Journal Issue

Romania: Fifth Review Under the Stand-By Arrangement, Request For Waiver of Nonobservance of Performance Criterion, and Request For Modification and Establishment of Performance Criteria—Supplementary Information

International Monetary Fund
Published Date:
September 2010
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1. This supplement provides an update on economic and policy developments since the issuance of the staff report. The additional information does not change the staff appraisal.

2. Recent economic indicators confirm a weakening of the economic activity. Economic data for July showed a decline across a broad range of activities, including sales, construction, services, and industrial production. On the demand side, this reflected a sharp drop in real wages following the 25 percent cut in public salaries and the jump in inflation with the VAT increase. Together with ebbing remittances, these are set to further dampen real disposable incomes and demand during the third quarter. Weaker demand, in turn, helped temper the passthrough of the VAT increase to inflation: the latter jumped from 4.4 percent in June to 7.1 and 7.6 percent in July and August, respectively, somewhat below market expectations.


3. The prior actions for the review have been met. The pension reform was passed in parliament in line with the program agreement, although opposition politicians have appealed the law to the Constitutional Court. The central government also repaid some 2 billion lei in arrears and unpaid bills in the health sector, thereby tackling the bulk of the current or impending arrears at the central government level. Efforts to repay local government arrears have been less successful due to a scarcity of tools to affect their financial management, which should be corrected early next year when the recent revisions to public finance legislation come into effect. In addition, the authorities have approved the reforms of the deposit guarantee (DGF) funding regime to increase the contribution rates, eliminate stand-by credit line with banks as a source of financing for the DGF, and increase the targeted coverage ratio (structural benchmark for end-September, see table). Also, as agreed in the letter of intent, the authorities have removed from the fiscal austerity package the provisions that required the central bank to transfer the savings from 25 percent wage cuts to the treasury, which were inconsistent with the monetary financing prohibitions under the EU law; the provisions affecting the central bank independence will be dealt with by end-year.

Table 2Romania: Performance for Fifth Review and Proposed New Conditionality
MeasureTarget DateComment
Prior actions
1. Repayment of RON 1.95 billion in arrears and unpaid bills, most in the health sectorMet
2. Parliamentary approval of pension reform legislationMet
Quantitative performance criteria
1. Floor on net foreign assetsJune, 2010Met
2. Floor on general government overall balanceJune, 2010Met
3. Ceiling on general government guaranteesJune, 2010Met
4. Ceiling on general government domestic arrearsJune, 2010Not met
5. Non-accumulation of external debt arrearsJune, 2010Met
Quantitative Indicative Target
1. Ceiling on general government current primary spendingJune, 2010Met
2. An indicative target on the operating balance of ten largest loss-making SOEsJune, 2010Met
Inflation consultation band
Inner bandJune, 2010Met
Outer bandJune, 2010Met
Structural benchmarks
1. Approval of reforms to mitigate fiscal risks from local governmentsSeptember 30, 2010Met in June 2010
2. Passage of implementing legislation for the unified wage lawOctober 31, 2010Reset from September 30, 2010
3. Passage of pension legislationSeptember 30, 2010Reset as prior action
4. Parliamentary ratification of the fiscal measures approved by the governmentSeptember 30, 2010VAT ratification pending
5. Reform of the DGF’s funding regime through increase in bank’s contribution rates and elimination of stand-by credit lines, and review of DGF governance arrangementSeptember 30, 2010Met; the reform of the governance arrangement modified to end-December 2010
6. Reform tax administration methodology for high net wealth individualsNovember 30, 2010
7. Integrate the accounting reporting system with the Treasury payment systemMarch 31, 2011
New Conditionality (Structural Benchmarks)
1. Parliamentary ratification of amendments to the bank resolution frameworkDecember 1, 2010
2. Parliamentary approval of agreed 2011 budgetDecember 15, 2010
3. deposit insurance legislation to ensure that neither members of the board nor employees of credit institutions participate in the DGF BoardDecember 31, 2010modified from September 30,2010

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