Romania
Sixth 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 and the Senior Advisor to the Executive Director for Romania
Author:
International Monetary Fund
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Publication Date:
20 Jan 2011
eISBN:
9781455213788
Language:
English
Keywords:
ISCR; CR; government; government ordinance; end-December NFA PC; disbursement of SDR; GDP deflator; nominal interest rate; debt ratio; short-term debt; headline CPI inflation
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The comprehensive program supported by the IMF, the European Union, and the World Bank has helped Romania in stabilizing its economy, reversing imbalances, rebuilding confidence of international financial markets, and setting a sustainable economic growth. Executive Directors appreciated the authorities’ monetary and financial sector policies, which have been prudent and proactive in preserving financial stability during the crisis. Directors appreciated the strong economic performance of Romania under the program and approved a waiver to maintain the reform momentum and provide additional security against unforeseen shock.

Abstract

The comprehensive program supported by the IMF, the European Union, and the World Bank has helped Romania in stabilizing its economy, reversing imbalances, rebuilding confidence of international financial markets, and setting a sustainable economic growth. Executive Directors appreciated the authorities’ monetary and financial sector policies, which have been prudent and proactive in preserving financial stability during the crisis. Directors appreciated the strong economic performance of Romania under the program and approved a waiver to maintain the reform momentum and provide additional security against unforeseen shock.

I. Introduction and Summary

1. The economy is now stabilizing and growth is set to resume. GDP fell in Q3, but indicators now point to a resumption of growth in late 2010 or early 2011. Growth is expected to be 1-1½ percent in 2011, after -2 percent in 2010. Inflation is projected to peak slightly above 8 percent late this year due to the VAT increase, before returning to the central bank’s target range of 3 percent ±1 ppt. by end-2011.

2. The program remains broadly on-track. The performance criteria for end-September 2010 have been met except for the criterion on government payments arrears. Arrears in the central government and social system fell sharply due to significant payments made in September, and the authorities have agreed to keep them near zero for the remainder of the program. However, local government arrears continue to climb and will only begin to fall when new legislation on local financing takes effect in 2011. The indicative target on current government expenditure was met, but the target on the operating balance of state-owned enterprises was missed by a substantial margin. Structural benchmarks on the 2011 budget (including ratification of the recent VAT increase), and approval of unified wage legislation will be met as prior actions for concluding this review. Other prior actions are the enactment of previously approved pension reform legislation (¶4) and modification of a government ordinance on lending conditions for banks (¶5, ¶27). The authorities are committed to meeting all prior actions by year-end, but staff is concerned that the lending ordinance modification may be delayed.

3. Fiscal adjustment efforts are bearing fruit, but face implementation challenges. The end-September fiscal targets were met with a margin, and end-2010 targets will likely also be met. Combined with prudent expenditure policies, the fiscal measures already enacted should be sufficient to deliver the agreed deficit reduction (to 4.4 percent of GDP) in 2011. Implementation may be difficult, however, as political and judicial pressures to reverse elements of the adjustment are building, and persistent problems controlling health expenditures may endanger the 2011 fiscal objectives.

4. The structural reform agenda is advancing despite significant political headwinds. The authorities expect parliamentary approval of the second round of the unified wage legislation by mid-December, and enactment of the pension reform should happen by year-end (prior actions). The authorities are making progress on reforms of the labor market and of the social benefits system, which will improve its targeting and help mitigate the impact of the austerity package. Public enterprise reforms are lagging, and additional action will be required in the future to prevent a deterioration of their financial position. Improving the absorption of European Union structural funds, which is trailing other EU countries, is critical to securing needed investments under tight budget constraints.

5. The banking system had been affected by the downturn, but remains well-capitalized and liquid. Nonperforming loans (NPLs) are likely to continue to grow through mid-2011, due to weak economic activity. Aggregate capital buffers remain large, however, with all banks above 11 percent capital adequacy, and the national bank maintains its proactive approach towards securing adequate capital reserves. However, action is needed to ensure that a recent banking ordinance (Ordinance 50) does not produce significant additional losses in the system.

II. Macroeconomic Developments and Outlook

A. Recent Developments

6. The recovery has been delayed by needed stabilization measures, but the economy is now stabilizing and growth is set to resume. GDP fell by 0.7 percent in the third quarter, reflecting the effect of fiscal consolidation on domestic demand. With consumer confidence and economic sentiment gradually improving and export oriented industry continuing to grow, recent indicators suggest growth will turn positive in the fourth quarter or early in 2011 (charts and Figure 1). The unemployment rate has begun to fall, but mainly due to shrinking labor force participation rather than job creation.

Figure 1.
Figure 1.

Romania: Recent Economic Trends

Citation: IMF Staff Country Reports 2011, 020; 10.5089/9781455213788.002.A001

Source: Haver IMF Staff Estimates.
uA01fig01

Private consumption and retail trade

Citation: IMF Staff Country Reports 2011, 020; 10.5089/9781455213788.002.A001

uA01fig02

GDP and ESI

Citation: IMF Staff Country Reports 2011, 020; 10.5089/9781455213788.002.A001

7. Financial market stress has eased further in recent months (charts and Figure 2). The CDS spread for sovereign debt has narrowed by around 100 basis points since September, leaving them below several other EU countries. Romanian equity markets have recovered somewhat since their June trough. Thus far, the turbulence in the Euro area periphery has had little direct impact on Romania, though risks remain. The leu has weakened slightly since September, with relatively low volatility due in part to occasional central bank interventions to smooth currency fluctuations.

Figure 2.
Figure 2.

Romania: Financial Developments

Citation: IMF Staff Country Reports 2011, 020; 10.5089/9781455213788.002.A001

Source: Bloomberg; Haver.
uA01fig03

National Currency per Euro

(July 1, 2008 = 100)

Citation: IMF Staff Country Reports 2011, 020; 10.5089/9781455213788.002.A001

uA01fig04

CDS, 5-years

Citation: IMF Staff Country Reports 2011, 020; 10.5089/9781455213788.002.A001

8. Monetary conditions continue to ease, supporting a fall in economy-wide interest rates (charts). Notwithstanding the National Bank of Romania’s (NBR’s) decision to pause further policy loosening, monetary conditions have moderated further, reflecting continued reductions in deposit and lending rates in the banking system. Lending rates did not fall by as much, however, as banks raised lending margins to cover increased provisioning due to the still rising non-performing loans (NPLs). Weakening of the nominal effective exchange rate has also contributed to the monetary easing.

uA01fig05

MONETARY CONDITIONS INDEX 1/

Citation: IMF Staff Country Reports 2011, 020; 10.5089/9781455213788.002.A001

1/ Weighted average of the annual change in the 3-month interbank offerate and the nominal effective exchange rate(at a ratio of 1.5 to 1)
uA01fig06

INTEREST RATES ON RUN INSTRUMENTS

(in percent)

Citation: IMF Staff Country Reports 2011, 020; 10.5089/9781455213788.002.A001

9.Inflation has increased sharply as a result of the recent increase in the VAT rate and higher food prices. Headline CPI inflation jumped from 4.4 percent in May to 7.9 percent in October. The initial pass-through of the 5 ppt. VAT hike was roughly as expected, but inflation has been boosted by increased food prices (due to higher world prices as well as recent flooding which disrupted food production in Romania). Prior to the VAT increase, prices were on a firm disinflation trend towards the center of the National Bank’ target band of 3½ percent ± 1 percentage point (Figure 1).

Romanian Banking System - Core Indicators

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Source: NBR.

Tier 1 capital/ total average net assets.

Unadjusted exposure from loans classified as “loss” defined as past 90 days and/or initiation of legal preceeding/ total loans and interest, excluding off-balance sheet items.

Cash, sight and term deposits w ith banks plus government securities free of pledge/ total liabilities.

10. The banking sector remains liquid and well capitalized but NPLs continue to rise. NPLs rose sharply in the third quarter, reaching 11.7 percent 1 of total loans at end-September with a notable dispersion around the mean. They will likely continue to increase in the first half of 2011, due to the slow economic recovery and the effects of recent public wage cuts on disposable incomes. The banking system retains adequate buffers, with an average capital adequacy ratio of 14.6 percent at end-September 2010 and with all banks above 11 percent (compared to the statutory minimum of 8 percent). Nevertheless, the authorities will need to maintain vigilance over some small banks (accounting in aggregate for less than 2 percent of system assets), which have seen a rapid deterioration in loan quality and have lower provisions compared to the system average. Lending to the private sector has been flat since early 2009, with declining local currency lending offset by an increase in foreign currency lending that mostly reflects the repatriation of offshore loans.2 Lending to the government, on the other hand, now accounts for 20 percent of total bank loans compared to 8 percent at the end of 2008, although crowding out effects appear limited so far due to weak private demand. The nine largest foreign banks under the European Bank Coordination Initiative (EBCI) have maintained an aggregate exposure of 98 percent3 at end-October, well above the commitment of 95 percent agreed in July.

