Romania: First and Second Reviews Under the Stand-By Arrangement and Requests for Waiver of Nonobservance of a Performance Criterion, Modification of Program Conditionality, and Rephasing of the Availability Dates of Purchases; Staff Report; Press Release; and Statement by the Executive Director for Romania

This first and second reviews under the Stand-By-Arrangement analyzes Ex Post Evaluation of exceptional access for Romania. Efforts are needed to strengthen monetary policy transmission. The banking system remains well capitalized, but the authorities need to accelerate the resolution of nonperforming loans and closely monitor risks from parent bank deleveraging. The Romanian authorities continue their efforts to reach the goals of a broad structural agenda, with a focus on structural reforms in the energy, transport and healthcare sectors, and continue the reform of the state-owned enterprises.


This first and second reviews under the Stand-By-Arrangement analyzes Ex Post Evaluation of exceptional access for Romania. Efforts are needed to strengthen monetary policy transmission. The banking system remains well capitalized, but the authorities need to accelerate the resolution of nonperforming loans and closely monitor risks from parent bank deleveraging. The Romanian authorities continue their efforts to reach the goals of a broad structural agenda, with a focus on structural reforms in the energy, transport and healthcare sectors, and continue the reform of the state-owned enterprises.


1. GDP growth has picked up though the economy and the financial sector remain fragile. The economy is estimated to have expanded 3.5 percent in 2013 as exports offset a sharp fall in domestic demand and a bountiful harvest and good industry performance boosted output. The central bank lowered the policy rate to a record low of 3.5 percent as inflation declined considerably and entered the central bank’s target range in September. Weak domestic demand has held import growth in check, precipitating a significant narrowing in the current account deficit. The exchange rate, bond spreads, and equity prices have remained rather firm despite recent volatility in emerging market asset prices. However, foreign parent banks withdrew almost EUR 3.3 billion in funding since the beginning of 2013 and the stock of non-performing loans is now among the highest in the region.

2. Romania’s overall performance under the program was good. Staff level agreement was reached in February 2014 on a combined first and second review.1 The combined review assessed performance relative to performance criteria and indicative targets for end-December 2013 (Table 1), which were set at program approval, as well as the structural benchmarks established at that time. One performance criterion and one indicative target were missed. At the same time, all end-September 2013 performance criteria and indicative targets were met:

Table 1.

Romania: Quantitative Program Targets

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The end-December 2012 figure is a stock. Reported at program exchange rates and gold price.

The December 2013 target is adjusted upward by EUR 700 million to reflect the higher than projected program financing due to the drawings under the World Bank DPL-DDO.

Cumulative figure during calendar year (e.g. September 2013 figure is cumulative from January 1, 2013). The September 2013 target is adjusted downward by RON 159 million for higher than programmed spending on national cofinancing of EU funded projects. The December 2013 target is adjusted downward by RON 600 million for higher than programmed spending on national cofinancing of EU funded projects.

Starting end-March 2014, outstanding payments past due accumulated and reported by companies while they are under insolvency procedures are excluded from the target. These past due payments amounted to RON 438 million for end-December 2013.

  • The 2013 fiscal deficit reached 2.5 percent of GDP, in line with the revised budget discussed during the November mission. It nevertheless breaches the performance criterion on the floor on the general government balance that was set at program approval by a small margin, with higher than anticipated co-financing of EU-funded projects a significant contributing factor.

  • The indicative target for SOE arrears was missed by a substantial margin. The authorities will take a number of corrective measures (prior action), including budgetary transfers, placement of several SOEs into voluntary liquidation or insolvency procedures, and implementation of restructuring measures.

3. The authorities met seven of nine structural benchmarks (Table 2). The benchmarks covered fiscal institutional, financial sector, and SOE reforms. The target date for submitting covered bond legislation was not met and the authorities request to reset the target date to end-March to reflect the consultative process. The authorities also request to reset the target for implementation of a new commitment control system for pilot units to end-April 2014, mainly to add functionalities and train users. The benchmark on preparing a basic health package was met with delay. Inflation consultations were held, since inflation fell below the inner band of the consultation mechanism.

Table 2.

Romania: Performance for First and Second Reviews

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A modification of this benchmark is proposed to specify that the required action is submission of draft legislation to parliament.

A modification of this benchmark is proposed to facilitate monitoring by specifying the required actions.

The content of this benchmark has been modified: the size of the IPO was increased from 10 to 15 percent and the reference to the planned capital increase dropped.

4. Fiscal policy remains in line with the authorities’ medium-term budgetary objective, while supporting greater absorption of EU funds. The budget envelope implies a structural effort of a cumulative 0.7 percent of GDP in 2013–14 in ESA terms. The 2014 budget relies primarily on revenue raising measures to meet the deficit target. However, the authorities are considering a reduction in the social security contribution rate by up to 5 percentage points in the mid-year budget rectification provided it can be done in a budget-neutral manner. Moreover, they have announced to ease liquidity constraints on indebted households in order to address the weak consumption.

5. Progress was made on the ambitious structural reform agenda though the privatization of the state-owned freight railway company (Marfa) failed. The authorities successfully completed initial public offerings (IPO) in two state-owned energy companies (Nuclearelectrica and Romgaz), decided to increase the number of government shares to be sold in the planned IPO in Hidroelectrica, and further deregulated the electricity and gas markets. However, the failure to complete the majority sale of Marfa is a setback. Marfa’s management, with the authorities’ backing, has adopted a major restructuring plan to restore Marfa to financial health and restart the privatization process, with Marfa’s sale expected in May 2015. Financial sector reform progress was uneven. A new guarantee scheme for small- and medium-sized enterprises (SMEs) is being implemented, and measures to facilitate NPL write-offs are under preparation, but the newly consolidated non-bank supervisory authority is still at an organization stage and a draft insolvency code and a covered bond law are yet to be discussed in parliament.

6. The program continues to be a policy priority for the government’s leadership but risks emanating from the political arena are growing. Prime Minister Ponta remains actively engaged in program development and execution. Following the withdrawal of the National Liberal Party (PNL) from the coalition, the prime minister reaffirmed the government’s commitment to program objectives and policies. However, this year’s European parliamentary elections in May and Romanian presidential elections at year-end are starting to dominate policy discussions. Moreover, the president and the government continue to differ on proposed budget measures such as the excise tax and the proposed measure to stimulate demand. These factors could complicate program execution and undermine the government’s resolve to implement the structural reform agenda.

Recent Economic Developments


Real GDP and Domestic Demand

(2013, percent change)

Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Source: Eurostat, National Institute of Statistics for Romania.Note: Region includes Bulgaria (only GDP data), Czech Republic, Hungary (up to 2013:Q3 for domestic demand), Poland and Slovakia.

7. GDP growth accelerated in 2013. Real GDP grew 3.5 percent yoy in 2013 (Figure 1) driven mostly by net exports. Domestic demand contributed negatively (-0.6 percentage points in 2013), largely due to a decline in investment as credit growth remained subdued. Growth was supported by robust industrial output and the agriculture harvest on the supply side. Overall, agriculture accounted for almost a third of the annual output increase. Unemployment is still higher than in 2012 but has started to decline to 7.1 percent in December 2013 (Figure 3).

Figure 1.
Figure 1.

