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The following item is a Letter of Intent of the government of Romania, which describes the policies that Romania intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Romania, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
 
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May 16, 2000

Mr. Horst Köhler
Managing Director
International Monetary Fund
700 19th Street
Washington, D.C. 20431

Dear Mr. Köhler:

The attached statement of policies--which updates the Memorandum on Economic Policies of July 26, 1999, and our letter of August 5, 1999--outlines our policies for the period ahead and proposes performance criteria for end-June, end-September and end-December 2000. Our policy efforts for 2000 will concentrate on improving the inflation and output performance of the Romanian economy, while consolidating last year's sizable external adjustment, and will encompass prudent macroeconomic policies as well as an acceleration of our structural reform effort. On the basis of these policies, we request: (a) waivers for the nonobservance of several performance criteria; (b) completion of the first review under the stand-by arrangement; and (c) a further extension of the arrangement to end-February 2001, with an associated rephasing of purchases.

We believe that the policies and measures described in the attached memorandum are sufficient to achieve its objectives, but we stand ready to take additional measures and seek new understandings with the Fund, if necessary, to keep the program on track. The government of Romania will remain in close consultation with the Fund in accordance with the Fund's policies on such consultations, and will provide the Fund with all information that it requests to assess the implementation of the program. The program will be reviewed by the Fund by August 15, and by November 15, 2000. The next review will cover, inter alia, issues related to developments in the budget, domestic arrears, and bank restructuring.

Yours sincerely,

/s/
Decebal Traian Remes
Minister of Finance
Ministry of Finance
  /s/
Emil Iota Ghizari
Governor
National Bank of Romania
 

Memorandum of the Government of Romania on Economic Policies

1.  This memorandum--which supplements and updates the memorandum of July 26 and the supplementary letter of intent of August 5, 1999--sets forth the economic objectives and policies of the Government of Romania for 2000, which have been formulated within a medium-term framework geared to EU Accession. As described below, the economic program is comprehensive in scope, encompassing policies to address continuing macroeconomic imbalances as well as structural problems in the banking and enterprise sectors.

I.  Performance under the Program

2.  The economic program for 1999 has yielded very favorable results in terms of external adjustment and financial stability, thereby creating the conditions for economic recovery and lower inflation this year. On the strength of tighter macroeconomic policies and an improvement in external competitiveness, the current account deficit is estimated to have narrowed sharply to US$1.3 billion (3.9 percent of GDP) in 1999 compared to an original program target of US$2.2 billion and an outturn of US$3.0 billion (7.2 percent of GDP) in 1998. This favorable development, as well as progress in bank restructuring and the removal of uncertainty related to large foreign debt repayments at mid-year, have led to markedly improved conditions in the interbank foreign exchange and money markets. The gross official foreign reserves recovered to US$2.5 billion (2.3 months of total imports) at end-1999 from US$1.5 billion at mid-1999, reflecting mainly sizable NBR purchases in the interbank market, while the average monthly rate of nominal leu depreciation decelerated sharply after March 1999. Meanwhile, interbank interest rates have declined significantly from their levels in the first half 1999, owing in part to improved market confidence. The strong external performance has continued into 2000: the trade account is estimated to have been nearly balanced in 2000Q1, while official reserves have continued to rise despite a peak in debt service.

3.  With regard to output and inflation, developments were less favorable in 1999. Real GDP is estimated to have declined by 3.2 percent in 1999, the third consecutive year of decline. More positively, the decline in 1999 was slightly less than expected under the program and now appears to have bottomed out, with preliminary estimates suggesting an increase in real GDP of nearly 1 percent in the year to the March quarter of 2000. Inflation, which was already at high levels as a result of continued increases in unit labor costs and in administered prices, accelerated in the wake of the large correction of the exchange rate through the latter part of 1998 and early 1999. Notwithstanding weak demand conditions, the 12-month CPI inflation rate reached almost 55 percent at end-1999, compared with 41 percent at end-1998. Recent developments are more encouraging; the inflation rate has since eased to 49 percent in the twelve months to March 2000.

4.  Macroeconomic policies were considerably strengthened in 1999 and were broadly in line with the program, notwithstanding deviations in some areas. Specifically, performance criteria on monetary and external policies were observed at end-July, end-October, and end-December 1999. The fiscal program was also implemented effectively, but problems were encountered in the area of financial discipline at the levels of local governments and public enterprises (e.g., reduction of domestic arrears) and wage policy (see Table 1).

5.  The end-July, end-October and end-December 1999 performance criteria for the NFA and NDA of the NBR were observed with comfortable margins. Reflecting a weakening of fiscal performance in December, the ceiling on net credit to government was exceeded at end-December 1999 by the equivalent of 0.6 percent of GDP. Earlier in the year, the ceiling had been comfortably observed at end-October and, while it had been slightly exceeded at end-July, the deviation was explained by the early issuance of treasury bills for the restructuring of Banca Agricola. Nevertheless, the underlying weaker position was offset by effectively delaying some of the programmed bank restructuring outlays into the year 2000 so that the overall fiscal deficit only reached 3½ percent of (the recently revised) GDP, in line with our target (about 3.9 percent of GDP on the basis of old data). This fiscal performance was consistent with an improvement in the primary balance of 3 percent of GDP compared to 1998. Reflecting the above developments, the NBR was enabled to effectively sterilize most of the higher than programmed increase in the NFA, thus ensuring that the indicative targets on broad money and reserve money were either met or only slightly exceeded.

6.  However, our efforts to enforce financial discipline at the enterprise level have met with limited success. Specifically, three performance criteria--on domestic arrears and on the assumption/guaranteeing of bank loans to enterprises--were not observed at end-July, end-October, and end-December 1999.

7.  The performance criterion on the wage bills in the state sector (state budget, régies autonomes and national companies, and 24 of the largest loss-making enterprises) was observed at end-July but was not observed at end-October and end-December 1999 owing to an upward revision of 1998 data that formed the basis for wage policy for the régies autonomes and national companies as well as large wage increases in the state budget sector. In general, the economy-wide wage growth has persisted at higher than targeted levels, aggravating the decline in employment over the past year.