11. Romania’s external position continues to improve. The current account deficit improved from 13½ percent of GDP in 2007 to 5 percent of GDP (on a 12-month basis) by September-2010, driven by strongly shrinking trade deficit. Exports are gaining momentum with recovery in major trading partners (driven by manufacturing sector) while depressed domestic demand is limiting import growth. On the transfers side, workers’ remittances have shrunk compared to 2009 due to the recession and high unemployment in host economies. Foreign direct investment continue to be weak, financing less than half of the current account deficit, while official financing remained to be the major source of inflows. As a result, the end-September net foreign asset target was met with a margin of some €3.7 billion. In the remainder of the year, potential outflows are anticipated to be less than €700 million, as most banks are expected to maintain or expand their operations in Romania.

B. Macroeconomic Framework and Risks

12. The macroeconomic outlook remained broadly unchanged compared with the last review, but continues to be subject to large uncertainties:

  • Growth. GDP remains forecast to fall by 1.9 percent in 2010, with growth of 1½ percent in 2011 as the expected gradual recovery takes hold in late 2010 or early 2011. Domestic demand will only slowly regain momentum after real disposable income was reduced by lower public wages and the VAT hike. Beginning in 2012, demand of households and enterprises should become the main growth engine, as incomes recover, employment generation starts kicking-in, and balance sheet adjustments wind up. Net external demand will gradually cede its place as the main driver of growth, reflecting both stronger domestic demand and slower growth in export markets. Growth should accelerate somewhat above the 3-3½ percent estimated increase of potential output in 2012–15, allowing for the output gap to close by 2015.

  • Risks to this outlook remain large but broadly balanced. On the downside, political tensions could dampen confidence and weaken performance. A weaker-than-expected recovery in Western Europe could affect Romanian exports. The ongoing turbulence in the Euro area periphery could still spill over into Emerging Europe, raising risk premia and affecting capital flows to Romania. On the upside, the booming export sector could result in stronger spill-over effects to the local economy. The sharp fiscal adjustment undertaken in 2010 could clear the way for a faster recovery of consumer confidence and domestic demand in 2011. Improved absorption of EU investment funds could also catalyze faster growth.

  • Inflation. Inflation will remain above the NBR’s target band until late-2011 due to the VAT hike and food price pressures. Staff now expects CPI inflation to peak at slightly above 8 percent late in 2010, before beginning to decline in the course of 2011. Given current weak economic recovery, the second-round effect of the VAT hike is likely to be small. The central bank’s 2011 target of 3 percent ±1 percentage point is still likely to be met.

  • Upside risks to the inflation outlook outweigh downside ones. A continued resurgence in world commodity prices may increase food and energy prices by more than currently expected. The need to raise administered prices as part of a more aggressive adjustment process in some public enterprises may also boost inflation. A further weakening of the exchange rate would also generate pressure on the CPI. On the downside, the wide output gap could lead to a smaller-than-projected pass through of the VAT increase.

  • External Position. The balance of payments outlook remains broadly unchanged from the previous review. The current account deficit is projected at around 5½ percent of GDP in 2010, rising to near 6 percent by 2012, slightly above its long-term estimated norm. Despite marked improvement in the goods trade balance, a larger services deficit and repatriation of income and weaker remittances and are limiting further adjustment in the current account. Nevertheless, weaker FDI and portfolio inflows coupling with potential outflows due to the revised EBCI agreement are broadly offset by government’s financing from official sources.

uA01fig08

INFLATION TARGETS AND OUTCOMES

Citation: IMF Staff Country Reports 2011, 020; 10.5089/9781455213788.002.A001

Romania: Macroeconomic Outlook

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III. Policy Discussions

A. Fiscal Policies

13. The fiscal adjustment is taking hold, setting the authorities on track to meeting this year’s targets. The ambitious fiscal package of July 2010 has produced the targeted adjustment in its first few months, backed by a modest turnaround in tax yields, strict expenditure control, and continued streamlining of public employment (down 5 percent from end-2008).4 As a result, the end-September deficit and current spending targets were met by a significant margin (0.8 percent and 0.3 percent of GDP, respectively), putting the authorities in a good position to meet the deficit target for the year as a whole while also leaving space to clear arrears.

uA01fig09

Public Sector: Wages and Employment 1/

Citation: IMF Staff Country Reports 2011, 020; 10.5089/9781455213788.002.A001

Source: Haver and staff estimates.1/ Covers administration, defense, education, health and culture.

14. Policies are in place to reach the 2011 fiscal targets, but there are significant implementation challenges. The draft 2011 budget relies on the full-year yield of the 2010 adjustment measures and on continued expenditure restraint to reach the targeted 4.4 percent of GDP deficit. These agreed policies include: (i) the elimination of the holiday bonuses and the 13th salary to allow some recovery in public wages within the agreed wage bill ceiling; (ii) continuing the replacement of only one in seven departing civil servants; (iii) the extension of this year’s pension freeze; (iv) expanding the base of the healthcare contributions to more pensioners; and (v) the elimination of the heating subsidies. However, the authorities will face a number of implementation challenges on key elements of the adjustment. The assumed reduction in the wage bill depends upon the authorities’ ability to retain the bulk of the wage cuts agreed in July 2010 throughout 2011, and on a continued gradual reduction in public employment.5 Healthcare reforms will have to effectively overcome the tendency for significant expenditure overruns in the past (see ¶22 below). The authorities will also have to continue to resist strong political pressures to reduce income taxes or social contributions rates or to boost capital spending beyond sustainable levels. The authorities remain fully committed to taking further measures if any of these challenges threaten to derail their adjustment strategy.

uA01fig10

STRUCTURAL FISCAL ADJUSTMENT

(in percent of GDP, EU-27)

Citation: IMF Staff Country Reports 2011, 020; 10.5089/9781455213788.002.A001

Source: WEO and staff estimates.

15. If current policies are maintained, Romania’s fiscal deficit is on track to fall to near 3 percent in 2012. In structural terms, the cash fiscal deficit will fall below 2 percent of GDP in 2011, representing a correction of nearly 7 percentage points of GDP over three years, bring the structural deficit down from an unsustainable 9 percent of GDP prior to the crisis and allowing the authorities to reach the Maastricht deficit criterion by 2012. With current policies and continued expenditure constraint, the 3 percent headline deficit would translate into a structural deficit of about 1½ percent of GDP as the effects of structural reforms are felt in pensions, healthcare spending, and social benefits.6 Public debt will peak at below 37 percent of GDP in 2011, after which it will decline to about a third of GDP over the medium-term. The authorities, however, will face increased headwinds as expenditure pressures intensify ahead of the 2012 parliamentary elections and as constitutional court decisions may limit the policy instruments available to reign in the wage bill.

uA01fig11

General Government Arrears

(>90 days, mil RON)

Citation: IMF Staff Country Reports 2011, 020; 10.5089/9781455213788.002.A001

16. The efforts to clear payment arrears continue with the slow progress. The government has paid off RON 1.9 billion (0.4 percent of GDP) in health arrears and unpaid bills in September, significantly reducing arrears at the central government level (see chart).7 In contrast, local government arrears have been rising, and the program target was missed once again. The government will allocate the necessary funds to keep the central government and social security arrears near zero (less than 0.05 percent of GDP) during the duration of the program until the necessary structural reforms, especially in the health sector, take effect.8 In November, an FAD TA mission provided additional assistance on integrating accounting and Treasury payment systems to control spending commitments and strengthen budget execution (structural benchmark, March 15, 2011). Local government arrears are expected to grow further before they start a downward trend early next year, when amendments to the local public finance law will require repayment of arrears next year. In addition, WB experts will help improve local government financial management. In line with a new EU directive, the government over time will start reducing the time period for paying bills after submission to no more than 30 days during 2011 and 2012.

17. The fiscal financing strategy will be recalibrated towards higher reliance on longer-term market financing and larger financing buffers. Over the last several months, the authorities limited their regular market access to short maturity instruments as local currency yields surpassed their comfort level. However, beginning in November, they have begun to focus on extending the maturity of their domestic currency debt while accepting somewhat higher yields, with a view to building a yield curve and building their financing buffers. They also successfully rolled over (with an increase in maturity) a large domestic euro-denominated syndicated loan with local banks. They also plan to launch a “euro medium term notes” program in late 2010 or early 2011 that will maintain their presence in the external markets under more flexible issuance procedures. A formal review of the government’s debt management strategy, with the assistance of the IMF the EC, and the World Bank, is planned for 2011.

uA01fig12

Public Debt Structure

Citation: IMF Staff Country Reports 2011, 020; 10.5089/9781455213788.002.A001

B. Structural Reforms

18. Key reforms in public sector wages and employment are advancing. Approval by parliament of the unified wage law for the public sector is expected in December (prior action). The framework law provides the new job categories and wage scale. The parameters for 2011 defined in the implementation law will ensure that: (i) the public wage bill remains within the agreed envelope for 2011; (ii) all remaining bonuses are set as ceilings rather than mandatory levels, both at an individual and aggregate level, allowing for flexibility according to performance and budgetary conditions; and (iii) the productivity bonus system (stimulente) will be eliminated by incorporating it into the basic wage, while allowing some flexibility for rewarding strong tax collections within the overall bonus ceiling. Full application of the new wage system will take several years, however. Reductions in public employment are on track. By end-October, some 88,000 jobs had been cut, bringing the year-end target of 100,000 into reach.

