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Adjustment lending requires capacity to succeed

In the mid-1990s, Romania was desperate for a financial bailout as it faced dire economic prospects. Romania had foreign debt coming due that was larger than Central Bank reserves, and was confronting default. 

The headquarters and manufacturing complex of Astra Rail

Pictured here is the headquarters and complex of Astra Industries. One of Romania's largest companies, it was once privatized from the state's railway manufacturing giant. (Creative Commons)

It was at this time that I was designated by an MDB to put together an economic reform program, an adjustment loan, that would stabilize the Romanian economy, and ensure that default would not occur.

Adjustment loans from MDBs for bailouts, are simply cash in exchange for economic reform. In Romania’s case, their economic crisis was the result of having an anemic private sector, and a litany of inefficient and loss making state enterprises. Losses from state enterprises were ballooning Romania’s budget deficit, and was behind a large part of their external borrowing. 

The Romanian cabinet designated the Minister of Transport as the chief negotiator with MDBs, to negotiate their adjustment loan. The appointment of the Minister of Transport to this role was met with scorn by MDBs. This appointment was seen as a sign that the Romanian government was torpedoing the success of the proposed adjustment loan. 

The Romanian Minister of Transport surprised everyone, and successfully negotiated an adjustment program with MDBs focused on privatization. But, how do you privatize close to 50 Romanian state enterprises in 10 months, to get the bailout cash needed to avoid default? Valuing state enterprises, preparing a prospectus for their sale, holding investment forums, and completing the bidding process, was a challenge for such a short period of time. 

Understanding this, my colleagues and I, came up with a novel idea. To accompany the adjustment loan would be a technical assistance grant. The Romanian government could use this grant to hire the necessary consultants to complete the complicated process of privatizing a company from valuation to sale. It was this grant that gave the Romanian government the technical ability to conclude these complex privatizations quickly. 

This technical assistance grant, allowed the Minister of Transport, a career mariner and ship captain, to implement one of the most successful adjustment loans on record. The Minister of Transport, Traian Băsescu, became President of Romania shortly afterwards. He is now remembered as an economic reform visionary.

Often, it is lack of government capacity, and time constraints, that perpetuate failure of adjustment loans and standbys. And, more often it seems, MDBs and the Fund under estimate the capacity of government’s to speedily implement complex reforms without adequate support. 



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