Download WT/BOP/R/45 - WTO Documents Online

RESTRICTED
WORLD TRADE
WT/BOP/R/45
24 February 1999
ORGANIZATION
(99-0723)
Committee on Balance-of-Payments Restrictions
REPORT ON THE CONSULTATIONS WITH ROMANIA
1.
The Committee on Balance-of-Payments Restrictions held consultations with Romania on 1
and 2 February 1999. The consultations were held under the Chairmanship of Mr. Peter Jenkins
(United Kingdom) in accordance with the terms of reference of Article XII:4(a) of the GATT 1994
and the Understanding on the Balance-of-Payments Provisions of the GATT 1994. The International
Monetary Fund was invited to participate in the consultations in accordance with Article XV:2 of
GATT 1994.
2.
The Committee had before it the following documents:
WT/BOP/S/8 + Corr.1
WT/BOP/G/7
WT/BOP/N/41
WT/BOP/N/42
Background Paper prepared by the Secretariat
Basic Document supplied by Romania
Notification from Romania
Notification from Romania
IMF
Romania: Supplementary Background Material for the WTO
15 January 1999
Opening statement of the representative of Romania
3.
The opening statement is attached as Annex 1.
Statement by the representative of the International Monetary Fund
4.
The statement by the representative of the International Monetary Fund is attached as
Annex 2.
Discussion in the Committee
5.
Members recognized the serious economic problems faced by Romania, the deteriorating
trade balance and the low level of reserves. They saw no reason to question the legitimacy of the
measure. At the same time, it was pointed out that balance-of-payments difficulties mirrored a lack of
progress in achieving sound macroeconomic policies. A tighter budget and more rapid restructuring of
the banking and state enterprise sectors, as well as a more appropriate exchange rate policy to enhance
external competitiveness, would address the underlying causes rather than the symptoms.
6.
Members welcomed Romania's prompt notification following the imposition of the surcharge,
accompanied by a clear phase out plan, and the fact that the measure was price-based, transparent, and
non-discriminatory. However, they expressed the view that the coverage of the surcharge, which
affected some 63 per cent of imports, could be wider, and sought clarification on imports exempt for
production destined for export. Members also encouraged Romania to consider an earlier elimination
of the surcharge if conditions permitted.
WT/BOP/R/45
Page 2
Replies by the representative of the Government of Romania
7.
The representative replied that his Government was well aware that reforms were necessary in
order to halt the drain on financial resources and for that reason had already adopted certain measures.
With respect to the exemption of certain imports from the surcharge, his Government believed that it
was necessary to exempt inputs for export production, to improve the trade balance and, subsequently,
the balance of payments. He undertook to submit promptly written information clarifying in detail the
exemption for export purposes.
Conclusions of the Committee
8.
Members sympathized with the economic difficulties faced by Romania and the seriousness
of the balance-of-payments problem. They welcomed the trade liberalization efforts already
undertaken by the Government as well as the recent measures introduced to accelerate restructuring
and privatization.
9.
Members welcomed the fact that the surcharge was a price-based measure, which had been
notified promptly, and that a time table for phase out had been presented. However, Members, noting
the number of exemptions, sought clarification regarding the coverage of the surcharge, which
affected some 63 per cent of imports. While the conformity of the measure with Article XII of GATT
1994 was recognized, Members recommended that Romania pursue a lasting solution to its balanceof-payments difficulties through fundamental macro economic reform, including fiscal tightening, an
appropriate exchange rate policy and rapid economic restructuring.
10.
Noting the intention of the Romanian authorities to keep the measure under review and their
understanding that the time table for its elimination might be modified in the light of significant
improvement in the balance of payments, the Committee found Romania in conformity with its
obligations under Article XII of GATT 1994.
WT/BOP/R/45
Page 3
ANNEX 1
Opening statement of the representative of Romania
It is both a duty and a pleasure for me to participate on behalf of Romania in the work of the
Committee on Balance-of-Payments Restrictions. Before going to the heart of the matter, I should
like to thank the WTO Secretariat and the IMF for their documents and for their cooperation in
preparing these consultations.