8.  Difficulties with the administration of called-up government loan guarantees previously extended to enterprises have given rise to a short period of external payments arrears such that the continuous performance criterion on the non-accumulation of external payments arrears to official creditors was not observed between August and December 1999.

9.  The prior action on eliminating the lower excise rate for Romanian produced tobacco products was not undertaken in time owing to the unexpected reversal of a government ordinance by the parliament. Upon learning of this delay, however, the government instituted this measure through an emergency ordinance.

II.  Economic Objectives and Policies for 2000 and Beyond

A.  Basic Strategy and Objectives

10.  Turning now to our economic objectives for 2000, we believe that our efforts should concentrate on improving the inflation and output performance, while consolidating last year's sizable external adjustment. Accordingly, the current account deficit would be targeted to remain broadly unchanged in relation to GDP in 2000; based on projected capital inflows from official and private creditors, this would be consistent with an increase in official foreign reserves of approximately US$1 billion to the equivalent of about 3.1 months of total imports by end-2000. After declining by 3.2 percent in 1999, real GDP is expected to register a positive growth of 1.3 percent in 2000 for the first time in four years. This would reflect the recent strengthening of exports and a bottoming out of domestic demand. Finally, we would aim to reduce 12-month CPI inflation to around 27 percent by end-2000, compared with 55 percent at end-1999. The decline in inflation would reflect in part a much lower rate of leu depreciation than last year, when a large corrective real depreciation was effected; and it would critically require that nominal wage growth decelerate broadly in line with projected inflation.

11.  On the policy front, we will maintain tight fiscal and monetary policies, while strengthening policy implementation in the area of financial discipline and wage policy, with a view to addressing the persisting problems of high inflation and declining output. To set the basis for sustainable growth, we intend to redress structural weaknesses through continued banking sector restructuring and accelerated privatization and liquidation of enterprises.

12.  Over the medium-term--in line with our key objectives of accession to the EU and achieving strong and sustainable growth--we intend to make further progress toward stabilizing the economy and addressing structural rigidities. Specifically, we intend to contain the external current account deficit broadly to levels that could be financed by nondebt capital inflows, consistent with a steady reduction in the external debt/GDP and debt servicing ratios. We also intend to make steady progress in the next several years toward reducing the inflation rate to levels closer to those prevailing in the EU. Achievement of these objectives will require sustained implementation of prudent fiscal and monetary policies, wage restraint in the state sector, and intensified efforts to further advance the privatization and restructuring of banks and enterprises.

B.  Fiscal Policy

13.  In order to help reduce inflation and release financial resources for the private sector, we aim to contain the fiscal deficit (excluding grants and privatization receipts) to 3½ percent of GDP in 2000, unchanged from 1999. This is accompanied by tax reform aimed at reducing distortions of economic incentives, curtailing tax evasion, and improving the supply response of the economy. Such a deficit target will be consistent with a primary surplus (defined here to exclude interest and bank restructuring expenditure) of 2.1 percent of GDP (compared to 2.6 percent in 1999) as well as a sharp cut in the issuance of new domestic debt equivalent to about 0.1 percent of GDP in 2000 (compared with an estimated net domestic borrowing of 1¾ percent of GDP in 1999). The target will continue to be monitored on the basis of net credit of the banking system to the consolidated government.

14.  On the revenue side, we have implemented wide-ranging tax reform geared toward lowering tax rates, broadening the tax base, and reducing distortions, implying a lowering of the economy's tax burden by 1 percent of GDP. In the area of direct taxation, we have introduced (a) a new corporate income tax law, with a tax rate of 25 percent (reduced from 38 percent) and a 10 percent investment tax allowance (lowering revenue collections by 1¼ percent of GDP, taking into account the preferential 5 percent tax rate for export activities), (b) a new global personal income tax law broadening the tax base, e.g., by subjecting high pension income to taxation and correcting for the past inflation erosion of minimum taxable income (reducing revenue by ¾ percent of GDP), and (c) a requirement that civil (as well as labor) contracts of employment be subject to all social security contributions (increasing revenue by ¼ percent of GDP on a net basis). In the area of indirect taxation, we have adopted a uniform rate of 19 percent to replace the previous rates of 11 and 22 percent, while canceling selected VAT exemptions for self-employed and family associations, type M and P fuels, as well as for household consumption of thermal and electric energy (raising revenue by ¼ percent of GDP). We have also reduced the customs surcharge from 4 to 2 percent in line with WTO commitments (lowering revenue by 0.1 percent of GDP). Finally, we have broadened the tax base for all excises and have increased excises on alcohol (increasing revenue by 2/3 percent of GDP).

15.  Most important, we have also permanently repealed Laws 92 and 241 providing for a variety of tax incentives; these laws had been suspended during 1999 and, had they come into effect on January 1, 2000, would have lowered tax revenue by the equivalent of 3 percent of GDP in 2000. We also permanently repealed Emergency Ordinance 67 as of May 15, 2000. To replace this discretionary, costly, and distortionary incentive system, we have already lowered the corporate tax rate, and are currently introducing sharp reductions in customs duties on imports of capital goods for own-investment purposes in a phased approach which will first benefit small and medium-sized enterprises as well as two new large investors, and in a next step--subject to sufficient resources in the budget--all enterprises. We will eschew any VAT exemptions for investors, and are addressing the underlying problem of excessively lengthy processing periods for VAT refunds.