Romania: Real Sector, 2007–13

Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Source: Haver.
Figure 2.
Figure 2.
Figure 2.

Romania: External Sector, 2007–13

Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Sources: Haver; National Bank of Romania; and IMF staff calculations.
Figure 3.
Figure 3.
Figure 3.

Romania: Labor Market, 2007–13

Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Sources: Eurostat; and Haver.1/ The indicator “employees” refers to the formal civil sector, while “employment” is a broader concept that also includes the informal market, self-employed and defense.

8. Inflation has fallen below the central bank’s target range (Figure 4). Annual headline inflation decelerated rapidly from the second half of 2013 to 1.1 percent (yoy) in January 2014. This reflects mainly declining food prices due to the abundant autumn harvest, a reduction in VAT on flour and bakery products, the dissipating effects of administered price increases in 2012, and weak domestic demand. Annual core inflation declined to -0.1 percent in January, from an average of 3 percent in the first half of 2013.2

Figure 4.
Figure 4.
Figure 4.

Romania: Monetary Sector, 2007–14


Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Sources: Haver; National Bank of Romania; Consensus Forecast; and IMF staff estimates.1/ Value equals percent of respondents reporting an increase minus the percent of respondents reporting a decrease.
Figure 5.
Figure 5.
Figure 5.

Romania: Fiscal Operations, 2007–14

(Percent of GDP)

Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Sources: Romanian authorities; and IMF staff estimates and projections.

9. The current account deficit has narrowed further while public capital inflows were strong (Figure 2). With weak domestic demand and export growth outpacing imports, staff projects the current account deficit to have reached 1.1 percent of GDP in 2013. While it is too early for a conclusive assessment, there are signs that some of the improvement could be permanent, such as the greater value added in exports, larger share of service exports, and lower energy imports (Box 1). Public sector capital inflows from international bond placements were strong and non-resident holding of RON-denominated government bonds increased substantially over the year. In addition, Romania drew down €700 million of the €1 billion World Bank Development Policy Loan—Deferred Drawdown Option (DPL-DDO). Private sector capital flows were more mixed with FDI picking up from recent lows, while banking sector deleveraging continued at a heightened pace. The central bank sustained international reserves at €36 billion as of end-January, while making substantial repayments to the Fund in 2013.


Contributions to Export Growth


Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Source: Haver.

Contributions to Import Growth


Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

10. Romania’s asset prices have remained relatively stable amid heightened volatility in emerging markets. Romania successfully tapped international capital markets several times since September, most recently garnering US$2 billion from an issuance of 10- and 30-year Eurobonds in January. This follows issuances for €1.5 billion in September 2013 and €0.5 billion in October 2013. Sovereign and CDS spreads widened during the recent market turbulence, but less than in emerging markets with weaker fundamentals. The exchange rate remained largely stable, in part due to central bank support for the currency.


EMBIG Spreads

(Change, basis points)

Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001


Bond Flows: ETFs/Mutual Funds

(4 week moving total, million of US dollars)

Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Source: Haver Analytics.1/ Region average weighted by GDP; includes Bulgaria, Hungary, and Poland. Excludes Bulgaria from August.

Exchange Rate Developments

(Percent change, + = local currency appreciation)

Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

11. The estimated fiscal deficit for 2013 is 2.5 percent of GDP. The cash deficit exceeded the adjusted floor on the general government overall balance, agreed at the time of program approval, by RON 477 million (0.1 percent of GDP), primarily due to higher-than-expected national co-financing of EU-funded projects.3 The authorities request a waiver as the nonobservance was minor (LOI ¶2). The 2.5 percent deficit was in line with the target set out in the second budget rectification and discussed with staff during the November mission. Revenues underperformed primarily reflecting declining VAT from imports, lower nontax revenues, and weakened collections partly due to a restructuring of the tax administrator. The revenue shortfall was largely offset by lower than expected social transfers and capital spending. Program arrears targets were met. Central government arrears remain at a de minimis level, while local government arrears increased by about RON 60 million but remained below the end-December indicative ceiling.

Fiscal Performance, January to December 2013

(In billions of lei)

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Source: Romanian authorities; and IMF staff estimates.

12. The banking system ability to support the recovery remains limited due to high NPLs and on-going deleveraging. Recent stress tests by the central bank (NBR) showed that the solvency of the Romanian banking system would be resilient to severe scenarios, although a number of banks would need to raise additional capital. However, the asset quality is still poor with NPLs of 21.9 percent at the end of 2013 (Figure 6). Provisioning kept pace and has been reinforced by collateral valuation audits mandated by the NBR, though additional efforts may be needed. While this could further affect short-term profitability, which is low, more broad-based economic growth in 2014 should be a counterbalancing factor. In addition, the mostly foreign-owned banking system faced the withdrawal of 19 percent of its parent funding from end-2012 until end-December 2013. As a consequence, banks’ reliance on local funding has increased, especially deposits, prompting a significant fall of the system-wide loan-to-deposit ratio to 105 percent at end-2013, from 117 percent the previous year. Credit to the private sector declined by 4.8 percent in real terms (yoy) in 2013, given the weak credit demand environment and also due to the drag imposed by the parent financing retrenchment. While euroization of loans has started to decrease in response to government programs in lei, particularly in the mortgage segment, the share of FX loans is still above 60 percent of the total and remains a weak spot of the system’s balance sheet.

Figure 6.
Figure 6.
Figure 6.

Romania: Financial Sector, 2007–13

Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Sources: Dxtime; and National Bank of Romania.

Bank Ownership Structure

(Percent of total gross assets, 2013)

Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Sources: National Bank of Romania

Parent Funding

Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Sources: Haver; and National Bank of Romania.

Outlook and Risks

13. The baseline scenario envisages a sustained and more broad-based recovery in 2014.

  • Growth is projected to advance by 2.2 percent in 2014, less than in 2013 but with a significant pick-up in non-agricultural growth. Better absorption of EU funds is set to support a gradual recovery in investment. Private consumption is expected to pick up with a rise in real disposable income following the recent policy easing and record low inflation, higher minimum wages (Box 2), as well as a general improvement in consumer confidence as the euro area returns to positive growth. The output gap is projected to close over the medium term, as employment and investment conditions improve.

  • Inflation is projected to remain subdued in the first quarter of 2014 (below the NBR’s lower target band), before returning to the upper part of the band in the second half of 2014, mainly reflecting base effects and further administrated price hikes. Potential food price volatility, however, will continue to be a major factor of uncertainty for inflation developments.

  • External position. Staff forecasts the current account deficit to widen slightly to 1½–2 percent of GDP in 2014–15 as domestic demand starts to recover. Capital inflows are projected to hold up with (i) FDI increasing from recent lows as Europe’s growth outlook brightens; (ii) a slowing pace of foreign bank deleveraging; and (iii) continued inflows of EU funds. With sizable repayments to the Fund, gross international reserves are projected to decline to €30 billion (five months of imports) by end-2015. Under the baseline scenario, no financing gaps are envisaged.

Romania: Macroeconomic Outlook


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Source: Eurostat; Romanian authorities; and IMF staff projections.

