Front Matter

Front Matter Page

© 2004 International Monetary Fund

April 2004

IMF Country Report No. 04/113

Romania: Ex Post Assessment of Longer-Term Program Engagement —Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Romania

In the context of the ex post assessment of Romania’ performance under Fund-supported programs, the following documents have been released and are included in this package:

  • the staff report for the ex post assessment of Romania’s performance under Fund-supported programs, prepared by a staff team of the IMF. The staff report was completed on March 25, 2004. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

  • a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its April 12, 2004 discussion of the staff report.

  • a statement by the Executive Director for Romania.

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to

Copies of this report are available to the public from

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Front Matter Page



Ex-Post Assessment of Longer-Term Program Engagement

Prepared by a Staff Team from European, Fiscal Affairs and Policy Development and Review Departments, and the International Bank for Reconstruction and Development1

Authorized for distribution by the European and Policy Development and Review Departments

March 25, 2004


  • Executive Summary

  • I. Introduction

  • II. Achievements and Shortcomings Under Fund-Supported Programs

    • A. The 1990s: Slow Progress in Macroeconomic Stabilization and Structural Reforms

    • B. Recent Macroeconomic Developments

    • C. Fiscal Policy

    • D. Monetary Policy and Banking

    • E. Structural Reforms

  • III. Nature and Reasons for the Fund’s Long-Term Engagement

  • IV. Lessons and Challenges Going Forward

    • A. Program Ownership

    • B. Bank-fund Cooperation

    • C. Key Challenges

  • V. Strategy for Future Fund Engagement

  • VI. Reaction of the Authorities

  • Figures

  • 1. Selected EU Accession Countries: Comparison of Economic Indicators, 2002

  • 2. Key Macroeconomic Variables

  • 3. Real Effective Exchange Rates

  • 4. Consolidated General Government

  • 5. Total Employment in 86 Monitored SOEs

  • 6. Engagement with the Fund, 1991–2003

  • Text Tables

  • 1. Estimated Losses From Quasi-Fiscal Activities in the Energy Sector

  • 2. The Bank’s Recent Adjustment Programs in Romania

  • Table

  • 1. Conditionality Under the Last Three SBAs

Executive Summary

Main Findings and Lessons

Main Findings

  • Romania had some of the worst starting conditions of any transition economy. Because of the policies of the Ceausescu regime, it had not only one of the largest state enterprise sectors, but also the most energy intensive and the most self sufficient. Similarly, agriculture was dominated by very large collective farms. Potential starting assets, the absence of any foreign indebtedness and the availability of domestic energy supplies, reinforced the view among many that Romania not only should, but could, undertake a gradual approach to transition.

  • As a result, the approach of successive governments to macroeconomic stabilization and structural reform has been hesitant and piecemeal since the beginning of the transition. The structural hurdles together with a lack of ownership of sustained reform efforts has produced a weak record of policy implementation, with macroeconomic policies alternating dramatically between periods of tightening and relaxation, and made Romania a laggard among EU accession candidates. Consequently, out of the six Stand-By Arrangements (SBAs) since the start of Romania’s transition all but the last eventually went off-track.

  • Accommodating losses from quasi-fiscal activities persistently undermined stabilization policies. Significant overvaluation of the leu (to protect energy intensive enterprises), tolerance of large arrears to the budget and utilities, and large directed lending to ailing SOEs in industry and agriculture periodically undermined macroeconomic stabilization and impacted negatively upon financial sector stability.

  • Implementation of reforms was stop-and-go over most of this period and the first five SBAs went off track. This primarily reflected fluctuations in reform ownership and in the authorities’ determination to confront vested interests. The first three SBAs focused more on the macroeconomic symptoms and achieved little in terms of restructuring SOEs, accelerating privatization, and reducing losses from quasi-fiscal activities. Some key structural reforms were achieved under the following two SBAs (1997–98 and 1999–2000), even though both of them eventually went off-track as well. In particular, besides policies to address imminent macroeconomic imbalances, they significantly reduced quasi-fiscal activities and comprised key structural reforms, including in the crisis-ridden banking sector.

  • Reflecting the reforms under the previous two SBAs and more consistent macro policy implementation under the last SBA, Romania has enjoyed a period of strong real GDP growth and steady, if gradual, disinflation since mid-2001. Inflation declined from 40 percent in early 2001 to 14 percent at end-2003. Failure to implement an effective incomes policy to complement monetary and fiscal policy in an environment with soft budget constraints, was the key obstacle preventing more rapid disinflation, and explains why inflation in Romania has been considerably higher compared with other transition economies. The current account deficit has recently widened as a result of a boom in private sector credit and an excessive minimum wage hike.

  • Despite progress, soft budget constraints remain a problem, as evidenced by arrears and wage settlement in SOEs and the still high inflation rate.


  • The Fund’s long-term engagement in Romania reflected unfavorable starting conditions at the beginning of 1990s and repeated reversals of macroeconomic stabilization efforts on account of the lack of program ownership. Strong vested interests, particularly the collusion between the management of large SOEs, labor unions, and factions within the ruling parties, were the main factor behind the slow progress in privatization and long delays in restructuring state-owned enterprises.

