Abstract
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.
1. This supplement provides an update on economic and policy developments since the issuance of the staff report on September 13, 2012. The additional information does not change the thrust of the staff appraisal.
2. Recent indicators suggest positive growth due to higher domestic demand. The latest GDP data release for 2012:Q2 showed a 0.5 percent real expansion broadly in line with expectations and driven largely by a stronger-than-expected recovery in domestic demand which offset a negative contribution from net exports. Real GDP growth in 2012:Q1 was revised up from -0.1 percent to 0.1 percent. High frequency indicators suggest that industrial production is recovering from a temporary dip in June while retail and wholesale trade continue to show solid growth. However, consumer confidence has been stagnating since May.
3. Annual inflation increased to 3.9 percent reaching the upper bound of the target band. This rate was somewhat higher than expected, reflecting the impact of food and fuel price increases. Core inflation remained stable at 2.5 percent, in line with projections.
4. Financial market conditions have improved somewhat as the political uncertainty subsided following the Constitutional Court decision that reinstated Mr. Basescu as President. The five-year sovereign CDS spreads have declined by more than 110 bps since early-August to slightly above 310 bps in recent days. The authorities have successfully issued a 10-year Eurobond at 5.1 percent yield which was met with strong market demand. The stock market has benefited from the recent improved market sentiment and gained about 14 percent year to date. Improved market sentiment contributed to a leu appreciation of 3 percent against the euro from the record lows reached in early-August, which allowed the NBR to scale down interventions in support of the leu while holding depreciation against the euro at about 4 percent for the year. Banking system deposits and total exposure of the largest foreign banks have remained stable in recent weeks.
5. Preliminary figures through August show budget performance remains on track to meet program targets. The cash deficit through August reached 1.2 percent of GDP compared to the target of 2.2 percent for 2012. Strict spending discipline has been maintained. Efforts to reduce local government arrears are ongoing.
6. The government has completed the prior actions. On September 10, the government approved an Ordinance changing the mechanism for tax sharing to enable payment of local government arrears. On September 15, the government issued an order increasing gas prices for both household and non-household consumers as planned. These steps will help ensure full cost recovery and market-based pricing. On September 6 and September 18, respectively, the tenders for the public offerings of shares in Oltchim and Transgaz were launched.
Romania: Performance for Sixth Review
Romania: Performance for Sixth Review
| Measure | Target Date | Comment | ||
|---|---|---|---|---|
| Prior action | ||||
| 1. | Approve government ordinance to allow that: (i) resources available to local governments, currently limited to co-financing investment, can be used for paying arrears; and (ii) the central government can directly pay off arrears of | Five days before the | Met | |
| 2. | Increase gas prices for non-residential consumers by 10 percent and for households by 5 percent. | Board meeting | Met | |
| 3. | Launch the tender for a secondary public offering of 15 percent of Transgaz shares. | Met | ||
| 4. | Launch the tender for the majority privatization of Oltchim. | Met | ||
| Quantitative performance criteria | ||||
| 1. | Floor on net foreign assets | September 30, 2012 | ||
| 2. | Floor on general government overall balance | September 30, 2012 | ||
| 3. | Ceiling on central government and social security domestic arrears | September 30, 2012 | ||
| 4. | Ceiling on general government guarantees | September 30, 2012 | ||
| 5. | Non-accumulation of external debt arrears | September 30, 2012 | ||
| Quantitative Indicative Target | ||||
| 1. | Ceiling on general government current primary spending | September 30, 2012 | ||
| 2. | Floor on operating balance of key SOEs | September 30, 2012 | ||
| 3. | Ceiling on stock of arrears of key SOEs | September 30, 2012 | ||
| 4. | Ceiling on stock of local government arrears | September 30, 2012 | ||
