Romania is on its way to receiving a EUR 20 billion cushion loan from a consortium made up of the International Monetary Fund, European Union, World Bank and European Bank for Reconstruction. But, as with any IMF stand-by agreement, the money comes with several conditions. Revising the pension system and public sector pay will be one of them, along with reform of the inspection system for certain public enterprises, which will keep the government busy for the next two years. Low inflation, within the Romanian Central Bank target of 3.5 percent, for this year and the next is also crucial, said IMF representatives. Measures to keep the local banking system well capitalized and strengthen it, plus key support for foreign banks in Romania are also on the to do list.
“We will meet with Austrian banks present in Romania to seek their voluntary commitment to keeping their exposure to Romania and not taking money out of the country,” said Jeffrey Franks, the head of the IMF mission which was in Romania for two weeks to discuss the loan agreement.
“The core measures under the program are designed to strengthen fiscal policy further to reduce the government's financing needs and improve long-term fiscal sustainability, thus preparing Romania for eventual entry into the Eurozone,” said Dominique Strauss-Kahn, managing director with the IMF. “The program aims to maintain adequate capitalization of banks and liquidity in domestic financial markets; bring inflation within the central bank's target and maintain it there; and secure adequate external financing and improving confidence. It contains explicit provisions to increase allocations for social programs, as well as protection under the reforms for the most vulnerable pensioners and public sector employees at the lower end of the wage scale,” he added.
The financing package put together for Romania will sustain the balance of payments and could help boost lending through the decrease of minimum mandatory reserves set by banks with the BNR. But the EBRD package will mostly go to the private sector and will not help adjust the balance of payments, which has been affected by imports exceeding exports.
“Times will be tough for Romania in the next two years. With or without the IMF agreement, 2009 will be a very difficult year for Romania. 2010 will also be difficult, although perhaps less so than 2009. But I am optimistic. I trust the EUR 20 billion financial aid for Romania will stand a better chance,” said the IMF representative in Romania.
The first disbursement of the funding from the IMF, which will give Romania EUR 12.95 billion under a two-year stand-by agreement, will most likely come in May, after the IMF board approves what is now a staff agreement. Romania would be able to draw on about $6.75 billion immediately after IMF board approval. The money from the European Council, which has pledged EUR 5 billion for Romania, will probably be available for a first withdrawal in July, after the go-ahead from the European Commission and European Council. The World Bank's EUR 1 billion loan has yet to be discussed in detail with the government, according to Catalin Pauna, chief economist with the World Bank in Romania. The country's budget deficit is also under scrutiny. It should stay below 3 percent of the GDP in the next two years, below the estimation of 5.1 percent calculated under ESA standards for 2009, slightly under the 5.3 percent of last year.
The IMF money will be lent at an interest rate of 3.5 per year, and must be repaid gradually by 2015. The EC finance will bear the interest rate determined by the market on which it is raised, amounting to the EURIBOR rate plus a few basis points, according to the European Commission representative in the joint mission, Filip Keereman, head of the EC unit for the Czech Republic, Poland, Romania and Slovakia.
This is the fourth stand-by agreement Romania has signed with the IMF and the biggest sum the country has got from the fund, after deals signed in 1999, 2001 and 2004. The last agreement expired in July 2006 but Romania has not used any of the money pledged by the IMF at that time. The previous IMF loans, which come in Special Drawing Rights, the fund's unit of account, were of 400 million and 300 million SDRs. Romania used 139 million SDR of the first and the full amount of the second.
The stringent policies agreed by the Romanian authorities and the IMF justify the exceptional level of access to IMF resources, the equivalent to around 1,127 percent of Romania's quota, according to the fund.
The IMF has so far committed around $50 billion in lending to several economies affected by the deepening global economic crisis, including Belarus, Hungary, Iceland, Latvia, Pakistan, Serbia, and Ukraine.
By Corina Saceanu