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Press release

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1999
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Romania: Stand-By

The IMF approved an eight-month Stand-By credit for Romania in an amount equivalent to SDR 400 million (about $547 million) to support the government’s economic stabilization and reform program. The loan will be made available in four installments. The first installment, which will be available immediately, will be in an amount equivalent to SDR 53 million (about $73 million).

Following are excerpts from IMF First Deputy Managing Director Stanley Fischer’s statement on the Executive Board discussion.

“Executive Directors welcomed the authorities’ renewed commitment and effort to correct severe economic imbalances and long-existing structural weaknesses. Directors considered that the authorities’ program, if fully implemented, would mark a major step forward in Romania’s quest for financial stability and establish the basis for sustainable growth. They noted with satisfaction the authorities’ recent up-front actions in several policy areas, including fiscal strengthening and progress in bank restructuring and privatization.

Romania: selected economic indicators
19951996199719981199920002
RevisedProposed
ProgramOutturnprogramOutturnprogram
(annual percent change)
Real GDP7.14.03.9–1.5–6.6–7.3–3.52.5
(period average)
Consumer prices32.323.038.8150.0154.859.141.418.6
(percent of GDP)
General government balance
(excluding privatization receipts)–2.6–4.0–4.6–5.7–3.9–2.1
Current account balance–4.9–3.2–7.4–3.6–6.2–7.9–7.5–7.0
(months of imports of goods and services)
Gross reserves32.83.04.24.63.63.94.3

Estimates.

Projections.

Including gold and excluding Bancorex deposits. Imports of goods and services of the following year.

Data: Romanian authorities and IMF staff estimates

Estimates.

Projections.

Including gold and excluding Bancorex deposits. Imports of goods and services of the following year.

Data: Romanian authorities and IMF staff estimates

“However, against the background of the uneven implementation of previous IMF programs, and in light of the weakness of the economy, Directors urged the authorities to hold firm to their policy commitments, as this is essential for regaining market confidence. Directors stressed the importance for the recovery of the economy of persevering with both fiscal and structural adjustment, and cautioned against a premature relaxation of financial policies.

“Medium-term fiscal sustainability and structural reforms were seen as key for the establishment of sustained noninflationary growth.

“Directors regretted that, despite the authorities’ efforts, it had not been possible for them to obtain the desired amount of private sector financing. They emphasized that it is vital that Romania continue to work vigorously toward obtaining additional private foreign financing in support of its reform program and that implementation of their stabilization and structural reform program would contribute both to restoring access to capital markets and to economic recovery and growth.”

Program summary

Romania has lagged behind most other transition economies in Central and Eastern Europe in economic reform and stabilization, mainly because of a lack of sustained policy efforts. Although prospects improved in early 1997, when a coalition government tightened macroeconomic policies and implemented overdue reform measures, this latest effort proved short-lived as economic imbalances increased. Economic performance continued to worsen in 1998 and early 1999 as market sentiment toward Romania became less favorable following the Russian crisis in August 1998.

The objectives of Romania’s 1999 program are to narrow external imbalances on the basis of domestic demand restraint and improved competitiveness; contain inflation to about 40 percent; limit the decline in output in 1999 to 3.5 percent; and restructure the economy, with a view to setting the basis for sustainable growth.

Fiscal policy under the program targets a sizable reduction in the fiscal deficit through major tax increases and strict limits on discretionary spending. The goals of Romania’s program are to reduce the general government deficit by nearly 2 percentage points to 3.9 percent of GDP in 1999. A significant tightening of fiscal policy will help to reduce the current account deficit while also easing pressure on monetary policy.

With the likely availability of foreign financing in the context of an IMF-supported program and the need to strengthen foreign reserves, the current account deficit is targeted to decline to about 7.5 percent of GDP in 1999 and help restore Romania’s access to foreign capital markets.

Structural reforms include restructuring the banking and enterprise sectors. With assistance from the IMF and the World Bank, improvements in bank supervision and external audits of major state-owned banks will be key steps toward restructuring and privatization.

As unemployment is expected to rise significantly by the end of the year, the government has intensified a dialogue with its social partners to win support for the program. The government plans to keep unemployment benefits and child allowances stable, provide severance payments, introduce retraining programs, and expand wage subsidies. It has also taken initiatives to improve the pension system and health services.

Romania joined the IMF on December 15, 1972, and its quota is SDR 1.0 billion (about $1.4 billion). Its outstanding use of IMF financing currently totals SDR 319 million (about $437 million).

Press Release No. 99/38, August 5

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