19. The enactment of the pension reform is expected in December (prior action). After parliament’s approval of the law in September, enactment of the pension reform was delayed because the president returned it to parliament to reconsider the pension age of women. Final approval was achieved on December 7, and enactment should occur by year-end.9 The government remains committed to increase the contributions to the second pillar to 3 percent in 2012 and to preserve current operating conditions for the private funds.

20. The authorities continue work on labor market and social benefits reforms to improve growth prospects and the efficiency of public spending. The Ministry of Labor has finalized a draft of reforms in the collective bargaining process to increase representativeness in the negotiations between social partners.10 A law on day workers has been submitted to the parliament, and an apprenticeship law has been drafted to provide young people better access to the labor market. The authorities have also made efforts to improve training programs to low-skilled workers. Efforts continue on improving the efficiency of social protection while providing support for fiscal adjustment. A social benefits reform, which has already been submitted to parliament, will consolidate the guaranteed minimum income benefit, heating subsidy and family allowance into one new means-tested scheme. Disability allowances will also be subject to incomes testing. The current maternity benefits will be streamlined to be more in line with the average EU standard. To reduce the significant rate of benefits fraud detected in recent inspections and increase spending efficiency, the authorities have doubled the personnel working on social benefit inspection and are expanding the range of programs subject to inspections to all programs that are high risk of irregularities.

21. Bold reforms in the health sector are critical to secure the success of the fiscal consolidation strategy. While authorities continue to implement measures to reduce healthcare costs (see LOIs of June 16, June 29 and September 9, 2010), these have proven insufficient to balance the much reduced budget for the health system without accumulating arrears. The government will therefore continue restructuring the health sector to ensure the functioning of the health care system within budgetary allocations going forward. On the revenue side, legislation will be approved to establish a copayment for most healthcare services and to make the recently approved tax on drug suppliers operational. On the spending side, the hospital network will be rationalized and the government will restructure its contracting of healthcare services to cap the contracts to budgeted amounts, to contract on a competitive rather than on hitherto universal basis, to reduce the imputed profits for drug suppliers, and continue the gradual move from a per-patient to a per-service reimbursement of primary healthcare providers. The authorities will also review and streamline, with help from the World Bank, the package of benefits insured by the government, and will develop an IT system for pricing medical services. These reforms are anticipated to yield at least 0.4 percent of GDP in savings during 2011.

22. Tax administration reforms to improve collections and fight evasion are ongoing. Legislation approved in June to deal with VAT and excise tax compliance has started bearing fruit, as collections have recently begun to improve. Additional legislation on high net wealth individuals is under preparation (end-December structural benchmark). The legislation will allow for a broader definition of income and will strengthen audits of unreported income. An IMF expert is expected to assist in the implementation of the law, and a mission is tentatively planned for early next year. To concentrate tax administration’s resources on medium and large taxpayers, the government will request a shift in the VAT mandatory registration threshold from the EC Council of Ministers to EUR 50,000, supported by a simplified taxation option for taxpayers below the threshold. As about 80 percent of revenue comes from 25,000 largest taxpayers, tax administrators will implement new criteria to allocate taxpayers into small, medium, and large segments and focus attention on the large segment. The introduction of information technology systems is ongoing. The electronic filing for large taxpayers is now in place, and necessary equipment to fight tax evasion is being provided to tax administration and customs offices. A newly introduced right to freeze assets and accounts has also improved compliance.

23. Progress concerning privatization and performance of state-owned enterprises (SOEs) remains limited. Revised data indicate that the 10 largest loss-making public enterprises failed to meet the indicative target for operating losses in the second quarter, and the third quarter was also missed by a wide margin. Moreover, payments arrears have continued to increase. Deficits of the 10 largest loss-making enterprises through end-September totaled about ¾ percent of annual GDP, while their gross arrears stood at roughly 3 percent of GDP (roughly 10 times those monitored under the general government target). The government continues efforts to improve the performance of public enterprises. Measures have been taken to improve the revenue side of these companies (via higher tariffs)

24. as well as cost reductions via personnel cuts and restructuring, but progress is slow. Many of the firms have deeply entrenched imbalances, inadequate management and supervision, and strong trade unions resistant to change.

25. The government is stepping up efforts to improve the absorption of EU structural funds for investment. Planning and execution of infrastructure projects is hampered by several legal, administrative and institutional factors, leading to absorption of less than 3 percent of EU structural funds available for 2007–2013. To address this, the government will take several measures including: restructuring key investment units, improving public procurement procedures, streamlining the portfolio of investment projects and focusing on those financed by EU funds, and encouraging greater private sector participation in investment projects. The government will move the EU project management unit from the Ministry of Finance to the Prime Minister’s office and strengthen its authority and staffing, and will create facilities for reallocating the capital budget during the year to those ministries with the best absorption performance.

C. Financial Sector Policies

26. The authorities continue efforts to strengthen the financial safety net. To improve the effective resources of the Deposit Guarantee Fund (DGF), a decision to increase bank contribution rates and eliminate the stand-by credit lines with banks was adopted (structural benchmark). Legislative reforms to the DGF’s governance structure to prevent bank employees from participating in its Board are on track for end-December (reset structural benchmark). The authorities have also committed to make a further legislative change to allow DGF funds to be used more flexibly in the event of bank distress (structural benchmark mid-March). In addition, the IMF has provided technical assistance on preparation and implementation of the new bank resolution powers and on liquidity stress testing.

27. The authorities will take steps to revise a recent government ordinance which could significantly exacerbate banking sector losses. The measure (Ordinance 2010/50) was originally intended to implement an EU directive for improving the transparency of lending practices by eliminating certain bank fees and obliging banks to index floating rate loans only to independent indices. However, it has been applied retroactively to pre-existing contracts without allowing bank to compensate for lost fees or for lower interest rate indices, imposing significant costs on banks. It has also given the consumer protection agency broad power to suspend banks’ lending activities, undermining the NBR’s role as the regulator of the system. The authorities have committed (prior action) to either eliminate the retroactive element in the current legislation or to allow the banks to re-adjust the terms of pre-existing contracts so as to avoid potentially destabilizing losses, and to clarify that the NBR will remain the sole agency with authority to suspend banks’ activities.

D. Monetary and Exchange Rate Policies

28. The central bank has left its easing cycle on hold, pending a clear signal that inflationary pressures are receding. After a 4 percentage point cumulative reduction in interest rates since early 2009, the NBR has left its key policy rate unchanged since July due to uncertainties associated with the VAT increase and food prices. Reserve requirements have remained unchanged since November 2009 but at relatively high levels11. The authorities believe that heightened vigilance will be needed to keep inflation expectations in check and stave off possible second-round inflationary effects, and intend to be cautious in resuming monetary easing only when inflation risks are believed fully under control. Interventions in the foreign exchange market have been quite limited in recent months, allowing full exchange rate flexibility, while occasionally smoothing excessive fluctuations. Looking forward, monetary policy will be geared towards reaching the projected disinflation path net of the tax effect.

uA01fig13

Policy Interest Rates

(percent)

Citation: IMF Staff Country Reports 2011, 020; 10.5089/9781455213788.002.A001

IV. Program Modalities

29. The attached Letter of Intent (LOI) describes the authorities’ progress in implementing their economic program and sets out their commitments through March 2011.

  • Some modifications to the program’s conditionality are proposed (Tables 1—2 (i) the end-November structural benchmark for reforming tax administration for high net wealth individuals will be reset to end-December 2010; (ii) the structural benchmark for end-March 2011 on integrating the accounting reporting system with the Treasury payment system is modified to the first phase of the integration project, which would include completing the tender for consultants to implement the project and a full project plan should be in place by March 15, 2011; (iii) the end-September structural benchmark on the reform of the DGF governance arrangement is reset to end-December 2010.

  • One new structural benchmark is proposed (Table 2): An amendment to the legislation on the Deposit Guarantee Fund (DGF) to permit resources to be used to facilitate bank resolution, including purchase and assumption transactions (March 15, 2011).

  • A net foreign asset performance criterion is proposed for end-January 2011.

Table 1.

Estonia: Selected Macroeconomic Indicators, 1997–2001

(In units as indicated)

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The December 2008 figure is a stock.

Performance criterion for January 2011 and indicative target for March 2011 are relative to December 2010 target.

Cumulative figure during calendar year (e.g. March 2011 figure is cumulative from January 1, 2011).

In accordance with TMU, the end-September program target was adjusted from the original target of -28,200 by one-half of the revenue over-performance.

The target for March 2011 can be adjusted with higher or lower capital spending as defined in TMU.

Table 2.

Romania: Performance for Sixth Review and Proposed New Conditionality

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30. Program modalities. The Fund arrangement remains adequate to meet Romania’s balance of payment needs through end-2010, alongside financing commitments from the European Union and the World Bank. No changes are therefore proposed to the level of access or the schedule of purchases (Table 8).

Table 3.

Romania: Selected Economic and Social Indicators, 2008–15

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Sources: Romanian authorities; Fund staff estimates and projections; and World Development Indicators database.

Actual fiscal balance adjusted for the automatic effects of the business cycle.

Table 4.

