Romania comes out of recession at the end of the month, IMF says

Public expenditure being ‘infested’ by inefficiency, fiscal consolidation much continue, said IMF mission head in Bucharest Jeffrey Franks. IMF approved new 24-month precautionary Stand-By Arrangement of about EUR 3.5 bln, completing the 7th and final review.

The Executive Board of the International Monetary Fund (IMF) approved on Friday a new 24-month precautionary Stand-By Arrangement (SBA) in the amount equivalent to SDR 3,090.6 M (about EUR 3.5 bln, 300 pc of quota), with the SBA coming into effect on March 31, 2011, as a press release informs.

After the announcement the head of the IMF mission in Romania, Jeffrey Franks, told Mediafax on Saturday that the country would come out of recession at the end of March, the economic growth would follow an ascending trend from one quarter to another and the population would only feel an improvement of the situation towards the middle of the year. The data confirms PM Emil Boc’s statements mid-February that there were signs suggesting Romania would formally come out of recession by the end of March.

‘There is always a degree of uncertainty and I do not know the exact figure at the end of Q1, but I believe the indicators on Romanian economy are almost universally positive,’ Franks said. He also noted that the indicators have constantly improved in Q1 and he expected a moderate economic growth after the first three months of the year. ‘I expect the advance of the economy to follow a gradual growth in the course of 2011. Every quarter growth will be, on the average, a bit higher than in the previous quarters, which means that we can start 2012 with quite a robust growth,’ Franks continued.

Technically speaking, in order to come out of recession, a country’s economy needs to post growth for two consecutive quarters. In the last quarter of 2010, the economy grew by 0.1 per cent as compared to the previous quarter.

IMF estimates 1.5 per cent economic growth this year, something PM Emil Boc also reiterated in Deva, yesterday.

Asked when the effects of economic growth would be noted by the public, the IMF official spoke about the period until the second half of the year, noting the time gap between the presentation of statistical data and the moment when the population sees that the situation has improved. Although Romania is one of the EU’s poorest states, Franks believes the local economy has a chance to grow faster than the EU average in the future, which would help the country bridge the current living standard divide compared to richer states.

At the same time, the head of the IMF mission in Romania stressed out the fact that, under conditions of poor absorption of European funds and of some public expenditure ‘infested’ by inefficiency, tax consolidation would have to continue in order to cut the budget deficit to less than 3 per cent of GDP until 2012. He pointed out that one such limitation was the absorption of EU money the objective of which is the improvement of infrastructure, education system and other areas supporting economic growth. As for the current agreement, due to end on March 30, Franks says there major objectives have been reached: correction of macro-economic imbalances, commencement of reform processes and avoidance of banking crisis. ‘The worst part of the crisis has past. There are, however, specific measures the Government still needs to take, but, overall, we have a positive outlook for the years to come,’ Franks said.
In his turn, John Lipsky, First Deputy Managing Director and Acting Chair, stated in a press release: ‘The fiscal and structural measures already implemented are yielding results. The economy has stabilized and growth is resuming. The new program appropriately focuses on building on achievements to date with additional fiscal consolidation and structural reforms to boost growth and improve private sector participation in the economy. (…) Going forward, efforts should focus on reforming social health care and public investment, tackling persistent domestic arrears, and improving the tax system. Priority should also be given to institutional changes that would facilitate the absorption of EU funds.’


Policy implementation under the Fund-supported program has remained strong and the authorities are seeking a follow-up precautionary arrangement to signal their commitment to continued reform, according to Fund’s representatives.

‘The fiscal and structural measures already implemented are yielding results. The economy has stabilized and growth is resuming. The new program appropriately focuses on building on achievements to date with additional fiscal consolidation and structural reforms to boost growth and improve private sector participation in the economy’, the press release informs. Lipsky said the improved governance, regulation, and pricing at state-owned enterprises, particularly in the energy and transport sectors, are essential to bolster economic efficiency as would a reactivation of the privatization program. ‘The authorities are also pursuing labor market and social benefits reforms, with a view to fostering job creation and productivity growth. These reforms should be mindful of the need to protect the most vulnerable groups and workers’ rights,’ First Deputy Managing Director added.

One thing is for certain – unlike Japan, for example, Romania cannot afford the luxury of cutting taxes and broaden the budget deficit to boost the economy, because measures like those are only possible in countries that have no international financing restrictions, said IMF mission chief Jeffrey Franks. He continued by saying that the best way to bolster Romanian economy was to adopt the kind of structural reforms that can render it more productive. He noted that government arrears at a central level had been virtually eliminated while, at a local level, the legislation allows for better controls, therefore the focus in the near future would move towards state-owned companies’ debt which is a serious issue. Franks reiterated the fact that the Fund would not impose conditions as to the privatisation of specific state-owned enterprises, and that the decision on selling or restructuring those was the state’s.

As the press release informs, the Romanian authorities have announced the IMF that they intend to treat the new arrangement as precautionary and therefore do not plan to draw under it. The SBA will be in conjunction with precautionary support from the European Union of EUR 1.4 bln and a loan from the World Bank of EUR 0.4 bln. The Executive Board has also completed the seventh and final review of Romania’s economic performance under an SDR 11.443 bln (about EUR 12.95 bln) 24-month SBA that was approved on May 4, 2009 and will end effective March 30, 2011 at the authorities’ request. The completion of the final review enables the immediate disbursement of SDR 874 M (about EUR 1 bln). The authorities have informed the IMF that they also intend to treat this final disbursement as precautionary.
Romania’s representative at the IMF, Mihai Tanasescu, says it has been the shortest Board meeting on Romania in the last two years. ‘The written statements and verbal answers given to the questions of the directors were clear and convincing enough. The unanimous perception of what has been done in Romania in the last two years was positive. (…) A two-year stage of major sacrifices by the population, yet with extremely beneficial effects on the future, is ending,’ Tanasescu stated.

According to, the Executive initially said the money from the IMF would only be used in case of emergency. However, Finance Minister Gheorghe Ialomitianu said, on Friday, that Romania might have to draw under the new arrangement, after all.


Price rises, less compensated medicaments and bigger bills for some Romanians are just a few of the effects the new stand-by agreement with the IMF, due to enter into effect in less than a week, is expected to have. According to, patients will benefit from fewer compensated and free drugs, as agreed with IMF. In addition, a total of 5,700 hospital beds will be cut. Heating bills will also grow for families who will no longer receive assistance from the state, because the Executive will reduce the number of subsidies. Bucharest ground transport fares could grow by 40 per cent and underground transport by 10 per cent. Railway transport will also cost more.

However, Franks has said the National Bank of Romania would take the necessary monetary policy measures to reduce inflation again, as prices have grown above expectorations in the last two months, influenced by international food, oil and energy prices. ‘Monetary and financial sector policies have been prudent and proactive, helping preserve financial stability during the crisis. Monetary policy should continue to strike a balance between the need to address inflation risks and the need to support the recovery. The banking system is liquid and well-capitalized, but vigilance remains warranted, in light of rising non-performing loans and the potential for adverse regional spillovers,’ John Lipsky concluded.

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