14. Risks to the economic outlook are broadly balanced for 2014. While strong industry performance could continue to support growth on the supply side, and better EU funds absorption could support a more robust recovery in investment, household, corporate, and foreign-parent bank deleveraging, along with rising non-performing loans, could continue to constrain credit growth and hinder the recovery in domestic demand. Moreover, monetary policy tightening in advanced economies could trigger capital outflows as investors reassess portfolio risks and return, which would put downward pressure on the exchange rate. Capital flows could also come under pressure if confidence wanes as the situation in Ukraine unfolds. Given the large volume of foreign-currency lending, a sharp depreciation in the exchange rate could lead to further deterioration in bank and private sector balance sheets. A buffer of more than four months of projected fiscal financing needs, a flexible exchange rate, and a broadly adequate level of international reserves provide insurance in the event of an external shock. Finally, heightened political uncertainty in the run-up to elections in 2014, in particular the presidential elections, could impact the stability of policy discussions and potentially weigh on investor and consumer sentiment.

Program Policies

A. Fiscal Policy: Staying the Course of Adjustment while Managing Risks to Growth

15. Fiscal policy aims to continue fiscal adjustment and strengthen the institutional framework while supporting more EU funds absorption. The authorities are set to lower the structural deficit by a cumulative 0.7 percent of GDP in 2013–14 at a time when output has started to recover, but domestic demand is still distant from its potential as reflected in a higher deviation from trend absorption than the output gap. Recent acceleration of EU funds absorption is projected to stir investment but also adds to budgetary pressures.


Romania: Deviation from Trend Absorption and Output Gap


Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Source: IMF staff estimates.Note: The deviation from trend absorption and output gap measures are based on IMF staff calculations and may differ from the European Commission, due to differences in methodology.

16. The authorities approved a budget consistent with a deficit target of 2.2 percent of GDP (in both cash and ESA terms) in 2014. Given the recent acceleration in the absorption of EU funds, the deficit ceiling was increased by 0.2 percent of GDP compared to program approval to create room for more co-financing of EU funds (in the form of an adjuster). Specifically, additional EU funds absorption has been incorporated into the baseline deficit target, which will be tightened if actual EU cofinancing is less than projected. The budget envelope implies a structural effort of 0.3 percent of GDP in 2014 in ESA terms. In addition, the wage bill increase is held to below projected nominal GDP growth, while accommodating a court-mandated reinstatement of certain wages equivalent to 0.3 percent of GDP and a two-stepped minimum wage increase. Final payments towards implementation of the EU Payments Directive, the second step of the planned increase of the Guaranteed Minimum Income, and additional transfers to SOEs to facilitate restructuring and arrears clearance are also budgeted and amount to 0.2 percent of GDP. Moreover, the budget provides for potential payments in 2014 related to restitution of World War II and communist era claims (0.1 percent of GDP). These spending requirements total 0.6 percent of GDP. Public pensions were increased by 3.8 percent in line with the pension law.

List of Measures

(Percent of projected 2014 GDP)

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While not a pure fiscal measure, the increase in the minimum wage generates net revenue for the government because the increase in personal income and social security tax receipts exceeds the increase in the public-sector wage bill from increasing the minimum wage.

Relative to 2013 budget outturn (net of court-ordered payments).

Relative to 2013 budget outturn.

17. Compensating measures to achieve the deficit target focus primarily on revenues (MEFP ¶5–7). Excises have been increased in line with inflation instead of the exchange rate and the base on property taxes has been expanded to include special constructions. A three-month delay in implementing a 7 euro cent surcharge on (about 0.1 percent of GDP) on diesel and gasoline products will be offset by a freeze on certain expenditures, including spending for local-government projects, unless revenues outperform by mid-year. On the expenditure side, the public wage bill falls in nominal terms if expenditures to accommodated court rulings and the minimum wage hike are excluded. The budget also foresees discretionary cuts in other expenditures and savings on interest payments. To safeguard against revenue collection uncertainties, the budget’s 10 percent buffer on certain expenditure items (about RON 2.3 billion, 0.3 percent of GDP) will not be released until the second budget rectification in autumn of 2014.

18. The government announced an intention to implement a new scheme to support indebted low- and middle-income households to address weak domestic demand. The voluntary scheme, which is a high priority of the government, allows a delay in debt service payments by two years for those whose debt is not overdue more than 90 days. The payment deferral is to be repaid in subsequent years. To ease the repayment burden, a tax credit would be offered in 2016–17. This measure aims to ease the liquidity constraint of households and contribute to higher consumption. While the proposal may potentially impact on the credit payment culture, this is mitigated by its voluntary nature. As it was presented, the measure has no budgetary impact in 2014–15, the fiscal liability will be contained to 0.1 percent of GDP per year in 2016–17, and the government as well as banks are committed to ensure proper consumer protection.

19. The authorities are moving ahead with structural fiscal reforms. The measures include:

  • Fiscal Compact: In compliance with the EU fiscal governance requirements, the authorities revised the Fiscal Responsibility Law to integrate structural fiscal targets and corrective actions in case of deviations.

  • Public financial management (MEFP ¶15): The authorities are taking measures to (i) prevent government arrears; (ii) improve the commitment control and fiscal reporting systems; and (iii) better manage fiscal risks. They have published detailed information on arrears (structural benchmark) and the Court of Accounts conducted an audit on the disputed invoices presented by local governments, which confirmed the amount of disputed invoices initially reported to staff. They have made good progress in implementing the commitment control system, but did not meet the end-January 2014 structural benchmark as some functionalities still need to be added and end-users trained so as to fully operationalize the system in three pilot institutions. The authorities expect to achieve this by end-April 2014 (reset structural benchmark). Fiscal reporting reforms are advancing more slowly than anticipated, due to a combination of highly ambitious objectives and capacity constraint. The authorities analyzed for the first time fiscal risks as part of the 2014 draft budget documents. The analysis could be expanded and deepened further, as recommended by the IMF fiscal transparency assessment that took place in February 2014.

  • EU funds absorption and public investment planning: The pace of EU funds absorption has accelerated in recent months as all operational programs were un-blocked and procedures were simplified. To create more fiscal space for EU funded investment and reduce inefficient domestic spending the authorities have taken steps to improve project prioritization. The MOPF staffed its Public Investment Evaluation and Monitoring Unit, the authorities prepared a list of investment projects based on predefined prioritization criteria (structural benchmark), and the fiscal implications of EU-funded projects over the medium term were identified to ensure sufficient resources for co-financing and needed financial corrections (structural benchmark). Efforts are also underway to improve prioritization of local government investment projects. Moreover, the authorities have committed to reappraise significant projects according to approved investment prioritization norms, and identify a list of projects to be cancelled in time for preparation of the 2015 budget. The World Bank is assisting the authorities in capacity building for evaluating fiscal commitments in concession and PPP projects.

  • Public administration: The authorities continue to maintain a tight control over public employment even after substituting the 1 for 7 replacement rule, i.e., ministries could only hire a new staff member after seven had departed, with a 1 for 1 rule. Public employment fell by about 6,500 in the second half of 2013 and is expected to decline further in 2014 through attrition and identification of redundancies.