Romania: Balance of Payments, 2008–15

(In billions of euros, unless otherwise indicated)

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Sources: Romanian authorities; and Fund staff estimates and projections.

Includes IMF disbursement to the Treasury of €0.9 billion in 2009 and €1.2 billion in 2010, and issuance of €1 billion Eurobond

1/ Revisions to the 2004 data since the May 2004 Board meeting have led to a deterioration of about 0.8 percent of GDP. of an Euro bond of €1 billion in 2010.

IMF disbursements amounted to €6.8 billion in 2009 and are projected to amount to €5 billion in 2010. Of these €0.9 billion in 2009, and €1.2 billion in 2010 have been disbursed directly to the Treasury, included in the capital and financial account as noted in footnote 1.

Operational defition. Reflects the allocation of SDR 908.8 million that was made avaialable in two tranches in August and September 2009.

Table 5.

Romania: Gross Financing Requirements, 2009–11

(In billions of euros, unless otherwise indicated)

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Source: IMF staff estimates.

Includes includes portfolio equity, financial derivatives and other investments, assets position.

Excludes the disbursements by the IMF directly to the Treasury, amounting to €0.9 billion in 2009Q3 and €0.8 billion in 2009Q4.

Operational defition. Reflects two SDR allocations in August and September 2009.

Table 6.

Romania: General Government Operations, 2007–12

(In percent of GDP)

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Sources: Ministry of Finance; Eurostat; and Fund staff projections.

Increase in 2009 mostly reflects higher EU-financed capital spending and budgeted rise in pensions.

Includes co-financing of EU projects.

Does not include all capital spending.

Total public debt, including government debt, local government debt, and guarantees.

Percentage deviation of actual from potential GDP.

Table 7.

Romania: Monetary Survey, 2007–11

(In millions of lei (RON), unless otherwise indicated; end of period)

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Sources: National Bank of Romania; and Fund staff estimates.

Rates for new local currency denominated transactions.

For interest rates and shares of foreign currency loans and deposits, latest available data.

Table 8.

Romania: Schedule of Reviews and Purchases

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Source: IMF staff estimates.

The amount of purchase for the second review was available from December 15, 2009, but was made together with the amount for the third review on February 19, 2010 given the delay in completing the second review.

31. Romania’s capacity to repay the Fund is expected to remain strong. Fund credit outstanding would peak in 2010 at 36 percent of gross reserves (Table 9). Peak payments would be in 2013–14 at a still manageable 11.7 and 12.0 percent of gross reserves, respectively. While this exposure remains large, the associated servicing risks are mitigated by the relatively low level of public debt (under 37 percent of GDP), with public external debt peaking at around 16 percent of GDP in 2011 (Table 6). Total external debt is projected to increase to about 82 percent of GDP at end-2011 from 51 percent at end-2008, but a return to economic growth would gradually reduce it to manageable levels in the medium term (Table 11). Romania’s strong political commitment to the SBA program and its excellent track record servicing external obligations also provide comfort that it will fulfill its financial obligations to the Fund in a timely manner.

Table 9.

Romania: Indicators of Fund Credit, 2010–15 1/

(In millions of SDR)

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Source: IMF staff estimates.

Using IMF actual disbursements, SDR interest rate as well as exchange rate of SDR/US$ and US$/€ of October 20, 2010.

End of period.

Repayment schedule based on repurchase obligations.

Table 10.

Romania: Public Sector Debt Sustainability Framework, 2007–2015

(In percent of GDP, unless otherwise indicated)

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Coverage: General government gross debt, excluding guarantees.

Derived as [(r - π(1+g) - g + αε(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of for denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Using Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Table 11.

Romania: External Debt Sustainability Framework, 2005–2015

(In percent of GDP, unless otherwise indicated)

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Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in Euro terms, g = real GDP growth rate, ε = nominal appreciation (increase in dollar value of domestic currency), and α = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock. ρincreases with an appreciating domestic currency (ε > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

32. Fund staff has continued to cooperate closely with the staff of the European Commission (EC) and the World Bank (WB). Staff from the three institutions consults regularly regarding developments in Romania, and IMF, EC and WB staff participated in joint missions. The EU has disbursed the first three tranches of its support (€3.7 billion), and two additional tranches are expected in 2011 (€1.4 billion). The WB has disbursed its first tranche (€0.3 billion) in September 2009, with the remaining tranches (€0.7 billion) expected in the first half of 2011.

V. Staff Appraisal

33. Romania is beginning to reap the benefits of the difficult adjustment measures implemented under the program. Government revenues are improving and expenditures are falling, putting the government on track to reach its 2010 fiscal deficit. The 2011 deficit target is also in reach without major significant additional measures. The fiscal consolidation is in turn feeding a continued improvement in the risk premium on Romania in international financial markets, notwithstanding the considerable uncertainties in the Euro zone periphery. While the economic recovery has been delayed by the weak domestic demand (in part due to the needed fiscal consolidation), exports are booming and high frequency indicators suggest that GDP growth is set to resume in the coming quarters.

Romania: Stand-By Arrangement

Access: SDR 11.443 billion.

Length: 24 months.

Phasing. SDR 4.37 billion was made available upon Board approval of the arrangement on May 4, 2009, and the subsequent four disbursements amounting to SDR 5.43 billion were made during September 2009—September 2010 with the completion of the first through fifth reviews (Table 8). The sixth disbursement amounting to SDR 769 million will be made available subject to the completion of this review. One final disbursement of SDR 874 million is contingent upon completion of the seventh review (March 2011).

Conditionality

  • Quantitative Performance Criteria

    • ➢ A floor on the change in net foreign assets

    • ➢ A ceiling on general government domestic arrears

    • ➢ A floor on the overall general government cash balance

    • ➢ A ceiling on general government guarantees

    • ➢ Non-accumulation of external debt arrears

  • Quantitative Indicative Target

    • ➢ A ceiling on general government current primary spending

    • ➢ A floor on the operating balance of the 10 largest loss-making SOEs

  • A consultation band around the 12-month rate of inflation of consumer prices

  • Prior Actions

    • ➢ Parliamentary approval of the 2011 budget including ratification of the 24 percent VAT rate

    • ➢ Parliamentary approval of framework and implementing legislation for the unified wage law

    • ➢ Enactment of the pension reform legislation

    • ➢ Amendment of the ordinance on credit contracts (Ordinance 2010/50)

  • Structural Benchmarks (Pending and Proposed)

    • ➢ Parliamentary ratification of the fiscal adjustment measures September 30, 2010 (ratification of the VAT hike reset as prior action in conjunction with budget approval)

    • ➢ Passage of framework and implementing legislation for the unified wage law October 31, 2010 (reset as prior action)

    • ➢ Reform tax administration methodology for high net wealth individuals December 31, 2010 (reset from November 30, 2010)

    • ➢ Parliamentary approval of agreed 2011 budget December 15, 2010 (reset as prior action)

    • ➢ Complte the first phase of integration of the accounting and Treasury payment systems March 15, 2011(modified and reset from March 30, 2011)

    • ➢ Reforming DGF’s governance regime December 31, 2010 (reset from September 30, 2010)

    • ➢ Amend legislation to allow for DGF resources to facilitate bank restructuring March 15, 2011 (proposed)

34. However, in order to fully restore confidence, the authorities must resist pressures to backtrack on policy implementation. Political forces are increasingly pushing for a reversal of components of the fiscal adjustment package. Resistance to key structural reforms is also mounting. While the authorities have thus far resisted these pressures, continued policy uncertainty can prove detrimental to market sentiment and adversely affect recovery prospects. The fiscal measures, along with signature reforms such as the pension reform, unified wage legislation, and the fiscal responsibility law, should be given the time needed to generate positive economic dividends in 2011 and beyond.

35. By the conclusion of this review, key structural reforms will be in place to generate a permanent improvement in the public finances. The pension and public wage reforms are two major pillars supporting the adjustment effort; together they are expected to generate several points of GDP of fiscal savings in future years while improving the efficiency of remaining expenditures. Staff firmly supports the authorities’ efforts to streamline public employment, as it will allow some recovery in real incomes of the remaining, better-qualified, employees. We also welcome the authorities’ initiatives to reform labor markets and the inefficient social benefits system. Further action is needed to bring healthcare spending fully in line with budgetary allocations, however. Efforts to improve tax collections are also beginning to show results, and should be expanded in order to bring the yield from major taxes more in line with that of other EU countries.

36. The authorities have wisely begun to normalize their fiscal financing. Given severe financial market difficulties in other EU countries, the authorities should place priority on rebuilding financial buffers and on developing a full range of debt instruments and maturities to cushion against future shocks. The development of a full yield curve in the public sector will also have positive effects on financial market development.

37. While some progress has been made, the problem of domestic government payment arrears remains a drag on the economic recovery. While the size of the arrears is small (0.3 percent of GDP at end-June), it has become clear over time that they are symptomatic of deeper problems of lack of adequate monitoring and control over public spending at all levels. Repayment of arrears would provide major benefits in terms of unblocking financial payments in the economy, as currently suppliers to the government are in turn unable to pay their obligations on a timely basis, causing multiplier effects throughout the economy. It will also permit a better allocation of public spending to areas of future priority rather than to the areas of past indiscipline.

