Front Matter Page
© 2012 International Monetary Fund
October 2012
IMF Country Report No. 12/290
Romania: 2012 Article IV Consultation and Sixth Review Under the Stand-By Arrangement, and Requests for Waiver of Nonobservance of Performance Criterion and Modification of Performance Criteria—Staff Report; Staff Supplement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Romania.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of a combined discussion of the 2012 Article IV consultation with Romania and the Sixth Review Under the Stand-By Arrangement, and Requests for Waiver of Nonobservance of Performance Criterion and Modification of Performance Criteria, the following documents have been released and are included in this package:
The staff report for the combined 2012 Article IV consultation and the Sixth Review Under the Stand-By Arrangement, and Requests for Waiver of Nonobservance of Performance Criterion and Modification of Performance Criteria, prepared by a staff team of the IMF, following discussions that ended on August 13, 2012, with the officials of Romania on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on September 13, 2012. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
A staff supplement of September 25, 2012, updating information on recent economic developments.
A Public Information Notice (PIN) and Press Release, summarizing the views of the Executive Board as expressed during its September 28, 2012, discussion of the staff report on issues related to the Article IV consultation and the IMF arrangement, respectively.
A statement by the Executive Director for Romania.
The documents listed below have been or will be separately released.
Letter of Intent sent to the IMF by the authorities of Romania*
Memorandum of Economic and Financial Policies by the authorities of Romania*
Technical Memorandum of Understanding*
Selected Issues Paper
*Also included in Staff Report
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
Copies of this report are available to the public from
International Monetary Fund • Publication Services
700 19th Street, N.W. • Washington, D.C. 20431
Telephone: (202) 623-7430 • Telefax: (202) 623-7201
E-mail: publications@imf.org Internet: http://www.imf.org
International Monetary Fund
Washington, D.C.
Front Matter Page
INTERNATIONAL MONETARY FUND
ROMANIA
Staff Report for the 2012 Article IV Consultation, Sixth Review Under the Stand-By Arrangement, and Requests for Waiver of Nonobservance of Performance Criterion and Modification of Performance Criteria
Prepared by the European Department in Consultation with Other Departments
Approved by Poul M. Thomsen and Vivek Arora
September 13, 2012
Discussions: Held in Bucharest during August 1–14, 2012. The mission met with interim President Antonescu, Prime Minister Ponta, Deputy Prime Minister Georgescu, National Bank of Romania (NBR) Governor Isarescu and other senior officials, and representatives of political parties, labor and business organizations, and financial institutions. The staff team comprised E. de Vrijer (head), J. Ralyea; A. Tuladhar; C. Saborowski (all EUR); J. Bersch (SPR); F. Eich (FAD); and H. Hesse (MCM). T. Lybek (Resident Representative) assisted the mission. Discussions were held jointly with staff from the European Commission. S. Matei (Senior Advisor to the Executive Director) and World Bank staff attended some of the meetings; European Central Bank staff participated as an observer.
Stand-By Arrangement: A 24-month, SDR 3,090.6 million (€3.4 billion, US$5.0 billion, 300 percent of quota) Stand-By Arrangement (SBA) was approved by the Executive Board on March 25, 2011 (Country Report No. 11/80) and became effective March 31, 2011. The seventh tranche of SDR 430 million (€509 million) will be made available upon completion of this review. The authorities are treating the arrangement as precautionary. Additional funds under the program are provided by the European Union and the World Bank (also on a precautionary basis).
Previous Article IV consultation: The previous consultation was concluded on July 2, 2010 (Country Report No. 10/227).
Data: Romania subscribes to the SDDS; data provision is adequate for surveillance (Informational Annex).
Political developments: Prime Minister Ponta of the Socialist Democratic Party (PSD) came to power on May 7, 2012, with the support of the National Liberal Party (PNL), the Conservative Party, and independent parliamentarians. Parliament voted on July 6 to impeach President Basescu, but a required referendum held on July 29, 2012 did not achieve sufficient voter turnout to uphold the impeachment.
Exchange Rate Regime: Romania has accepted the obligations of Article VIII and the exchange rate system is free of restrictions on current international payments and transfers. The de facto exchange rate arrangement is classified as floating and the de jure exchange rate arrangement as managed floating.