As is well known, Romania is facing a difficult economic situation. Last year was the second
consecutive year of economic decline. GDP fell by over 5 per cent and during the first 11 months
industrial production decreased by 17.4 per cent. At the same time, the deficit in the trade balance
reached record levels. In 1998, inflation was over 40 per cent. The Romanian currency continued to
depreciate. Unemployment exceeded 9 per cent, compared with 6 per cent for the preceding two
years.
Unfortunately, the outlook for this year is not much better. The National Forecasting
Commission believes that there will be a third consecutive year of economic decline. It is forecast
that GDP will fall by 2 per cent while industrial production is expected to decrease by 4 per cent. In
order to have a better understanding of this situation, it must be borne in mind that the reimbursement
of Romania's external debt will be at its highest level in 1999.
In order to overcome the difficulties facing the Romanian economy, the Government has
taken radical reform measures.
At the end of last year, a start was made on liquidating State-owned enterprises, which make
the greatest losses. To date, 30 enterprises have been liquidated and others are in the process of being
liquidated.
Simultaneously, the Government began to restructure the mining and agricultural sectors and
to reform public administration. It also took stringent measures to restructure the large State
authorities in the energy sector (electricity and natural gas).
There has been a real acceleration in the privatization process. The philosophy of
privatization has changed and greater importance has been given to the quality and amount of the
capital to be privatized. Another measure intended to speed up the privatization process is its
decentralization. For example, small and medium State-owned firms will be directly privatized by the
local agencies of the State Property Fund.
The first results of this new strategy can be seen. In 1998, the company ROMTELECOM and
the Romanian Development Bank (the third largest) were privatized. On 25 January 1999, the
contract for the privatization of the PETROMIDIA refinery was signed. Privatization of BANCPOST
is in the final phase. It is expected that two other large banks - BANCOREX and the Agricultural
Bank - will be privatized this year.
The Government firmly supports the restructuring of enterprises by allocating substantial
financial resources to this activity. A large part of the funds yielded by privatization is used to
restructure commercial companies. Financial resources are given to employees who have lost their
jobs to assist their conversion or are set aside for the establishment of small and medium firms.
WT/BOP/R/45
Page 4
Structural reform is accompanied by fiscal, monetary and budgetary policies that will
continue to consolidate macroeconomic stability and achieve a sustainable and permanent reduction in
inflation.
One of the Government's important objectives is economic recovery; this will involve the
privatization and restructuring of enterprises, reform of the banking system and support for the
development of the private sector, particularly small and medium firms.
The Government is determined to complete the reform process under way, although it is
aware that it will have a high social cost.
As an original Member of the WTO, Romania has met all its commitments to the
Organization. Its trade policy measures guarantee respect for international rules and standards, as
well as the commitments under multilateral and other international agreements. The trade policy
measures applied have made it possible to create the basis for a market economy, essential during the
period of transition, reform and restructuring that characterize Romania.
Romania's trade regime has been significantly liberalized. We have abolished all export
restrictions. Romania has no import restrictions. The licensing system has been radically simplified
and is restricted to areas directly related to the protection of non-renewable natural resources, human
beings, plants, animals and the environment.
Romania firmly supports the multilateral system and has taken an active part in the
negotiations on liberalization of trade in services.
For the first 11 months of 1998, the deficit in the balance-of-payments current account was
US$2,516 million. This corresponds to an increase of over 54 per cent in comparison with the same
period in 1997.
The main reason for the serious deterioration in the current account has been the increase in
the trade balance deficit which, for the first 11 months of 1998, was US$2,242 million (in f.o.b.-f.o.b.
prices) or US$3,000 million in f.o.b.-c.i.f. prices, the largest deficit over the past seven years.
The deficit in the current account and the servicing of the external debt have been financed by
capital inflows (particularly direct investment and external loans to finance investment), as well as by
foreign currency reserves in the banking system.