38. The failure to meet the indicative targets on public enterprise deficits and arrears12 points to the need for much more comprehensive action in SOEs. The measures taken to date to improve revenues and cut expenditures are dwarfed by the magnitude of the problem. Beyond the fiscal impact of these firms, it is clear that they are generating significant drag on the economic recovery as a whole. Their payments arrears to suppliers starve private sector firms of needed liquidity and their inefficiency in key sectors like transport and energy raises costs for firms throughout the economy.

39. Staff urges the authorities to take all actions needed to improve the absorption of the EU funds. This improvement will have positive effects throughout the economy. The inflows of grant money will help the balance of payments. Increased investment resources will reduce pressure on the authorities’ own fiscal resources for capital expenditures. Properly designed and executed projects could provide an engine of growth in the economy, with immediate multiplier effects and improved infrastructure for other economic activities.

40. Staff supports the pause in monetary easing in the wake of the VAT increase. The authorities should gear their future policy decisions towards reaching the projected disinflation path net of the tax effect by end-2011. If inflation develops as currently forecast, the NBR would likely be in a position to resume gradual reductions in interest rates and reserve requirements by midyear. Of course, continued vigilance will be needed to forestall second-round effects from the VAT hike and higher administrative prices.

41. Financial system defenses against the crisis have proven resilient, but continued watchfulness will be needed given risks from uncertainty in other EU countries and further asset quality deterioration. The authorities’ proactive approach to monitoring and securing adequate capital buffers will need to continue until economic recovery takes hold and NPLs finally begin to stabilize around mid-2011. Reforms of the bank resolution framework and of the deposit insurance fund agreed under the program have either been completed or are underway. Staff supports the authorities’ commitment to modify Ordinance 50, which otherwise would pose risks of significant additional losses in some banks, and would undermine NBR control of banks’ lending activities.

42. On the basis of Romania’s performance under the SBA, staff supports the authorities’ request for completing the sixth review. Staff also supports the approval of a waiver of applicability for the end-December targets for which data are not available, and a waiver of nonobservance of the end-December 2010 performance criterion on the accumulation of domestic arrears on the basis of the small nature of the deviation and the corrective actions undertaken by the government. Staff also recommends approval of the modification of program conditionality, as proposed by the attached Letter of Intent.

Figure 3.
Figure 3.

Romania: Public Debt Sustainability: Bound Tests 1/

(Public debt in percent of GDP)

Citation: IMF Staff Country Reports 2011, 020; 10.5089/9781455213788.002.A001

Sources: International Monetary Fund, country desk data, and staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Fiures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2010, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).
Figure 4.
Figure 4.

Romania: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2011, 020; 10.5089/9781455213788.002.A001

Sources: International Monetary Fund, Country desk data, and staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.3/ One-time real depreciation of 30 percent occurs in 2010.

Appendix I. Romania: Letter of Intent (LOI)

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, DC, 20431

U.S.A.

Bucharest, December 22, 2010

Dear Mr. Strauss-Kahn:

1. The anti-crisis program supported by the International Monetary Fund (IMF), the European Union (EU), and the World Bank (WB) has continued to play a crucial role in stabilizing the Romanian economy, reversing imbalances, rebuilding confidence of international financial markets, and setting the stage for future sustainable economic growth. Economic activity is now stabilizing and we expect growth to resume in the coming months, leading to an increase of around 1½ percent in 2011 (compared to around -2 percent in 2010). Inflation has jumped sharply in recent months due to the effects of the July VAT increase and food price pressures. We expect inflation to peak at slightly above 8 percent at end 2010 before beginning to return to within the National Bank of Romania’s target band in the course of 2011. We continue to project a current account deficit of about 5–6 percent of GDP for 2010.

2. Our performance on the quantitative targets and the structural reform agenda has been strong (Tables 1 and 2).

  • Quantitative performance criteria and indicative targets. All end-September 2010 quantitative performance criteria were observed, with the exception of that on general government arrears (¶8). However, we have taken action to assure that central government arrears are near zero and will remain so for the remainder of the program. The indicative target on the operating balance of loss-making state-owned enterprises was also missed. Inflation remained within the inner band of the inflation consultation mechanism throughout the period.

  • Structural benchmarks. All structural benchmarks to end-December will be met, albeit with delays in some cases. We have reformed the Deposit Guarantee Fund’s (DGF’s) funding regime and have reviewed its governance structure by end-September, as programmed. The Unified Wage legislation will be approved by parliament in December (prior action), with only a small delay from the end-October target. There has been a delay in the parliamentary ratification of some of the June austerity measures and we now expect that this will take place in the context of the approval of the 2011 budget. While the earlier structural benchmark on approval of the pension reform law was met, there was a delay in enactment which we now expect in December (¶16; prior action). We are making significant progress on other structural benchmarks under the program.

Table 1.

Romania: Quantitative Program Targets

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The December 2008 figure is a stock.

Performance criterion for January 2011 and indicative target for March 2011 are relative to December 2010 target.

Cumulative figure during calendar year (e.g. March 2011 figure is cumulative from January 1, 2011).

In accordance with TMU, the end-September program target was adjusted from the original target of -28,200 by one-half of the revenue over-performance.

The target for March 2011 can be adjusted with higher or lower capital spending as defined in TMU.

Table 2.

Romania: Performance for Sixth Review and Proposed New Conditionality

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3. In view of this performance—and of the supplementary and corrective actions outlined in this Letter—we request completion of the sixth review under the Stand-By Arrangement. We request a waiver of applicability for the targets on the general government balance, on the ceiling on government guarantees, and for the inflation consultation band. We also request a waiver of non-observance for the end-December performance criterion on general government arrears as that target is unlikely to have been met.

4. We believe that the policies set forth in the letters of April 24, 2009, September 8, 2009, February 5, 2010, June 16, 2010, June 29, 2010, September 9, 2010 and in this Letter are adequate to achieve the objectives of our economic program, but the government stands ready to take additional measures as appropriate to ensure achievement of its objectives. As is standard under all IMF arrangements, we will consult with the IMF before modifying measures contained in this Letter or adopting new measures that would deviate from the goals of the program, and will provide the IMF and the European Commission (EC) with the necessary information for program monitoring.

Fiscal sector

5. We are on track to meeting this year’s fiscal targets, following the difficult fiscal adjustment measures applied in July. The overall deficit target for the end-September has been met with a significant margin due to strict expenditure control and better-than-anticipated tax revenues. We also expect to meet the full year deficit target of 6.8 percent of GDP for 2010. The recent payment of health sector arrears and overdue bills produced a sharp drop in domestic payments arrears, but the end-September ceiling has been breached again given limited progress in the repayment of local government arrears. We will take action to maintain central government and social security arrears near zero for the remainder of the program (¶8).

6. For 2011, we remain fully committed to reducing the deficit to 4.4 percent of GDP. On the revenue side, we intend to leave the main components of the tax system unchanged. On the spending side, we are committed to keeping the wage bill within the agreed limit of RON 39 billion, excluding contributions from the military (RON 1.6 billion under the new pension law), while calibrating wages, bonus payments, and public employment policies to ensure some recovery of real public sector wages. To secure the 2011 deficit target and compensate for the elimination of the minimum tax, we will take the following measures: (i) undertake further health sector reforms (¶17) to improve revenues and control expenditures; (ii) reduce the total subsidies for livestock welfare for 2011, after confirming the introduction of funding for these programs in the European National Program for Rural Development and further streamline state aid; (iii) continue public employment reductions by inter alia maintaining the policy of replacing only 1 of 7 departing workers; and (iv) broaden the base of health contributions to cover pensioners earning between RON 740 and RON 1000. We are continuing the comprehensive reform of the education system, which should improve the quality of instruction while generating additional savings as a result of rationalization of the school network and of the teacher workload. Within the budget envelope, we will allocate additional resources to investment in the first half of the year so as to improve absorption of EU funds. If absorption improves sufficiently, we will work on solutions to create greater fiscal space for investment from mid-2011. The European Union will provide expert assistance for utilizing the resources available from the EU, European Investment Bank, and the World Bank, including through innovative financing solutions. We stand ready to take compensatory actions if any judicial impediments arise to the execution of this fiscal strategy. Parliamentary approval of the agreed 2011 budget (including ratification of the 24 percent VAT rate) will be a prior action for the review. The remaining policies in the fiscal area remain as outlined in our letter of intent of September 9, 2010 (¶6).

7. For 2012, we aim to bring the deficit down to the 3 percent of GDP Maastricht target (in accrual terms). This will require continued expenditure restraint, including on wages and bonuses, and may require additional measures. We will strictly limit further ad hoc changes to the tax system to ensure predictability and stability. Once we are firmly on track to meeting our deficit target, we will undertake—with technical assistance from the IMF and in consultation with the EC and World Bank—a comprehensive review of the tax system with a view to its revenue-neutral optimization and simplification. Should the economic recovery create sufficient fiscal space, we will consider a gradual reduction in labor taxation, the high incidence of which weighs heavily on competitiveness, employment creation and labor market practices. The Medium-Term Fiscal Strategy for 2011–13 is an important step in implementing the Fiscal Responsibility legislation and in solidifying our commitment to the Maastricht targets. We also intend to begin discussions in the coming months on a new arrangement, which will help anchor our fiscal performance in 2011 and 2012. We will strengthen the recently established Fiscal Council by providing it with adequate funding so as to ensure that its secretariat is fully staffed with appropriately skilled people.

