particular with regard to balance of payments data and the consistency of fiscal and monetary data.

Directors noted that the discussion on policies for the second review of the Stand-By Arrangement with Romania was not concluded. They hoped that the authorities would soon commit to a comprehensive set of measures for stabilization and structural reform.

Romania: Selected Economic Indicators, 1995-2000

  1995 1996 1997 1998 1999   2000  

  (Percent change)
Real economy                    
Real GDP 7.1 3.9 -6.1 -5.4 -3.2   1.3 1.5 2.1  
Real wages in economy-wide (period average,
deflated by CPI
17.3 9.3 -21.9 0.7 -0.7   ... ... -2.4  
Unemployment rate (end of period; in percent) 9.5 6.5 8.9 10.4 11.5   ... ... 10.8  
Consumer prices (end of period) 27.8 56.9 151.4 40.6 54.8   27.0 40.0 45.4 a/
  (In percent of annual GDP)
Public finance; general government budget                    
Revenues 31.4 29.4 29.4 30.2 33.3   32.8 32.2 15.2  
Expenditures 34.7 34.0 34.0 35.2 37.1   36.1 36.4 16.8  
Balance including privatization receipts -3.0 -3.9 -2.1 -3.7 -2.2   -2.4 -3.7 -1.5  
Balance excluding privatization receipts -3.4 -4.5 ... -5.0 -3.8   -3.5 -4.3 -1.7  
  (12-month percentage change)
Money and credit                    
Broad money (end of period) 71.6 66.0 75.9 48.9 44.9   28.6 35.2 43.5 b/
Real domestic credit (end of period) 50.1 15.5 -52.5 21.8 -10.6   ... ... -9.8 b/
NBR interest rates (end of period; in percent) 1/ 67.0 66.9 138.8 105.0 66.2   ... ... 40.3  
  (In billions of U.S. Dollars)
Balance of payments                    
Current account balance -1.7 -2.6 -2.2 -1.0 -1.3   -1.4 -1.5 -0.4  
(as percent of GDP) -4.9 -7.4 -6.2 -7.5 -3.8   -3.9 -4.3 -1.2  
Exports 7.9 8.1 8.4 8.3 8.5   9.5 9.9 4.9  
Imports 9.5 10.6 10.4 10.9 9.6   10.6 11.4 5.4  
Gross reserves (in months of imports of G&S) 2/ 2.8 3.0 4.4 4.0 3.5   4.2 3.7 ...  
External debt/GDP (in percent) 19.2 24.5 26.9 23.9 25.7   29.0 26.0 ...  
Debt service ratio 10.1 12.6 19.1 21.8 28.5   20.3 18.3 ...  
Exchange rate                    
REER (period average; CPI-based 12/1996=100) 101 93 107 139 119   ... ... 129  

Sources: Romanian authorities; and IMF staff estimates.

1/ Weighted NBR average interest rate; from 1997 interbank rate.
2/ Including gold, and excluding Bancorex deposits. Imports of goods and services of the following year.
a/ 12 months to August.
b/ 12 months to June.

1 Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. In this PIN, the main features of the Board’s discussion are described.


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