Press Release No. 03/60

Press Release: IMF Approves US$76 Million Disbursement Under Stand-By Credit with Romania

April 25, 2003

The Executive Board of the International Monetary Fund (IMF) today completed the third review of Romania's economic performance under the 18-month Stand-By Arrangement, and approved the extension of the arrangement until October 15, 2003. The decision will enable Romania to draw SDR 55.1 million (about US$76 million) from the IMF immediately.

The Stand-By Arrangement was approved on October 31, 2001 (see Press Release No. 01/43) for a total amount of SDR 300 million (about US$413 million). So far, Romania has drawn SDR 134.7 million (US$186 million) under the arrangement from the IMF.

Following the Executive Board discussion, Anne Krueger, First Deputy Managing Director and Acting Chair, said:

"Romania's macroeconomic performance was favorable in 2002. Economic growth was strong, inflation continued to decline, and the external current account balance improved significantly. These achievements stemmed from sound macroeconomic policies and progress in addressing structural weaknesses, notwithstanding slippages in enforcing financial discipline in state-owned enterprises and delays in privatization. The government is committed to implementing measures to consolidate macroeconomic stabilization, ensure robust and lasting economic growth, and prepare for EU accession. Key elements of the reform effort include pursuit of a restrained public sector wage policy, further reduction in state-owned enterprise losses, and more decisive progress in privatization.

"The uncertainties surrounding macroeconomic developments increased somewhat in early 2003, owing to the large increase in the minimum wage in January and a more unfavorable external environment. Against this background, full and firm implementation of cautious wage policies will be vital to preserve macroeconomic stability and avoid a significant deterioration in Romania's external competitiveness in the medium term. Should unexpected pressures on prices or the current account develop because of the minimum wage hike, macroeconomic policies will need to be tightened.

"The 2003 budget continues to emphasize fiscal consolidation, while allowing for a substantial cut in payroll taxes, increased capital spending, and a doubling of heating subsidies to support low-income households. Looking forward, revenue collection needs to be further strengthened by implementing the envisaged improvements in tax administration-including a unified social security administration-and preserving the benefits of the recent VAT reform.

"Monetary policy continues to aim at achieving gradual disinflation and averting excessive real appreciation of the currency. The authorities are aware that scope for further interest rate cuts is now constrained by wage developments and the need to keep a strong external position. To prevent the build-up of excessive vulnerabilities, close monitoring of the rapid growth of credit, particularly that in foreign-currency, remains warranted.

"The authorities are restructuring a group of large loss-making state-owned enterprises to strengthen their financial position and with a view to their eventual privatization. This is a commendable effort, and the government would be well advised to extend its scope in the future. Perseverance in improving energy utilities' collection rates is also crucial for improving state-owned enterprises' financial balances and enforcing hard-budget constraints throughout the economy. Progress in energy sector privatization, particularly of gas and electricity distribution companies, will also be key for improving efficiency. In the banking sector, the government is committed to sell a minority share in the largest bank, BCR, and to complete the bank's privatization as soon as market conditions improve," Ms. Krueger said.