Banca Naţională a României

The Romanian authorities and IMF staff wish to stress that they are continuing to work closely on the development of a stable macroeconomic policy framework for the country in the critical period up to European accession. A government team has been invited to Washington during the Spring Meetings of the World Bank and the IMF in mid-April to continue discussions on the second and third reviews of the IMF Stand-by arrangement, which were delayed due to the elections. It is hoped to conclude discussions on the reviews by mid-2005, when the impact of recent tax reforms and plans to liberalize the capital account can be more fully assessed.

Discussions between the government and the IMF staff have reached broad understandings on:

1. the need for a prudent fiscal policy in the period to accession to temper signs of overheating of the economy, moderate exchange rate appreciation pressures, and contain the sharp slippage in the current account deficit in the last two years, and
2. the need to strengthen the revenue base of the budget in the face of the large expenditure commitments that Romania will inevitably face in the next 2-4 years associated with economic restructuring and European accession.

The government and IMF staff believe that it is important to design a fiscal package that will permanently strengthen the revenue base, while relying less on expenditure restraint, especially when it is neither feasible or desirable. The Romanian authorities are continuing to assess the impact of the recently introduced tax cuts, before deciding on the scope and nature of further fiscal reforms to put the budget on a sustainable path in the medium term, and which will allow for further cuts in the still very high social security contributions (a major incentive for firms to remain in the grey economy) and cover the cost of the pensions recalculation and infrastructure commitments in the coming years.

The Romanian authorities and the IMF staff are concerned about the pace of the recent appreciation in the exchange rate on the competitiveness of the country's exports, and are closely monitoring current and capital account developments in assessing the appropriate stance of fiscal and monetary policies for the transition period. Such appreciation pressures have been a common feature of other countries in the run-up to European accession, and a careful analysis is needed to balance the favorable impact on real incomes and inflation with the implications for the overall competitiveness of the economy and financial stability.

The talks are also focusing on accelerating structural reforms, measures to improve governance and the business climate, encourage productive investments and strengthen living standards.