At the end of 1997, currency reserves covered 3.6 months of imports, whereas at the end of
1998 the figure was 2.8 months and the forecast for 1999 is 2.3 months.
According to preliminary estimates, the current account deficit in 1998 will be
US$2,650 million, of which US$2,500 million can be attributed to the deficit in the trade balance. In
f.o.b.-c.i.f. prices, the deficit will be around US$3,100 million.
The trend in the trade balance deficit for the first 11 months of 1998 was mainly due to an
increase in imports and a slight decrease in exports.
The accelerated growth in imports over the first 11 months of 1998 was due to the reduction
in domestic production of consumer goods, changes in production technology, high prices on the
domestic market and an overvalued exchange rate for the national currency.
WT/BOP/R/45
Page 5
Internal factors such as the fall in industrial production and in the number of livestock, the
rigidity of the export structure, and the low exchange rate were responsible for the 2.3 per cent
decrease in exports over the first 11 months of 1998, together with external factors such as the
decrease in demand and in international prices for some of Romania's main exports.
Another reason for the decrease in exports was the global economic and financial crisis,
which limited markets and made them more sensitive. Romania's exports have lost some important
outlets and, in addition, trade protection measures in a number of markets have become more common
and more stringent, no doubt due to the increased sensitivity of these traditional markets for
Romanian exports.
In 1999, the balance-of-payments situation is likely to deteriorate because of the need to repay
around US$3 billion of the external debt (of which US$2.2 billion during the first half of the year).
The unfavourable economic trends made it necessary to take action to safeguard the external
financial position and the equilibrium of the balance of payments, in accordance with the provisions
of Article XII of the GATT 1994. This premise has also been mentioned by the Secretariat and the
IMF in their respective documents.
This is why we consider that the application of the temporary import surcharge is in
conformity with the relevant rules of the WTO. The measure was taken under Article XII of the
GATT 1994 without reference to status as a developing country.
In introducing a temporary import surcharge, the Romanian Government chose the measure
that would be the least disruptive to trade, as called for by the relevant international rules.
The level of the surcharge does not exceed what is strictly necessary to improve the
balance-of-payments. On 10 October 1998, a surcharge of 6 per cent was introduced, and this was
lowered to 4 per cent as from 1 January 1999, respecting the timetable for gradual dismantling drawn
up by the authorities.
The sole purpose of the temporary surcharge is to control the general import trend and it
applies to all products irrespective of origin, including imports from countries with which Romania
has signed preferential trade agreements.
The import surcharge applies to all products with the exception of essential goods or those
which help to remedy the balance-of-payments situation (medicines, certain fuels or raw materials,
goods needed to achieve complex objectives or requiring a long production cycle - for export -, goods
that are legally duty free).
In our view, these correspond to the definition of "essential goods" that may be exempt. The
surcharge applies to over 63 per cent of imports (in terms of value for the first 11 months of 1998),
and so applies to the majority of goods imported.
It is interesting to note that, commencing in November 1998, the rising trend in imports was
reduced to 5.8 per cent compared with the same period in 1997. The volume of imports for
November 1998 was US$100 million less than for November 1997. At the same time, the decrease in
exports was reduced by 2.6 per cent over ten months and 2.3 per cent over 11 months.
These initial results show that the measure introduced by the Romanian Government has
started to bear fruit, affecting both imports and exports, as is required by the international rules. It is
nonetheless premature to draw any conclusions regarding reversal of the deteriorating trend in the
current account, particularly since there is a serious lack of resources to finance the deficit.
WT/BOP/R/45
Page 6
Romania has set a timetable for the gradual elimination of the temporary import surcharge
and this is set out in the basic document. In accordance with this timetable, on 1 January 1999 the
surcharge was reduced to 4 per cent. The next reduction will be on 1 January 2000, when it will fall
to 2 per cent.
