Romania: First and Second Reviews Under the Stand-By Arrangement and Request for Waiver of Nonobservance of a Performance Criterion, Modification of Program Conditionality, and Rephasing of the Availability Dates of Purchases; Staff Report; Press Release;

KEY ISSUESStand-by Arrangement (SBA): A 24-month SBA with access of SDR 1,751.34 million (about €1.98 billion, 170 percent of quota) was approved by the Executive Board on September 27, 2013. The second and third tranches of SDR 194.7 million each (cumulative SDR 584.1 million) would be made available upon completion of the first and second reviews. Balance-of-payments assistance of €2 billion is also available from the European Union (EU). The authorities treat both arrangements as precautionary.Program status: Four of five end-December 2013 quantitative performance criteria and four of five indicative targets were met. The performance criterion on the general government overall balance was missed by a small margin. The 2014 budget provides for gradual fiscal adjustment consistent with EU requirements, while allowing for greater absorption of EU funds. On the structural agenda, a landmark initial public offering of government shares in the state-owned natural gas producer (Romgaz) was concluded and the energy regulator increased energy prices as planned. The privatization of the state- owned freight railway company (Marfa), however, failed. In addition, the end-December indicative target on state-owned enterprise (SOE) arrears was missed.Program modalities: One prior action was established that requires implementation of specific measures to reduce significantly SOE arrears. In addition, five new structural benchmarks and a new indicative target on Marfa's arrears are proposed along with modifications of three other structural benchmarks.Staff views: Staff recommends completion of the first and second reviews and supports the authorities' request for a waiver of nonobservance of a performance criterion, modifications to program conditionality, and rephasing of availability dates. Sound macroeconomic policies have shielded Romania from most of the recent volatility in emerging financial markets. Political risks to program implementation are rising as tension between the government and the president mounts in advance of elections later this year.