IMF Executive Board Concludes 2010 Article IV Consultation and Fourth Review of the Stand-By Agreement with Romania

Public Information Notice (PIN) No. 10/97
July 23, 2010

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2010 Article IV Consultation with Romania is also available.

The Executive Board of the International Monetary Fund (IMF) today completed the fourth review of Romania’s economic performance under 24-month Stand-By Arrangement (SBA) approved on May 4, 2009 and concluded the 2010 Article IV consultation with Romania.1 The completion of this program review enables the immediate disbursement of SDR 768 million, bringing total disbursements under the program to SDR 9.031 billion (about €9.32 billion or about US$12.60 billion.


Before the current crisis, the Romanian economy was characterized by high growth rates, associated with the build-up of external and internal imbalances. Large capital inflows stimulated domestic demand, while labor constraints and rising public sector wages generated wage inflation. Fiscal policy was pro-cyclical, exacerbating the overheating of the economy despite tight monetary policy to counteract price pressures. The rapid development of the banking system came with vulnerabilities to outside liquidity shocks and foreign exchange risks. The global economic and financial crisis hit Romania hard in late 2008 and 2009. Capital inflows dried up, exports plunged, and country risk indicators skyrocketed. As a result of the sharp contraction in domestic demand, GDP plummeted and the current account deficit fell markedly. Although banks generally entered the crisis well capitalized, they faced rising NPLs, a dried up interbank market and limited access to external sources of funds. The country’s large fiscal deficit constrained the fiscal policy response to the crisis.

In early 2009 authorities put together a policy package supported by financing from the Fund, the EU, and the World Bank. The program included (i) fiscal consolidation accompanied by structural reforms to restore fiscal sustainability and boost market confidence, (ii) steps to further strengthen the resilience of the financial sector and to obtain commitments from foreign parent banks to maintain their Romanian subsidiaries capitalized and liquid, and (iii) prudent monetary policy management to reduce inflation. The program has contributed to stabilizing the economy and alleviating financing pressures. Economic activity remained weak throughout 2009 (declining by 7.1 percent), but exchange rate pressure eased, the country risk premium narrowed significantly, and financial sector stress eased. While for 2010 as a whole growth is forecast to be slightly negative, a gradually recovery is expected in the second half of the year. Domestic demand will remain subdued, as unemployment continues to rise and real wages adjust to the recession with a lag, while investment will pick up slowly. The contribution of net exports is forecast to remain positive but limited in 2010. Beyond 2010, GDP should recover, with growth forecast to rise to around 3½ percent in 2011 and to the range of 4-4½ percent per year in the medium-term.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They noted that despite one of the largest economic downturns in Europe, the Romanian authorities have made significant strides toward restoring macroeconomic stability and achieving an orderly adjustment of pre-crisis imbalances. They noted, however, that important challenges remain in ensuring that the economic and policy adjustments are sustainable. They encouraged the authorities to carry through with planned structural reforms to secure a sustainable fiscal position, boost potential growth, and reinforce the economy’s resilience to shocks.

Directors commended the authorities’ strong adjustment effort this year as an appropriate response to the near-term challenges posed by the sharp deterioration in the fiscal position. They agreed with the authorities’ approach of balancing the adjustment between expenditure cuts and tax increases, by way of cushioning the social impact of the adjustment while decisively tackling the large public wage bill. . Directors also supported the proposed relaxation of the 2010 deficit target to accommodate the cyclical deterioration in the fiscal position since the last review.

Directors stressed that the sustainability of the targeted fiscal adjustment can only be secured if supported by structural reforms. They welcomed the recent approval of the fiscal responsibility legislation, and encouraged the authorities to complete the reforms of the pension and the public compensation systems. Other important reforms are the planned reductions in public employment, reforms of the healthcare system and of the local government finances, and efforts to boost tax collections. These reforms would ensure that the deficit remains on a downward path in the medium term.

Directors also emphasized that structural reforms in other areas, such as labor and product markets, are also crucial in building the economy’s competitiveness and resilience. They would also help prepare Romania for an eventual euro adoption by ensuring that the economy can handle shocks without the support of monetary and exchange rate policies.

