News Brief No. 02/91

News Brief: IMF Approves US$109 Million Credit Tranche Under Stand-By Arrangement to Romania

August 28, 2002

The Executive Board of the International Monetary Fund (IMF) today completed the first and second reviews of Romania's economic performance under the Stand-By Arrangement. The decision will enable Romania to draw SDR 82.67 million (about US$109 million) from the IMF immediately.

The 18-month Stand-By Arrangement for SDR 300 million (about US$396 million) was approved on October 31, 2001 (see Press Release No. 01/43). So far, Romania has drawn SDR 52 million (about US$69 million) from the IMF.

Following the Executive Board discussion, Eduardo Aninat, Deputy Managing Director and Acting Chair, said:

"Romania has achieved favorable macroeconomic performance under its program—including a higher rate of growth, supported by a recovery in agriculture and exports; progress in reducing inflation and the budget and current account deficits; and a build-up in official reserves and improved access to international financial markets. However, success in restraining wages and reducing losses in public enterprises, particularly in the energy sector, has been mixed.

"In completing the first and second reviews of the program, Executive Directors therefore underscored the critical importance of swiftly and fully implementing the measures to correct weaknesses in these areas and, in particular, moving ahead decisively with the remaining structural reform agenda. This will be essential in order to achieve durable growth and macroeconomic stability, and to strengthen the momentum of transition to a well-functioning market economy, paving the way for EU accession.

"The authorities' strategy to reduce inflation will be supported by containing the budget deficit to below 3 percent of GDP in 2002 and by a further tightening in 2003. The recently passed VAT and profit tax laws will improve the structure of the tax system and the business climate. Going forward, it will be important to further lower subsidies, while improving well-targeted social protection, and to refrain from granting ad hoc tax incentives.

"A crucial component of the program continues to be a reduction in the quasi-fiscal deficit of state-owned enterprises. The implementation of the government's wage and employment programs for 2002 and 2003 will be of key importance both for improving enterprise profitability and for the success of the disinflation strategy. In this context, the authorities will need to make every possible effort to contain the impact of the decision to substantially raise the minimum wage in 2003 on overall wage trends in public enterprises—and to stand ready to implement prompt corrective measures if necessary. In the energy sector, after appropriately ambitious adjustments in prices in 2001 and 2002, priority should now be given to correcting the persisting weakness in the collections of the main utilities.

"Monetary policy, implemented in the framework of a managed floating exchange rate regime, will aim at further reducing inflation, while preventing an unwarranted real appreciation of the currency. The authorities have taken welcome measures to closely monitor and contain the rapid expansion of foreign currency denominated credit.

"The government is committed to reinvigorate the privatization process and will move ahead with several major privatization projects. Particularly important is the privatization of the largest state-owned bank, BCR, which will involve the complete sale of the state's capital share and transfer of control to a strategic investor. Privatization in the gas and electricity sectors is set to accelerate. Together with restructuring measures, this will be essential to improve the efficiency of collections and ensure the energy sector's financial soundness, which is key for sustained macroeconomic stability and growth," Mr. Aninat said.