The IMF mission that visited Bucharest during July 7-17 reached understandings with the Romanian Government on supplementary measures for the completion of the first and second reviews under the Stand-By Arrangement that was approved by the IMF Board on October 31, 2001.
Since the last mission in March, macroeconomic developments have remained favorable and in line with the program. The 12-month annual inflation fell to 24 percent in June and the 22 percent target for end-2002 is fully within reach. The developments in the external current account for the first four months were also favorable, and the annual deficit is likely to be about 5 percent of GDP in 2002, below the program target of 5˝ percent of GDP. The foreign reserves of the National Bank of Romania have reached a comfortable level. Notwithstanding a slower growth in the first quarter of the year, GDP is projected to increase by 4-4.5 percent in 2002, in line with the expected pick up in demand of Romania's trading partners. The economy-wide average net wage rose by 4.6 percent in the first five months of 2002, compared to the same period in 2001, but wages in the state-owned enterprises again outpaced those in the private sector. Progress in privatization has unfortunately been slower than expected.
The March mission discussed with the authorities the strategy to reduce the quasi-fiscal deficit in the energy sector and other state-owned enterprises, including by improving the utilities' collection rates. Since then progress has been achieved in this regard, although there is still scope and need for further improvement. On that occasion, we also discussed with the government measures to control the wage costs in state-owned enterprises, but as noted above, recent developments in this regard have not been in line with the program.
In this context, we were concerned about the macroeconomic implications of the planned increase of the minimum wage as of January 2003. If not mitigated, its effects on household demand as well as on competitiveness and labor costs could undermine the successful disinflation efforts and the external accounts position. We were particularly concerned about the effects of this measure on state-owned enterprises. In the past such adjustments have often triggered large wage increases in the whole pay scale, even though there are not many workers earning the minimum wage in this sector. The Government agreed in this respect on offsetting measures, including the continuation of a firm policy to contain wages and employment in the state-owned enterprises and the budgetary sector. A somewhat tighter fiscal stance in 2003 is also appropriate, with the general government budget deficit limited to 2.65 percent of GDP. Furthermore, the envisaged reduction by 5 percentage points of the social security contributions, which will be done in a balanced manner, will contribute to the reduction of labor costs.
For the remainder of 2002, the fiscal deficit as defined in the budget law remains appropriate, but it is very important that additional efforts are invested in improving the revenue performance, which has so far been below expectations. We remain confident that, with the agreed measures, the government will achieve its 2002 deficit target. We also look forward to discuss with the government details of the 2003 budget in September. We welcome the government's plan to adopt well targeted social measures to mitigate the impact of the increase in utility prices on low-income households during the next winter season. In our view, however, it is very important that these new measures are fully embedded in the preparations of the 2003 budget and the overall resource envelope.
Moreover, privatization, including in the energy sector, needs to be accelerated. Without a much stronger effort in this area, Romania will not be able to attract sufficient FDI and its growth prospects could be at risk.
We remain confident that with the agreed policies the program objectives of reducing inflation to 15 percent at the end of 2003 and containing the current account deficit below 5 percent of GDP remain achievable, while GDP growth could reach a level close to 5 percent. Subject to the approval of IMF management, the meeting of the Board to discuss the supplementary letter of intent and the completion of the reviews could take place in late August or early September.