The IMF mission chief for Romania, Mr. Neven Mates, announced today that the mission and the Romanian authorities reached agreement, ad referendum, on the economic and financial program for the period 2001-02 that could be supported by a Stand-By Arrangement.
Discussions on the program took place in the context of a rapid recovery of the Romanian economy, with GDP growth picking up to 5 percent in the first half of 2001. Moreover, exports have continued to perform very well, which reflected gains in competitiveness that were achieved by the real effective depreciation and fiscal consolidation of the previous two years. Growth over the last four quarters has, however, started to be led primarily by domestic demand, which, in combination with the effects of the drought in 2000, has led to a widening of the current account deficit. Within the components of domestic demand, household consumption has recently been growing at about 7.5percent, in line with disposable income and, in particular, wages and social transfers. Investment, increasing at about 6.5percent, has also started to recover.
In this context, the Romanian authorities and the staff have agreed on a program of macroeconomic policies and structural reforms. To stabilize the current account deficit and achieve the objective of reducing inflation, the government has appropriately decided to tighten fiscal policy somewhat in the remaining period of 2001, and to target a fiscal consolidation of 0.5percentage point of GDP in 2002, when the general government deficit will decline to 3 percent of GDP. This budget target is also in line with the government's medium term macroeconomic strategy that was submitted to the EU in 2000. In the area of tax policy, the mission welcomes the authorities' decision to focus primarily on reducing the payroll taxes and modernizing the tax system with a view to fostering the stability of business environment.
The government and IMF staff have also agreed on measures needed to address the issue of the financial performance of regie autonomes and state-owned enterprises, which in the first half of this year added impulse to domestic demand; moreover, the weak financial performance of these enterprises remains one of the main structural problems of the Romanian economy. The agreed measures include the following: (a) the implementation of a prudent wage policy in 2002; (b) the substantial improvement in the payment collection of the electricity, gas and heating utilities. These measures should also help to reduce the large arrears of state-owned enterprises, which continue to plague the Romanian economy; and (c) further adjustment in energy prices, which are particularly needed to reduce losses of the main thermo-power producer, in parallel with measures to further alleviate the social effects. The program also includes important structural measures to improve the legal and regulatory framework for the financial sector including, in particular, a comprehensive set of measures to strengthen bank supervision.
Finally, the government's program for 2002 includes an ambitious program of privatization , which stretches across all the sectors of the economy. The privatization of state-owned enterprises, including the largest ones and several utilities, in line with the ongoing discussions on the World Bank's PSAL, carried out in a transparent manner will further attract foreign investment. In the banking sector, to continue to reduce the government's role in the banking industry, the government has decided to attach the highest priority to the privatization of the Banca Commercial Romana.
We firmly believe that the determined implementation of the agreed program will lay the basis for a sustainable rise in living standards in Romania, and will contribute to reducing inflation to a single digit level and to ensure that Romania rapidly catches up with the other accession countries.
In line with the usual procedures, the understandings reached between the staff and the authorities will need to be approved by IMF management, and subsequently by the IMF Board. We expect that the Board could consider the Romanian program in late October-early November, after the agreed prior actions have been implemented.
Office of the IMF Resident Representative