Abstract
Romania’s economy has stabilized and growth is now resuming. The financial program’s objectives include structural reforms in the energy and transport sectors, and restructuring and privatization of state-owned enterprises (SOEs). The macroeconomic outlook is expected to improve in 2011–12 with a gradual pickup in growth, a stable current account, and inflationary pressures that are still high but will begin to recede after mid-2011. The authorities are also focusing on reducing the arrears of the rest of the public sector.
1. This supplement provides an update on economic and policy developments since the issuance of the staff report on June 13, 2011. The additional information does not change the thrust of the staff appraisal.
2. Recent indicators confirm a growth recovery led by external demand, and an elevated inflation rate driven by supply shocks. GDP growth reached 0.7 percent (qoq) in the first quarter, driven by strong export growth. High frequency indicators show that the growth momentum in exports and industrial production has retreated slightly from its peak in March, partly reflecting supply chain problems in the car industry. Consumer sentiment indicators are rising. Labor market indicators have shown some improvement as unemployment rate declined to 5.3 percent in April and employment stabilized. As expected, headline inflation in May rose to 8.4 percent (yoy) on the back of strong increases in the prices of food, fuel, tobacco, and administered prices.
3. On June 10, the government successfully launched a three-year “euro medium term note” program. After a gap of over a year, Romania issued a five-year fixed-rate Eurobond for €1½ billion which was oversubscribed nearly two times. Another issue is planned in the second half of the year to meet its financing needs. The success of this issue helps support the precautionary nature of the program.
4. Nevertheless, market nervousness about contagion from the Greek banking crisis is becoming more pronounced. Since June 1, the leu depreciated by about 2 percent and CDS spreads jumped by around 30 basis points as concerns mounted over the significant presence of Greek banks in Romania and the potential withdrawal of funds by the parent banks.
5. The government has met all three prior actions. The authorities have completed a stock-taking of arrears and unpaid bills as of end-December 2010 for the general government and SOEs. The government has also approved a decision on the restructuring of ANAF. In addition, they have approved an ordinance on separation of the household prices from non-residential prices for CUG gas prices, thereby allowing ANRE to issue an implementation order to increase the CUG price for non-households, effective July 1.
(Revised Table 2 of the Staff Report). Romania: Performance for First Review and Proposed New Conditionality
(Revised Table 2 of the Staff Report). Romania: Performance for First Review and Proposed New Conditionality
| Measure | Target Date | Comment | |
|---|---|---|---|
| Prior actions | |||
| 1. | Completion of a stocktaking of arrears and unpaid bills as of end-December 2010 for the entire general government and SOEs (¶9). | At least 5 working days before the Executive Board meeting | Met |
| 2. | Pass the government decision on ANAF restructuring (¶9). | Met | |
| 3 | Approval of a government ordinance separating the CUG prices between households and non-residential customers and allowing ANRE full autonomy to adjust the CUG price to non-residential customers (¶22). | Met | |
| Quantitative performance criteria | |||
| 1. | Floor on general government overall balance | March 31, 2011 | Met |
| 2. | Ceiling on general government guarantees | March 31, 2011 | Met |
| 3. | Ceiling on central government and social security domestic arrears | March 31, 2011 | Met |
| 4. | Non-accumulation of external debt arrears | March 31, 2011 | Met |
| 5. | Floor on net foreign assets | March 31, 2011 | Met |
| Quantitative Indicative Target | |||
| 1. | Ceiling on general government current primary spending | March 31, 2011 | Met |
| 2. | Ceiling on local government domestic arrears | March 31, 2011 | Met |
| 3. | Floor on the operating balance and ceiling on arrears of key loss-making SOEs | March 31, 2011 | Met |
| Inflation consultation band | |||
| Inner band | March 31, 2011 | Met | |
| Outer band | March 31, 2011 | Met | |
| Structural benchmarks | |||
| 1. | Preparation of strategic action plans for key SOEs (as specified in TMU) (¶19). | April 30, 2011 | Met |
| 2. | Completion of a stocktaking of arrears and unpaid bills as of end-December 2010 for the entire general government and SOEs | April 30, 2011 | Reset as prior action |
