Abstract
Growth in Romania is likely to moderate in 2012, weighed down by the euro area slowdown. The Fifth Review Under the Stand-By Arrangement highlights that Romania’s overall track record under the program continues to be strong. All performance criteria for the fifth program review were met, except for accumulation of central government arrears, which was missed by a small margin. The indicative target on local government arrears accumulation was also missed. Progress was made on the large and difficult structural agenda, although more action is needed.
1. This supplement provides an update on economic and policy developments since the issuance of the staff report on June 11, 2012. The additional information does not change the thrust of the staff appraisal.
2. The government met the prior actions. On June 6, 2012, the government approved a memorandum laying out the agreed roadmap for liberalization of gas prices for both household and nonhousehold consumers. Also on June 6, the government approved a memorandum for the cancellation of penalties on arrears of the state-owned railway company to a state-owned electricity company and an emergency ordinance to grant a bridge loan to the railway company to clear arrears to private electricity providers. In return for payment of principal, the electricity providers have agreed to cancel penalties on the arrears owed to them.
3. Recent indicators suggest weak, but positive, growth. Final national accounts data confirmed a 0.1 percent contraction in GDP in Q1, but high frequency indicators for April point to moderate growth in Q2. Industrial production posted modest gains and consumption indicators remained solid with retail trade volumes and consumer confidence improving further. Annual inflation remained low at 1.8 percent in May.
4. Risks have risen, as seen in CDS spreads and exchange rate pressure. The CDS spread for Romania has risen by nearly 90 b.p. since end-April, reflecting increased risk perception stemming from the euro area crisis and political uncertainties in Romania. The authorities have stepped up intervention in the foreign exchange market, holding leu depreciation for the year to around three percent against the euro. Absent countervailing measures, the resulting decline in reserves could constitute a risk for the end-June NFA target. The stock market has largely given up gains from earlier this year. Banking sector deposits continue to grow, albeit with significant variations among banks.
5. Preliminary fiscal data for May shows that revenues are broadly on track. However, both current and capital spending are above programmed levels, suggesting that tight policies will be needed June to reach the second quarter targets.
6. Political pressures are likely to persist ahead of parliamentary elections this fall. The ruling coalition prevailed in country-wide local elections held in mid-June.
7. The authorities placed state-owned power producer Hidroelectrica into bankruptcy on June 18. The government announced that bankruptcy procedures would be used to cancel below-market bilateral energy contracts. This unexpected bankruptcy raises concerns about the viability of the share sale agreed as part of the structural benchmark for end-October. It may also pose risks to overall market confidence in Romania and to the viability of sales of stakes in other public firms.
(Revised Table 2 of the staff report). Romania: Performance for Fifth Review
The health care legislation is being revised to better address lack of financial controls and adequacy of funding needs in the health sector. The provisions on private insurance for basic medical benefits are also being reassessed.
(Revised Table 2 of the staff report). Romania: Performance for Fifth Review
| Measure | Target Date | Comment | ||
|---|---|---|---|---|
| Prior Action | ||||
|
5 days before the Board date | Met | ||
|
5 days before the Board date | Met | ||
| Quantitative performance criteria | ||||
| 1. Floor on net foreign assets | Mar. 31, 2012 | Met | ||
| 2. Floor on general government overall balance | Mar. 31, 2012 | Met | ||
| 3. Ceiling on central government and social security domestic arrears | Mar. 31, 2012 | Not Met | ||
| 4. Ceiling on general government guarantees | Mar. 31, 2012 | Met | ||
| 5. Non-accumulation of external debt arrears | Mar. 31, 2012 | Met | ||
| Quantitative Indicative Target | ||||
| 1. Ceiling on general government current primary spending | Mar. 31, 2012 | Met | ||
| 2. Floor on operating balance of key SOEs | Mar. 31, 2012 | Met | ||
| 3. Ceiling on stock of arrears of key SOEs | Mar. 31, 2012 | Met | ||
| 4. Ceiling on stock of local government arrears | Mar. 31, 2012 | Not Met | ||
| Inflation consultation band | ||||
| Inner band | Mar. 31, 2012 | Met | ||
| Outer band | Mar. 31, 2012 | Met | ||
| Structural benchmarks | ||||
| 1. Undertake SOE reforms, including (i) Appointment of legal advisors for privatization of CFR Marfa, TAROM, Transelectrica, Transgaz, and Romgaz; (ii) Preparation of action plans for the remaining SOEs of the central government; (iii) Design mechanisms to facilitate restructuring and securitizing SOE arrears. | July 15, 2011 | Met | ||
| 2. 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. | Sept. 30, 2011 | Met | ||
|
Dec. 31, 2011 | Reset to June 30, 2012 | ||
|
Feb. 15, 2012 | Met | ||
|
June 30, 2012 | |||
| New structural benchmarks | ||||
|
June 30, 2012 | |||
|
October 15, 2012 | |||
The health care legislation is being revised to better address lack of financial controls and adequacy of funding needs in the health sector. The provisions on private insurance for basic medical benefits are also being reassessed.
(Revised Table 2 of the staff report). Romania: Performance for Fifth Review
| Measure | Target Date | Comment | ||
|---|---|---|---|---|
| Prior Action | ||||
|
5 days before the Board date | Met | ||
|
5 days before the Board date | Met | ||
| Quantitative performance criteria | ||||
| 1. Floor on net foreign assets | Mar. 31, 2012 | Met | ||
| 2. Floor on general government overall balance | Mar. 31, 2012 | Met | ||
| 3. Ceiling on central government and social security domestic arrears | Mar. 31, 2012 | Not Met | ||
| 4. Ceiling on general government guarantees | Mar. 31, 2012 | Met | ||
| 5. Non-accumulation of external debt arrears | Mar. 31, 2012 | Met | ||
| Quantitative Indicative Target | ||||
| 1. Ceiling on general government current primary spending | Mar. 31, 2012 | Met | ||
| 2. Floor on operating balance of key SOEs | Mar. 31, 2012 | Met | ||
| 3. Ceiling on stock of arrears of key SOEs | Mar. 31, 2012 | Met | ||
| 4. Ceiling on stock of local government arrears | Mar. 31, 2012 | Not Met | ||
| Inflation consultation band | ||||
| Inner band | Mar. 31, 2012 | Met | ||
| Outer band | Mar. 31, 2012 | Met | ||
| Structural benchmarks | ||||
| 1. Undertake SOE reforms, including (i) Appointment of legal advisors for privatization of CFR Marfa, TAROM, Transelectrica, Transgaz, and Romgaz; (ii) Preparation of action plans for the remaining SOEs of the central government; (iii) Design mechanisms to facilitate restructuring and securitizing SOE arrears. | July 15, 2011 | Met | ||
| 2. 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. | Sept. 30, 2011 | Met | ||
|
Dec. 31, 2011 | Reset to June 30, 2012 | ||
|
Feb. 15, 2012 | Met | ||
|
June 30, 2012 | |||
| New structural benchmarks | ||||
|
June 30, 2012 | |||
|
October 15, 2012 | |||
The health care legislation is being revised to better address lack of financial controls and adequacy of funding needs in the health sector. The provisions on private insurance for basic medical benefits are also being reassessed.