Romania-IMF relations

The Romania-IMF relations span for more than 40 years, during which Romania had two economic systems: Soviet-type economic planning of the 1970s and 1980s and capitalism since the 1990s. The IMF had a strong role in shaping the Romanian economy of the 1990s towards neoliberalism.

Socialist Republic of Romania

Joining the IMF

Informal and exploratory discussions between Romania and the IMF began in 1968,[1] but it was only on September 21, 1972 that the IMF announced that Romania applied for membership.[2] Romania was formally accepted on December 5, 1972 following a vote on the IMF's board of directors,[3] becoming a member on December 15, 1972.[4] While Romania was not the first socialist country to become a member (Yugoslavia had been a member for some time), it was the first member of the Comecon to join.[3] In order to become a member, Romania agreed to grant a scrutiny of its economic situation (including holdings of gold and international monetary reserves, international trade, balance of payments and domestic budget[2]), a thing that other socialist states were reluctant to grant.[3]

1981 agreement

Due to worsening trade deficit (in part due to the rise of the price of oil) and the rise of interest rates, in 1981 Romania had difficulties paying the debts it owed to Western banks, estimated at the end of 1981 at $11.4 billion.[5]

On June 15, 1981, it was announced that Romania will get a $1.5 billion in loans from the IMF at an interest rate between 6.25% and 13.5%, to be repaid over 3 to 7 years.[6] Part of the loan was from IMF's own money and part was from money that the IMF borrowed, the latter being at a higher interest rate.[6] At that time, Romania already owed $280 million to the IMF[6] and the additional loan was needed to help Romania pay the interest it owed to the private banks.[5]

In order to be granted the loan, Romania agreed to raise food and gasoline prices and reduce spending (see 1980s austerity policy in Romania) and to provide additional information about its economy to the fund.[6][7] It also agreed to reduce the pace of industrialization and to increase investment in agriculture.[8] These demands were similar to the demands made by the Soviet Union during the early 1960s, which then led to a nationalist and dissident attitude of Romania.[8]

Romania borrowed in 1981 from the IMF a sum of $400 million out of the $1.5 billion line of credit,[9] but in November 1981, the IMF had cut off further financing because Romania failed to meet economic performance targets.[10]

In January 1982, Romania and the banks reached an agreement of defferment. IMF announced that it was negotiating a new agreement with Romania and that they'd give additional loans in return for implementing economic reforms.[5] The IMF was involved in the negotiations between the Romanian government and 200 Western banks regarding the rescheduling of the debt.[9]

The Romanian authorities began a very tough austerity program, which gained the approval of IMF, releasing the second tranche of the loan on June 24, 1982.[11] Following negotiations, the Paris Club agreed to delay 80% of the arrears due for 1981 and 1982 and the IMF released the last tranche in December 1982.[11]

Paying off the debts

On December 16, 1982, at the National Conference of the Romanian Communist Party, President Nicolae Ceaușescu announced a new policy of paying off all of Romania's external debt,[8] a policy continued throughout the 1980s.

In 1987, Ceaușescu entered an open conflict with the IMF after he stopped the communication of basic economic data to the IMF[12] and a year later he banned contracting new loans from the IMF,[13] announcing that Romania gave up on Western financing forever.[12]

Romania made the last payment in 1989, a few months before the Romanian Revolution. According to Mugur Isărescu, Ceaușescu wanted to take the country out of the IMF, but he did not act out of the fear that he might lose the gold deposited at the organization.[14]

Gradual liberalization: 1991-1996

After the Revolution, Romania had no debt and some reserves, which were quickly depleted. By September 1990, the Romanian government began talks with the IMF, seeking a line of credit.[14] Romania signed an agreement with the IMF in March 1991, getting $1 billion in aid on the condition of beginning free market reforms, including abolishing foreign exchange restrictions.[15]