With a view to informing the Members of the WTO, the Romanian Government notified this
measure within the time allotted, thus providing the necessary transparency concerning the temporary
import surcharge.
We believe that the measures taken by the Romanian authorities to speed up economic reform
and ensure macroeconomic stabilization will undoubtedly have a favourable effect on the
balance-of-payments.
The measures exempting imports of raw materials and materials used to produce exports from
the surcharge will improve the balance-of-payments situation still further.
The Romanian Government has also taken other ad hoc measures to boost exports, in
conformity with the relevant WTO rules. For example, Romania's participation in international fairs
and exhibitions has become more selective; Romania's trade representatives abroad have been
promoting Romanian exports and, within the specified limits, export subsidies for certain agricultural
products have been applied.
We are convinced that, as a result of the measures adopted, Romania will make progress in
remedying its balance-of-payments situation and will thus be able to respect the timetable for the
gradual reduction of the surcharge to zero.
Romania counts on your understanding in undertaking this important action and also on your
support for the arguments we have put forward regarding the import surcharge.
We are ready to pursue consultations on this subject with the Members of the WTO in good
faith.
WT/BOP/R/45
Page 7
ANNEX 2
Statement by the representative of the International Monetary Fund
1.
Romania has lagged behind most other transition economies in Central and Eastern Europe in
economic reform and stabilization, mainly because of a lack of sustained policy effort. The prospects
for effective policy implementation improved in early 1997, when a new government adopted tighter
macroeconomic policies as well as long-overdue reform measures—including liberalization of the
exchange and trade system, adoption of market-based instruments of monetary policy, and
restructuring of the mining and agricultural sectors. However, even this latest effort proved
short-lived, resulting in the exacerbation of economic imbalances over the past year. In late 1998, the
authorities announced their intention to intensify the policy efforts—with a view to addressing the
underlying causes of the widening external imbalance and continued economic decline—and held
preliminary discussions with Fund staff on an economic program for 1999 that could eventually be
supported by a stand-by arrangement.
2.
Recent economic performance has been disappointing, characterized by contracting output
and growing macroeconomic imbalances. Real GDP declined by an estimated 5½ per cent in 1998,
against 6½ per cent in 1997, with output in agriculture and industry contracting significantly and that
in services broadly stagnating. According to preliminary staff estimates, real domestic demand rose
slightly nevertheless, with a recovery of private consumption (as evidenced by buoyant retail sales)
being largely offset by a further decline in investment. The current account deficit thus widened by
US$1 billion to an estimated US$3.1 billion (7½ per cent of GDP) in 1998, reflecting in part a sizable
real appreciation of the leu and intensified competition from East Asian exporters. Meanwhile, the
unemployment rate rose to 9½ per cent in November 1998, compared with 6 per cent two years ago.
The 12-month CPI inflation is estimated to have declined from 150 per cent at end-1997 to around
42 per cent at end-1998; but, as this was achieved at the cost of a sharp real appreciation of the leu,
underlying inflation was probably significantly higher.
3.
Market concerns about Romania’s worsening external position—as reflected in downgradings
by major rating agencies and huge spreads on existing sovereign debt—and wariness among
multilateral lenders all contributed to lower debt capital inflows in 1998. With total external debt
still relatively low (US$9¾ billion at end-1998, equivalent to 23 per cent of GDP, of which about
10 per cent was short term), creditor concerns mainly focused on the widening external current
imbalance, a sharp rise in scheduled amortization payments in 1999, and the declining official foreign
reserves. In these conditions, the National Bank of Romania (NBR) has acquiesced in an accelerated
depreciation of the leu since August 1998 as well as a drawdown of its reserves, while keeping
interest rates relatively high. As a result of intervention sales as well as debt service payments, NBR
gross foreign reserves declined to US$2.0 billion (equivalent to 2.2 months of merchandise imports)
at end-1998, compared with US$2.7 billion at end-1997.
4.
