August 5, 1999

Dear Mr. Camdessus:

1.  I am writing to update you on the Romanian government's recent steps to proceed with the implementation of our policy commitments outlined in the Memorandum on Economic Policies.

2.  As concerns the budget, recent data have depicted more adverse fiscal performance in June than we had previously estimated. The root cause of the problem can be traced to weak revenue collections that arose from the delayed implementation of the budget and the tax increases adopted therein, as well as from generally weaker economic activity. While we have agreed to adopt revenue-increasing measures--most recently in the context of our discussions with a Fund mission in late June--we have until now not succeeded in containing expenditure in line with lower revenue. Therefore, and as a matter of urgency, the government is taking the following steps to hasten the implementation of the remaining revenue measures and to enhance expenditure control:

• On June 18, 1999, excises on non-petroleum products were raised by an average 25 percent.

• In the coming week, we will commence the collection of tax arrears by CONEL, PETROU, and ROMGAZ through forced execution. We are confident that we will shortly collect lei 300 billion initially targeted for July, as well as a further lei 300 billion in the remainder of August and an additional lei 300 billion in September. (These constitute indicative targets; see attached Table 1). The relevant data will be sent on a regular basis.

• Also in August, the Finance Minister will issue an order raising excises on petroleum products, with effect from September 1, so as to offset their erosion in real terms over the last quarter.

• Another component of our fiscal program is to change the assessment of tobacco excises (from specific to ad valorem on retail prices), which will also lead to an increase in effective taxation. A parliamentary initiative, however, was rejected, reflecting widespread unease about the implications of such a move--in terms of requiring frequent changes in retail prices--in an economy which has not yet attained reasonable price and exchange rate stability. In the circumstances, the government will either effect the change in the tobacco tax assessment through an ordinance during August or implement an increase in the specific excise with an equivalent yield. Either way, the increase will become effective in September.

• We have also upgraded our budgetary early warning and control system. In consultation with Fund staff, we have specified the attached indicative targets for monthly revenue, overall expenditure, and primary expenditure, which are consistent with attaining the relevant performance criteria for end-October and end-December (see attached Table 1). The establishment of monthly indicative targets has been supplemented by the recent redesigned budgetary expenditure management. Until recently, line ministries had received lump-sum monthly allocations, mostly prorated from their annual budget allocation. Starting in August, they are instead given monthly allocations by major expenditure items. This new system will ensure that the cuts in selected expenditure categories (mainly subsidies and spending on goods and services) will be effected, and it will also enable us to keep discretionary spending below the prorated annual allocation as long as the revenue shortfall persists. The relevant data will be sent on a regular basis.

• Recently, the government has decided to index the pensions, unfortunately without prior consultation with the Fund staff. We propose to discuss the impact of this measure on the budget and possibly needed offsetting measures with the Fund mission for the first review of the program. Anyhow, we will not allow any alterations of the targets of the agreed program.

3.  On behalf of the Romanian authorities, I would like to assure you that we intend to proceed with prompt implementation of all agreed measures, and to adopt new measures as needed, to ensure the attainment of the program's fiscal objective.

4.  As you know, in the first seven months of this year, Romania has not benefited from any balance of payments support, while the external debt has been entirely serviced, including the peaks in May and June. Due to the aforementioned, as well as larger than expected bond issuances for restructuring the banking system, especially Bancorex, the domestic public debt has significantly increased, incurring higher than foreseen interest expenditures.

5.  As regards our ongoing efforts to mobilize additional private sector financing, I would like to inform you on the status of this operation;

• On July 2, the Ministry of Finance has awarded the mandate to Credit Suisse First Boston to raise a minimum of US$200 million (or the equivalent in euro) from the international capital markets at a maximum interest of 12 percent;

• With the assistance of the law firm Linklaters (that has been appointed by the Ministry of Finance to assist it in this transaction), we have finished the offering circular and Credit Suisse First Boston began to market the transaction;

• Both law firms (Linklaters and Clifford Chance, the law firm representing Credit Suisse First Boston) have finished the documentation related to this transaction: the Subscription Agreement, the Fiscal Agency Agreement, Deed of Covenant, and the Paying Agent Agreement;

• In this present stage, the transaction is ready to be launched.

6.  From the feedback we receive from Credit Suisse First Boston, it appears that the market is not favorable to Romania, since after the pre-marketing of the transaction they have succeeded to raise only US$50 million at a cost of 17 percent for euro (18.5 percent swapped into U.S. dollars). The Ministry of Finance contacted already the other initially interested investment banks, trying to seek other financing alternatives in order to increase this amount up to US$200 million.

7.  Under the above circumstances, having in view the unfavorable market conditions and the very high cost, it would be helpful for Romania if the Fund would agree with a lower amount to be raised now and increasing the amount for the second stage for the first review of the program, when the financial market might be more positive.