16.  On the expenditure side, the 2000 budget will mark a first step toward a more sustainable public sector, with a targeted reduction in the ratio of total expenditures to GDP by 1¼ percent of GDP. Most importantly, the civil service will undergo a sizable reduction: the budget provides for a reduction of 22,700 positions; in addition, we plan to reduce staff in the defense/public order/security sectors by 22,000 by end-2000; and have made additional ministerial pay increases conditional on their reducing staff employment. In the area of material and operating expenditures, we expect to be able to generate some savings as a result of closing 3 government agencies. As concerns subsidies, we have stopped the voucher program for agricultural diesel and have limited overall agricultural vouchers to 4.3 trillion lei; have reduced budgetary subsidies to the Bucharest subway system by 36 percent in real terms; will close 425 km of unprofitable local railway lines and 366 railway stations, and will cut 123 two-way short-distance trains by end-May 2000 (permitting us to cut the railway subsidy by around 8 percent in real terms); and project that expenditure on price difference subsidies can be brought down by 40 percent in real terms because of the termination of subsidies for stocking wheat and importing pesticides. With regard to transfers, we expect that expenditure by the state pension fund will amount to 6.9 percent of GDP in 2000. We also have moved to better target social expenditure following World Bank and European Union advice by earmarking 1 percent of GDP for spending on child protection and the handicapped, a real increase of 10 percent. Overall, the share of social transfers in GDP will amount to 9.1 percent of GDP as compared to 9.2 percent in 1999. The government has also decided to abolish 5 out of 12 "special funds" financed through earmarked revenues which have in the past greatly burdened a more rational allocation of expenditures. We have also implemented new laws regarding public procurement and internal audit and control which should reduce wasteful expenditure. Financial assistance to public enterprises, including through capital injections or the use of SOF deposits as collateral for commercial bank loans will be eschewed from now on, reflecting the need to dedicate these scarce resources to a better use. This undertaking represents a performance criterion under the stand-by arrangement.

17.  As in the case of revenue policies, we also had to take the difficult step of altering past legislation so as to overcome their unaffordable expenditure implications: we have suspended the requirement to pay holiday premia across the civil service; we have amended the general severance pay entitlement contained in Emergency Ordinance 98 in order to prevent any payments to new claimants; we will cease technical unemployment benefit payments to personnel in the defense industry effective July 20; and we have revised the new public pension law so as to limit the implied increase in the replacement rate (this will enable the re-correlation of pensions to proceed within the existing budgetary envelope).

18.  We have witnessed serious shortcomings in the new revenue- and task-sharing arrangements between the state budget and local governments, notably with regard to the funding of orphanages and local public institutions' payments arrears to the heating utilities. In response, the government has mandated district councils to allocate designated fixed amounts for orphanages; established a Child Protection Agency, which will receive earmarked revenue no longer fungible for other local authority expenditure; quickly disbursed 400 billion lei in heating subsidies in 1999; and allocated 1.2 trillion lei for this purpose in the 2000 budget. Also, the Minister of Finance and the Minister of Public Functions will jointly head a group to study the issue of arrears, both of and to local public authorities and local utilities. We will implement the recommendations of this group by June 30, in consultation with Fund staff.

19.  Notwithstanding these comprehensive and determined reforms, the government recognizes that these represent only a starting point to a medium-term program aimed at a more sustainable budgetary position. We are particularly concerned about the pattern in our pension system in recent years where a rising dependency ratio has required ever higher contributions and outlays. In this light, our comprehensive reform will aim at steadily reducing the contribution rate in the coming years. This will notably require an increase in the retirement age, and a revision of current plans to introduce a private pension pillar, so as to make it less costly to the budget. To facilitate a more rational expenditure policy, we will shortly undertake, with World Bank assistance, a Public Expenditure Review. We also expect that the maintenance of a primary surplus in the current year should alleviate interest expenditures in the next year, and expect to use this gain for a reduction of the government deficit. In our efforts geared toward the reform of the pension system, we will also scrutinize existing laws and current legislative initiatives in line with budgetary requirements and in a way acceptable to the World Bank--as we have done when we changed the newly promulgated public pension law, which now provides a limit on the replacement rate and increases the minimum retirement ages starting in 2001.

C.  Monetary and Exchange Rate Policy

20.  Monetary policy targets for 2000 will be consistent with a sharp deceleration of inflation and a large build-up of foreign reserves, and will be premised on a broadly unchanged, year-on-year, velocity of broad money. The envisaged stance of exchange rate policy, accompanied by tight control in wage growth, will serve to preserve recent gains in external competitiveness while contributing to a stabilization of market expectations and lower real interest rates. The implementation of the monetary program will continue to be based on targeting the NDA of the central bank. In the event of unexpected upward pressures on reserves and/or the exchange rate, the NBR will engage in sterilized intervention with a view to meeting the indicative target for reserve money as it has done since mid-1999. The NBR will also be prepared to keep its NDA below its programmed level in the event of unexpected downward pressures on reserves and/or depreciation pressures on the exchange rate of the leu.

21.  The NBR intends to rely increasingly on market-oriented instruments. Against the background of large sterilization requirements as well as the ongoing liquidity injections into Banca Agricola, the NBR raised in November-December 1999 the minimum reserve requirement on lei deposits further by 10 percentage point to 30 percent (the reserve requirement on foreign currency deposits was left unchanged at 20 percent) to reduce its heavy reliance on deposit-taking operations--this compares with a unified reserve requirement of 15 percent in June 1999. To mitigate the effects on the costs of intermediation, the NBR has decided to adjust monthly the remuneration of the incremental (15 percent) required reserves on the basis of various market indicators. In addition, we intend to abstain from further increases in the reserve requirements for lei deposits and, indeed, to gradually lower them and reunify them with those for foreign currency deposits as soon as money market conditions improve sufficiently. In the meantime, in line with recommendations of the IMF's MAE Department, we published at end-March, 2000, a set of regulations for credit market operations. These regulations serve to: (a) clarify the legal status of credit operations including the Lombard window and define eligible collateral, (b) define and clarify tendering procedures for deposit taking operations, and (c) define repurchase and reverse repurchase transactions, swaps, and outright purchases and sales of government securities. The regulations should facilitate the further development of the interbank money market, the secondary market for government securities, and NBR's greater reliance on market instruments for monetary operations. We also intend to shift from bilateral deposit-taking to deposit-auctioning (with deposit auctions expected to rise to at least 30 percent of total outstanding deposits by June 15, 2000) as a means of increasing the efficiency of these operations, and also to expand the use of repos and reverse repo transactions--especially taking into account that the sterilization requirements are expected to remain large during 2000. Moreover, the NBR's Lombard rate will remain significantly higher than the interbank market rate.

D.  Incomes Policy and Financial Discipline

22.  Strict implementation of incomes policy in the area of the state sector (state budget, régies autonomes and national companies, and 33 of the largest loss-making enterprises) will be key to achieving the inflation target and safeguarding the gains in external cost competitiveness.