Directors commended the authorities for vigilant monetary and financial sector policies. They viewed the moderate pace of monetary easing as appropriate in striking a balance between the need to support the economy and to contain exchange rate pressures. They agreed that, while there may be room for further easing in the near future, a cautious approach remains warranted given inflation risks and regional uncertainties. Directors welcomed the authorities’ proactive approach towards banking supervision and regulation, and called for continued vigilance in view of the unsettled regional situation and the deteriorating quality of the loan portfolio.

Romania: Selected Economic and Social Indicators, 2007–11
  2007 2008 2009 2010 2011
        Prog. Proj. Proj.

Output and prices

(Annual percentage change)

Real GDP

6.3 7.3 -7.1 1.3 -0.5 3.6

Domestic demand

14.6 9.9 -14.0 0.1 -1.5 2.6

Net exports (contribution)

-16.7 -2.6 16.1 1.1 1.4 0.4

Consumer price index (CPI, average)

4.8 7.8 5.6 3.9 6.6 5.2

Consumer price index (CPI, end of period)

6.6 6.3 4.7 3.2 7.9 3.0

Unemployment rate (average)

4.3 4.0 6.3 7.9 8.9 8.4

Nominal wages

22.6 23.6 8.4 4.4 4.3 6.2

Saving and Investment

(In percent of GDP)

Gross domestic investment

31.0 31.3 25.1 30.7 24.8 25.2

Gross national savings

17.6 19.7 20.6 25.2 19.8 20.2

General government finances



32.3 32.2 31.8 31.3 32.6 32.6


35.4 37.0 39.2 37.3 39.4 37.0

Fiscal balance

-3.1 -4.8 -7.4 -5.9 -6.8 -4.4

Privatization proceeds

0.1 0.1 0.0 0.0 0.0 0.0

External financing

0.1 0.4 2.9 3.7 4.6 0.8

Domestic financing

2.9 4.3 4.5 2.2 2.2 3.6

Structural fiscal balance 1/

-4.3 -6.9 -5.4 -2.4 -3.3 -1.2

Gross public debt (direct debt only)

17.5 19.5 28.2 31.5 33.9 35.7

Money and credit

(Annual percentage change)

Broad money (M3)

33.7 17.5 9.0 6.6 10.4 7.3

Credit to private sector

60.4 33.7 0.9 5.8 7.3 10.2

Interest rates, eop

(In percent)

Euribor, six-months

4.79 3.52 4.52 - - -

NBR policy rate

7.50 10.25 8.00 - - -

NBR lending rate (Lombard)

12.00 14.25 12.00 - - -

Interbank offer rate (1 week)

7.10 12.70 10.70 - - -

Balance of payments

(In percent of GDP)

Current account balance

-13.4 -11.6 -4.5 -5.5 -5.0 -5.0

Merchandise trade balance

-14.3 -13.7 -5.8 -7.1 -7.0 -7.2

Capital and financial account balance

17.3 12.7 -0.9 4.2 4.0 6.1

Foreign direct investment balance

5.7 6.7 3.8 4.1 4.1 4.2

International investment position

-40.1 -51.8 -68.3 -53.6 -62.5 -60.2

Gross official reserves

23.0 20.2 26.6 30.5 31.7 31.3

Gross external debt

47.0 52.6 65.7 68.3 69.0 64.3

Exchange rates


Lei per euro (end of period)

3.5 4.0 4.2 - - -

Lei per euro (average)

3.3 3.7 4.2 - - -

Real effective exchange rate


CPI based (depreciation -)

9.0 -4.1 -7.8 - - -

Memorandum Items:


Nominal GDP (in bn RON)

416.0 514.7 491.3 538.9 510.4 553.9

Social and Other Indicators


Unemployment rate: 8.3% (February 2010)


Poverty rate: 5.7% (2008)








1/ Actual fiscal balance adjusted for the automatic effects of the business cycle.


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. An explanation of any qualifiers used in summings up can be found here:


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