8. We continue our efforts in clearing outstanding payment arrears. At the central level, we paid off RON 1.9 billion in health arrears and overdue bills in September. We will allocate necessary funds in 2010–11 to prevent accumulation of further arrears and will assure that central government and social security sector arrears will remain near zero at end-November 2010 (prior action). In line with a new EU directive, we will reduce over time the period for paying bills after submission to no more than 30 days. New legislation on local government finance will also allow for greater control of local government arrears beginning in January 2011. To improve commitment control, the recent IMF technical assistance mission helped us with efforts to integrate the accounting reporting system with the Treasury payment system. However, the reforms will take longer than anticipated and we will focus our initial efforts on completing the tender for consultants to implement the project and having a full project plan should be in place by March 2011 (modified structural benchmark reset for March 15, 2011). EU and World Bank experts will review the local government arrears issue with a view toward improving financial management in the local administrations. We will continue using budget appropriations as commitment ceilings and will enforce sanctions against institutions and individuals who breach the ceilings.

9. Our financing strategy will focus on extending the maturity of our domestic debt and consolidating the financial buffers. We will, thus, aim to transition from use of short-term cash management facilities to increased issuance of longer-term instruments under marketdetermined conditions, with a view to building a yield curve. We also plan to launch a “euro medium term notes” program in late 2010 or early 2011 that will maintain our presence in the external markets under more flexible issuance procedures and will help us balance the financing between the domestic and external markets. We are firmly committed to stabilizing our financial buffers over the coming months and to gradually increasing them to around 4 months of financing needs. To enhance our capabilities, in 2011 we will conduct a formal review of our debt management strategy with the assistance of IMF, EC, and World Bank experts.

Fiscal and structural reforms

10. We continue efforts to improve our tax collection and administration and to fight tax evasion. Work is progressing on a draft ordinance on high net wealth individuals to be approved by end-December (structural benchmark, reset from end-November) and an IMF expert will assist in its subsequent implementation. The definition of income will be broadened and the right to audit unreported income will be strengthened. As agreed with the IMF and the EC, we will request a shift in the VAT mandatory threshold from the EU Council of Ministers to EUR 50,000, while studying options for simplified taxation for smaller taxpayers under the threshold. Starting next year, we plan to implement new criteria to allocate taxpayers into small, medium, and large segments. The requirement of electronic filing for medium and large taxpayers has come into effect in November. We will continue our efforts to introduce information technology (IT) systems and consolidate the IT department in ANAF to improve tax administration. We will also provide customs and tax administration with the necessary technical equipment to fight tax evasion. We will continue our efforts to implement measures described in our previous letters.

11. The accelerated absorption of EU funds remains a focal objective of the government. Over the coming year, we will focus on strengthening the administrative capacity of units managing the funds; modernizing and consolidating the legislative and regulatory framework for public investment and other fields relevant for EU fund absorption; and prioritizing investment to assure sufficient financing for key projects as per recommendations in the recent functional reviews. Specifically, we are committed to: (i) giving priority to investment projects co-financed with EU funds when initiating new investments; (ii) prioritizing the existing portfolio of capital projects to focus on projects where funding can be fully secured, with low priority projects discontinued; (iii) strengthening the project appraisal process by requiring private sector review of the bankability of projects; (iv) encouraging private sector participation in projects via outsourcing or public-private partnership arrangements; and (v) ensuring full staffing of program management bodies and the adequate remuneration of the specialized staff, financed with support from technical assistance funds. The government will move the EU project management unit from the Ministry of Public Finance to the Prime Minister’s office and strengthen its authority and staffing with full authority to take necessary actions across ministries to speed up EU funds absorption for investment projects to ensure economic growth. We will create facilities for reallocating the capital budget during the year to those ministries with the best absorption performance.

12. We are undertaking a social benefits reform to improve the efficiency of protection of the poorest and most vulnerable, while providing support for the fiscal adjustment strategy. Efficiency will be increased by allowing for more focused income and means tested eligibility criteria. The reform, which has already been submitted to parliament, will consolidate the guaranteed minimum income scheme, heating benefits and family allowance into one new means-tested scheme. Disability allowances will also be subject to an income-test. We will also streamline the current maternity policy to bring it more in line with the EU average. The draft is currently being discussed in the government. To reduce the significant rate of benefits fraud detected in recent inspections and increase spending efficiency, we have also doubled the personnel working on social benefit inspection.

13. The government continues efforts to improve the performance of public enterprises. The 10 largest loss-making public enterprises failed to meet the indicative target for operating losses in the third quarter. Moreover, arrears have continued to increase, violating EC conditionality on a quarterly reduction of arrears. Measures have been taken to improve the revenue side of these companies (via higher tariffs) as well as cost reductions via personnel cuts and restructuring, but progress continues to be slow. The government will continue the process of winding-up or privatizing state owned enterprises (including Termoelectrica and the cargo rail company) with the goal of securing an optimum price. The privatization agency AVAS continues work on preparing the sale of small firms under its majority ownership and the minority stakes it holds in at least 150 additional firms, but completion of most sales will be expected in 2011.

14. The government will continue to reform the transportation sector to reduce losses and clear arrears of the major SOEs in the railway and road transport sectors. This will be done through widening the revenue base, strengthening controls, reforming legislation to increase transparency of the procurement and contracting frameworks, and increasing reliance on value-for-money analysis of our investment projects. We also aim to gradually increase the system’s use of railway transportation, away from roads, in order to reduce road maintenance costs. To boost absorption of EU funds, we will give priority to investment projects for crosscountry road and rail connections from Nadlac to Constanta (European Corridor IV), finalize the EU project portfolio for 2014–20, and contract independent experts to monitor project execution. Finally, we will restructure the Ministry of Transport and Infrastructure to strengthen administrative capacity through independent human resource evaluation and introduction of a performance-based remuneration system.

15. Preparation of framework and implementing legislation for the unified wage law is nearing completion. It is expected to be approved by parliament in December 2010 (prior action). The parameters will ensure that: (i) the public wage bill remains within the agreed envelope for 2011; (ii) all remaining bonuses are set as ceilings rather than mandatory levels, both at an individual and aggregate level, allowing for flexibility according to performance and budgetary conditions; (iii) the productivity bonus system (stimulente) will be eliminated by incorporating it into the basic wage and annulling the legislative provisions that create its financing fund, while allowing some flexibility for rewarding strong tax collections within the overall bonus ceiling. The government remains committed to further reductions in public employment in the remainder of 2010 and in 2011.

16. Enactment of the pension reform was delayed because the president sent it back to parliament to reconsider of the pension age of women. The parliament has reapproved the legislation early December and it will be signed by the president and enacted by mid-December (prior action). As noted in our September letter, we have suspended early retirements until the new law enters into force, and the new pension indexation provisions will enter into effect in 2012, after the 2011 pension freeze expires.

17. The government will continue restructuring the health sector to ensure the functioning of health care system within budgetary allocations going forward. While we continue to implement measures to reduce healthcare costs (see LOIs of June 16, June 29, and September 9, 2010), these have proven insufficient to balance the much reduced budget for the health system without accumulating arrears. To achieve an appropriate balance between the need to preserve adequate healthcare services and to control costs, we will undertake the following measures in 2010 that will be continued in 2011:

  • Ensure that the revised 2010 and the 2011 budget for the health system are consistent with the projected spending after restructuring measures.

  • To increase the revenues of the system, we will: (i) approve urgent legislation to establish a beneficiary copayment for all healthcare services (excluding emergency), with exemptions based solely on means-testing to protect the most vulnerable; and (ii) clarify the legislative framework for the clawback tax on drug suppliers.

  • To further reduce spending, we will: (i) restructure the hospital system; (ii) limit the number of contracted hospital in-patients by 10 percent relative to the 2010 levels, through annual contracts with the hospitals; (iii) eliminate mandatory contracting with all hospitals, allowing competitive contracting with selected hospitals while ensuring transparency and oversight; (iv) reduce the price markup paid by the government for drugs in the national programs (list C2) at both retail and wholesale levels to 1.5 and 4 percent, respectively; (v) in the primary healthcare system, reduce the share of per-capita reimbursement of doctors from 70 to 50 percent, in favor of per-service reimbursement; and (vi) reform, with assistance from the World Bank, the package of benefits insured by the government to exclude coverage of costly nonessential health services.

  • To improve controls over the financial performance of the sector, we will cap the nominal amount of quarterly services contracted with hospitals, primary care doctors and pharmacies to budgeted amounts; and develop a transparent and integrated IT system in the Ministry of Health and Health House to monitor and increase efficiency of health spending and to use the system as a basis for health policymaking.

18. We are continuing work on labor market reforms to increase flexibility, increase representativity in the negotiations between social partners, and encourage greater labor force participation, particularly for young people. We have submitted to parliament a revised law on day laborers to parliament, and a draft enhanced apprenticeship law is ready for submission. Before end-December (after consultation social partners and with the IMF, the World Bank and the European Commission), we will send a revised social dialog code and an improved labor code to parliament. We are also making efforts to improve the provision of training programs to low-skilled workers. After freezing the minimum wage since 2008, we will raise it to broadly compensate for recent inflation, while delinking the unemployment benefits from the minimum wage.