| 3. | Introduction of a simplified taxation system for smaller taxpayers under the threshold with help from the IMF and EC, while requesting a shift in the VAT mandatory threshold from the EU Council of Ministers to €50,000 (¶9). | June 30, 2011 | Reset to Dec. 31, 2011 |
| 4. | Eliminate by government ordinance the legal basis of stimulente funds, effective January 1, 2012 (¶9). | June 30, 2011 | Reset to Aug. 31, 2011 |
| 5. | Amend legislation to allow the use of the deposit guarantee fund resources to facilitate bank restructuring, including purchase and assumption transactions (¶16). | July 31, 2011 | Reset to Nov. 30, 2011 |
| 6. | Completion of a comprehensive review of the existing investment portfolio, which will prioritize and evaluate existing projects to focus on those where funding can be fully secured, examine the viability of old projects, with low priority and unviable ones discontinued, and production of a final report and an action plan (¶11). | Sept. 30, 2011 | |
| New structural benchmarks | |||
| 1. | Undertake SOE reforms, including (i) appointment of legal advisors for privatization of CFR Marfa, TAROM, Transelectrica, Transgaz, and Romgaz (¶21,¶23); (ii) Preparation of action plans for the remaining SOEs of the central government (¶19); (iii) Design mechanisms to facilitate restructuring and securitizing SOE arrears (¶7). | July 15, 2011 | |
| 2. | Approve legislation to improve governance of SOEs (¶20). | Aug. 31, 2011 | |
(Revised Table 2 of the Staff Report). Romania: Performance for First Review and Proposed New Conditionality
| Measure | Target Date | Comment | |
|---|---|---|---|
| Prior actions | |||
| 1. | Completion of a stocktaking of arrears and unpaid bills as of end-December 2010 for the entire general government and SOEs (¶9). | At least 5 working days before the Executive Board meeting | Met |
| 2. | Pass the government decision on ANAF restructuring (¶9). | Met | |
| 3 | Approval of a government ordinance separating the CUG prices between households and non-residential customers and allowing ANRE full autonomy to adjust the CUG price to non-residential customers (¶22). | Met | |
| Quantitative performance criteria | |||
| 1. | Floor on general government overall balance | March 31, 2011 | Met |
| 2. | Ceiling on general government guarantees | March 31, 2011 | Met |
| 3. | Ceiling on central government and social security domestic arrears | March 31, 2011 | Met |
| 4. | Non-accumulation of external debt arrears | March 31, 2011 | Met |
| 5. | Floor on net foreign assets | March 31, 2011 | Met |
| Quantitative Indicative Target | |||
| 1. | Ceiling on general government current primary spending | March 31, 2011 | Met |
| 2. | Ceiling on local government domestic arrears | March 31, 2011 | Met |
| 3. | Floor on the operating balance and ceiling on arrears of key loss-making SOEs | March 31, 2011 | Met |
| Inflation consultation band | |||
| Inner band | March 31, 2011 | Met | |
| Outer band | March 31, 2011 | Met | |
| Structural benchmarks | |||
| 1. | Preparation of strategic action plans for key SOEs (as specified in TMU) (¶19). | April 30, 2011 | Met |
| 2. | Completion of a stocktaking of arrears and unpaid bills as of end-December 2010 for the entire general government and SOEs | April 30, 2011 | Reset as prior action |
| 3. | Introduction of a simplified taxation system for smaller taxpayers under the threshold with help from the IMF and EC, while requesting a shift in the VAT mandatory threshold from the EU Council of Ministers to €50,000 (¶9). | June 30, 2011 | Reset to Dec. 31, 2011 |
| 4. | Eliminate by government ordinance the legal basis of stimulente funds, effective January 1, 2012 (¶9). | June 30, 2011 | Reset to Aug. 31, 2011 |
| 5. | Amend legislation to allow the use of the deposit guarantee fund resources to facilitate bank restructuring, including purchase and assumption transactions (¶16). | July 31, 2011 | Reset to Nov. 30, 2011 |
| 6. | Completion of a comprehensive review of the existing investment portfolio, which will prioritize and evaluate existing projects to focus on those where funding can be fully secured, examine the viability of old projects, with low priority and unviable ones discontinued, and production of a final report and an action plan (¶11). | Sept. 30, 2011 | |
| New structural benchmarks | |||
| 1. | Undertake SOE reforms, including (i) appointment of legal advisors for privatization of CFR Marfa, TAROM, Transelectrica, Transgaz, and Romgaz (¶21,¶23); (ii) Preparation of action plans for the remaining SOEs of the central government (¶19); (iii) Design mechanisms to facilitate restructuring and securitizing SOE arrears (¶7). | July 15, 2011 | |
| 2. | Approve legislation to improve governance of SOEs (¶20). | Aug. 31, 2011 | |