Abstract
Although the economic growth of Romania has resumed, it has boosted downside risks. However, the country has continued its strong performance under the new program in strengthening macroeconomic policies, accelerating structural reforms, and consolidating economic development. In conclusion, the authorities concur that the current precautionary Stand-By Arrangement (SBA) will provide additional security against unforeseen shocks, thereby setting the stage for strong and sustainable economic development while maintaining external and internal stability and thereby achieving the fiscal goals for 2012.
1. This supplement provides an update on economic and policy developments since the issuance of the staff report on September 14, 2011. The additional information does not change the thrust of the staff appraisal.
2. Recent indicators suggest a slowdown in export growth, in line with regional trends, while domestic demand appears to be turning around. GDP growth slowed to 0.2 percent in the second quarter (qoq) with a large negative contribution of net exports. Domestic demand improved as consumption growth turned positive, reflecting the favorable agricultural harvest and public sector wage increases. High frequency indicators show that these trends will likely continue. Net real wages increased by 3.5 percent, domestic trade indicators improved and private credit growth continued to recover. Headline inflation in August declined further to 4.3 percent on the back of a strong decline in food prices, which offset increases in railway tariffs (of 10 percent m-o-m) and other administered prices. For 2012, market analysts have been revising down growth by 0.5 to 1 pp in light of the revised EU projections, and staff expects to revise downward by a similar magnitude during the upcoming mission.
3. Financial market stress has worsened, reflecting global developments as well as spillovers from difficulties elsewhere in Europe. CDS spreads rose by an additional 50 basis points since the beginning of September, broadly in line with regional peers, but are still below the highs reached during the Greek crisis in mid-July last year. Average yields for government paper have been rising, resulting in lower than planned issuance during August and thus far in September.
4. The authorities are stepping up efforts to improve EU funds absorption. A new Ministry for Coordinating European Funds Absorption has been set up.
5. The government has met the prior action. On September 22, the government announced its decision to raise CUG gas prices for non-residential customers by 8 percent. The structural benchmark for amending the legislation on the use of Deposit Guarantee Funds to facilitate bank restructuring was also met.
(Revised Table 2 of the Staff Report). Romania: Performance for Second Review and Proposed New Conditionality
(Revised Table 2 of the Staff Report). Romania: Performance for Second Review and Proposed New Conditionality
| Measure | Target Date | Comment | ||
|---|---|---|---|---|
| Prior Actions | ||||
| 1. Increase the gas price for non-residential customers, in order to further align with CUG formula, by 8 percent. | At least 5 working days before the Board meeting | Met | ||
| Quantitative performance criteria | ||||
| 1. Floor on net foreign assets | June 30, 2011 | Met | ||
| 2. Floor on general government overall balance | June 30, 2011 | Met | ||
| 3. Ceiling on central government and social security domestic arrears | June 30, 2011 | Met | ||
| 4. Ceiling on general government guarantees | June 30, 2011 | Met | ||
| 5. Non-accumulation of external debt arrears | June 30, 2011 | Met | ||
| Quantitative Indicative Target | ||||
| 1. Ceiling on general government current primary spending | June 30, 2011 | Met | ||
| 2. Floor on operating balance of key SOEs | June 30, 2011 | Met | ||
| 3. Ceiling on stock of arrears of key SOEs | June 30, 2011 | Not Met | ||
| 4. Ceiling on stock of local government arrears | June 30, 2011 | Met | ||
| Inflation consultation band | ||||
| Inner band | June 30, 2011 | Not met | ||
| Outer band | June 30, 2011 | Met | ||
| Structural benchmarks | ||||
| 1. Undertake SOE reforms, including (i) Appointment of legal advisors for privatization of CFR Marfa, TAROM, Transelectrica, Transgaz, and Romgaz; (ii) Preparation of action plans for the remaining SOEs of the central government; (iii) Design mechanisms to facilitate restructuring and securitizing SOE arrears. | July 15, 2011 | Partially met | ||
| 2. Approve legislation to improve governance of SOEs. | Aug. 31, 2011 | Reset to Oct. 31, 2011 | ||