  • The performance under the three SBAs between 1991–96 raises questions about the appropriateness of the composition of conditionality under these three arrangements. While the build up of major macroeconomic imbalances and the slow pace of structural reforms during this period primarily reflected the authorities’ insufficient ownership of the stabilization and reform programs, it also raises the question why it took the Fund until 1997 to recognize that re-engaging with Romania in a program relationship would need to address the issue of vested interests through front-loaded structural conditionality. It can be argued that the emphasis on macro-based conditionality in Fund-supported programs postponed the emergence of sustained growth.

  • Progress towards a market-based and financially stable economy gradually increased under the last three SBAs. This reflected the comprehensive use of structural conditionality under the last three SBAs. More recently, the government’s strong commitment to join the EU in 2007 has moved the need to sustain macroeconomic stabilization and accelerate structural reforms to the top of the policy agenda.

  • While conditionality appears to have been generally appropriate under the last three SBAs, a few shortcomings could have been addressed earlier. The comprehensive reliance on structural conditionality proved effective in addressing the resistance of vested interests against structural reform. However, given the risks emanating from quasi-fiscal activities, efforts to measure losses resulting from these activities should have started earlier. Moreover, while the last SBA brought about major progress in improving the utilities’ collection rates in the electricity and gas sectors, collections in the ailing district heating sector hardly improved, reflecting the absence of a strategy for reforming this sector.

  • The potential drawbacks of longer-term engagement were mitigated by the Fund’s requirement of a positive track record prior to the approval of a new program. While the Fund showed flexibility by re-engaging with Romania despite uneven performance, the bar for such re-engagement was progressively raised over time to preserve the credibility of its program signals and limit the development of expectations that Fund program support was automatic. In terms of program design, the increasing reliance on prior actions proved effective in bringing about reforms. By contrast, the granting of multiple waivers, may have lessened the authorities’ resolve to implement their commitments once the program was approved.

  • The Fund’s determination not to accommodate major policy slippages limited the Fund’s exposure and contributed to preserving its credibility. With the exception of the last SBA, programs went off-track by margins too great to be reasonably accommodated. Accordingly, many reviews were never completed and, despite the Fund’s extensive engagement with Romania, there has not been a prolonged period of high Fund exposure. Indeed, at end-2003, outstanding Fund credit was less than 40 percent of quota. Frankness in Article IV consultations was maintained, many of which were completed when program negotiations had stalled.

  • Despite repeated slippages in policy implementation Fund involvement was beneficial for promoting good policies. While the stop-and-go pattern of reform prevented Romania from making faster progress in the transition to a fully-functioning market economy, these programs have facilitated significant structural change, with for example the share of the private sector in GDP increasing from 55 percent in 1996 to 65 percent in 2001.

  • The Fund’s Private-Sector-Involvement Initiative (PSI) in 1999 strained relations with the authorities. The Fund, concerned about being viewed as bailing out foreign private creditors in the aftermath of a $750 million bond repayment, conditioned its support on the authorities securing new money from private creditors. In this context, the Fund’s decision to include Romania as a case on which to pursue PSI alongside countries that could have been illiquid or insolvent, worsened the difficulty Romania faced in securing new money. As the Fund recognized the problems with the PSI, and the balance of payments strengthened, the Fund gradually eased and eventually dropped the condition.

  • The overlap between Bank and Fund conditionality has been substantial, reflecting the unfinished structural reform agenda and mixed reform ownership. Bank technical expertise was used as key input for the design of Fund programs. In areas that are crucial for macroeconomic stabilization the Fund incorporated Bank conditionality into its own programs when this facilitated faster implementation. While not conducive to reducing the number of conditions in Fund programs, this approach successfully increased pressure on the authorities to maintain the reform momentum.

  • The authorities’ request for a new arrangement could be supported if it provides assurances that macroeconomic stabilization will be sustained and vigorous structural reforms will continue. While the progress achieved under past programs would now make a surveillance-only relationship feasible, a new arrangement could (a) address the recent deterioration in the current account; (b) help ensure sufficient credibility of macroeconomic policies that is a prerequisite for achieving single-digit inflation; (c) strengthen the momentum of structural reforms during the run up to the elections; and (d) create the conditions for a successful transition to a surveillance-only relationship.

  • Features of a new arrangement should comprise:

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      Given the absence of an imminent financing need, a successor arrangement should be a low access precautionary SBA.

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      To ensure the implementation of key structural reforms, a longer program period of at least 18 months would be preferable.

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      To guard against the risk that there is an automatic move from one program to the next, an explicit strategy for exiting from Fund program-engagement should be formulated and made public.

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      Given the importance of structural reform for medium-term external viability and the low probability that reform ownership will strengthen in the run up to the elections, there is limited scope for streamlining conditionality in a future program.

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      As in past programs, the Fund should continue to condition new arrangements and reviews on the prior completion of significant structural reforms.

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      As weaknesses in governance remain a major barrier to generating sustained private sector growth and attracting FDI, stepping up the fight against corruption and the reform of the judiciary would need to be addressed more forcefully.

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      Critical structural reforms should be coordinated and agreed with the World Bank early on, to ensure a unified front vis-à-vis the authorities, and to allow the Bank to prepare for supporting implementation.

Front Matter Page

April 12, 2004

Front Matter Page

Public Information Notice (PIN) No. 04/44

April 23, 2004

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