INTERNATIONAL MONETARY FUND
REGIONAL OFFICE FOR ROMANIA AND BULGARIA
Nr. 7, Halelor Street, Second floor, Sector 3, Bucharest
Tel # (4021)3115833 Fax # (4021) 3181410 Web-site www.fmi.ro
An IMF mission and the Romanian authorities have yesterday reached agreement at the staff level on an economic program to be supported by €12.95 billion loan under a 2-year Stand-By Arrangement. This agreement still requires the approval of the IMF's management and Executive Board. The IMF Board is expected to meet to consider the program in the weeks ahead. Romania would be able to draw €5 billion after Board approval. As part of the financial support package, the EU stands ready to provide a loan of €5 billion, following approval by the European Commision and the European Council; and the World Bank is prepared to provide €1 billion, subject to approval from its Executive Board. Support from the EBRD and other multilateral financial institutions would amount to an additional €1 billion.
The global financial turmoil has put pressures on Romania' financial markets. In addition, economic activity has already contracted at end-2008 and the near term outlook for economic growth is difficult. In an effort to preempt a further deterioration of the financial and economic situation, the Romanian authorities have requested a multi-lateral financial package to be supported by the IMF, the European Union, the World Bank, the EBRD, and other multilateral financial institutions. We welcome this pro-active approach by the Romanian authorities, which puts Romania on a good footing to face potential difficulties ahead.
The proposed program will aim to cushion the effects of the sharp drop in capital inflows while implementing policy measures to address the external and fiscal imbalances and to strengthen the financial sector. The program is based on three main planks: fiscal sector reforms; financial sector reforms; and monetary policy implementation. Fiscal policy will be strengthened further to return the government finances to sustainability, reducing the excessive increases in public wages and employment in recent years that have crowded out public investment and exerted upward pressure on private sector wages beyond productivity growth. Technical assistance from the IMF, the World Bank, and the European Commission will assist in improving public financial management, tax administration, the efficiency of public expenditures, and pension system sustainability. Financial sector reforms are aimed at strengthening liquidity and solvency of the system, and being prepared to deal promptly with any problem that may arise. Monetary policy should retain the inflation targeting framework, and allow continued exchange rate flexibility within the constraints imposed by banking system stability.
The program contains explicit provisions to increase allocations for social programs, as well as protection under the reforms for the most vulnerable pensioners and public sector employees at the lower end of the wage scale.
In conjunction with Romania's efforts and multilateral financial support, we and the Romanian authorities are actively consulting with banks and other financial institutions operating in the country to assure continued adequate financing to Romania.
Bucharest, March 25, 2009