Press Release: IMF Executive Board Approves €12.9 Billion Stand-By Arrangement for Romania
IMF News, May 4, 2009
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- Published: May 4, 2009
Overview of the Arrangement
- The Executive Board approved a 24-month Stand-By Arrangement for Romania for SDR 11.4 billion (about €12.9 billion or US$17.1 billion).
- SDR 4.37 billion (about €4.9 billion or US$6.6 billion) is immediately available; the remainder will be available in installments subject to quarterly reviews.
- The Stand-By Arrangement entails exceptional access to IMF resources, amounting to 1,111 percent of Romania’s quota.
- The Stand-By Arrangement will be combined with other multilateral financial support to fill the country's 2009-2010 financing gap; the total international financial support package will amount to €19.9 billion (about US$26.4 billion).
Composition of International Financial Support
- European Union: €5 billion (or about US6.6 billion).
- World Bank: €1 billion (or about US$1.3 billion).
- EBRD, EIB, and IFC (combined): €1 billion (or about US$1.3 billion).
Key Messages from Executive Board Discussion
- John Lipsky, First Deputy Managing Director and Acting Chairman, said:
- “The Romanian authorities are to be commended for seeking early international support to assist them with an orderly correction of the large external imbalances and vulnerabilities built up during recent boom years, and leaving the country highly exposed to global financial turmoil and exchange rate volatility. Excessive public spending in recent years also produced sizeable fiscal deficits which, in the current tight financing environment, are destabilizing. With the global downturn increasingly spilling over to Romania, a rebalancing of the economy is unavoidable.
- “The Romanian authorities have launched a comprehensive program to respond to the current challenges. The program aims at reversing the deteriorating fiscal path with significant expenditure cuts and additional revenues. Planned fiscal reforms are designed to contain future expenditures pressures, improve the budgeting process, and enhance the efficiency of tax collections and government operations over the medium-term. An action plan is being implemented to maintain confidence in the banking system, including by preemptive bank recapitalization, agreements to maintain foreign banks’ exposure in the country, and efforts to strengthen bank supervision and resolution. This program, combined with significant external financial support, should ease short-term funding pressures and enhance medium-term economic prospects.
- “The joint financial assistance being provided by the IMF, the European Union, and the World Bank will help cushion the economic downturn and will provide reassurance to markets that Romania’s external obligations will be met. It sends a strong signal of the international community’s confidence that, with the consistent implementation of the program, Romania will weather the current difficulties and emerge with a better-balanced and more flexible economy,” Mr. Lipsky said.
Economic Context and Recent Developments
- Romania experienced an economic boom over the past five years that led to overheating and unsustainable imbalances; GDP growth averaged over 6½ percent per year from 2003-08.
- Drivers of the boom included foreign direct investment and capital inflows, financing high consumption and investment growth; rapid increase in borrowing left Romania highly exposed to global financial difficulties and exchange rate volatility.
- Loose fiscal and incomes policies contributed to overheating; excessive spending, especially on wages and pensions, identified as the main culprit.
- Economic activity turned down sharply in late 2008 and has fallen further in 2009.
Projections and Outlook (as presented)
- Growth is projected at about 4 percent in 2009.
- Correction in the current account deficit from 12½ percent of GDP in 2008 to 7½ percent in 2009.
- Growth will remain near zero in 2010, before recovering to 5 percent in 2011.
- Inflation is expected to fall in 2009 to within the official target (3.5 percent, plus or minutes 1 percent) and remain there in 2010.
- Once confidence is restored, domestic demand is expected to slowly rebound.
Program Summary and Policy Measures
- The IMF-supported program combines strong policy measures with sizable financial support.
- Key elements:
- Reverse the sharp increase in public spending that caused a large deficit.
- Implement short-term budget cuts combined with fiscal policy reforms to place public finances on a more sustainable path.
- Cushion effects of fiscal adjustment by boosting social safety net spending and safeguarding capital spending.
- Implement banking sector measures to ensure adequate capitalization and liquidity and to maintain confidence in the banking system, including preemptive bank recapitalization, agreements to maintain foreign banks’ exposure, and efforts to strengthen bank supervision and resolution.
- Specific program objectives include:
- Reduce the fiscal imbalance to bring the deficit back under 3 percent of GDP by 2011.
- Maintain adequate capitalization of banks and liquidity in domestic financial markets.
- Bring inflation within the target range of the National Bank of Romania (NBR) by end-2009 and maintain it there.
- Secure adequate external financing and improve confidence.
Key Statistics and Selected Indicators (2005–11, as presented)
- Real GDP (annual percentage change): 2005: 4.1; 2006: 7.9; 2007: 6.2; 2008: 7.1; 2009: -4.1; 2010: 0.0; 2011: 5.0.
- Domestic demand (annual percentage change): 2005: 8.3; 2006: 12.8; 2007: 14.3; 2008: 8.9; 2009: -8.2; 2010: -2.7; 2011: 5.7.
- Net exports (contribution): 2005: -6.1; 2006: -10.2; 2007: -16.6; 2008: -6.3; 2009: 7.8; 2010: 3.9; 2011: -2.6.
