The following Supplementary Letter of Intent of the government of Romania describe the policies that Romania intends
to implement in the context of its request for financial support from the IMF. It is being made
available on the IMF website by agreement with the member as a service to users of the IMF website. |
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.
Yours sincerely,
/s/
Decebal Traian Remes
Minister of Finance |
Table 1: Indicative Targets, August-September
1999
(In billions of lei)
|
|
August |
September |
|
|
(cumulative from January 1, 1999) |
|
Total revenue (indicative target) |
105,481 |
119,528 |
|
Total expenditure (indicative ceiling) |
113,133 |
128,518 |
Primary current expenditure (indicative
sub-ceiling) |
88,030 |
99,835 |
|
|
(cumulative from July 1,
1999) |
Collection of tax arrears from CONEL, PETROU, and
ROMGAZ (Indicative target) |
600 |
900 |
|
|