Removing the restrictions on prices led to a 250% inflation.[16] The IMF identified the monetary surplus, rather than the economic depression, as the main priority for the government[17] and the government tried to limit as much as possible the spending, having a budget surplus in 1991.[18] This program led to a crisis which affected much of the economy, leading to the impossibility for companies to pay their suppliers (arrears reached 40% of the companies' turnover).[17]

The government broke the terms of the agreement in order to prevent a collapse of the entire economy, forcing the National Bank to take over debts from state-owned companies.[17] The IMF canceled the stand-by agreement and recommended the National Bank to force the companies' to pay their credits before maturation, thereby neutralizing much of the effects of the government's program.[17] This led to the collapse of a third of the nation's industry and the destruction of nearly one million jobs.[17]

Another agreement was signed in November 1991, Romania getting $300 million in IMF loans and $200 million in other loans. In exchange for this loans, Romania agreed to take austerity measures resulting in higher food and fuel prices.[19]

The National Bank soon took over completely the neoliberal policies of the IMF and argued for a complete free market for the state-owned enterprises.[20] The state-owned banks also took over this ideology and gave only short-term loans at large interest rates to state-own enterprises, despite the Văcăroiu government's attempts to pressure them to lower interest rates.[21] The IMF also demanded raising the prices of energy to international levels despite the fact that Romanian energy was cheaper to produce.[21] Due to these divergences, both the 1993 and the 1995 agreements with the IMF failed, the Fund arguing that the state violated the independence of the central bank by demanding lower interest rates.[21]

Neoliberal reforms: 1996-2000

In the Romanian general election, 1996, the former communists lost power, being replaced by the liberal Romanian Democratic Convention who began a shock therapy.[22] The reform package made by the IMF and the Romanian government included a massive reduction of subsidies and loans given to state-owned enterprises, refraining from intervening to prop up the exchange rate of the leu, closing down all state-owned companies that were not profitable, privatizing the state-owned banks, financing the deficit exclusively from the market (sovereign debt).[22] The government privatized around 40% of the industry for a meagre sum of $2.1 billion and closed down much of the rest.[22]

The result of these reforms, rather than revitalize the economy, led to a social tragedy (a doubling of poverty rate due to rising unemployment) and a macroeconomic disaster (a decrease by 20% of industrial production).[23] 60% of the newly unemployed people took up subsistence farming, in the greatest urban-to-rural migration in post-war Europe.[23]

2009 agreement

While in January 2009, President Traian Băsescu said that the last thing Romania would do would be to sign an agreement with the IMF,[24] his tone softened to agree an IMF monitorization (but without any conditions put on by the IMF)[25] and eventually, Prime Minister Emil Boc signed the new agreement in June 2009, Boc arguing that the loan will be taken exclusively by the National Bank of Romania to consolidate its reserves.[26]

The IMF and EU agreement gave Romania a 20 billion € line of credit of which the National Bank of Romania and the Romanian government took 17.9 billion € and which should be gradually returned by 2023, giving a total average interest of 15% (2.74 billion €).[27]

List of agreements

Start End Value (XDR) Reference
October 3, 1975 October 2, 1976 95 million [28]
September 9, 1977 September 8, 1978 64.1 million [28]
June 15, 1981 January 14, 1984 817.5 million (of 1102.5 million) [28]
April 11, 1991 318.1 million (of 380.5 million) [28]
May 29, 1992 261.7 million (of 314 million) [28]
May 11, 1994 94.3 million (of 320.5 million) [28]
April 22, 1997 120.6 million (of 301.5 million) [28]
August 5, 1999 139.75 million [28]
October 31, 2001 October 15, 2003 300 million [28]
July 7, 2004 July 6, 2006 0 (of 250 million) [28]
May 4, 2009 10569 million (of 11443 million) [28]
March 31, 2011 0 (of 3090.6 million) [28]
September 27, 2013 0 (of 1750 million) [29]