  • Tax administration: A newly setup task force assessed the weak revenue collection in the second half of 2013 and found it to reflect mainly the tax-poor composition of economic growth as well as the ongoing reorganization of the tax administration agency (ANAF) (MEFP¶18). To raise revenue collection and efficiency, the authorities are committed to enhance monitoring of all aspects of corporate tax. The authorities will produce quarterly progress reports from end-2013 showing the number of audits, installment agreements and collection targets (proposed structural benchmark). As part of its wider reform efforts, ANAF is shifting resources towards its anti-fraud unit and will move to risk-based audits, which are expected to be more efficient than the current across-the-board audit system. ANAF aims to regain momentum for its high net-wealth individual taxpayer initiative supported by Fund technical assistance, and continues to seek improvements to taxpayer services. ANAF also plans to launch publicly a pilot project, in line with EU compliance strategies, to address undeclared labor and tax evasion by May 2014 (proposed structural benchmark).

20. The authorities are studying tax policies with the goal of further improving tax buoyancy and efficiency (MEFP ¶8). Preparations for a new oil and gas taxation and royalty regime have started while royalties for other minerals were raised by 25 percent from 2014. The authorities seek to lower the tax wedge on labor by a social security rate reduction up to 5 percentage points at the earliest from the second half of 2014. For that purpose they are assessing, with the support of the World Bank, how rate cuts could be done in a budget neutral way, including by base widening, while supporting program objectives. The authorities are also analyzing the impact of the September 2013 reduction in VAT rates for flour and bakery products before considering any further reduction in VAT rates for specific sectors.

21. The authorities are pressing ahead with a large-scale highway project (Comarnic-Brasov) despite the reputational risk should funding fail to materialize. The authorities consider constructing the highway a priority and are committed to carry it out at least cost and in a fiscally affordable way (MEFP ¶16). The intention is to finance the highway through a concession agreement, a first for such type of project for Romania. However, the authorities plan to sign a commercial contract by April and begin preparatory work before financing terms are agreed and resources are identified. Possible funding from the EIB and EBRD to potential private investors might be at risk, if the selection of a concession winner is not carried out in accordance with their practices and the provisions of the relevant EU Directives. While a budget allocation has been made to cover the fiscal risk in 2014 in the event that financing does not materialize, staff stressed that the reputational risk from announcing and starting such a project without allowing for proper due diligence on the financing is high.

22. Progress was made in reforming the healthcare system to ensure financial sustainability, raise efficiency, and improve health services delivery (MEFP ¶19–21). Romania’s public healthcare system relies heavily on transfers from the central government budget, and faces significant financial imbalances and increasing spending pressures from an aging population. Design of the healthcare reforms is being done in close consultation with the World Bank and the European Commission (EC). The authorities have defined and costed a basic health package (structural benchmark) but exceeded the original deadline of September 2013 as they needed more time to ensure consistency with the other pillars of the reforms (namely the minimum package for the uninsured, the list of reimbursable medicines, and healthcare programs). The reform measures are designed to remain within the existing budget in 2014. Remaining services to be covered by private co-payments and private health insurance will be defined by September 2014. The authorities have already launched discussions with the private sector on various private insurance schemes to cover those remaining services. Other reforms include eliminating cost ineffective medicines from the drug list, shifting the delivery of health services from hospitals to less costly ambulatory health care providers, centralizing procurement, introducing a lower tax rate for generics within the claw-back tax, and monitoring public hospital budgets.

23. Romania’s public debt is sustainable. In the baseline scenario, continued fiscal adjustment would ensure debt sustainability. The main vulnerability is a projected gross financing need of 9.5 percent of GDP. Main risks arise from underperformance of GDP growth and banking sector contingent liabilities, which could push the public debt ratio to nearly 50 percent of GDP in the Debt Sustainability Analysis (DSA) scenario (Annex I). Risks from contingent liabilities are contained, however, since all outstanding guarantees are already included in the public debt, SOE debt is less than 10 percent of GDP, and banks are well capitalized. External vulnerabilities persist due to relatively high external debt and rollover needs, but the projected current account deficits are sustainable.

B. Monetary and Exchange Rate Policies: Proceed with Caution

24. The central bank (NBR) remains committed to maintaining a prudent monetary policy stance (MEFP ¶23–25). Headline inflation decelerated to 1.1 percent in January from 1.6 percent in December, thereby undershooting the lower band of the consultation mechanism, after entering the NBR’s target band in September 2013. Staff discussed with the NBR recent inflation developments and the outlook as part of the inflation consultation mechanism. In the near term, inflation is expected to stay temporarily at levels below the target band, then gradually return into the band, and move into the upper part in the second half of 2014. The NBR’s end-year inflation target was converted to a continuous target from January 2014 onward.

25. The current monetary policy stance appears appropriate; however, increased caution should be exercised going forward. The authorities continued the easing cycle during September 2013 to February 2014, lowering the policy rate by a cumulative 100 basis points to 3.5 percent. Reflecting this decline, average interest rates on new loans reached historical lows at end-2013. In addition, in January the NBR reduced the high minimum reserve requirements (MRRs) by three and two percentage points for leu- and foreign exchange denominated liabilities, respectively, with a view to gradually bring the MRRs closer to levels maintained by the European Central Bank and prevailing in most other EU countries. These decisions were taken with both headline and core inflation expected to remain within the NBR’s comfort zone throughout the projection horizon amid a still sizeable negative output gap and subdued credit. However, the reduction in the MRRs exacerbated the excess liquidity situation as the recent emerging market turmoil did not leave the Romanian financial markets unscathed creating pressures on the leu. The NBR intervened to support the leu resulting in the elimination of excess liquidity and an increase in interbank rates to levels above the policy rate.


Selected Interest Rates


Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Sources: NBR; and Haver.

Selected EU Central Banks: Minimum Reserve Requirements 1/


Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Source: IMF Information System for Instruments of Monetary Policy database.1/ Maximum rate in case of differentiated rates.

26. The NBR needs to reassess the effectiveness of its monetary policy framework. Base money creation has increasingly reflected treasury operations related to disbursements of EU funds; however, rather than using the regular toolkit to absorb the excess liquidity the NBR has relied on foreign exchange sales due to their limited impact on its profitability. On the other hand, divergence between interbank rates and the policy rate as well as excessive interbank rate volatility risk undermining the monetary policy transmission. NBR should aim for a more clear-cut operational framework and effective transmission mechanism through a further narrowing of the interest rate corridor as well as improved liquidity management. In case of a need for liquidity absorption, and with a view to maintain FX reserve adequacy, the NBR should implement it primarily through deposit taking operations or issuance of certificates of deposit.

27. International reserves remain adequate. International reserves have been bolstered by the recent Eurobond placements and a disbursement under the World Bank’s DPL. The net international reserves (NIR) performance criterion for end-December was met with a wide margin while short-term debt coverage of reserves remained just below 100 percent. Going forward, the path for NIR has been adjusted to reflect recent temporary pressures on financial markets due to spillovers from emerging market turbulences. The real exchange rate remains broadly in line with fundamentals. The NBR should hence continue to allow the exchange rate to adjust with market conditions and limit interventions in support of the leu to smoothing disorderly exchange rate volatility. Discussions are underway with the World Bank on two Development Policy Loans for 2014 and 2015 of about €500 million each.