Romania’s recent economic performance is largely the consequence of an unbalanced
financial policy mix, and structural weaknesses in the enterprise and banking sectors. Specifically:
(a)
The general government deficit remained rather high at about 4 per cent of GDP in
1998, broadly unchanged from 1997, in line with the authorities’ original target. The
target was met despite a revenue shortfall of 4 per cent of GDP, which required the
containment of expenditures to well below their original budgeted level. The revenue
shortfall reflected lower-than-anticipated privatization proceeds; a decline in tax
collection efficiency; and lower-than-projected economic activity. In assessing the
WT/BOP/R/45
Page 8
level of the fiscal deficit, it is important to note that the recorded deficit excludes
substantial quasi-fiscal deficits on account of losses in the state-enterprise sector and
associated bad loans in the portfolios of state-owned banks.
(b)
Monetary policy was instrumental in lowering inflation, but at the cost of a large real
appreciation of the leu. This has entailed rather high interest rates, reflecting in part
persisting inflation expectations. The NBR has been increasingly constrained in terms
of its ability to raise interest rates by the government’s large gross borrowing
requirements (especially given its lower access to foreign financing) and the liquidity
problems of enterprises and major state-controlled banks. These banks are burdened
by bad loans and undercapitalized, and two of them rely heavily on the interbank
market for funds.
(c)
In the area of structural policies, progress with restructuring and privatization of
banks and enterprises has been limited—notwithstanding the intensified policy effort
in late 1998. Besides resource misallocation and stifled economic activity, this has
fostered financial indiscipline through weak corporate governance, as indicated by
excessive wage growth and large inter-enterprise arrears.
5.
On unchanged policies, the external outlook for 1999 is worrisome. The current account
deficit is likely to widen further, thereby exacerbating creditor concerns as well as adding to the
foreign borrowing requirements. In conjunction with the bunching of amortization payments in the
first half of 1999 and barely comfortable foreign reserves, this could generate intensified pressures in
the foreign exchange market. There will also be no prospect of a sustainable economic recovery as
long as the fiscal and external imbalances continue to burden monetary policy and the inefficiencies
of the enterprise and banking sectors are not decisively addressed.
6.
In recent months, the Romanian authorities have been engaged in policy discussions with the
Fund staff on a stabilization and reform program for 1999. In this connection, the authorities have
announced their intention to reduce the general government deficit to 2 per cent of GDP in 1999;
improve external competitiveness through a combination of wage restraint and continued leu
depreciation; and address key structural weaknesses in the economy through accelerated privatization
and restructuring of enterprises and banks. On the basis of these policies, the authorities expect to
narrow significantly the current account deficit in 1999, lower underlying inflation, and set the basis
for sustainable economic recovery.
7.
Romania has made significant progress in liberalizing its trade and exchange systems in
recent years. In 1997, the remaining export bans and quotas on agricultural products were eliminated,
import tariffs were reduced considerably, and all quantitative and licensing restrictions on imports
were removed. Based on the index of trade restrictiveness prepared by the Fund staff, Romania is
currently rated as “moderately restrictive” (6 on a scale from 1 to 10). Moreover, Romania accepted
the obligations of Article VIII of the IMF’s Articles of Agreement on March 26, 1998.On October 10,
1998 the Romanian authorities imposed a 6 per cent import surcharge applicable to about 55 per cent
of imports, which they intend to phase out gradually by end-2000, by reducing the rate to 4 per cent
on January 1, 1999 (this change has already come into effect) and to 2 per cent in 2000. The import
WT/BOP/R/45
Page 9
surcharge revenue is projected to amount to the equivalent of 0.4 per cent of GDP in 1999, compared
with 0.1 per cent of GDP in 1998. In recent discussions with the Romanian authorities about the
import surcharge, the Fund staff — who had advised against its introduction — urged the authorities
to rely on appropriate macroeconomic policies to address the external imbalance rather than trade
restrictions, and to eliminate the surcharge by end-1999. In the meantime, the authorities were urged
to minimize the distortionary effects of the surcharge, in particular by widening its product coverage.
__________