  • As discussed above, the budget law limits the wage bill in the state budget and Special Fund for Education to lei 35,182 billion in 2000, which would represent an increase of 56 percent in nominal terms and an increase of 12½ percent in real terms on the basis of the projected rate of inflation. Payment of the recently announced wage increases--including increases for the education sector, and the wage increases for other budgetary sector workers pursuant to Emergency Ordinance 24/2000--will be strictly subject to the availability of funds within this ceiling for the wage bill. The civil service staff will be reduced as necessary to ensure that implemented wage increases will not lead to a breach of budgeted allocations. We have already provided in the budget for year-average reductions in civil service staff of 22,700 (around 4½ percent), including non-teaching staff of 10,500 in the Ministry of Education; we plan a further reduction of 12,500 in Ministry of Education staff in September. Staff in the defense/public order/security sector will be reduced by around 22,000 by the end of the year. Still further reductions in personnel may be implemented in the context of restructuring ministries; and would also be necessary to implement higher wage increases for civil servants outside the education sector than the minima set in Emergency Ordinance 24.

  • We are introducing an "early-warning" system of wage monitoring to underpin control of budget sector wage growth. The Ministry of Finance and the Ministry of Labor and Social Protection will jointly monitor, on a monthly basis, wage spending by each ministry to ensure that wage bills do not overrun the wage budget allocated to that ministry. Each line ministry and agency will have its own specific monthly wage bill ceiling consistent with the budget allocation, within which any wage increase must be accommodated. This system will be overseen by the Prime Minister and the Cabinet.

  • The overall wage bill of the régies autonomes and national companies will be strictly limited to four times their level in 1999 QIV, and will be adjusted downwards in line with employment cuts that do not raise labor productivity, for example owing to the outsourcing of an activity whereby staff are transferred to other enterprises. This represents a 9½ percent decline in real terms in 2000 on the basis of the projected rate of inflation. The 2000 budgets for the régies autonomes and national companies, to be approved by the cabinet, will be consistent with this guideline and will be monitored closely by the Ministry of Labor, as well as by the responsible Ministries.

  • The much more restrictive wage policy for the régies autonomes and national companies, compared with the state budget sector, should also reduce the large disparity in wages that has arisen between the two sectors. In late 1999 and early 2000, gross monthly salaries in the régies autonomes and national companies averaged around lei 3.7 million, while salaries in the public administration, education, and health and social assistance sectors averaged around lei 2.1 million.

  • The wage bills in 2000 of the 33 largest loss-making commercial enterprises will be limited to four times their estimated level in 1999 QIV; this would represent a nominal increase of 10 percent and a 21 percent decline in real terms on the basis of the projected rate of inflation. Wage developments in these loss-making enterprises will be monitored closely by the Ministry of Labor and the State Ownership Fund (SOF).

Accordingly, we intend to limit the nominal wage bill in the monitored state sector to lei 32,480 billion in January-June, lei 45,572 billion in January-September, and lei 62,095 billion in January-December 2000. This represents a nominal increase of 40 percent, and a 1 percent increase in real terms in 2000 on the basis of the projected year-average rate of inflation.

23.  We are taking several measures to provide an impetus for arrears reduction throughout the economy, in particular for arrears to the three major utilities--PETROU, ROMGAZ, and CONEL--and to the budget. The first set of measures is associated with further reforms to bolster wage and financial discipline in the régies autonomes and national companies whose budgets are approved by the central government; and in the 33 largest loss-making commercial companies with a majority of state-owned capital. To this end, we will implement a new ordinance by end-May 2000 which provides for the replacement of existing management contracts of indefinite duration with fixed-term contracts, and condition payment of bonuses and premia on fulfillment of financial criteria, key among them the reduction of arrears:

  • For each of these enterprises, the budget of revenues and expenditures will include a schedule for reducing arrears, and annual targets for reducing costs and increasing labor productivity. The arrears reduction schedule for each enterprise will include quarterly targets, consistent with the targeted annual reduction in arrears. For the régies autonomes and national companies as a group, and the 33 loss-making commercial companies as a group, the targets will be consistent with restricting arrears to their level of end-April 2000.

  • Wage funds will be restructured from the current system in which bonuses and benefits are generally as large as, or larger than, base salaries. For most employees, base salaries will remain at currently envisaged levels, but regular bonuses and benefits will be limited to 50 percent of base salary funds. The balance of the regular bonuses and benefits will be transferred to a performance-based bonus fund and will be granted only at the end of the fiscal year, strictly according to performance criteria, which would include progress in reducing arrears both of and to the enterprise.

  • For managers, the base salary of the manager of the enterprise will be restricted to the salary of an undersecretary of state; base salaries of subordinate managers will be correlated with that of the general director and bonuses and benefits will be accorded as for most employees. The new ordinance provides that, in the event of an increase in arrears beyond their quarterly target, the monthly managerial salary fund (including base salary and regular bonuses and benefits) will immediately be reduced by the amount of the increase in arrears, up to a maximum of 30 percent of the salary fund. At the end of the fiscal year, the manager of the enterprise may be granted a performance bonus of up to 100 percent only if targets for reducing costs and arrears, and increasing labor productivity, have been met. The manager of the enterprise will be responsible for granting performance bonuses to subordinate managers and employees; the main spending agency--that is, the relevant ministry--will be responsible for granting the performance bonus to the top manager. Unjustified granting of performance bonuses will represent a criminal offence.

24.  Other measures to foster financial discipline include the establishment of an action plan to seize bank balances of the 30 largest debtors to the consolidated government (excluding PETROU, CONEL, and ROMGAZ, for which a separate program applies). This will enable the budget to lay primary claims on the companies' financial resources. Through this mechanism, we intend to reduce such tax arrears by at least lei 100 billion by end-June and lei 200 billion by end-July 2000, from their level of end-April 2000. The effectiveness of this measure will be assessed at the next program review.

25.  Measures to tackle the arrears problem are particularly urgent given the recent increase in domestic arrears to the three major utilities, by 10 percent in real terms during January-March 2000 against a targeted decline of nearly 4 percent in real terms during the same period.

