Press Release No. 04/200

The IMF's Executive Board approved the Stand By-Arrangement on July 7, 2004 (see Press Release No. 04/137) for an amount equivalent to SDR 250 million (about US$367 million).

Following the discussion of the Executive Board, Mr. Agustín Carstens, Deputy Managing Director and Acting Chair, said:

"Underpinned by the continuing favorable performance of the Romanian economy, the authorities' program sustains prudent macroeconomic policies, and includes a strengthening of the finances of state-owned enterprises through energy price adjustments and wage restraint, and the wide-ranging structural reforms necessary to prepare the economy for EU accession. The authorities have appropriately tightened fiscal policy in response to the recent strengthening of domestic demand, and implemented measures to slow rapid credit growth.

"The 2005 budget will introduce a far-reaching tax reform. Cuts are envisaged in the profit, income, and social security taxes, while excises will increase substantially, in line with EU requirements. To avoid risking the achievement of the 2005 deficit target, the fiscal impact of the tax reform will need to be monitored closely and revenue collections further strengthened. The budget includes welcome measures to restrain expenditures, particularly on subsidies. Looking forward, expenditures will need to be carefully prioritized to make room for EU accession-related investment spending.

"Monetary policy continues to aim at achieving gradual disinflation and averting excessive real appreciation. The scope for further interest rate cuts depends on prospects for sustained reduction in inflation. To address pressures from strong capital inflows, the National Bank of Romania has appropriately decided to allow more flexibility of the exchange rate. The authorities have moved quickly to curb rapid expansion in foreign-currency denominated credit and stand ready to take further measures, if necessary, supported by efforts to improve banking supervision.

"The authorities are confronting long-standing problems of tax arrears and a lack of hard budget constraints on state-owned enterprises. Regarding arrears, they are taking measures against private companies, including forced collection and bankruptcy procedures. For the state-owned enterprises, they need to proceed with downsizing the loss-making mining and railway sectors, supported by assistance for retraining and relocation. The privatization program will proceed, with future efforts concentrating on the energy sector. Continued adjustment of electricity and heating prices in line with costs, and adjustment of producer gas prices to import parity will be crucial for strengthening the finances of the sector.

"In 2004, the authorities have implemented important measures to improve the business climate. These include stepped-up efforts to improve governance by fighting corruption and ongoing reform of the judiciary, and a planned review of the labor code in 2005, with a view to improving flexibility in labor markets," Mr. Carstens said.