C. Financial Sector Priorities: Strengthening Banks’ Balance Sheets and Supporting the Economy

28. Continued parent bank deleveraging and credit supply constraints call for policies to improve financial intermediation. Lower reserve requirements have freed up some liquidity and could help ease the funding pressure from parent bank withdrawals. However, the authorities must remain vigilant to avoid unwanted capital outflows and exchange rate pressures. The wedge between the foreign currency and the lei minimum reserve requirement (MRR) serves to discourage foreign-currency lending at the margin, but macroeconomic stability, prudential measures, and the funding mix are important to boosting national currency lending in the long term. In this context, enabling long-term bank funding such as that derived from a new covered bond law will also benefit intermediation (reset structural benchmark) (MEFP ¶35). On the demand side, particularly SMEs experience difficulties in accessing bank lending as they also have the highest ratio of NPLs. To mitigate this situation, the government has devised a guarantee scheme for the sector, where the government shares the credit risk of the loan with the bank. Continued dialogue with market players is needed to help fine-tune the rules, as necessary, and contain risks.

29. Strengthening the banking system’s balance sheet requires a plan to reduce NPLs while permanently monitoring banks’ asset portfolio quality. Recent progress achieved on the basis of portfolio audits and the gradual closing of the provisioning gaps has helped keep provision coverage at prudent levels 89.8 percent at end-2013 including the prudential filter. However, in view of the unprecedented accumulation of NPLs (see Box 3), the central bank is working on the key elements of an NPL reduction action plan (proposed structural benchmark) (MEFP ¶ 32). The plan will establish the role of the NBR in the process, set out the responsibilities of supervised entities, and seek to provide appropriate incentives for self-discipline regarding the timely write off of unrecoverable loans. In addition, with the objective to add transparency to the system’s balance sheet, the plan will specify the accounting treatment that helps distinguish fully-provisioned and unrecoverable NPLs from other impaired loans.

30. Enhancing the insolvency law could help in dealing with high NPLs. In October, the cabinet approved a new insolvency code as a government emergency ordinance, but the manner of its promulgation and two of its substantive provisions were challenged successfully before the constitutional court. A revised draft insolvency code to address the court decision was submitted to parliament for consideration. In consultation with the IMF staff, amendments will be proposed to the revised draft so that an insolvency code aims to better support the early rescue of viable firms and speedy exit of non-viable ones, and includes at a minimum provisions on: pre-insolvency procedures, creditor voting, priority financing, automatic stay, ranking of claims, notice requirements will be submitted to Parliament by end-April 2014 for consideration (proposed structural benchmark) (MEFP ¶49).

31. The risk of financial instability arising from the recently enacted civil procedure code needs to be mitigated. The application of the new code since October 1, 2013, created certain interpretations of the abusive clauses provisions that, once applied to financial sector contracts, could give rise to the prohibition of some interest charges, decisions with retroactive impact, and class action suits regarding loan financial terms. Those interpretations have already been sanctioned in certain lower court cases, and could become a source of instability for some banks. To avoid such cases the authorities are setting up a new specialized court in Bucharest to ensure a harmonized application of those provisions in line with the spirit of the law (MEFP ¶ 37).

32. The incipient non-banking system and capital market as well as their supervision need to be developed and strengthened further. Given their limited market share, risks in the securities, insurance, and pension funds sectors appear non-systemic, though the Financial Supervisory Authority (FSA) recently placed one of the main insurance companies under special administration and appointed a private accounting firm to be the administrator. This leaves the non-bank FSA with the responsibility to develop a consistent framework of regulation and supervision of the sources of funds mobilization, and of consumer/investor protection, which in turn will promote the healthy development of the capital market. At the same time, the FSA needs to support the growth of the stock exchange with the necessary transparency and efficiency. A priority should be the ongoing work on the type and level of fees and assessment charges to put those on comparable levels with similar markets in the region (MEFP ¶ 36). The FSA is also actively working on its internal organization with support from external advisors.

D. Structural Reforms: Better Infrastructure, Better Growth

Energy and Transportation Sector

33. Implementation of the reform agenda in the energy and transportation sectors is a vital component for increasing economic growth (MEFP ¶38–46). The program seeks to improve the financial position, operating efficiency, and transparency of SOEs and the pricing framework in the energy and transportation sectors with program commitments having been developed in collaboration with World Bank and EC staff. Since program approval, the state-owned natural gas producer (Romgaz) launched a landmark initial public offering (IPO) and energy regulator raised prices in accordance with the liberalization calendars. The authorities also committed to undertake a major restructuring of the state-owned freight railway operator (Marfa) in the wake of the failed privatization effort.


SOE Arrears

(Percent of GDP)

Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Sources: Romanian authorities; and IMF staff estimates.

34. Stronger efforts are needed to reduce and prevent the re-emergence of outstanding past due payments (arrears) of SOEs. While the end-December 2013 target for the operating balance of companies under monitoring was met, the central-government owned SOEs arrears target was missed by a large margin. This was mainly due to a delayed budgetary payment to the road company for EU funded works, less than-budgeted subsidies to railway companies, and SOEs under insolvency increasing their arrears. The latter was not under the control of the government and staff proposes to take it out of the definition going forward. Also, arrears of local-government SOEs increased. The authorities have committed to take a number of corrective actions to reduce arrears significantly in the first quarter of 2014 (prior action), including a budgetary transfer, measures to improve governance and financial performance, and placement of companies into the insolvency process or liquidation. They have also started a write-off process for defense industry SOE arrears and will prepare an action plan to adhere to future arrears targets (proposed structural benchmark). Moreover, the authorities plan to strengthen monitoring and oversight of SOEs (MEFP ¶39).

35. Good progress is being made in implementing IPOs in energy companies, which can foster greater transparency and efficiency in the sector. The authorities followed the successful September IPO of shares in the nuclear power company (Nuclearelectrica) with a ground-breaking IPO of 15 percent of government shares in Romgaz. In a first for Romania, Romgaz shares were also sold through Global Depository Receipts (GDRs) traded in London. Given the success of the transaction structure, the authorities indicated their plans to do the IPOs of shares in the electricity supply and distribution company (Electrica) (structural benchmark for end-May 2014) and the hydro-power generator (Hidroelectrica) (structural benchmark for end-June 2014) through a dual listing or include GDRs. In addition, the authorities increased the percentage of shares to be sold in the Hidroelectrica IPO to 15 percent from 10 percent (MEFP ¶43) (Box 4). However, in late February, an Appeals Court placed Hidroelectrica back into insolvency until the legal claims of energy traders against the company are resolved. While the authorities remain committed to the IPO, as soon as possible after it exits insolvency, the timing of the structural benchmark may have to be revisited.

36. In contrast, the majority sale of Marfa failed. The competition council was not able to issue a ruling on market concentration, which was a condition precedent for concluding the transaction by the government-imposed deadline of October 2014. The authorities now plan to restructure the company and simultaneously restarted the privatization process. Specifically, Marfa’s management has developed a list of restructuring measures, including cuts in personnel costs, to restore the company to an operating profit in 2014 and prevent the accumulation of arrears. The authorities have committed to support Marfa’s management in restructuring the company and approved a 2014 budget for Marfa that incorporates such measures. Progress will be monitored through a new quarterly indicative target that allows for no accumulation of outstanding past due principal payments by Marfa starting from end-December 2013. Marfa’s operating performance will continue to be monitored under the existing indicative target of a floor on the operating balance of the railway companies. In the event that the restructuring does not produce the desired results, the authorities agreed to explore other options for advancing the restructuring process. The majority sale is envisaged in May 2015.

