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European Commission Staff Statement after a joint mission with the IMF and the World Bank to Romania

08.02.2011 - A European Commission mission has reviewed the implementation of the ongoing balance-of-payments assistance to Romania and reached staff-level agreement on the necessary measures to meet the conditions for the fifth and final disbursement of the current programme (€150 million).

Following a request by the Romanian authorities for a precautionary follow up programme, Commission staff also discussed the contents of a possible follow up programme to be carried out in conjunction with a two-year precautionary IMF program and further assistance by the World Bank over the next two years.

A joint European Commission, IMF and World Bank mission visited Bucharest from 25 January to 8 February, 2011 to assess implementation of agreed policies under the ongoing multilateral assistance program and to discuss a new successor program. The mission will report its findings to the Commission and consult the Economic and Financial Committee. Subject to satisfactory implementation of the agreed measures (to be reviewed in March), the Commission will disburse the final instalment (EUR 150 mn) of the EU loan to Romania.

Regarding the current program and recent developments the economy is recovering as expected, with growth projected to reach 1½% in 2011, and inflation is projected to return within the NBR's inflation target range by year-end. The budget deficit reached 6.5% of GDP in cash terms (around 7% of GDP in ESA terms) in 2010, somewhat below the program target. In 2011, it is projected to further decline to 4.4% of GDP in cash terms (below 5% of GDP in ESA terms) in line with program targets.

With the support of the current program, Romania has made major achievements. It has stabilized the economy, consolidated public finances, and preserved financial system stability in the midst of a global financial crisis. It has also strengthened the macroeconomic policy framework. The Fiscal Responsibility Law, the Unified Wage Law and the pension reforms will be crucial to keeping public finances on a sustainable path and bringing fiscal deficit within 3% of GDP by 2012.

Building on these achievements, it is now time for Romania to shift attention to structural reforms that can help unleash its growth potential and improve everyday's life for its citizens. To attain this, the authorities should create a better business environment, improve infrastructure and maintain macroeconomic and financial stability, and improve the absorption of EU funds. This will promote investment and job creation in the private sector, leading to higher productivity and wages.

A new precautionary BoP assistance program requested by Romania was discussed at staff-level. Such program would help Romania achieve these goals by focusing on major reforms in the energy and transportation sectors, labour market reforms, and improvements in public services for business. The program would also support the ongoing ambitious fiscal consolidation program and focus on maintaining financial stability. The EU program would be carried out in conjunction with a two-year precautionary IMF program and be supported by the World Bank. A new two-year arrangement of the EU with Romania, if approved, would be expected to start on 1 May 2011. The size of the EU's precautionary loan would likely be EUR 1.4 bn.

Regarding the electricity and gas sectors, the authorities' key reforms steps will include the gradual deregulation of prices for non-household users, measures to increase market access and cross-border transport capacity and measures to strengthen the independence of the regulator. In line with EU directives and core labour standards, labour market reforms will focus on making rules on streamlining the wage-setting system, removing obstacles to the used of fixed-term contracts, reducing elements of rigidity in the regulation of employment protection and working time.

Romania has so far absorbed only about 2% of the available EU structural funds and thus risks losing a substantial part of its entitlement if no immediate action is taken. It needs to invest more wisely by giving priority to those projects which can be financed from EU funds. In view of this, specific targets will be set in the new program to accelerate the pace of absorption of EU funds, project implementation will be more closely monitored, and collaboration with the European Commission will be improved. Decisive action will be taken to bring project implementation fully in line with EU rules and to improve the payment verification system. 

The mission would like to thank the authorities for their excellent cooperation.

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