Notes

  1. ↑ Times, Edwin L. Dale Jr special To The New York (1968-05-17). "RUMANIA WEIGHS WORLD FUND ROLE; She Explores Membership in 2 Major International Monetary Agencies RUMANIA WEIGHS WORLD FUND ROLE". The New York Times. ISSN 0362-4331. Retrieved 2015-07-26.
  2. 1 2 Times, Edwin L. Dale Jr special To The New York (1972-09-22). "RUMANIANS SEEK WORLD BANK ROLE; Apply Also for Membership in I.M.F. -- Acceptance Is Expected by Year-End SOVIET ENTRY IS URGED Reuss Is for Admitting China and Eastern Europeans to Bank and Fund". The New York Times. ISSN 0362-4331. Retrieved 2015-07-26.
  3. 1 2 3 Times, Special To The New York (1972-12-06). "International Monetary Fund Accepts Rumania". The New York Times. ISSN 0362-4331. Retrieved 2015-07-26.
  4. ↑ "Rumania, in I.M.F.; Signs U.S. Pact". The New York Times. 1972-12-16. ISSN 0362-4331. Retrieved 2015-07-26.
  5. 1 2 3 Times, Paul Lewis, Special To The New York (1982-01-30). "BANKS PLANNING TO DEFER PAYMENTS BY RUMANIA". The New York Times. ISSN 0362-4331. Retrieved 2015-07-26.
  6. 1 2 3 4 "I.M.F. Loans Set For Rumania". The New York Times. 1981-06-16. ISSN 0362-4331. Retrieved 2015-07-26.
  7. ↑ Times, R. w Apple Jr , Special To The New York (1982-10-20). "IN RUMANIA, 'PLOTS' AND HARD TIMES". The New York Times. ISSN 0362-4331. Retrieved 2015-07-26.
  8. 1 2 3 Burakovski, p.271
  9. 1 2 Times, Clyde H. Farnsworth, Special To The New York (1982-03-08). "RUMANIA IN TALKS WITH I.M.F.". The New York Times. ISSN 0362-4331. Retrieved 2015-07-28.
  10. ↑ Farnsworth, Clyde H. (1982-04-26). "Washington Watch; Rumania Loan Payment Claim". The New York Times. ISSN 0362-4331. Retrieved 2015-07-26.
  11. 1 2 Burakovski, p.272
  12. 1 2 Ban, p.69
  13. ↑ Ban, p.67
  14. 1 2 "Romania Seeks Lines of Credit". The New York Times. 1990-09-11. ISSN 0362-4331. Retrieved 2015-07-29.
  15. ↑ "Romanian Money Rules". The New York Times. 1991-03-09. ISSN 0362-4331. Retrieved 2015-07-29.
  16. ↑ Ban, p.126
  17. 1 2 3 4 5 Ban, p.128
  18. ↑ Ban, p.124
  19. ↑ Perlez, Jane (1993-11-13). "Pyramid Scheme a Trap for Many Romanians". The New York Times. ISSN 0362-4331. Retrieved 2015-07-29.
  20. ↑ Ban, p.148
  21. 1 2 3 Ban, p.149
  22. 1 2 3 Ban, p.160
  23. 1 2 Ban, p.161
  24. ↑ "Imprumut de la FMI? Traian Basescu sustine ca e ultimul lucru pe care il va face Romania". HotNews. Retrieved 2015-07-30.
  25. ↑ "Traian Basescu: Combinatia bani europeni si un acord de supraveghere cu FMI este optima". Retrieved 2015-07-30.
  26. ↑ "Boc: Toţi banii de la FMI vor merge la BNR, iar românii nu vor plăti niciun leuţ dobândă". Realitatea TV. Retrieved 2015-08-01.
  27. ↑ "România a plătit deja dobânzi de 1,6 mld. € către FMI şi UE. Cât 320 km de autostradă | Ziarul Financiar". Ziarul Financiar. Retrieved 2015-08-01.
  28. 1 2 3 4 5 6 7 8 9 10 11 12 "Acordurile României cu FMI, de la Ceaușescu și până în prezent". Capital. Retrieved 2015-08-02.
  29. ↑ Relaţii cu organismele internaţionale - Fondul Monetar Internaţional (FMI) at the National Bank of Romania

References

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