05.02.2012 - Bucharest, February 5, 2012
The teams’ assessment is that the programme remains on track. All IMF quantitative performance criteria for end-December were met. The authorities have made good progress in implementing programme policies in a very difficult external environment. Going forward, continued prudent macroeconomic policies and accelerated structural reforms are important to ensure strong economic performance and instil market confidence.
For 2011, we have revised upwards our growth estimate to around 2½ percent, thanks in part to a bumper harvest. Inflation has also fallen sharply and came within the National Bank of Romania’s inflation target band. For 2012, we have slightly revised down our forecast in light of the more difficult economic environment in the Euro Area. We now project growth of 1½ to about 2 percent, depending on improved domestic demand and better absorption of EU structural funds. Inflation is expected to remain within the target band. The current account deficit is projected to be around 4-4½ percent of GDP.
In spite of global financial market tensions and deterioration in domestic asset quality, the banking sector has remained resilient. The average capital adequacy ratio of the banking sector stayed high at 14.5 percent at end-December 2011. Although bank lending to the corporate sector has picked up, credit growth has been weak in real terms, reflecting weak credit demand.
Continued fiscal consolidation has improved Romania’s credibility. The successful placement last week of a 10-year dollar bond bears witness to this. In 2011, Romania reached its general government budget deficit target of 4.4 percent of GDP (in cash terms). Encouragingly, the government also succeeded in paying off a substantial amount of arrears and unpaid bills at the end of the year. Initial estimates suggest that it has also achieved a deficit in accrual (ESA) terms well below the 5 percent of GDP programme target. There was a slight underperformance on the revenue side, due mainly to lower than planned grants from the EU, which was more than compensated by savings on the expenditure side.
For 2012, the government continues to be firmly committed to reducing the general government budget deficit to below 3 percent of GDP in accrual (ESA) terms. Reflecting the need for prudence, the authorities continue to target a 1.9 percent of GDP cash deficit, or 2.1 percent of GDP including expenditures of the National Development and Infrastructure Program. Meeting these ambitious fiscal targets will require continued expenditure restraint.
We have agreed with the authorities the key parameters of the path towards price deregulation in the electricity sector, which is essential to ensure proper market functioning in line with EU legislation and to trigger the urgently needed investments in this important sector. Accordingly, regulated prices for non-residential consumers will be phased out gradually by the end of 2013. For households, prices will be adjusted gradually to reach market levels by 2017 rather than by 2015 as originally agreed. Additional government revenues from energy price liberalisation could be used to mitigate the impact of the price adjustment for those in real need. On gas, we have agreed to discuss the roadmap during the next review mission. In the meantime the government will explore with the industry fiscal and regulatory measures governing energy exploration, production and distribution.
The government remains committed to implementing a comprehensive reform of the health sector to put it on a sustainable financial footing and improve its effectiveness and efficiency. Pending this review, a number of concrete measures will be taken in the short term with a view to immediately address some deficiencies.
State-owned enterprises continue to be in urgent need of accelerated reforms to make them more efficient. These reforms include the sale of minority or majority stakes in some companies and the introduction of professional private management. The newly adopted law on corporate governance in state-owned enterprises is an important step to address inefficiencies. Strategies are being implemented to reduce arrears and put the state-owned enterprises on a sound financial footing. A strong regulatory framework will be important for ensuring reasonable prices in case of partial or full privatization of some state-owned enterprises.
The next review of the programme is scheduled for late April – early May 2012.
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¹ It was the fourth review of Romania’s Stand-By Arrangement with the IMF (providing up to around EUR 3.5 billion of financial assistance) and the second interim review of the Program by the EC (providing up to EUR 1.4 billion of financial assistance). Subject to completion of this review by the IMF’s Executive Board, the fifth tranche of SDR 430 million (around EUR 505 million) will become available. The Executive Board meeting is tentatively scheduled for end-March. The authorities will continue to treat both arrangements as precautionary, i.e., not drawing on the available resources. The World Bank is currently working with the authorities on a Deferred Draw Down Option (DPL DDO) for EUR 1 billion to be approved by June 2012 to help support the fiscal buffer.