Banca Naţională a României

An IMF mission visited Bucharest July 14-August 1 for discussions on the fourth and final review of the IMF stand-by arrangement. Substantive agreement was reached on a supplementary letter of intent, while discussions will continue on measures to contain wage bill growth in state-owned enterprises.

Macroeconomic developments in the first half of 2003 continued to be generally favorable, with GDP growth strong and inflation falling faster than expected. Export growth has slowed, however, following a period of exceptionally strong performance. Rapid wage growth in excess of that justified by productivity, and buoyant private sector credit, have also led to stronger private sector demand and put pressure on imports. As a result, the current account deficit has widened compared to expectations. The impact of high real wage growth on international competitiveness remains of concern.

Fiscal policy has been on track. The weaker external environment and a temporary reversal in capital flows, however, have presented challenges for monetary policy. Gross reserves continue to provide very comfortable import cover.

The rapid growth of private credit needs close monitoring, and the World Bank/IMF financial sector assessment (FSAP) in May stressed that this risks increasing non-performing loans. Nevertheless, the assessment of the financial sector was positive noting that the banking system has strengthened, and that Romania is largely in compliance with international standards on banking supervision. Progress in reducing energy sector losses has slowed in 2003. Rising imported fuel prices have reduced energy tariffs below cost-recovery levels, and energy collections, particularly for heating, remain weak.

Restructuring of the remaining companies under the Privatization Authority has allowed for the successful privatization of a number of large problem companies. Negotiations with EBRD and IFC on the sale of a share of BCR are proceeding well, although privatization of the energy companies has been slower than expected. Policy discussions for completion of the review focused on consolidating macroeconomic stabilization, moderation of domestic demand, and decisive action to reduce energy sector losses and correct slippages under the arrangement. The authorities expressed their interest for continuing discussions in October on the economic prospects for 2004. We are confident that successful implementation of the agreed measures and continued progress to strengthen energy sector collections and to contain unjustified wage growth, would allow for IMF Executive Board discussion of the review to take place in early October, subject to management approval.