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
Author:
International Monetary Fund
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Publication Date:
30 Sep 2010
eISBN:
9781455208654
Language:
English
Keywords:
ISCR; CR; authority; tax authorities; government ordinance; stand-by credit lines; health sector; contribution rate; DGF governance arrangement; DGF's funding regime; reforms of the deposit guarantee; Arrears; Pension reform; Pension legislation; High Net Wealth Individuals; Lines of credit
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Economic growth finally turned positive, but further recovery will be delayed, as fiscal austerity measures and recent floods will weigh on domestic demand. The macroeconomic outlook has weakened and continues to be subject to exceptional uncertainties. With the enactment of the ambitious adjustment package, fiscal policies are on track to meet the targets. Structural reforms continue to be geared toward supporting the fiscal consolidation agenda, and remain on track. The authorities have initiated a new reform of social assistance programs.

Abstract

Economic growth finally turned positive, but further recovery will be delayed, as fiscal austerity measures and recent floods will weigh on domestic demand. The macroeconomic outlook has weakened and continues to be subject to exceptional uncertainties. With the enactment of the ambitious adjustment package, fiscal policies are on track to meet the targets. Structural reforms continue to be geared toward supporting the fiscal consolidation agenda, and remain on track. The authorities have initiated a new reform of social assistance programs.

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.

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Citation: IMF Staff Country Reports 2010, 301; 10.5089/9781455208654.002.A002

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.

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Romania: Performance for Fifth Review and Proposed New Conditionality

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Cover IMF Staff Country Reports
Romania: Fifth Review Under the Stand-By Arrangement, and Requests for Waiver of Nonobservance of Performance Criterion, and Request for Modification and Establishment of Performance Criteria: Staff Report; Supplementary Information; Press Release on the Executive Board Discussion; Statement by the Executive Director for Romania
Author:
International Monetary Fund
Volume/Issue:
Volume 2010: Issue 301
Publisher:
International Monetary Fund
ISBN:
9781455208654
ISSN:
1934-7685
Pages:
60
DOI:
https://doi.org/10.5089/9781455208654.002

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