37. Improved governance and oversight of SOEs are also cornerstones of the structural reform agenda. The authorities appointed the supervisory board of Hidroelectrica in November 2013 (structural benchmark). They are also working closely with the World Bank on SOE corporate governance and monitoring (MEFP ¶40). However, the SOE Corporate Governance Law continues to languish in parliament as the government decided to wait for the conclusion of an independent study on the experience with the SOE corporate governance ordinance before pressing ahead with passage of the law.

38. The authorities continue to take steps to improve the pricing and operating framework of the energy and transportation sectors (MEFP ¶42 and ¶45). The energy regulator (ANRE) implemented the October 1, 2013 and January 1, 2014 steps of the energy price liberalization roadmaps and also intends to implement the April 1, 2014 price increases. Electricity sales to non-residential consumers are now fully sourced from the competitive market and the gas price deregulation for non-residential consumers may be completed in July, earlier than scheduled. ANRE will take that decision based on a risk assessment study. In the transportation sector, the authorities raised rail passenger ticket prices up to 10 percent effective September 1, 2013, and completed a review of railway access charges with the support of the World Bank.

Romania: Energy Price Liberalization Roadmaps (abridged)

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Source: Romanian authorities and IMF staff

The electricity roadmap specifies a timeline for electricity suppliers to progressively increase the share of electricity sourced from the competitive market. Non-household electricity is to be fully sourced from the competitive market by January 1, 2014, and household electricity by December 31, 2017.

The gas roadmap contains a calendar of price increases to raise the price of domestically produced gas up to international levels and the corresponding estimated increase in the regulated end-user price. Non-household prices are to be raised to international levels by October 1, 2014, and household prices by October 1, 2018.

Labor Markets

39. The authorities continue to monitor the functioning of the labor legislations and are taking further steps to improve youth employment (MEFP ¶48). The Labor Code has introduced more flexibility in employment relations and supported employment growth. The share of fixed term contracts grew slightly from 8.2 percent of total active contracts in 2012 to 8.4 percent in 2013. The authorities plan to review the Social Dialogue Law by end-2014 and have invited input from social partners for potential legislative revisions. To address the issue of high youth unemployment in Romania, which stood at 23 percent in September 2013, the authorities are adopting measures under the National Job Plan. They also plan to implement the secondary legislation for the Apprenticeship Law, which introduces a dual apprenticeship model, and a law facilitating professional training stages for higher-education graduates.

Program Modalities

A. Program Conditionality and Monitoring

40. The attached Letter of Intent (LOI) and Memorandum of Economic and Financial Policies (MEFP) describe the authorities’ progress in implementing their economic program. Staff recommends the waiver of nonobservance of the end-December 2013 performance criterion on the general government balance on the basis that the deviation is minor. Some modifications to the program’s conditionality are proposed (Tables 12), including setting the performance criteria for end-March and end-June 2014:

  • Prior action (Table 2). Provide a report to the IMF on the completion of the actions specified in Section L of the TMU to significantly reduce SOE arrears.

  • Five new structural benchmarks (Table 2): (i) Provide quarterly progress reports on the number of completed audits in the large taxpayers unit and high net wealth unit, and the number of installment agreements signed for large taxpayers and medium-size taxpayers to clear tax arrears as well as collection targets based on these actions; (ii) submit to parliament an insolvency code law, aimed at better supporting early rescue of viable firms and speedy exit of non-viable firms, prepared in consultation with IMF staff, at a minimum on: preinsolvency procedures, creditor voting, priority financing, automatic stay, ranking of claims, and notice requirements; (iii) prepare a strategy for the reduction of fully provisioned uncollectible NPLs on commercial banks’ balance sheets; (iv) prepare a plan that clearly identifies the companies and the actions that will be taken to adhere to the overall path of arrears reduction established under the program; and (v) issue a press release announcing the pilot structural compliance project targeted at undocumented labor and tax evasion.

  • Modifications to three structural benchmarks (Table 2): (i) the structural benchmark on launching an IPO for Hidroelectrica (end-June 2014) is modified to increase the amount from 10 to 15 percent of the shares to provide for greater trading liquidity; (ii) the structural benchmark to fully operationalize the commitment control system for all general government entities is modified to facilitate monitoring by specifying the required actions; and (iii) the structural benchmark on the covered bond legislation is modified to specify submission to parliament as the required action.

  • Resetting two structural benchmarks: (i) the structural benchmark on submitting covered bond legislation to Parliament is proposed to be reset to end-March 2014; and (ii) the structural benchmark to fully operationalize the commitment control system, covering expenditures of the MOPF and at least one additional unit at both the central and local government levels, is proposed to be reset to end-April 2014.

  • One new indicative target (Table 1): A quarterly ceiling on outstanding principal payments past due of Marfa that provides for no accumulation over the program.

  • Rephasing of availability dates (Table 10): The authorities request a rephasing of the availability dates for the purchase associated with this review and the following reviews as well as add a review based on end-June 2014 performance. The additional review would coincide with the planned Article IV consultation and the mid-year budget rectification.

B. Capacity to Repay the Fund

41. Romania is not expected to face actual balance of payments financing needs in 2014–15. The authorities have expressed that they will continue treating the SBA as precautionary.

42. Romania’s capacity to repay the Fund is expected to remain strong. Fund credit outstanding fell below 600 percent of quota in early November 2013, thereby bringing it below exceptional access limits. Scheduled payments will peak this year and remain at a manageable 11.6 percent of gross reserves, or 6 percent of exports of goods and services. While this exposure is large, servicing risks are mitigated by the relatively low level of public debt. General government indebtedness (including guarantees) is expected to remain under 40 percent of GDP, with general government external (excluding guarantees) debt peaking at 18.2 percent of GDP in 2013. Total external debt was an estimated 68.2 percent of GDP in at end-2013 and is projected to decline over the medium term. Romania’s broad political commitment to the SBA program and its excellent track record servicing external obligations, also provide comfort that it will fulfill its financial obligations to the Fund in a timely manner.

Repurchases from IMF and Principal Repayments to the EC

(In millions of euros)

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Source: Romanian National Authorities.

C. Ex-Post Evaluation and Update of Safeguards Assessment

43. Staff prepared an Ex Post Evaluation (EPE) of the 2011 SBA and a safeguard assessment update for the current arrangement.4 The EPE highlights that the program supported by the 2011 SBA was successful in preserving macroeconomic stability and advancing economic adjustment, although progress on the structural reform agenda was uneven. The 2013 update assessment of the NBR finds that the safeguards framework at the central bank remains robust.

  • Ex Post evaluation: The new program is consistent with conclusions in the EPE report. Since implementation of the broad-based structural reform agenda under the 2011 SBA faced delays, the current program focuses mainly on two macro-critical sectors, energy and transportation. To test the authorities’ commitment conditionality was front-loaded with two IPOs already completed by the time of the scheduled first review. Moreover, the coverage of the arrears target was broadened and staff suggests adding a target on the non-accumulation of arrears for the rail-freight company Marfa (¶33). Given the rising urgency to repair bank balance sheets, the current arrangement proposes two new structural benchmarks related to the financial sector. The use of net international reserves instead of net foreign assets as a performance criterion is also consistent with the EPE.