  • Problems have arisen in cases where CONEL provides heating to a local utility for distribution to households, with the households paying the local utility but the local utility failing to pass payment to CONEL. In collaboration with the World Bank, we will explore measures to reduce the number of intermediaries responsible for passing customer payments to CONEL, including the possibility of transferring the ownership of co-generation (electricity and heating) plants and distribution networks on a case-by-case basis.

  • We are also taking several additional steps to improve the financial situation of CONEL and ROMGAZ. In the case of CONEL, we intend to reduce costs and excess capacity significantly by closing down several thermal power plants, which account for around 4,500 megawatts per hour; currently, installed capacity is 18,000 MW/h but demand is only around 8,000 MW/h. These plant closures would also involve an employment cut of about 20,000 workers, out of a current total of around 72,000. As part of this restructuring plan, we also intend to increase energy tariffs, which have remained unchanged since November, by 20 percent at the beginning of June. In the case of ROMGAZ, where tariffs have remained unchanged since June 1999, tariffs will be increased by at least 20 percent in June.

26.  Accordingly, we are aiming to reduce arrears to the three utilities by around 15 percent in real terms in the year to December 2000, based on the targeted rate of inflation. Our target ceilings for outstanding arrears to the three major utilities are lei 18,735 billion at end-June, lei 17,652 billion at end-September, and lei 16,997 billion at end-December 2000. These ceilings represent a performance criterion under the stand-by arrangement. Moreover, the measures described in the above paragraphs will assist the three major utilities in reducing their own tax arrears to the government. The stock of arrears from the three major utilities to the consolidated general government totaled lei 9,057 billion as at December 1999, and increased by lei 1.4 trillion to lei 10,445 billion as at March 2000. We are targeting a reduction of these arrears to lei 10,195 billion by June 2000, to 9,745 billion by end-September and to their end-December 1999 level of lei 9,057 billion by December 2000. These ceilings represent a cumulative decline of lei 1,388 billion from their level as at end-March and also form a performance criterion under the stand-by arrangement. We are targeting a similar decline in the level of the arrears of other utilities, régies autonomes and national companies to the consolidated general government from their level of end-April 2000. The arrears of the 33 loss-making commercial companies to the consolidated general government are targeted to be held to their level of end-April 2000.

E.  Balance of Payments and External Debt Management

27.  Given the projected current account deficit of US$1.4 billion (3.9 percent of GDP), capital inflows and the targeted increase in NFA of the NBR, our gross reserves target for 2000 is US$3.5 billion (3.1 months of imports). The gross reserve accumulation in 2000 would be met by exceptional financing from the World Bank, EU and the Fund.

28.  We undertake to avoid accumulation of new arrears to foreign creditors through strengthened internal procedures for debt management at the Ministry of Finance. On several occasions during August-December 1999, Romania incurred relatively small amounts of external payments arrears on government-guaranteed loans to enterprises, as a result of slow procedures relating to the authorization of payments on behalf of defaulting enterprises. Accordingly, to ensure no new accumulation of external payments arrears during the arrangement period, we have taken measures to strengthen the internal procedures at the Ministry of Finance and coordinate with the NBR in executing debt payments due. Specifically, the Cabinet has approved a governmental decision requiring that all companies that have government-guaranteed debt service payments coming due should notify the Ministry of Finance two weeks in advance of the due payment date. Upon receiving this notification, the MOF will send the payment documentation to the NBR. The NBR would then immediately execute the payment to the external creditor, and the Ministry of Finance would reimburse the NBR in lei within two working days.

29.  We will limit medium and long-term non-concessional borrowing to US$2.8 billion for 2000 with a sub-ceiling of US$0.6 billion for maturities between one and three years. The ceilings would cover all borrowing by the government, the NBR, and banks and enterprises for which the government has a controlling share. As a matter of better debt management practice, we will limit contracting/guaranteeing sovereign debt instruments that have put options embedded in the debt contracts. These ceilings constitute performance criteria under the stand-by arrangement.

30.  We are committed not to introduce new or intensify existing exchange restrictions, allow multiple currency practice or impose or intensify import restrictions for balance of payments/fiscal purposes. In this connection, in line with the schedule agreed with the WTO, we have halved the import surcharge to 2 percent at the beginning of 2000 and plan to eliminate it at the beginning of 2001. Moreover, we have made progress in the ongoing negotiations with Sweden on the settlement of disputed external arrears and we will pursue these discussions in order to resolve this matter in a manner consistent with the objectives of our program.

F.  Financial Sector Reform

31.  After good progress last year in the area of financial sector reform and bank restructuring--notably by the resolution of Bancorex--the priorities for 2000 will be the privatization of Banca Agricola (BA) and Romanian Commercial Bank (BCR), the effective functioning of the Asset Recovery Agency (AVAB), and further strengthening of banking supervision.

32.  Bank restructuring under the program has focussed on three major state-owned banks accounting for over 50 percent of the banking system as of end-1998.

  • As of December 1999, we successfully completed the closure of Bancorex through the transfer of its bad assets to the AVAB, the transfer of its liabilities (backed by treasury bills) to BCR, and the absorption of its remaining balance sheet by BCR. As a result, a serious source of financial instability has been dealt with, while the budget has assumed liabilities equivalent to 4.5 percent of annual GDP.

  • Meanwhile, progress has been made with the restructuring/privatization of Banca Agricola through: a reduction in administrative costs by means of sharp cuts in staff and closure of branches; the transfer of all bad assets including the Danube fund (totaling lei 3,700 billion) to the AVAB in exchange for treasury bills; a freeze on new lending; abstention from interbank borrowing; and the maintenance of deposit rates at levels slightly lower than those offered by other banks. Moreover, in an effort to improve management practices and the prospects for early privatization, the government appointed a new management last November, thereby effectively bringing BA under the direct control of the NBR. We have insisted that BA complies with the minimum reserve requirements (starting in mid-March, 2000) in part for reasons of financial transparency and the effectiveness of monetary policy, and will recapitalize BA only at the completion of the privatization of the bank. We intend to expedite the privatization process of BA: Following completion of the due diligence in early February, we expect to receive written expression of interest from potential investors by mid-May, and a binding offer by end-June, 2000.