Financial sector

19. The protracted recession and uncertainty caused by recent government ordinance on credit contracts is weighing on asset quality and on the profitability of the banking sector. Loans classified as doubtful and loss rose to 20.2 percent, while those calculated on the 90 day loss classification reached 11.7 percent at end-September, and they are expected to continue to rise into next year. Capitalization ratios stayed high due to timely injections of capital by banks, but pressures remain due to losses from increased provisioning in a number of banks. The average capitalization ratio for the banking sector was 14.6 percent at end-September, and all institutions remained above 11 percent. Nearly all parents of the nine largest foreign banks have complied with their commitment to maintain exposures under the European Bank Coordination Initiative (EBCI) and in aggregate ended October at 98 percent.

20. We are committed to continuing the consolidation of the safety net to deal with financial distress. The parliament has ratified the amendments to the banking law, which enable the special administrator to promptly implement a broad range of restructuring measures, and amendments to the winding up law are expected to be ratified shortly. We have taken steps to strengthen the funding and governance of the Deposit Guarantee Fund (DGF) and will amend the deposit insurance legislation accordingly by end-December (structural benchmark). We will also amend by ordinance the DGF law by mid-March, 2011, to allow for the use of resources administered by the DGF (including through guarantees) to facilitate restructuring measures authorized by the National Bank of Romania (NBR) regarding the transfer of deposits, including purchase and assumption transactions, if such use would be less costly than the direct payment of deposit guarantees (structural benchmark). The current provisioning framework is sound and the NBR does not consider that any new prudential regulation in this area is necessary at present. The NBR will continue to consult with the IMF and EC staff before introducing or amending other aspects of the regulatory framework and we will refrain from promoting legislative initiatives (such as the current draft of the personal insolvency law) that would undermine credit discipline.

21. As a prior action, we will work with parliament to ensure that the emergency ordinance 50 of 2010 improves transparency and protects consumer rights, while safeguarding the stability of the financial system. At the same time, we will ensure that the National Bank is the only agency authorized to regulate banks’ lending activity.

22. We remain committed to reversing recent legislative initiatives that inadvertently infringed on the independence of the central bank and of non-bank financial regulators. An ordinance was issued removing monetary financing provisions of the wage cuts imposed on the NBR, and we will reverse provisions violating the autonomy of wage-setting by end-December.

Monetary and exchange rate policy

23. So far, the effects of the recent increase in VAT on inflation have been somewhat less than expected. However, food price pressures from higher world prices and the effects of recent flooding on domestic agricultural production have pushed the headline CPI somewhat above previous expectations. We now expect inflation to peak in the coming months at slightly above 8 percent before receding in 2011. Barring significant second-round increases, the price-level effects should peter out after mid-2011, allowing the attainment of the end-2011 target of 3 percent ±1 percentage point. There are risks, however, if second round effects materialize or if significant adjustments in administered prices take place. While the one-off nature of the VAT-induced price increase does not warrant a monetary policy response, increased vigilance is required to keep inflation expectations in check and stave off possible second-round inflationary effects. The NBR board has paused its easing cycle until the effects of the VAT increase become clearer and headline inflation begins to ease. Looking forward, monetary policy will be geared towards reaching the projected disinflation path net of the first-round tax effect.

Program modifications and monitoring

24. The program will continue to be monitored through regular reviews, prior actions, quantitative performance criteria and indicative targets, and structural benchmarks. The quantitative targets for end-December and continuous PCs have been set at the fifth review and are subject to clarifications as set out in the attached updated Technical Memorandum of Understanding. An end-January 2011 NFA performance criterion and indicative targets for end-March 2011 are proposed as set out in Table 1 and the structural benchmarks are set out in Table 2. The understandings between the Romanian authorities and IMF staff regarding the quantitative performance criteria and the structural measures described in this letter are further specified in the attached Technical Memorandum of Understanding.

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Appendix II. Romania: Technical Memorandum of Understanding (TMU)

December 22, 2010

1. This Technical Memorandum of Understanding (TMU) updates and replaces the TMU dated September 9, 2010. It: (i) defines the variables subject to the quantitative targets specified in the Letter of Intent (LOI); (ii) describes the methods to be used in assessing the program performance and the information requirements to ensure adequate monitoring of the targets (Section I); and (iii) provides clarifications for some of the structural conditionality under the program (Section II). As is standard under all Fund arrangements, we will consult with the Fund before modifying measures contained in this letter, or adopting new measures that would deviate from the goals of the program, and provide the Fund with the necessary information for program monitoring.

2. For the purposes of the program, the exchange rates of the Romanian Leu (RON) to the euro is set at RON 3.9852 = €1, to the U.S. dollar at RON 2.8342 = $1, to the Japanese yen at RON 3.1419 = ¥100, and to the pound sterling at RON 4.1169 = £1, the rates as shown on the National Bank of Romania’s (NBR’s) website as of December 31, 2008. The exchange rates to other currencies, where applicable, will also be the ones shown on the NBR’s website as of December 31, 2008.

3. For the purposes of the program, the general government includes the entities as defined in the 2010 budget. These are: the central government (state budget, treasury, self-financed state entities included in the budget, etc.), local governments, social security funds (pension, health, and unemployment), road fund company, and administration of the property fund. This definition of general government also includes any new funds, or other special budgetary and extra budgetary programs that may be created during the program period to carry out operations of a fiscal nature as defined in the IMF’s Manual on Government Finance Statistics 2001. The authorities will inform IMF staff of the creation of any such new funds or programs immediately.

I. Quantitative Performance Criteria, Indicative Ceiling, and Continuous Performance Criteria

A. Floor on the Net Foreign Assets

4. For program purposes, Net Foreign Assets (NFA) are defined as the NFA of the NBR minus Treasury liabilities to the International Monetary Fund.

5. NFA of the National Bank of Romania (NBR) are defined as the euro value of gross foreign assets of the NBR (including reserve requirements of the commercial banking system held at the NBR) minus gross foreign liabilities of the NBR; and will be measured on the basis of the NBR’s operational rather than accounting definitions. Non-euro denominated foreign assets and liabilities will be converted into euro at the program exchange rates.

6. Gross foreign assets of the NBR are defined to include the NBR’s holdings of SDRs, the country’s reserve position at the Fund, holdings of cash, securities and deposits abroad in convertible foreign currencies. Excluded from reserve assets are: (i) gold and other precious metals; (ii) assets in nonconvertible currencies; (iii) illiquid assets; (iv) any assets that are pledged, collateralized, or otherwise encumbered, unless there is also a gross foreign liability associated with it; (v) claims on residents; and (vi) claims in foreign exchange arising from derivatives in foreign currencies vis-à-vis domestic currency (such as futures, forwards, swaps, and options).

7. Gross foreign liabilities of the NBR are defined as all foreign exchange liabilities to residents and nonresidents, including commitments to sell foreign exchange arising from derivatives (such as futures, forwards, swaps, and options), and all credit outstanding from the Fund, but excluding (i) banks’ foreign currency deposits against reserve requirements; and (ii) government foreign currency deposits at the NBR. This definition is meant to bring the concept of foreign liabilities closer to the balance of payment definition, on which the targets are based.

Floor on cumulative change in NFA from the beginning of the year

(in mln. euros) 1/

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PC=performance criterion; data for end-month. Performance criterion for January 2011 and indicative target for March 2011 are relative to the December 2010 target (€18,658 million).

Flows in 2010 and 2011 are relative to previous year’s end-period stock.

8. NFA targets will be adjusted upward (downward) by the surplus (shortfall) in program disbursements relative to the baseline projection. Program disbursements are defined as external disbursements from official creditors (World Bank and the EC) that are sable for the financing of the overall central government budget. The NFA targets will also be adjusted upward by the increase in commercial bank reserve requirements held with the NBR relative to end-December, 2009 (€7,874 million), measured at program exchange rates.

External Program Disbursements - Baseline Projections

(in mln. euros)

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B. Consultation Mechanism on the 12-month Rate of Inflation

9. The quarterly consultation bands for the 12-month rate of inflation in consumer prices (as measured by the headline consumer price index (CPI) published by the Romanian Statistical Institute), are specified below. Should the observed year-on-year rate of CPI inflation fall outside the outer bands specified below, the authorities will complete a consultation with the Fund on their proposed policy response before requesting further purchases under the program. In addition, the NBR will conduct discussions with the Fund staff should the observed year-on-year rate of CPI inflation fall outside the inner bands specified for the end of each quarter in the table above.

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C. Performance Criterion on General Government Balance

10. The budget deficit will be monitored quarterly through the cash balance of the general government. The authorities will consult with IMF staff on corrective measures in the event of shortfalls in government revenue and financing.