  • Safeguard assessment update: The NBR continues to publish audited financial statements and maintains strong controls over foreign reserves management, government banking, and vault operations. Staff recommended that the internal audits of foreign reserves data (a measure during both the 2009 and 2011 arrangements) be continued during the current program.

Staff Appraisal

44. Growth remains challenging and the economy vulnerable to shocks, notwithstanding the limited impact of recent volatility in emerging financial markets. Household and bank balance sheet restructuring continue to hold back domestic demand and growth in Romania’s main trading partners remains weak. In addition, gross financing requirements are significant, the energy and transport sectors are dominated by inefficient SOEs, and global liquidity tightening presents a risk for portfolio flows. This puts a premium on decisive implementation of the program to foster confidence, stimulate private capital flows, and address longstanding structural weaknesses. Moreover, better absorption of EU funds would provide a boost to investment and growth.

45. The policy focus should remain on supporting sound macro- and financial policies. There is no room left for additional monetary support of cyclical consumption and investment weakness, thus emphasis should shift to dealing with the NPLs burden to facilitate bank intermediation. Fiscal policy can accommodate some easing, compared to program approval, in particular to finance accelerated EU fund absorption and possibly expand SME lending guarantees. But medium-term fiscal risks need to be carefully managed. Beyond cyclical concerns, Romania’s economic convergence hinges on the success of structural reforms, with the program focusing on removing bottlenecks in the energy and transportation sectors.

46. Improved revenue collection and strict spending discipline will be needed to achieve the fiscal targets. The deficit ceilings have been increased somewhat to accommodate higher EU co-financing, in an environment of weak domestic demand. Nonetheless, the targets remain in line with the EU governance framework. Most of the adjustment is through revenue measures and will require strong efforts by the tax administration to raise revenue collection. In addition, inefficient domestic capital spending needs to make room for increased EU funds absorption. As Romania is getting closer to meeting its MTO, a premium should also be placed on predictability and stability of the revenue and social safety system. This implies resisting pressure to reverse previous reforms, including to the pension system, and not rushing any major changes before careful assessment of all implications. Any reduction in social contributions at the mid-term budget rectification should only be considered if it is budget-neutral, ensures the sustainability of the pension system, and is in line with program objectives. To manage risks of potential fiscal costs from concessions and PPPs, the authorities need to step up the strengthening of public financial management and procedures.

47. Monetary policy should not be eased further. A cautious approach is warranted following the recent easing steps and emerging market turmoil. In addition, prolonged periods of divergence between interbank rates and the policy rate as well as excessive interbank rate volatility risk undermining the monetary policy transmission. A further narrowing of the interest rate corridor would be appropriate as well as improved liquidity management by the central bank. Any further changes with respect to the MRRs should be implemented gradually and timed properly to avoid such episodes as the one in January 2014 when the excess liquidity situation was exacerbated by the cut in the MRRs. Going forward, if there is a need for liquidity absorption, the NBR should implement it primarily through deposit taking operations or issuance of certificates of deposit. In addition, the NBR should closely monitor bank liquidity profiles, including through stress tests, to keep them resilient to exogenous shocks.

48. Concrete actions are needed to foster a financial sector that is more supportive of growth. The improvement in the guarantee scheme for SMEs is a small step in the right direction. However, key measures to help repair bank balance sheets remain undone. The NBR has prudently focused its efforts on strengthening the supervision and regulatory enforcement of loan classification and collateral valuation. However, an NPL reduction plan that clearly establishes stakeholder responsibilities and appropriate incentives for the write-off of non-collectible loans is still needed. The authorities should also submit to parliament an insolvency law that better supports early rescue of viable firms and speedy exit of non-viable ones. If the authorities proceed with the proposed support scheme for indebted low and middle income households, its design should limit any potential impact on credit payment culture, in particular through a voluntary basis, ensure proper consumer protection, and strictly limit future fiscal liabilities. Moreover, the FSA needs to be urgently reformed to adhere to best international practices.

49. Growth prospects would be enhanced through continued implementation of the macro-critical reforms to improve service quality in the energy and transportation sectors. The published energy market liberalization roadmaps with gradual price adjustments allow firms and households time to adjust consumption patterns. Future planned price increases should be implemented without delay; and possible earlier than planned full deregulation would be a welcome step. Other positive steps include the recent and planned IPOs of energy companies, including through dual listings or with GDRs, as well as the increase in the number of shares to be sold in Hidroelectica. However, stalled progress on reducing SOE arrears is a disappointment and points to fiscal pressures that have not been fully accounted for as well as to the need for sustained corrections, including stronger restructuring efforts in the railway sector. The authorities’ identified specific steps, including plans to establish greater accountability within the government, should help reduce SOE arrears and improve resource allocation within the economy if fully implemented.

50. The failure to sell Marfa was a setback. The company continues to incur losses. Staff welcomes the authorities’ decision to relaunch the privatization process. However, the process will take time. In the interim, without a significant restructuring, Marfa is unlikely to remain a going concern. Marfa’s management has developed a restructuring plan to restore the company to financial viability. Successful implementation of the plan will require the strong backing of the government as the sole shareholder in Marfa. In the event that such backing proves too politically difficult, the authorities should voluntarily place Marfa into the insolvency process.

51. Political risks to program implementation are growing. Staff is concerned that electoral pressures, particularly those related to the presidential elections later in the year, could lead to decisions to reduce taxes, increase expenditures, and loosen the fiscal targets at the time of the budget rectification. It will be difficult, but critical to undertake any new measures in a budget neutral manner. In addition, as structural reforms advance, deeply entrenched vested interests could press for delays in the reform agenda. Continued active engagement at the highest levels in program implementation will likely be required to manage these pressures.

52. Staff supports the authorities’ request for completion of the combined first and second review. Staff also recommends the waiver of nonobservance of the end-December 2013 performance criterion on the general government budget balance, the setting of performance criteria for end-March and end-June 2014, and approval of the modification of the program conditionality and the rephasing of availability dates for purchases, as proposed in the attached LOI/MEFP.

Romania: Recent Current Account Developments

Romania’s current account deficit narrowed significantly last year. It fell from 4.4 percent of GDP in 2012 to an estimated 1.1 percent of GDP in 2013, mainly driven by improved trade and services balances.

  • During January–November 2013, exports to other EU countries increased by 8 percent (yoy), notwithstanding continued weak growth in the EU, while exports to non-EU countries were even stronger, growing at 10 percent. As in previous years, machinery and transportation equipment together with manufacturing accounted for the majority of exports. In the meantime, imports were broadly flat as domestic demand remained weak and energy imports declined.

  • The services balance surplus widened to 1.8 percent of GDP after being broadly flat until 2012. Higher exports of goods also increased the demand for services such as transportation. Moreover, part of the improvement reflects methodological advances in the collection of services export data.

  • The income balance deteriorated as FDI picked up, while current transfers held up.


Contributions to Export Growth

(In percent, 12-month moving sum)

Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Source: Haver and IMF staff calculations.

Contributions to Import Growth

(In percent, 12-month moving sum)

Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Source: Haver and IMF staff calculations.

