The Executive Board of the International Monetary Fund (IMF) approved on September 27 a new stand-by arrangement (SBA) for Romania of EUR 1.98 billion, reads a statement from the fund.

The new arrangement, which has a duration of two years, is a precautionary agreement and the Romanian authorities don’t plan to draw any money under it.

“The authorities have also requested precautionary support from the European Union of EUR 2 billion,” according to the IMF statement.

According to Nemat Shafik, IMF First Deputy Managing Director and Acting Chair, Romania has reduced large external and fiscal imbalances and begun structural reforms in a variety of areas under the authorities’ programs supported by the last two stand-by arrangements with the IMF.

However, he added that the country’s real GDP was yet to return to its pre-crisis level, the economy was still vulnerable to external shocks, including volatile capital flows, and that the reform agenda remained unfinished.

"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," he said.

Romania’s current orientation of monetary and fiscal policies is found broadly appropriate and the authorities should be commended for their plans to further reduce, at a gradual pace, the budget deficit in line with their commitments under the EU’s Stability and Growth Pact, reads the IMF statement.

However, the country should accelerate the institutional reforms to clear arrears, prioritize public investment and increase absorption of EU funds and also take measures to broaden the tax base, strengthen tax administration, and reform the healthcare system, it adds.

Also, according to IMF’s Deputy Managing Director, the macro-critical reforms in the transportation and energy sectors are important to improve the business climate and that 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.”

Romania’s banking system is well capitalized and foreign bank deleveraging remains orderly but the balance sheet repair needs to accelerate, as non-performing loans continue to rise, the statement reads.

“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,” said Nemat Shafik.

This is Romania’s third agreement with the IMF since 2009.

The first package was worth EUR 20 billion, out of which some EUR 13 billion came from the IMF, while the second one was signed in 2011 and was worth some EUR 5 billion, out of which EUR 3.6 billion were from the IMF.

Irina Popescu, irina.popescu@romania-insider.com