This paper discusses Romania’s Seventh and Eighth Reviews Under the Stand-by Arrangement and Request for Waiver of Nonobservance of Performance Criteria. Continued strong fiscal consolidation would enable Romania to exit the EU Excessive Deficit Procedure by mid-2013; prudent monetary policy kept core inflation low, and close supervision buttressed banking sector stability. Fiscal and international reserves buffers and a well-capitalized banking sector provide a cushion against shocks. Market sentiment toward Romania improved as political uncertainty subsided in the aftermath of the December 2012 parliamentary elections, which the ruling coalition won. Structural reforms, however, advanced slowly, and the recovery has lagged behind that in most other European emerging economies.
The Executive Board of the International Monetary Fund (IMF) completed today the seventh and eighth reviews of Romania’s performance under its economic program supported by a 24-month Stand-By Arrangement (SBA). Completion of the reviews makes an additional amount equivalent to SDR 450.6 million (about €520.74 million), available for disbursement, bringing the total resources currently available to Romania under the SBA to an amount equivalent to SDR 3,090.6 million (about €3,571.68 million, 300 percent of quota). The SBA was approved on March 25, 2011 (see Press Release No. 11/101) and became effective on March 31, 2011. The authorities are treating the arrangement as precautionary and do not intend to draw under it.
In completing the reviews, the Executive Board approved three waivers for the nonobservance of the performance criteria on net foreign assets of the National Bank of Romania, the general government balance, and the central government arrears, based on corrective actions taken by the authorities.
Following the Executive Board’s discussion on Romania, Ms. Nemat Shafik, Deputy Managing Director and Acting Chair, said:
“Romania has successfully concluded the second of two Stand-by Arrangements with the Fund. The economy has stabilized. Core inflation remains low, and the fiscal and current account balances are sustainable. However, growth is weak and downside risks exist. Structural reforms are critical to realizing Romania’s growth potential and creating jobs, while continued fiscal discipline is essential to anchor macroeconomic stability.
“Significant fiscal adjustment since 2009 has enabled Romania to exit the EU Excessive Deficit Procedure in June. The government’s intention to further reduce the structural deficit at a moderate pace to reach its medium-term deficit objective is appropriate. The budgetary framework will also benefit from the establishment of an effective commitment control system and strict prioritization of public investment which would help to avoid recurrence of arrears. Tax administration and healthcare reform along with tax base broadening measures are also needed.
“Reform of the energy and transport sectors and of state-owned enterprises remains incomplete. The authorities have begun to gradually raise gas and electricity prices and establish a more competitive energy market while taking steps to protect vulnerable consumers. These measures are welcome, but more must be done to reform inefficient state-owned enterprises, including through greater private-sector involvement.
“The monetary policy stance is broadly appropriate. Romania’s banking system is well capitalized, but vulnerable to external shocks. Accordingly, the authorities should continue to improve their crisis management arrangements and contingency planning. In particular, further efforts to remove obstacles to the resolution of non-performing loans are needed and corporate governance weaknesses at the new unified financial supervisor should be addressed,” Ms. Shafik stated.