The Executive Board of the International Monetary Fund (IMF) approved Friday a new 24-month Stand-By Arrangement (SBA) in an amount equivalent to SDR 1.75 billion (about EUR 1.98 billion, or 170 percent of Romania’s quota in the Fund), a press release informs. The authorities have informed the IMF that they intend to treat the new arrangement as precautionary, and therefore do not plan to draw under it. The authorities have also requested precautionary support from the European Union of EUR 2 billion.
Following the Executive Board’s discussion on Romania, Nemat Shafik, First Deputy Managing Director and Acting Chair, stated the new SBA will support policy continuity, provide a reserve buffer, and catalyze growth-enhancing reforms. It will also put Romania “on the path toward exiting from Fund support.” “However, real GDP has yet to return to its pre-crisis level, the economy is still vulnerable to external shocks, including volatile capital flows, and the reform agenda remains unfinished. (…) The current orientation of monetary and fiscal policies is broadly appropriate. The authorities should be commended for their plans to further reduce at a gradual pace the budget deficit in line with Romania’s commitments under the EU’s Stability and Growth Pact. Pressure to rollback previous fiscal reforms should be resisted, and institutional reforms to clear arrears, prioritize public investment, and increase absorption of EU funds should be accelerated. Measures to broaden the tax base, strengthen tax administration, and reform the healthcare system are also needed.
According to Shafik, macro-critical reforms in the transportation and energy sectors are important to improve the business climate. The gradual deregulation of energy prices, supported by measures to protect vulnerable consumers, should be continued. Likewise, the authorities’ commitment to undertake long-delayed reforms of state-owned enterprises, including improvement in governance and the expansion of private-sector involvement, is welcome.
The banking system is well capitalized and foreign bank deleveraging remains orderly, said IMF First Deputy Managing Director. However, balance sheet repair needs to accelerate as non-performing loans continue to rise. “The amendment of the insolvency code and the adoption of covered bond legislation would be important steps in this direction. As an additional policy priority, the governance structure at the non-bank financial supervisor should be brought in line with international standards,” Shafik stated.
While in Bistrita, the PM pointed out that one of the key elements the government negotiated with the IMF is related to increasing the overall investment warranty threshold from RON 3 billion to RON 8 billion. “It’s a significant increase that allows us to support the private economy, such as Prima Casa, state aid and other SME warranties”, he said. In turn, president Traian Basescu stated yesterday on the ProTV show “Dupa 20 de ani” (Twenty years later) that Romanian banks are repatriating “enough” money to parent banks and the government made a strategic mistake in negotiating the latest agreement with IMF.
“If you recall, when I was with Boc (former Prime Minister Emil Boc – editor’s note), one of the objectives of the two agreements concluded in 2009 and 2011, respectively, was for IMF to conclude an agreement with banks to prevent them from withdrawing capital from parent banks,” Basescu said. He added that he does not know why the Ponta governance did not do the same with the latest agreement.
BNR: The agreement ensures stability for the business environment
The new agreement with IMF ensures the predictability, transparency and stability of the business environment, as well as the transparency of decisions made in the public sector. However, Romania still has problems that must be solved by use of internal resources, First Deputy Governor of the National Bank of Romania (BNR) Florin Georgescu stated Saturday at the Bucharest Forum, Mediafax informs. He explained that Romania’s major problems are economic growth largely based on agriculture, despite this year’s good economic increase compared to other countries and previous years, reduced internal savings and banking deleveraging (withdrawal of the funds provided by parent banks to Romanian branches). The BNR official mentioned that the “Vienna 1” banking agreement, which was valid between 2009 and 2011 and referred to parent banks committing to not diminish exposure for Romanian branches, has not been extended; this means they are free to optimize their funds and distribute them globally according to their own strategy.