Some of these developments could lead to a lasting narrowing of the current account deficit. The improvements in the services balance due to the changes in data collection should be permanent but the size of that impact is hard to disentangle from other factors. Also, there is some anecdotal evidence for the reduction in energy imports being more durable as some particularly energy intensive companies have closed down and energy efficiency is increasing. There are also indications that Romania’s exports are moving up the value-added chain. For example, in the machinery and transportation equipment sector, accounting for some 40 percent of exports, the ratio of imports to exports has declined noticeably during the last year. These developments could contribute to relatively small current account deficits going forward, even though we expect a small widening in the short run as domestic demand recovers.


Import to Export Ratio

(In percent, 12-month moving sum)

Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Source: Haver and IMF staff calculations.

Romania: Minimum Wage

The minimum wage will rise significantly in 2014 but remain low compared to regional peers. An increase to RON900 from the 2013 level of RON800 (about €180) is planned in two steps (RON850 from January 1 which took place and RON900 lei from July 1). Since 2011, the minimum wage would then have increased by 31 percent in nominal and 19 percent in real terms. The current minimum wage is the second lowest in the region, above the level in Bulgaria (€158.5 euro), but around 50 percent lower than in other emerging EU member states, such as Croatia, Poland and Slovakia (while GDP per capita in Romania is around 40 percent below these three countries).


Monthly Minimum Wage in Selected EU Member States


Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Source: Eurostat.Last updated: September 27, 2013.

Romania: Average Increase in Minimum Wage


Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Source: Romania National Commission for Prognosis.

So far minimum wage increases have had a limited impact on overall wage developments and competitiveness. Despite a 10 percent hike in the minimum wage in 2013, average private sector salaries increased only by 3.3 percent for the year. The relatively low share of employees paid at the minimum wage (5 to 12 percent) is one factor behind this. In general, unit labor costs have been broadly flat over the past two years. Going forward, the new minimum wage increase will put pressure on the pay scale. The overall impact on wages and competiveness will depend on the degree of pass-through (to higher salary categories) and productivity growth.

Sharp minimum wage increases could put at risk employment options for low-skilled, short-term and young workers. Given the high youth unemployment rate in Romania (23.2 percent on average in the first nine months of 2013) and the rising proportion of fixed term contracts following the introduction of the Labor Code, higher minimum wages may have negative implications for employment. The unemployment rate rose to an average of 7.3 percent in 2013, compared with 7 percent in 2012.

The fiscal impact of the minimum wage increase is projected to be mixed. On the one hand, higher minimum wages are expected to contribute to higher social security contributions, personal income tax payments, and higher VAT revenue. On the other hand, the public sector wage bill is expected to increase by about RON100 million and the private sector profitability of firms could be affected negatively with implications for corporate income tax collection. However, anecdotal evidence indicates that a higher minimum wage would in many cases merely reduce the unofficial part of the employees’ take-home pay.

Romania: The Nonperforming Loan Problem

NPLs in Romania have reached a historical high and exceed the levels observed in most of its peers. The bulk of problem loans is a legacy of several years of very high credit growth in the pre-crisis period when credit standards were relaxed and external funding fueled FX loans at nominally low interest rates. At the same time, part of the continuous upward trend in the past two years, despite a stable macroeconomic environment, is explained by the low or negative overall credit growth (denominator effect).

Most problem loans are concentrated in the SMEs. They have an average NPL ratio of 26.9 percent versus 21.9 for the system as a whole in December 2013. Households have on average a lower incidence of loan deterioration (13.6 percent NPLs), except for the sub-segment related to credit card debt and debt in foreign currency. The NPL dispersion across economic sectors of corporate borrowers is less marked, though in the past two years companies in agriculture and utilities exhibit a higher tendency to default.


Non-performing Loans to Total Gross Loans

(Percent; 2013Q2, for Bulgaria 2012Q4)

Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Source: Financial Soundness Indicators.

Romania: Contributions to Changes in the Banking System NPL Ratio


Citation: IMF Staff Country Reports 2014, 087; 10.5089/9781475516005.002.A001

Sources: Financial Soundness Indicators; and IMF staff calculations.

The central bank (NBR) has made important strides to ensure that weak asset quality does not undermine banking sector soundness. Strengthened prudential supervision of loan classification standards as well as collateral valuation, resulted in higher provisioning. The provision coverage includes the prudential filter, a concept implemented at the time of the adoption of IFRS standards.1 The recent clarification of an accounting matter that created tax liabilities to NPL sales and an NBR plan to support an orderly reduction of fully-provisioned NPLs should help the gradual convergence to more normal levels associated with the business cycle.

Other initiatives also aim to strengthen banks’ loan portfolio and stimulate lending. A new guarantee scheme for the NPL-plagued SME sector has been started, where the government shares the credit risk of the loan with the lending bank. While this plan holds some promise, its ultimate success will depend on its adoption by the private sector and the minimization of moral hazard. At the same time, the program that provides housing loans guarantees was switched to domestic currency starting in September 2013, and will gradually help reduce FX risk in the banks’ portfolio.

1 Since the previous Romanian provisioning standards were stricter than IFRS, the NBR imposed the prudential filter for the difference, which is charged against own funds for prudential reporting. In line with EU regulatory requirements, starting in 2014 the prudential filter will be phased-out in five equal annual cuts until 2018. This will not have an immediate impact on capital but will increase the lending capacity of banks.

Romania: Initial Public Offerings

The authorities have completed two of the five planned initial public offerings (IPO) in key state-owned energy companies (MEFP ¶43):

  • Nuclearelectrica (generates about 20 percent of Romania’s electricity from nuclear power)—successfully concluded an IPO for 10 percent of the government’s shares in September 2013;

  • Romgaz (produces about 45 percent of Romania’s natural gas)—successfully concluded an IPO for 15 percent of the government’s shares in November 2013;

  • Electrica (electricity distribution, supply, and service company)—launch an IPO for the majority of the government’s shares by end-May 2014;

  • Oltenia (produces about 30 percent of Romania’s electricity from coal-fired generators)—launch an IPO for 15 percent of the government’s shares by end-June 2014; and

  • Hidroelectrica (generates about 25 percent of Romania’s electricity from hydro power)—launch an IPO for 15 percent of the shares by end-June 2014. The timing may need to be revisited, following the decision by an Appeals Court in late February to place Hidroelectrica back into insolvency.

Table 3.

Romania: Selected Economic and Social Indicators, 2009–14

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Sources: Romanian authorities; IMF staff estimates and projections; and World Development Indicators database.

General government finances refer to cash data.

Includes in 2011–12, the National Program for Infrastructure Projects (PNDI), which was cancelled thereafter.

Excludes receipts from planned privatizations under the program.

Fiscal balance (cash basis) adjusted for the automatic effects of the business cycle and one-off effects.

For 2014: Latest available data.

Recalculation of potential GDP growth and output gap since program approval resulted in a narrowing of the output gap in 2013 and prior years.

Table 4.

Romania: Medium-Term Macroeconomic Framework, Current Policies, 2009–19

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Sources: Romanian authorities; and IMF staff estimates and projections.

Based on gross value added data from the National Institute of Statistics (NIS) in Romania. Note that there is a small discrepancy between the supply side GDP data from the NIS and the demand side data from Eurostat.

Includes in 2011–12, the National Program for Infrastructure Projects (PNDI), which was cancelled thereafter.

Actual fiscal balance adjusted for the automatic effects related to the business cycle and one-off effects.