Contents
I. Executive Summary
II. Context: A Vulnerable Recovery
III. Program Implementation
IV. Outlook and Risks
V. Policy Discussions
A. Main Challenges
B. Achieving Fiscal Sustainability
C. Preserving Low Inflation with a Flexible Exchange Rate
D. Maintaining Medium-Term External Sustainability
E. Developing a Resilient Banking System
VI. Medium-Term Perspective: Fostering Higher and Inclusive Growth
A. Upgrading the Energy and Transportation Sectors
B. Restructuring State-Owned Enterprises
C. EU Funds Absorption
D. Labor Market Reform
VII. Program Modalities and Other Issues
VIII. Staff Appraisal
Boxes
1. Stand-By Arrangement
2. Medium Term Growth Potential
3. Addressing the Challenges of the Healthcare System
4. Effectiveness of Interest Rate Transmission in Romania
5. Adequacy of International Reserves
6. Foreign Bank Deleveraging in Romania
7. Main Amendments to Labor and Social Assistance Legislations
Tables
1. Quantitative Program Targets
2. Performance for Sixth Review
3. Selected Economic and Social Indicators, 2008–13
4. Macroeconomic Framework, Current Policies, 2008–17
5. Balance of Payments, 2008–17
6. Gross Financing Requirements, 2010–13
7. General Government Operations, 2008–14
8. Monetary Survey, 2008–13
9. Financial Soundness Indicators, 2008–12
10. Schedule of Reviews and Purchases
11. Indicators of Fund Credit, 2012–17
12. Public Sector Debt Sustainability Framework, 2007–17
13. External Debt Sustainability Framework, 2007–17
Figures
1. Real Sector, 2007–12
2. External Sector, 2007–12
3. Labor Sector, 2007–12
4. Monetary Sector, 2005–12
5. Fiscal Operations, 2005–12
6. Financial Sector, 2007–12
7. Financial Developments
8. Public Debt Sustainability: Bound Tests
9. External Debt Sustainability: Bound Tests
Appendix
I. Letter of Intent
Attachments
I. Memorandum of Economic and Financial Policies
II. Technical Memorandum of Understanding
I. Executive Summary
1. Significant progress has been made in macroeconomic stabilization under two successive SBAs but the economic recovery remains fragile. Growth is expected to remain subdued in the near term and to only gradually recover over the medium term, with risks to the outlook mostly on the downside. With strong trade and financial sector linkages, Romania is exposed to the euro area crisis. Fiscal and external reserves provide a buffer and the banking sector remains well-capitalized. At the same time, the political situation has become more unsettling with three governments in 2012, uneasy cohabitation between the President and the governing coalition that has sought to remove him, and parliamentary elections to be held in the fall. The political uncertainty has contributed to accelerated exchange rate depreciation and higher financing costs, and has dented confidence.
2. Romania’s overall track record under the program continues to be good. All performance criteria for the sixth program review were met except the one on reducing central government arrears, which was missed by a small margin. All indicative targets, except the ceiling on the stock of local government arrears, were met. Corrective actions are being taken to reduce the stock of arrears and prevent accumulation of new arrears. The structural benchmarks on increasing electricity prices, integrating the accounting reporting system with the Treasury payment system, and preparing comprehensive amendments to the health care legislation were met. However, progress on the structural agenda, in particular privatization of public enterprises, has remained slow. As prior actions for completion of this review, the government has committed to undertake public offerings of shares in two public enterprises where preparations are more advanced.
3. A prudent fiscal and monetary policy stance and decisive implementation of the structural reform agenda are needed to ensure macroeconomic stability and increase growth.
Strong fiscal discipline will be needed, especially ahead of the upcoming parliamentary elections, to meet the fiscal program targets and achieve fiscal sustainability.
The monetary policy stance should lean towards tightening in light of risks to inflation as well as potential capital outflows and exchange rate pressures.
In the financial sector, where vulnerability to spillovers from euro-area parent banks to Romanian subsidiaries is high, measures are needed to ensure adequate capital and liquidity buffers, mitigate the rise in nonperforming loans, and finalize contingency plans.
Pressing ahead with structural reforms, in particular in the energy and transport sectors and of public enterprises, would provide a much-needed impetus for investment and growth. Improving EU funds absorption is a priority to unlock significant resources that would help further real convergence with other European countries.
Front Matter Page
Prepared by the European Department
September 13, 2012
Contents
I. Fund Relations
II. Relations with the World Bank
III. Statistical Issues
Front Matter Page
Prepared by the European Department
(In Consultation with Other Departments)
Approved by Poul M. Thomsen and Vivek Arora
September 25, 2012
Front Matter Page
Public Information Notice (PIN) No. 12/122
FOR IMMEDIATE RELEASE
October 23, 2012
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
Telephone 202-623-7100
Fax 202-623-7100
Front Matter Page
Press Release No. 12/372
FOR IMMEDIATE RELEASE
September 28, 2012
International Monetary Fund
Washington, D.C. 20431 USA
Telephone 202-623-7100
Fax 202-623-7100
Front Matter Page
September 28, 2012