| 5. | Ceiling on the execution of the PNDI program | September 30, 2012 | ||
| Inflation consultation band | ||||
| Inner band | September 30, 2012 | |||
| Outer band | September 30, 2012 | |||
| Structural benchmarks | ||||
| 1. | Prepare comprehensive amendments to the health care legislation to address the persistent budgetary shortfalls and to ensure high quality health care services. | June 30, 2012 | Met | |
| 2. | Launch tender for providing software to integrate the accounting reporting system with the Treasury payment system. | June 30, 2012 | Met | |
| 3. | Increase by 5 percent the electricity price for both residential and nonresidential consumers. | June 30, 2012 | Met | |
| 4. | Hold IPOs of government shares in Romgaz and Hidroelectrica. | October 15, 2012 | Reset to March 15, 2013 | |
| New structural benchmarks | ||||
| 1. | Update the investment database to identify priority local government projects funded through budgetary and EU funds, and publish a list of low priority projects which will be discontinued. | September 30, 2012 | ||
| 2. | Publish up-to-date financial statements of all public hospitals on a webpage of the Ministry of Health. | October 31, 2012 | ||
| 3. | Sign a contract with legal and transaction advisor for the majority privatization of Oltenia. | November 30, 2012 | ||
| 4. | Finalize a detailed definition of the structural architecture of the accounting and treasury reporting system. | December 31, 2012 | ||
Romania: Performance for Sixth Review
| Measure | Target Date | Comment | ||
|---|---|---|---|---|
| Prior action | ||||
| 1. | Approve government ordinance to allow that: (i) resources available to local governments, currently limited to co-financing investment, can be used for paying arrears; and (ii) the central government can directly pay off arrears of | Five days before the | Met | |
| 2. | Increase gas prices for non-residential consumers by 10 percent and for households by 5 percent. | Board meeting | Met | |
| 3. | Launch the tender for a secondary public offering of 15 percent of Transgaz shares. | Met | ||
| 4. | Launch the tender for the majority privatization of Oltchim. | Met | ||
| Quantitative performance criteria | ||||
| 1. | Floor on net foreign assets | September 30, 2012 | ||
| 2. | Floor on general government overall balance | September 30, 2012 | ||
| 3. | Ceiling on central government and social security domestic arrears | September 30, 2012 | ||
| 4. | Ceiling on general government guarantees | September 30, 2012 | ||
| 5. | Non-accumulation of external debt arrears | September 30, 2012 | ||
| Quantitative Indicative Target | ||||
| 1. | Ceiling on general government current primary spending | September 30, 2012 | ||
| 2. | Floor on operating balance of key SOEs | September 30, 2012 | ||
| 3. | Ceiling on stock of arrears of key SOEs | September 30, 2012 | ||
| 4. | Ceiling on stock of local government arrears | September 30, 2012 | ||
| 5. | Ceiling on the execution of the PNDI program | September 30, 2012 | ||
| Inflation consultation band | ||||
| Inner band | September 30, 2012 | |||
| Outer band | September 30, 2012 | |||
| Structural benchmarks | ||||
| 1. | Prepare comprehensive amendments to the health care legislation to address the persistent budgetary shortfalls and to ensure high quality health care services. | June 30, 2012 | Met | |
| 2. | Launch tender for providing software to integrate the accounting reporting system with the Treasury payment system. | June 30, 2012 | Met | |
| 3. | Increase by 5 percent the electricity price for both residential and nonresidential consumers. | June 30, 2012 | Met | |
| 4. | Hold IPOs of government shares in Romgaz and Hidroelectrica. | October 15, 2012 | Reset to March 15, 2013 | |
| New structural benchmarks | ||||
| 1. | Update the investment database to identify priority local government projects funded through budgetary and EU funds, and publish a list of low priority projects which will be discontinued. | September 30, 2012 | ||
| 2. | Publish up-to-date financial statements of all public hospitals on a webpage of the Ministry of Health. | October 31, 2012 | ||
| 3. | Sign a contract with legal and transaction advisor for the majority privatization of Oltenia. | November 30, 2012 | ||
| 4. | Finalize a detailed definition of the structural architecture of the accounting and treasury reporting system. | December 31, 2012 | ||