Journal Issue

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

International Monetary Fund
Published Date:
January 2012
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1. This supplement provides an update on economic and policy developments since the issuance of the staff report on December 5, 2011. The additional information does not change the thrust of the staff appraisal.

2. Recent indicators confirm strong third quarter growth, but a slowdown is expected going forward. Full Q3 GDP data confirmed the flash estimate of 1.8 percent quarterly growth (4.4 percent y-o-y). Domestic demand grew sharply, with private consumption and investment both turning positive, while the external sector also supported growth. Agriculture posted a 22 percent growth rate (y-o-y), but all other major sectors also grew (except “other services”). High frequency indicators for October were also positive and export growth remained strong, but industrial orders dropped sharply and construction slipped, suggesting declining future output as the eurozone crisis spills over into Romania. Annual inflation eased slightly in November, to 3.4 percent (from 3.6 percent in October).

3. Financial market stress has eased in recent days, but conditions remain fragile. CDS spreads have fallen by 50 basis points since November 25 (in line with other emerging European countries) but remain well above their levels earlier in the year. The leu has been roughly stable. Central Bank reserves fell by some €0.5 billion in November on top of a drop in October, reflecting in part intervention to stabilize the currency. The government has had a couple of successful T-bill auctions at rates below 7 percent, but with shorter maturities.

4. The 2012 budget is on track for approval by year-end. The constitutional court recently approved a wage a pension freeze for 2012, clearing the way for the budget to target a cash deficit of 1.9 percent of GDP.

5. The government has met the prior actions. In early December, the parliament approved health copayment legislation, and the government issued an emergency ordinance to apply the revised claw back tax on pharmaceuticals. The energy regulator approved a decision to hike natural gas prices to non-household consumers by 5 percent on January 1, 2012. The agreed actions to publish tenders and appoint privatization advisors for selected state-owned firms were also completed.

Table 1(Revised Table 2 of the staff report). Romania: Performance for Third Review
MeasureTarget DateComment
Prior Action
1. Appoint legal advisor for Hidroelectrica, transaction advisor for Oltchim, Transelectrica, and publish tender for transaction advisor for Romgaz, Tarom and Transgaz.Met
2. Enact the copayment law and the revised clawback tax law.Met
3. Increase gas price for non-resident consumers, in order to further align with CUG formula, by 5 percent.Met
Quantitative performance criteria
1. Floor on net foreign assetsSept. 30, 2011Met
2. Floor on general government overall balanceSept. 30, 2011Met
3. Ceiling on central government and social security domestic arrearsSept. 30, 2011Met
4. Ceiling on general government guaranteesSept. 30, 2011Met
5. Non-accumulation of external debt arrearsSept. 30, 2011Met
Quantitative Indicative Target
1. Ceiling on general government current primary spendingSept. 30, 2011Met
2. Floor on operating balance of key SOEsSept. 30, 2011Met
3. Ceiling on stock of arrears of key SOEsSept. 30, 2011Met
4. Ceiling on stock of local government arrearsSept. 30, 2011Met
Inflation consultation band
Inner bandSept. 30, 2011Met
Outer bandSept. 30, 2011Met
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.July 15, 2011Partially met / partially reset as prior action
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.Sept. 30, 2011Partially Met
3. Amend legislation to allow the use of the deposit guarantee fund resources to facilitate bank restructuring, including purchase and assumption transactions.Sept. 30, 2011Met
4. Selection of advisors for SOE reform: (i) select transaction advisors for group 1 and (ii) legal advisors for group 2Oct. 31, 2011Partially met/ partially reset as prior action
5. Approve legislation to improve governance of SOEs.Oct. 31, 2011Met
6. Impose a revised clawback tax on the pharmaceuticals based on the growth in their costs or above a pre-determined threshold.Nov. 30, 2011Reset as prior action
7. Introduction of a simplified taxation system for smaller taxpayers under the threshold with help from the IMF and EC, while requesting a shift in the VAT mandatory threshold from the EU Council of Ministers to €50,000.Dec. 31, 2011Modified
8. Prepare comprehensive amendments to the health care legislation to address the persistent budgetary shortfalls and to ensure high quality health care services.Dec. 31, 2011
New Structural Benchmarks
1. Design measures to reduce registration of small VAT payers by 20 percent by end-September 2012(compared to end-September 2011).Dec. 31, 2011
2. Appoint transaction advisor for group 2 and legal advisor for group 3 as specified in MEFP.Feb. 15, 2012

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