Romania : Fourth Review Under the Stand-By Arrangement and Request for Modification of Performance Criteria: Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Romania.


Romania: Fourth Review Under the Stand-By Arrangement and Request for Modification of Performance Criteria—Supplementary Information

International Monetary Fund
Published Date:
April 2012
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1. This supplement provides an update on economic and policy developments since the issuance of the staff report on March 7, 2012. The additional information does not change the thrust of the staff appraisal.

2. Recent indicators suggest a continued weakening of growth. The 2011 GDP data confirmed an annual growth of 2.5 percent, in line with staff expectations. The Q4 GDP data showed a slight contraction of 0.2 percent quarterly (+1.9 percent y-o-y). Private consumption and fixed investment grew faster than expected, while public consumption and inventories continued to drag down domestic demand. Export growth also slowed down but net exports contributed positively due to a contraction in imports. High frequency indicators for January pointed to moderate growth. Industrial production and construction posted modest gains and consumption indicators remained strong with retail trade volumes, consumer confidence, and employment improving further. However, new industrial orders fell and Q1 GDP growth is expected to be negative due to the adverse impact of severe weather in February.

3. Annual inflation fell further to 2.6 percent in February. This figure was somewhat higher than expected, perhaps reflecting supply disruptions from the severe weather.

4. Financial market conditions continued to improve. Five year CDS spreads have narrowed by around 50 basis points since end-February to near 300 bps. Equity prices have been stable in March following an increase of over 10 percent in February.

5. Pre-election political pressures are rising, increasing risks to the 2012 budget deficit. Senior officials have publicly discussed possible public sector wage increases and/or reductions in social contribution rates. However, the authorities have also reaffirmed their commitment to the program targets.

6. The government met the prior action. On March 14, the government approved a memorandum laying out a multi-year roadmap for liberalization of electricity prices for both household and non-household consumers. These steps will help ensure full cost recovery and market based pricing.

Table 1 (Revised Table 2 of the staff report). Romania: Performance for Fourth Review
Measure Target Date Comment
Prior Action
1 Approve a roadmap for the deregulation of electricity prices as specified in the MEFP. 5 days before the Met
Quantitative performance criteria Board date
1. Floor on net foreign assets Dec. 31, 2011 Met
2. Floor on general government overall balance Dec. 31, 2011 Met
3. Ceiling on central government and social security domestic arrears Dec. 31, 2011 Met
4. Ceiling on general government guarantees Dec. 31, 2011 Met
5. Non-accumulation of external debt arrears Dec. 31, 2011 Met
Quantitative Indicative Target
1. Ceiling on general government current primary spending Dec. 31, 2011 Met
2. Floor on operating balance of key SOEs Dec. 31, 2011 Met
3. Ceiling on stock of arrears of key SOEs Dec. 31, 2011 Met
4. Ceiling on stock of local government arrears Dec. 31, 2011 Met
Inflation consultation band
Inner band Dec. 31, 2011 Met
Outer band Dec. 31, 2011 Met
Structural benchmarks
1. Undertake SOE reforms, including (i) Appointment of legal advisors for privatization of CFR Marfa, TAROM, Transelectrica, Transgaz, and Romgaz; (ii) Preparation of action plans for the remaining SOEs of the central government; (iii) Design mechanisms to facilitate restructuring and securitizing SOE arrears. 1/ July 15, 2011 Partially Met
2. Completion of a comprehensive review of the existing investment portfolio, which will prioritize and evaluate existing projects to focus on those where funding can be fully secured, examine the viability of old projects, with low priority and unviable ones discontinued, and production of a final report and an action plan. 2/ Sept. 30, 2011 Partially Met
3. Prepare comprehensive amendments to the health care legislation to address the persistent budgetary shortfalls and to ensure high quality health care services. 3/ Dec. 31, 2011 Partially Met
4. Design measures to reduce registration of small VAT payers by 20 percent by end-September 2012(compared to end- September 2011). Dec. 31, 2011 Met
5. Appoint transaction advisor for group 2 and legal advisor for group 3 as specified in MEFP. 4/ Feb. 15, 2012 Partially Met
New Structural Benchmarks
1. An increase of 5 percent in the electricity price for both residential and nonresidential consumers. June 30, 2012

Legal advisors were appointed for TAROM, Transelectrica, Transgaz, and Romgaz and mechanisms to facilitate restructuring of SOE arrears were implemented. In addition, most action plans have been received. The authorities committed to complete the action plan process by mid-February and to hire a legal advisor for CFR Marfa by end-April 2012.

The investment portfolio is being revised to include local government projects co-financed by the state budget.

The health care legislation is being revised to better address lack of financial controls and adequacy of funding needs in the health sector. The provisions on private insurance for basic medical benefits are also being reassessed.

Legal advisors were appointed for Electrica Serv and Nuclearelectrica. The deadline for hiring legal or transaction advisors for the other companies in Group 2 and Group 3 was rescheduled.