Romania’s 2004 Article IV Consultation and Request for Stand-By Arrangement (SBA) are discussed. The authorities have requested a new precautionary 24-month SBA to secure macroeconomic stabilization and keep European Union accession on track. Romania has preserved competitiveness, despite the slowdown in depreciation and recently strong domestic demand. Exports remained the strongest component of aggregate demand and Romania continued to increase market share in its main trading partners. An exchange-rate-based monetary policy has been successful in accomplishing disinflation but has faced challenges in containing credit growth.

Abstract

Romania’s 2004 Article IV Consultation and Request for Stand-By Arrangement (SBA) are discussed. The authorities have requested a new precautionary 24-month SBA to secure macroeconomic stabilization and keep European Union accession on track. Romania has preserved competitiveness, despite the slowdown in depreciation and recently strong domestic demand. Exports remained the strongest component of aggregate demand and Romania continued to increase market share in its main trading partners. An exchange-rate-based monetary policy has been successful in accomplishing disinflation but has faced challenges in containing credit growth.

1. This statement summarizes information that has become available since the issuance of the staff report for the 2004 Article IV consultation and Request for Stand-By Arrangement. The staff appraisal remains unchanged.

2. Recently released macroeconomic data are broadly in line with the agreed program.

  • Industrial production rose 5.2 percent year-on-year in April, compared to 4.2 percent in Q1. This, and the already stronger than expected GDP growth in Q1, suggests the possibility of an upward revision in GDP growth projection for 2004.

  • The 12-month headline inflation rate fell to 12.3 percent in May, about ½ percentage point below the program projection.

  • The current account deficit for the four months through April reached 1.2 percent of annual GDP, in line with the annual program target.

  • In May, economy wide net wage growth was relatively high (9 percent in real terms compared to a year earlier), similar to growth in January-April. However, real wage growth in the monitored state-owned enterprises is hovering around zero, in line with the program.

  • The general government budget deficit was contained to 0.5 percent of annual GDP in January-May, reflecting buoyant revenue performance and expenditure restraint early in the year.

  • To prevent nominal appreciation, the NBR bought €390 million in June, bringing total purchases to €1.1 billion in Q2. In response to the lower inflation and the persistent excess supply on the foreign currency market, the NBR cut its policy rate by 50 basis points on June 7, to 22.8 percent.

3. All prior actions have been fully met, except for one, the main objectives of which was, however, observed. Regarding the permanent closure of 15 inefficient district heating plants, the mayors of the corresponding districts confirmed that the heating services of all the plants had been terminated, about half which had already ceased operations in 2003. As the government incurred legal problems in the rapid liquidation of these plants, it approved a decree that, in addition to terminating all subsidies to these plants, requested from the local councils to adopt measures for their permanent closure or reorganization. As the government is committed not to reinstate the subsidies, without which the plants cannot function, the objective of the agreed prior action has been achieved. Staff therefore recommends that the Board approve the program.

4. On May 25, the authorities eliminated the authority of the prosecutor general to reopen civil cases after their adjudication by courts (“extraordinary appeal procedure”). (The World Bank also saw this procedure as undermining the integrity of the judicial process and the autonomy of the judiciary). The corresponding structural PC under the program has therefore been met.

5. FIN completed the safeguards assessment of the National Bank of Romania (NBR) on June 17, 2004. The safeguard framework was found to be considerably improved and generally adequate. Regarding the remaining weaknesses, the main recommendations were that (i) the NBR establish a statutory deadline for completing external audits within three to four months after the end of the financial year; and (ii) strengthen the procedures for reviewing the compilation of data reported to the Fund under the program. The authorities have agreed with the recommendations and staff will monitor their implementation in the context of the program supported by the Stand-By Arrangement.