March 25, 2011
The Executive Board of the International Monetary Fund (IMF) today approved a new 24-month precautionary Stand-By Arrangement (SBA) in the amount equivalent to SDR 3,090.6 million (about €3.5 billion, 300 percent of quota), with the SBA coming into effect on March 31, 2011. The authorities have informed the IMF that they intend to treat the new arrangement as precautionary and therefore do not plan to draw under it. The SBA will be in conjunction with precautionary support from the European Union of €1.4 billion and a loan from the World Bank of €0.4 billion.
The Executive Board has also completed the seventh and final review of Romania’s economic performance under an SDR 11.443 billion (about €12.95 billion or US$17.07 billion) 24-month SBA that was approved on May 4, 2009 (Press Release No 09/148) and will end effective March 30, 2011 at the authorities’ request. The completion of the final review enables the immediate disbursement of SDR 874 million (about €1 billion or US$ 1.4 billion). The authorities have informed the IMF that they also intend to treat this final disbursement as precautionary.
Following the Executive Board's discussion on Romania, Mr. John Lipsky, First Deputy Managing Director and Acting Chair, stated:
“Policy implementation under the Fund-supported program has remained strong and the authorities are seeking a follow-up precautionary arrangement to signal their commitment to continued reform. The fiscal and structural measures already implemented are yielding results. The economy has stabilized and growth is resuming. The new program appropriately focuses on building on achievements to date with additional fiscal consolidation and structural reforms to boost growth and improve private sector participation in the economy.
“The authorities’ planned fiscal adjustment should help reduce the budgetary deficit to within 3 percent of GDP in 2012. Going forward, efforts should focus on reforming social health care and public investment, tackling persistent domestic arrears, and improving the tax system. Priority should also be given to institutional changes that would facilitate the absorption of EU funds.
“Improved governance, regulation, and pricing at state-owned enterprises, particularly in the energy and transport sectors, are essential to bolster economic efficiency as would a reactivation of the privatization program. The authorities are also pursuing labor market and social benefits reforms, with a view to fostering job creation and productivity growth. These reforms should be mindful of the need to protect the most vulnerable groups and workers’ rights.
“Monetary and financial sector policies have been prudent and proactive, helping preserve financial stability during the crisis. Monetary policy should continue to strike a balance between the need to address inflation risks and the need to support the recovery. The banking system is liquid and well-capitalized, but vigilance remains warranted, in light of rising non-performing loans and the potential for adverse regional spillovers”.
ANNEX
Recent Economic Developments
The Romanian economy is beginning to recover. Recent data show slight positive growth in the last quarter of 2010, while revisions to previous quarters have produced a better outturn for the year than previously expected (-1.3 percent). Strong export growth continues and industrial production remains robust, however, weak retail sales persist. Registered unemployment has decreased, but mainly due to shrinking labor force participation rather than job creation.
Headline CPI inflation peaked at 8.0 percent in December 2010, and has since eased to 7.6 percent in February 2011. The CDS spread for sovereign debt has narrowed by around 125 basis points since September, and is now below several other EU countries. Romanian equity markets have recovered since their June trough. Thus far, the turbulence in the Euro area periphery has had little direct impact on Romania, though risks remain. Since January 2011, the leu has appreciated against the euro, obviating the need for significant central bank intervention in support of the currency.
The current account deficit improved from 13½ percent of GDP in 2007 to around 4¼ percent of GDP in 2010, driven by a strong shrinking trade deficit. Exports are booming, driven by the manufacturing sector. On the transfers side, workers’ remittances have shrunk due to the recession and high unemployment in host economies.
Program Summary
The successor SBA will focus on boosting potential growth through structural reforms. Structural deficiencies in key economic areas weigh heavily on economic growth. Improved efficiency of the public sector will reduce bureaucratic barriers to economic efficiency and will increase the absorption of EU structural funds to boost capital spending to improve the country’s infrastructure. The new program also aims at deep-rooted reforms in the energy and transport sectors, including pricing reforms, improved regulation, and the restructuring and privatization of energy and transport state owned enterprises. Fund and EU precautionary support will reassure private markets and provide a cushion against future shocks, should they materialize.
Fiscal adjustment will continue. The difficult fiscal measures enacted in 2010, complemented with continued prudent expenditure policies, put the fiscal cash deficit targets of 4.4 percent in 2011 and 3.0 percent in 2012 well within reach. However, continued efforts to improve tax collections, tackle expenditure pressures (particularly in the health sector), and reduce arrears will be crucial to sustained deficit reduction.
The banking sector has weathered the crisis well, remaining well-capitalized and liquid. Non-performing loans continue to increase, but at a declining pace and are expected to peak in mid-2011. Banks remain well-capitalized, with an average capital adequacy ratio of 14.7 percent and all banks above 11 percent at end-2010.