Cumulative floor on general government balance

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11. The budget deficit will be measured from above the line using the budget execution data. The Ministry of Public Finance (MoPF) will also provide monthly data to measure the deficit from below the line. The balance of the general government measured from below the line will include:

  • + (i) net external financing, excluding valuation gains and losses;

  • + (ii) change in net domestic credit from the financial system, excluding valuation gains and losses from deposits denominated in foreign currency and including adjustments for;

    • + (a) received EU funds not yet spent (advance payments);

    • + (b) claims of the government on EU funds;

    • + (c) property fund obligations not yet paid;

  • + (iii) change in the stock of issued government securities, net of valuation changes;

  • + (iv) net changes in other financing.

12. If the difference between the general government deficit measured from above the line and from below the line is larger than lei 200 million each quarter during 2010, the MoPF will consult with IMF staff.

13. In the event that non-grant revenues exceed those projected under the program, the deficit target will be adjusted downward by one half of the surplus to allow for additional capital spending while reducing the deficit further. The following table shows the accumulated projected non-grant revenue for 2010, to which the actual non-grant revenue will be compared.

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14. In the event that current spending in the previous quarter exceeds the indicative target (defined below), deficit target for the next quarter will be adjusted downward by a corresponding amount.

15. The indicative target for the general government balance for the first quarter of 2011 will be adjusted downward from -6,300 by the amount that capital spending (including EU funds-related spending) exceeds 5,740 million lei, up to a limit of -8,000 million. Likewise, the target will be adjusted upward by the amount of that capital spending undershoots 5,740 million lei in the first quarter of 2011.

D. Performance Criterion Limiting the Issuance of Government Guarantees to the Non-Financial Private Sector and Public Enterprises

16. The issuance of general government guarantees to the non-financial private sector and public enterprises will be limited during the program period. This ceiling may be adjusted upward by up to RON 4.3 billion relative to the original ceiling of RON 7.7 billion for guarantees for financing the counterpart payments of investment projects financed by the EU or for guarantees on projects cofinanced by the EBRD, IBRD/IFC, EIB, AfDB, IADB, ADB, Council of Europe Development Bank, Black Sea Trade and Development Bank, Nordic Investment Bank, KfW, JICA and Export Import Bank of the U.S.

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E. Performance Criterion on Non-Accumulation of Domestic Arrears by the General Government

17. The performance criterion established on the stock in domestic payments arrears of the general government contemplates no accumulation of new arrears and their elimination during the program period. The stock will be measured net of intergovernmental arrears, but both gross and net arrears will be reported by the government. In case of need, the government will take corrective measures to prevent the accumulation of new spending arrears. For the purpose of the program, arrears mean accounts payable past due date by 90 days (in line with ESA95 definitions for expenditures). Separate from the performance criterion defined above, we will make necessary payments to ensure that the stock of arrears in the central government and social funds (as defined in ¶3 above) is under 250 million lei as of November 30, 2010.

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F. Continuous Performance Criteria on Non-Accumulation of External Debt Payments Arrears by the General Government

18. The general government will not accumulate external debt arrears during the program period. For the purposes of this performance criterion, an external debt payment arrear will be defined as a payment by the general government, which has not been made within seven days after falling due. The performance criterion will apply on a continuous basis.

G. Indicative Target on General Government Current Primary Spending

19. The indicative target on current primary expenditure of the general government is defined as spending on personnel, goods and services excluding EU funds (specified under external grant category), subsidies, transfers to public entities, pensions (social security budget in social assistance category and one-third of the state budget in the same category), state aid and other spending in other transfers category, Reserve Fund, and other expenditure as classified in the monthly reporting tables. The current spending target will be adjusted for the extra spending due to swap arrangement between local governments and public enterprises by an amount spent in the respective quarter.13

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H. Monitoring of Public Enterprises

20.As of 2009, the Ministry of Public Finance, the Ministry of Labor and Social Protection, and other pertinent institutions have implemented a monitoring system of public enterprises. During the program period, information will be provided to document that sanctions—decline in remuneration and dismissal of management according to Ordinances 37/2008 and 79/2008—are imposed if the budgets and company targets for restructuring are not observed.

21. The quarterly indicative target for 2010 is set on the aggregate operating balance (earnings before interest and tax), net of subsidies, of the following public enterprises: (1) C.N. Cai Ferate CFR; (2) S.N. Transport CFR Calatori; (3) CN a Huilei; (4) SC Termoelectrica; (5) C.N. de Autostrazi si Drumuri Nationale; (6) S.C. Metrorex; (7) S.N. de Transport Feroviar CFR Marfa S.A.; (8) SC Electrocentrale Bucuresti; (9) Societatea Comerciala Electrificare CFR S.A.; and (10) S.C. Administratia Nationala a Imbunatatirilor Funciare. The data shall be reported with operating results by firm. The targets for December 2010 and March 2011 will be -4000 and -750 million lei, respectively.

I. Reporting Requirements

22. Performance under the program will be monitored from data supplied to the IMF by the NBR and the MoPF as outlined in Table 1. The authorities will transmit promptly to the IMF staff any data revisions as well as other information necessary to monitor the arrangement with the IMF.

Table 1.

Romania: Data Provision to the IMF

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II. STRUCTURAL CONDITIONALITY: SPECIFICATIONS

A. Public Wage Legislation

23. Following the unified public wage law approved in October 2009, a new framework law and implementing legislation for 2011 will be approved before the sixth review IMF Board meeting that will abide by the following principles:

  • a. It will ensure the respect of the quantitative targets for the public wage bill included in the unified public wage law and the proposed changes will be fully costed.

  • b. It will ensure that new salary grading structure is simplified and that pay will be linked based on job responsibility and qualification. The established new pay system will be benchmarked on private sector wages (through a salary survey) to ensure that public pay is broadly aligned with actual labor market conditions, within affordability constraints.

  • c. The regulation would introduce a limit of 30 percent on non-wage personnel expenditures and caps on individual bonuses for non-military personnel. All remaining bonuses will be set as ceilings rather than mandatory levels, both at an individual and aggregate level. For the purpose of this law, “stimulus” payments will be treated as bonuses and the legislative provisions that created corresponding financing funds will be annulled.

B. Financial Sector: Emergency Ordinance 50/2010

24. The ordinance will be amended before being adopted by parliament to either remove the retroactive component, or alternatively to allow banks full flexibility to adjust contractual terms on loan contracts entered into prior to the ordinance coming into effect so as to safeguard financial sector stability. In addition, we will ensure that the National Bank is the only agency authorized to regulate banks’ lending activity.
1

Using the authorities preferred definition of non-performing loans based upon 90 days past due. The ratio based upon 60 days past due rose to 20.2%.

2

High reserve requirements before the crisis resulted in subsidiaries of some foreign banks booking loans to residents offshore. As reserve requirements have been reduced, loans have moved back onto the subsidiaries’ balance sheets.

3

Compared to the exposure at end-March 2009.

4

The adjustment package was enacted in July 2010, yielding an annualized 4.6 percent of GDP due to a 25 percent cut in public wages, a 15 percent cut in most social transfers, and a 5 percentage point hike in the VAT rate.

5

The 25 percent wage cut was approved by the Constitutional Court only if applied for a limited time. The opposition has threatened to challenge in the Court its continuation through 2011.

6

In the recently approved Fiscal Responsibility law, the authorities set an objective of a zero fiscal deficit over the economic cycle.

7

From the payments made in September, arrears were reduced by some 500 million, with the remainder used for overdue bills which would become arrears if not paid.

8

To comply with the prior action of maintaining near-zero central government and social security arears at end-November, additional payments of around RON 500-600 million would be required.

9

The approved version adjusts the pension age for women to 63 (compared to 65 in the original law). Currently, the retirement age for women is only 58.

10

The law would consolidate the Trade Union law, the Employers Law, the Economic Council Law and the Law on Collective Agreements.

11

The reserve requirements are 25 percent for foreign currency liabilities under 2 year maturity and 15 percent for short-term local currency liabilities.

12

The EU has an indicative target on the arrears of the 10 largest SOEs in parallel with the Fund target on their losses.

13

The swap arrangement would involve mutually cancelling overdue tax obligations of public enterprises with arrears owed to those enterprises by the general government (local administration).

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Cover IMF Staff Country Reports
Romania: Sixth 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 and the Senior Advisor to the Executive Director for Romania
Author:
International Monetary Fund
Volume/Issue:
Volume 2011: Issue 020
Publisher:
International Monetary Fund
ISBN:
9781455213788
ISSN:
1934-7685
Pages:
64
DOI:
https://doi.org/10.5089/9781455213788.002
Figure 1.

Romania: Recent Economic Trends

Private consumption and retail trade

GDP and ESI
Figure 2.

Romania: Financial Developments

National Currency per Euro

(July 1, 2008 = 100)

CDS, 5-years

MONETARY CONDITIONS INDEX 1/

INTEREST RATES ON RUN INSTRUMENTS

(in percent)

INFLATION TARGETS AND OUTCOMES

Public Sector: Wages and Employment 1/

STRUCTURAL FISCAL ADJUSTMENT

(in percent of GDP, EU-27)

General Government Arrears

(>90 days, mil RON)

Public Debt Structure

Policy Interest Rates

(percent)
Figure 3.

Romania: Public Debt Sustainability: Bound Tests 1/

(Public debt in percent of GDP)
Figure 4.

Romania: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)