  • With regard to BCR, we intend to proceed with its rapid preparation for privatization. A major investment bank appointed as privatization advisor in December 1999, and a due diligence report will be completed by end-May 2000. We intend that BCR will be offered for sale by end-July 2000, and expect that a firm binding offer would be received by end-September, 2000.

33.  With a view to making the AVAB functional and accountable, especially in light of its implications for the budget, the government appointed last November a new Chairman of the Agency and established a five-member Supervisory Council--in line with an earlier agreement with the World Bank regarding terms of institutional set-up requirements including the appointment of qualified management and staff with terms of reference acceptable to the Bank. To prevent the erosion through inflation of the real value of the debt--which was valued at about US$2.3 billion when it was transferred to the AVAB at various times since mid-1999, we decided to (a) maintain the original currency denomination of the foreign currency denominated debt (71 percent of AVAB portfolio); (b) index the value of the local currency denominated debt that is to be rescheduled to the US dollar; (c) index the non-rescheduled debt that exceeds US$10,000 to the U.S. dollar. An international accounting firm has been auditing the AVAB portfolio since early February and will submit a complete estimate of the recoverable value of the AVAB assets by mid-May. This will permit us to establish performance objectives--in terms of revenue from loan recoveries--for the remainder of 2000 and subsequent years. Our preliminary target for this year, on which the 2000 budget was based, was to collect revenue of at least lei 2,000 billion by end-2000. We have revised this target upwards to lei 2,250 billion on the basis of better than expected actual collections in the first quarter (lei 610 billion), and will again review the target at the time of the next review on the basis of the results of the auditor's report.

34.  The recent organizational restructuring of the NBR consolidated the supervising responsibilities within the central bank by forming a new banking supervision department, which combines the previous departments of control and supervision. The NBR intends to redouble its effort to strengthen banking supervision so as to ensure sound banking practices. In conjunction with developing and bringing into full operation an "early warning indicator" system for banking supervision--as a means of identifying banks in difficulty--we will strengthen supervisory enforcement actions outlined in the Decision Matrix for Progressive Enforcement Actions (DMPEA), which is being discussed and revised in consultation with the IMF (both the IMF advisor and the MAE mission). By end-June 2000, the strengthened DMPEA will be put in force, and all banking rules and prudential regulations will be more strictly enforced consequently. For example, banks failing to meet their capital-adequacy and/or asset classification provisioning requirements, depending on the degree of noncompliance, will be given limited time for their gradual compliance, along with (or followed progressively by) enhanced supervision, special administration, and suspension of lending activities, fines to bank managers, and finally, withdrawal of the banking license and the initiation of bankruptcy procedures. To ensure smooth exit of insolvent banks from the banking system, we have started to have the current legislation concerning bankruptcy and liquidation procedures for banks reviewed by legal and bankruptcy specialists with a view to enhancing central bank authority and facilitating early resolution. This review shall be made in consultation with the IMF advisor to the NBR, and proposals for amending the relevant laws will be made by the end of May, 2000. In addition, all commercial banks will be inspected in 2000, and summary reports of the NBR supervision teams will be prepared by the end of December, 2000. Monthly reports on systemic risk of Romania's banking system including specific supervisory actions/penalties taken using strengthened DMPEA have started being prepared, with a copy being provided to the Fund staff. Concerning the credit cooperatives or so-called popular banks--which are not subject to central bank regulation or supervision but appear to have considerably expanded their operations over time--the NBR, has undertaken the preparation of a draft law on their regulation and supervision, which is now in its final stages. We intend to discuss the draft with the Fund and the World Bank before submitting it to Parliament for approval.

G.  Enterprise Restructuring and Privatization

35.  Notwithstanding unprecedented progress in privatization over the last year and considerable labor shedding in industry over the last several years, structural problems at the enterprise level remain a key impediment to Romania's growth and stability, pointing to the need for accelerated enterprise restructuring.

36.  Our privatization effort is proceeding on three levels:

  • First, direct sales of state enterprises by the State Ownership Fund (SOF). About 1,470 enterprises (of which 70 were large) were privatized during 1999, accounting for about 13 percent of SOF capital (valued as of end 1998); this compared with a program target of 14 percent. The cumulative total of privatized enterprises at the end of 1999, since the beginning of the reform, stands at 35 percent of SOF capital. Privatization sales would have been higher in 1999 but for the disruptive effects of a new privatization law adopted in mid-year, which increased the environmental protection requirements and created legal uncertainties regarding the state debt obligations of the enterprises being privatized. By December, the monthly volume of privatization sales had been restored to its level prevailing in the first half of 1999. In the beginning of 2000, 2,154 companies, remained in the SOF portfolio with SOF share capital of some 29 trillion lei. About ¾ of these companies, accounting for about 85 percent of the total remaining SOF share capital, will be offered for sale in 2000; the others will be either liquidated or worked out. At a minimum, we expect to privatize an additional 15 percent of SOF initial share capital during 2000 through direct sales by the SOF.

  • Second, privatization/liquidation--through the "pool" method or the case-by-case method involving international tenders--of 64 large companies, including 50 companies grouped in five pools--accounting for 25 percent of SOF capital. This process has attracted strong interest from reputable investment banks to serve as advisors, which augurs well for the eventual restructuring of these enterprises. By early April 2000, all contracts had been signed with investment banks or liquidation advisors except for Sidex and Tractorul. The tender for Tractorul, which was broken into 10 small units, has been re-opened. Given the apparent further deterioration in Sidex's financial position, we are committed to continue the privatization process of Sidex in the most expeditious fashion by issuing a new tender and making a decision by June 15, 2000. In line with understandings reached with the World Bank, we are committed to offer for sale or liquidation/workout by end-September all the companies for which contracts with investment banks have already been signed. We also intend to finalize the privatization or liquidation for 3 out of the five pools and 10 out of the 12 case by case enterprises (for which contracts with investment banks have already been signed) by end-2000.