| 3. Eliminate by government ordinance the legal basis of all the stimulente funds, effective January 1, 2012. | Aug. 31, 2011 | Met | ||
| 4. Completion of a comprehensive review of the existing investment portfolio, which will prioritize and evaluate existing projects to focus on those where funding can be fully secured, examine the viability of old projects, with low priority and unvable ones discontinued, and production of a final report and an action plan. | Sept. 30, 2011 | |||
| 5. Amend legislation to allow the use of the deposit guarantee fund resources to facilitate bank restructuring, including purchase and assumption transactions. | Nov. 30, 2011 | Reset to Sept 30, 2011 (Met) | ||
| 6. Introduction of a simplified taxation system for smaller taxpayers under the threshold with help from the IMF and EC, while requesting a shift in the VAT mandatory threshold from the EU Council of Ministers to €50,000. | Dec. 31, 2011 | |||
| New structural benchmark | ||||
| 1. Selection of advisors for SOE reform: (i) select transaction advisors for group 1 and (ii) legal advisors for group 2 | Oct. 31, 2011 | |||
| 2. Impose a revised clawback tax on the pharmaceuticals based on the growth in their costs or above a pre-determined threshold. | Nov. 30, 2011 | |||
| 3. Prepare comprehensive amendments to the health care legislation to address the persistent budgetary shortfalls and to ensure high quality health care services. | Dec. 31, 2011 | |||
(Revised Table 2 of the Staff Report). Romania: Performance for Second Review and Proposed New Conditionality
| Measure | Target Date | Comment | ||
|---|---|---|---|---|
| Prior Actions | ||||
| 1. Increase the gas price for non-residential customers, in order to further align with CUG formula, by 8 percent. | At least 5 working days before the Board meeting | Met | ||
| Quantitative performance criteria | ||||
| 1. Floor on net foreign assets | June 30, 2011 | Met | ||
| 2. Floor on general government overall balance | June 30, 2011 | Met | ||
| 3. Ceiling on central government and social security domestic arrears | June 30, 2011 | Met | ||
| 4. Ceiling on general government guarantees | June 30, 2011 | Met | ||
| 5. Non-accumulation of external debt arrears | June 30, 2011 | Met | ||
| Quantitative Indicative Target | ||||
| 1. Ceiling on general government current primary spending | June 30, 2011 | Met | ||
| 2. Floor on operating balance of key SOEs | June 30, 2011 | Met | ||
| 3. Ceiling on stock of arrears of key SOEs | June 30, 2011 | Not Met | ||
| 4. Ceiling on stock of local government arrears | June 30, 2011 | Met | ||
| Inflation consultation band | ||||
| Inner band | June 30, 2011 | Not met | ||
| Outer band | June 30, 2011 | Met | ||
| Structural benchmarks | ||||
| 1. Undertake SOE reforms, including (i) Appointment of legal advisors for privatization of CFR Marfa, TAROM, Transelectrica, Transgaz, and Romgaz; (ii) Preparation of action plans for the remaining SOEs of the central government; (iii) Design mechanisms to facilitate restructuring and securitizing SOE arrears. | July 15, 2011 | Partially met | ||
| 2. Approve legislation to improve governance of SOEs. | Aug. 31, 2011 | Reset to Oct. 31, 2011 | ||
| 3. Eliminate by government ordinance the legal basis of all the stimulente funds, effective January 1, 2012. | Aug. 31, 2011 | Met | ||
| 4. Completion of a comprehensive review of the existing investment portfolio, which will prioritize and evaluate existing projects to focus on those where funding can be fully secured, examine the viability of old projects, with low priority and unvable ones discontinued, and production of a final report and an action plan. | Sept. 30, 2011 | |||
| 5. Amend legislation to allow the use of the deposit guarantee fund resources to facilitate bank restructuring, including purchase and assumption transactions. | Nov. 30, 2011 | Reset to Sept 30, 2011 (Met) | ||
| 6. Introduction of a simplified taxation system for smaller taxpayers under the threshold with help from the IMF and EC, while requesting a shift in the VAT mandatory threshold from the EU Council of Ministers to €50,000. | Dec. 31, 2011 | |||
| New structural benchmark | ||||
| 1. Selection of advisors for SOE reform: (i) select transaction advisors for group 1 and (ii) legal advisors for group 2 | Oct. 31, 2011 | |||
| 2. Impose a revised clawback tax on the pharmaceuticals based on the growth in their costs or above a pre-determined threshold. | Nov. 30, 2011 | |||
| 3. Prepare comprehensive amendments to the health care legislation to address the persistent budgetary shortfalls and to ensure high quality health care services. | Dec. 31, 2011 | |||