- Consumer price index (CPI, average): 2005: 9.0; 2006: 6.6; 2007: 4.8; 2008: 5.9; 2009: 3.5.
- Consumer price index (CPI, end of period): 2005: 8.6; 2006: 4.9; 2007: 6.3; 2008: 4.5.
- Unemployment rate: 2005: 5.8; 2006: 5.4; 2007: 4.3; 2008: 4.0; 2009: 9.7; 2010: 7.7.
- Nominal wages: 2005: 17.0; 2006: 18.9; 2007: 22.6; 2008: 23.6; 2009: 3.8; 2010: 5.2.
- Public sector wages (annual change): 2005: 25.9; 2006: 27.3; 2007: 18.5; 2008: 31.0; 2009: 5.1.
- Private sector wages (annual change): 2005: 14.7; 2006: 16.5; 2007: 23.2; 2008: 21.2.
- Gross domestic investment (percent of GDP): 2005: 23.3; 2006: 26.5; 2007: 31.1; 2008: 31.4; 2009: 30.8; 2010: 29.9; 2011: 31.9.
- Gross national savings (percent of GDP): 2005: 14.4; 2006: 16.1; 2007: 17.3; 2008: 19.0; 2009: 23.4; 2010: 25.7.
- General government revenue (percent of GDP): 2005: 32.3; 2006: 32.5; 2007: 32.6; 2008: 33.0; 2009: 33.4; 2010: 33.1.
- General government expenditure (percent of GDP): 2005: 32.1; 2006: 33.7; 2007: 35.6; 2008: 37.5; 2009: 37.0; 2010: 35.8.
- Fiscal balance (percent of GDP): 2005: -0.7; 2006: -1.4; 2007: -3.1; 2008: -4.9; 2009: -4.6; 2010: -3.6.
- Privatization proceeds (percent of GDP): 2005: 1.3; 2006: 0.4; 2007: 0.1.
- External financing (percent of GDP): 2005: 0.5; 2006: 0.2; 2007: 2.8; 2008: 1.1.
- Domestic financing (percent of GDP): 2005: -1.1; 2006: 0.7; 2007: 2.9; 2008: 4.4; 2009: 1.8; 2010: 2.4; 2011: 2.5.
- Structural fiscal balance 1/ (percent of GDP): 2005: -0.6; 2006: -2.1; 2007: -4.2; 2008: -6.7; 2009: -3.8; 2010: -1.7; 2011: -1.2.
- Gross public debt (direct debt only, percent of GDP): 2005: 15.6; 2006: 15.4; 2007: 17.5; 2008: 20.1.
- Broad money (M3, percent change): 2005: 36.5; 2006: 28.1; 2007: 17.6; 2008: 6.5; 2009: 11.5.
- Credit to private sector (percent change): 2006: 54.5; 2007: 60.4; 2008: 3.1.
- Euribor, six-months (end of period): 2005: 2.79; 2006: 3.23; 2007: 4.79; 2008: 3.52.
- NBR policy rate (end of period): 2005: 7.50; 2006: 8.75; 2007: 10.25.
- NBR lending rate (Lombard): 2005: 14.00; 2006: 12.00; 2007: 14.25.
- Interbank offer rate (1 week): 2005: 7.00; 2006: 7.42; 2007: 7.81; 2008: 15.95.
- Current account balance (percent of GDP): 2005: -8.9; 2006: -10.4; 2007: -13.8; 2008: -12.4; 2009: -7.5; 2010: -6.5; 2011: -6.2.
- Merchandise trade balance (percent of GDP): 2005: -9.9; 2006: -12.0; 2007: -14.4; 2008: -13.3; 2009: -7.1; 2010: -6.4.
- Capital and financial account balance (percent of GDP): 2005: 15.7; 2006: 13.7; 2007: -2.3; 2008: 3.2; 2009: 7.4.
- International investment position (percent of GDP): 2005: -29.2; 2006: -35.3; 2007: -39.8; 2008: -52.9; 2009: -55.6; 2010: -54.6; 2011: -53.0.
- Gross official reserves (months of imports or percent not specified): 2005: 22.9; 2006: 21.5; 2007: 24.6; 2008: 26.7.
- Gross external debt (percent of GDP): 2005: 39.0; 2006: 42.9; 2007: 47.1; 2008: 53.4; 2009: 64.2; 2010: 68.5; 2011: 64.0.
- Lei per euro (end of period): 2005: 3.7; 2006: 3.4.
- Nominal GDP (in bn RON): 2005: 289.0; 2006: 344.7; 2007: 412.8; 2008: 504.0; 2009: 531.3; 2010: 568.5; 2011: 634.1.
- Nominal GDP (in bn euros): 2005: 79.7; 2006: 97.8; 2007: 123.6; 2008: 136.8; 2009: 119.7; 2010: 118.8; 2011: 130.7.
Social Indicators (reference years as presented)
- Per capita GNI (Atlas method, 2005): US $4445.
- Income distribution (GINI index, 2000): 30.3.
- Poverty rate (2005): 13 p.c.
- Primary education completion rate (2004): 94 percent.
- Gender pay gap (2003): 18 percent.
- Life expectancy at birth (2004): 71.3.
- Infant mortality per 1000 live births (2004): 16.8.
International Monetary Fund