IMF Survey: Romania Receives Support from IMF to Counter Crisis

IMF News, May 4, 2009

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Romania experienced very strong growth until 2008: GDP growth averaged over 6½ percent per year from 2003 to 2008.
Growth turned sharply negative in late 2008: growth slowed from an average of 9 percent during the first three quarters of 2008 to a 13 percent decline in the fourth quarter.
Key domestic vulnerabilities:
- Large current account deficit as imports outstripped exports.
- Heavy dependence on foreign capital inflows and foreign direct investment, including foreign banks’ subsidiaries.
- Rapid increase in private sector borrowing, with over half of domestic private credit in foreign currency.
External shock transmission:
- Global credit crunch reduced capital inflows.
- The leu depreciated by more than 15 percent against the euro since October 2008, raising the cost of servicing foreign-currency loans for consumers and companies.
Resulting effects: output is falling, exports have dropped sharply, and large capital inflows that financed the boom have dwindled.

Combined pressures from the worldwide slump and Romania’s internal economic weaknesses left limited policy space:
- Large pre-crisis fiscal deficits reduced maneuverability during the downturn.
- Reforms to improve productivity and flexibility had stalled.
Romanian authorities sought a comprehensive policy package to bolster resilience as regional conditions worsened.
Multilateral support: In March (2009), the IMF, together with the European Union, the World Bank, and other multilateral organizations, committed to supporting the authorities’ efforts.

Timeline and approvals:
- IMF Survey online: May 4, 2009.
- IMF’s Executive Board approved a Stand-By Arrangement in the amount of $17.1 billion (noted separately).
- The IMF’s Executive Board has approved a 24-month Stand-By Arrangement for €12.95 billion as part of a total €20 billion financial support package.
Program aims:
- Help cushion the effects of the downturn through financial support.
- Support policy changes to avoid the worst consequences of the crisis.
Three main program areas:
- Fiscal consolidation.
- Banking reform.
- Reducing inflation to help restore financial stability.

IMF Survey online: May 4, 2009 — Interview with Jeffrey Franks, IMF mission chief for Romania.