Romania joined the IMF on December 15, 1972, and its quota is SDR 1.03 billion (about €1.2 billion or US$1.6 billion).
| Romania: Selected Economic and Social Indicators, 2007–12 | |||||||
| 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | ||
| Prog. | Est. | Proj. | Proj. | ||||
|
Output and prices |
|||||||
|
Real GDP |
6.3 | 7.3 | -7.1 | -1.9 | -1.3 | 1.5 | 4.4 |
|
Domestic demand |
14.2 | 7.3 | -12.9 | -3.9 | -1.0 | 1.2 | 4.3 |
|
Net exports (contribution) |
-9.6 | -1.0 | 7.5 | 2.2 | -0.2 | 0.2 | -0.1 |
|
Consumer price index (CPI, average) |
4.8 | 7.9 | 5.6 | 6.1 | 6.1 | 5.4 | 3.4 |
|
Consumer price index (CPI, end of period) |
6.6 | 6.3 | 4.7 | 8.2 | 8.0 | 3.7 | 3.0 |
|
Unemployment rate (average) |
4.3 | 4.0 | 6.3 | 7.8 | 7.6 | 6.6 | 5.8 |
|
Nominal wages |
22.6 | 23.6 | 8.4 | 2.0 | 2.6 | 4.7 | 6.7 |
|
Saving and Investment |
|||||||
|
Gross domestic investment |
31.0 | 31.3 | 25.3 | 27.8 | 26.5 | 24.6 | 25.2 |
|
Gross national savings |
17.6 | 19.7 | 21.1 | 22.3 | 22.2 | 19.5 | 20.1 |
|
General government finances |
|||||||
|
Revenue |
32.3 | 32.2 | 31.4 | 32.7 | 32.8 | 33.3 | 33.7 |
|
Expenditure |
35.4 | 37.0 | 38.7 | 39.5 | 39.4 | 37.7 | 36.7 |
|
Fiscal balance |
-3.1 | -4.8 | -7.3 | -6.8 | -6.5 | -4.4 | -3.0 |
|
Privatization proceeds |
0.1 | 0.1 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
|
External financing |
0.1 | 0.4 | 2.9 | 4.6 | 4.6 | 2.8 | 0.7 |
|
Domestic financing |
2.9 | 4.3 | 4.5 | 2.2 | 1.9 | 1.6 | 2.3 |
|
Structural fiscal balance 1/ |
-5.8 | -8.5 | -7.0 | -4.4 | -4.9 | -2.4 | -1.6 |
|
Gross public debt (direct debt only) |
17.5 | 19.5 | 27.4 | 33.9 | 33.2 | 36.1 | 36.2 |
|
Money and credit |
|||||||
|
Broad money (M3) |
33.7 | 17.5 | 9.0 | 4.3 | 6.9 | 10.3 | 14.1 |
|
Credit to private sector |
60.4 | 33.7 | 0.9 | 4.1 | 4.7 | 7.7 | 8.7 |
|
Interest rates, eop |
|||||||
|
Euribor, six-months |
4.79 | 3.52 | 4.52 | - | 1.23 | - | - |
|
NBR policy rate |
7.50 | 10.25 | 8.00 | - | 6.25 | - | - |
|
NBR lending rate (Lombard) |
12.00 | 14.25 | 12.00 | - | 10.25 | - | - |
|
Interbank offer rate (1 week) |
7.14 | 12.72 | 10.69 | - | 3.63 | - | - |
|
Balance of payments |
|||||||
|
Current account balance |
-13.4 | -11.6 | -4.2 | -5.5 | -4.2 | -5.0 | -5.1 |
|
Merchandise trade balance |
-14.3 | -13.7 | -5.8 | -5.4 | -4.8 | -5.1 | -4.7 |
|
Capital and financial account balance |
17.6 | 12.7 | -2.5 | 2.1 | 1.1 | 5.3 | 8.4 |
|
Foreign direct investment balance |
5.7 | 6.7 | 3.0 | 2.4 | 2.0 | 2.9 | 2.9 |
|
International investment position |
-43.5 | -49.4 | -62.7 | -61.3 | -70.8 | -75.3 | -72.6 |
|
Gross official reserves |
23.0 | 20.2 | 26.3 | 27.8 | 29.5 | 31.7 | 30.9 |
|
Gross external debt |
47.0 | 51.4 | 68.3 | 73.9 | 74.5 | 78.9 | 75.4 |
|
Exchange rates |
|||||||
|
Lei per euro (end of period) |
3.5 | 4.0 | 4.2 | - | 4.3 | - | - |
|
Lei per euro (average) |
3.3 | 3.7 | 4.2 | - | 4.2 | - | - |
|
Real effective exchange rate |
|||||||
|
CPI based (percentage change) |
8.4 | -5.0 | -7.5 | - | 1.8 | - | - |
|
GDP deflator based (percentage change) |
17.3 | 1.5 | -8.8 | - | 0.2 | - | - |
|
Memorandum Items: |
|||||||
|
Nominal GDP (in bn RON) |
416.0 | 514.7 | 498.0 | 511.6 | 513.6 | 542.0 | 590.2 |
|
Nominal GDP (in bn euros) |
124.6 | 139.7 | 117.6 | 122.1 | 127.2 | 140.7 | |
|
Social and Other Indicators |
|||||||
|
GDP per capita (current US$, 2009): $7,500; GDP per capita, PPP (current international $, 2009): $14,198 | |||||||
|
Unemployment rate: 6.8% (December 2010) |
|||||||
|
Poverty rate: 5.7% (2008) |
|||||||
|
Sources: Romanian authorities; Fund staff estimates and projections; and World Development Indicators database. | |||||||
|
1/ Actual fiscal balance adjusted for the automatic effects of the business cycle. | |||||||
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