  • Third, with regard to national companies (formerly régies autonomes), as agreed with the World Bank, we offered a minority share of PETROM (35 percent) for privatization in late 1999. However, this strategy failed to attract any serious interest. We will review the reasons behind the failed strategy, along with the World Bank, and open international tender for the privatization of a controlling stake of PETROM this year. We are also preparing national companies in the area of energy distribution for privatization. We are splitting CONEL into several separate units: one unit producing hydroelectric energy, one producing thermal energy, one unit for transportation and dispatching, and one unit for distribution to consumers. The distribution unit will be split into a number of smaller branches which will be privatized separately. We will also split ROMGAZ into several separate units: one unit for production, one unit for transportation, one unit for stocking gas, and two units for delivery. The two delivery units, originally to be split on a north-south basis, will in turn be split into several smaller units to be privatized separately.

37.  So far, some progress has been made in initiating liquidation or terminating operations of some loss-making enterprises. However, owing to the slow process and continued economic decline, overall losses generated by SOF enterprises and other state enterprises have continued to grow. To date, loss reduction measures are considered satisfactory according to the World Bank's PSAL conditionality: liquidators have been appointed for, or the operations have been terminated, for state-owned enterprises generating 12 percent of SOF losses (which, in turn, account for about 40 percent of total losses in the economy at the end of 1998). Meanwhile, losses of six mining companies have been reduced by 47 percent in real terms. We intend to redouble our effort to reduce total losses of the state sector (and of SOF companies, in particular) through a combination of restructuring, privatization, and liquidation measures in 2000. In this regard, another set of companies in the SOF portfolio is being selected for the liquidation/termination of operation to reduce losses, and further mine closures are expected in 2000, as tentatively agreed with the World Bank. Losses in the mining sector will be reduced by 20 percent in real terms in 2000, and contracts on the technical closure and environment work for at least 10 mines have to be concluded.

H.  Social Protection

38.  The decline in economic activity during last year has further increased the burden on the poorest in society. The recent crisis in orphanages was but one example of the continuing human suffering which government must redress. While a sustained improvement in the real economy will have to be the main factor in improving social conditions, the government also needs to act directly. We have taken steps to consolidate all functions related to care for children and orphans into only one agency. In addition, a comprehensive review of local authority finance will be undertaken (para 18). So as to redress the dire financial straits of retired with the lowest pensions, we have recorrelated all pensions (para 16). The National Health Insurance House is now set up and endowed with the required resources to effect a much improved provision of medical services to the population. In the coming months, we will strengthen the social safety-net for the long-term unemployed and the poorest within society by taking legal action to consolidate the institutional responsibility for the delivery of Social Assistance benefits and services; improve the allocations for a means-tested minimum income support scheme; and better target child benefits to larger families. So as to improve the impact of public policy on poverty reduction, we will also set up a poverty policy monitoring unit (PPMU) within the Prime Minister's Office.

III.  Program Monitoring

39.  On the basis of performance under the arrangement thus far and the policies described in this letter, we request the completion of the first review under the arrangement and waivers for noncompliance with the continuous performance criterion on external payments arrears to official creditors and the five end-December 1999 performance criteria relating to net credit of the banking system to the consolidated general government, aggregate wage bills, assumption by the consolidated general government of enterprise debt to banks and on the issuance of government guarantees on bank loans to enterprises, domestic arrears to CONEL, ROMGAZ and PETROU, as well as the net reduction of tax arrears of CONEL, ROMGAZ to the consolidated general government.

40.  We also request an extension of the program through end-February 2001. Program implementation will be monitored on the basis of the performance criteria and indicative targets as described in the next few paragraphs. In addition, the program will be reviewed by the Fund twice during the remaining period of the stand-by arrangement: by August 15 and November 15, 2000.

41.  The performance criteria are as follows: (i) quarterly ceilings on net domestic assets of the NBR; (ii) quarterly ceilings on credit of the banking system to the consolidated government; (iii) quarterly floors on net foreign assets of the NBR; (iv) quarterly ceilings on nominal wage bills for the state budget and the Special Fund for Education, régies autonomes, national companies, and loss-making commercial companies; (v) quarterly ceilings on the contracting or guaranteeing by the government of non-concessional external debt, with subceilings for the one- to three-year maturity range; (vi) quarterly ceilings on the level of external debt with a maturity of up to one year contracted or guaranteed by the government; (vii) quarterly ceilings on the assumption by the government of enterprise debt to banks and guaranteeing of bank loans to enterprises by the general government; (viii) quarterly ceilings on domestic arrears to CONEL, ROMGAZ, and PETROM; (ix) quarterly floors on the net reduction in tax arrears of CONEL, ROMGAZ, and PETROM. (x) A continuous performance criterion of no new accumulation of external payments arrears to official foreign creditors will also apply.

42.  The indicative targets are as follows: (i) quarterly ceilings on reserve money; (ii) quarterly ceilings on the stock of external payments arrears; (iii) quarterly floors on net foreign assets of the banking system; and (iv) quarterly ceilings on broad money. The monetary ceilings on the NBR will be defined as the average of the daily positions for the monthly period in question.

43.  Structural benchmarks under the program include: (i) quarterly targets for privatization sales; (ii) offering of BCR on the market for privatization and receipt of written and detailed expression of interests by end-July; (iii) a binding offer for the privatization of BCR by end-September; (iv) implementation of improved Decision Matrix of Progressive Enforcement Actions as agreed with IMF (end-May 2000); (v) quarterly targets on minimum revenue from recovery of bad assets in AVAB's possession; (vi) in the absence of a firm binding offer for the privatization of BA, initiation of resolution by end-June 2000; (vii) the finalization of privatization of BA or completion of resolution by end-September;(viii) the offer for sale of seven large SOEs selected for privatization (TaROU, Alro, AlpROU, Electroputere, Hidromecanica, Antibiotice, Romvag) and the five pools of enterprises by end-September 2000; (ix) the signing of new contracts with investment banks on the privatization of Sidex and Tractorul by end-September 2000; (x) the initiation of liquidation/work out proceedings for all five large SOEs selected for liquidation/work outs (Clujana Cluj, Siderurgica, Roman, Nitramonia, IUG) by end-October; (xi) the completion of these liquidation/work out proceedings by end-December, 2000; and (xii) review of existing legislation related to bank bankruptcy procedures and preparation of proposed amendments (end-June 2000).

44.  The prior actions for completing the first review include: (i) abrogation of Emergency Ordinance 67 and amendment of Emergency Ordinance 98; (ii) the written expression of interest for Banca Agricola, or a decision to proceed with the resolution of Banca Agricola.

Technical Memorandum of Understanding for Stand-By Arrangement

I.  Ceilings on the Average Net Domestic Assets of the National Bank of Romania
II.  Targets for Floor on Net Foreign Assets of the National Bank of Romania.
III  Ceilings on Net Credit of the Banking System to the Consolidated General Government.
IV.  Limits on the Assumption of Enterprise Debt to Banks by the Consolidated General Government and the Issuance of Government Guarantees on Bank Lending to Enterprises
V.  Ceilings on Contracting or Guaranteeing of Medium- and Long-Term External Debt
VI.  Ceilings on Short-Term External Debt Outstanding
VII.  Ceilings on Domestic Arrears to CONEL, ROMGAZ, and PETROM
VIII.  Floor on the Net Reduction of Arrears of CONEL, ROMGAZ, and PETROM to the Consolidated General Government
IX.  Ceiling on Aggregate Wage Bills of Règies Autonomes and National Companies, Commercial Companies, and the State Budget Sector
X.  Indicative Targets for Floor on Net Foreign Assets of the Banking System
XI.  Indicative Targets for Ceilings on Average Reserve Money
XII.  Indicative Targets for Ceilings on Broad Money
XIII.  Summary of Understandings on Targets for Arrears Reduction

I.  Ceilings on the Average Net Domestic Assets of the National Bank of Romania


  Ceiling Actual

  (In billions of lei)
Stock as of:
  December 31, 1999    19,865
  March 31, 2000    19,764
     
  June 30, 2000 (performance criterion) 15,898
  September 30, 2000 (performance criterion) 16,686
  December 31, 2000 (performance criterion) 10,982

The average net domestic assets of the NBR are defined as the difference between average reserve money (as defined in Table XI) and average of net foreign assets (net foreign assets, as defined in Table II), both expressed in local currency.

For the purposes of the program, average net foreign asset stocks will be converted into lei for the purposes of calculating average net domestic assets at the average monthly programmed lei/U.S. dollar rates: June 2000, 20,639 lei/dollar; September 2000, 21,037 lei/U.S. dollar; December 2000, 22,191. The average stock of NFA is defined as the average of the daily NFA as defined in table II.

The limits will be monitored from daily data on the accounts of the NBR supplied weekly to the Fund by the NBR.

The ceiling on average net domestic assets of the NBR will be adjusted under the following circumstances:

(1) The ceiling would be adjusted downwards in a proportional fashion, for the fraction of the month that gross foreign financing, as defined in table II, exceeds programmed levels, specified in table II.

(2) The ceiling would be adjusted upwards one-for-one, in a proportional fashion for the fraction of the month and to the extent of shortfalls in gross foreign financing (specified in table II) through end-June 2000, and of up to US$200 million on a cumulative basis for the remainder of 2000.

(3) The ceilings would be adjusted for any change in reserve requirements as described in table XI. Before undertaking any such changes, the NBR will consult Fund staff.

II.  Targets for Floor on Net Foreign Assets of the National Bank of Romania


  Floor Actual

  (In millions of U.S. dollars)
Stock as of:
  December 31, 1999    846
  March 31, 2000    945
  June 30, 2000 (performance criterion) 1,226
  September 30, 2000 (performance criterion) 1,337
  December 31, 2000 (performance criterion) 1,740

Net foreign assets of the NBR consist of reserve assets minus foreign liabilities.

For the purposes of the program, reserve assets shall be defined as monetary gold, holdings of SDRs, any reserve position in the IMF, and holdings of foreign exchange in convertible currencies by the NBR. Excluded from gross reserves are long-term assets, NBR redeposits at the commercial banks, any assets in nonconvertible currencies, encumbered reserve assets, reserve assets pledged as collateral for foreign loans, reserve assets pledged through forward contracts, and precious metals other than gold. Monetary gold shall be valued at an accounting price of US$280.4 per ounce and SDRs at US$1.355109 per SDR. On December 31, 1999, the NBR's reserve assets as defined above amounted to US$2,462 million, including gold valued at US$932 million.

For the purposes of the program, foreign liabilities shall be defined as loan, deposit, swap (including any portion of the NBR gold that is collateralized), and forward liabilities of the NBR in convertible currencies to residents and nonresidents, as well as liabilities arising from foreign currency deposits of resident commercial banks at the NBR; IMF purchases; borrowing from international capital markets; and bridge loans from the BIS, foreign banks, foreign governments, or other financial institutions, irrespective of their maturity. Yen-denominated liabilities shall be valued at their respective swap rates Samurai I at 108.25/U.S. dollar and Samurai II at 111.9/U.S. dollar. On December 31, 1999, the NBR's foreign liabilities, as defined above, amounted to US$1,616 million.

All assets and liabilities denominated in convertible currencies, other than the U.S. dollar, shall be converted at their respective exchange rates against the U.S. dollar on December 31, 1999. All changes of definition or valuation of assets or liabilities as well as details of operations concerning sales, purchases, or swap operations of gold shall also be communicated to the Fund staff.

The NFA of the NBR will be automatically adjusted for the deviation of gross foreign financing1 from the programmed levels (on a cumulative basis).

June 2000 US$295 million
September 2000 US$490 million
December 2000 US$640 million

Specifically, if the proceeds from foreign financing:

(1) exceed the program limits, the NFA floor for the quarter will be increased by 100 percent of the additional financing;

(2) fall short of the program limits, the NFA floor will be reduced by 100 percent of the shortfall by June 2000, and up to a maximum of US$200 million in the remainder of the year.

III.  Ceilings on Net Credit of the Banking System to the Consolidated General Government


  Ceiling Actual

  (In billions of lei)
Stock as of:
  December 31, 1999    43,621
  March 31, 2000    43,154
  June 30, 2000 (performance criterion) 46,441
  September 30, 2000 (performance criterion) 46,213
  December 31, 2000 (performance criterion) 44,440

The consolidated general government includes the state budget; the budgets of the local authorities; the social protection funds;2 the Special Funds for Developing and Modernizing Customs, Developing Energetic Systems, Modernizing Roads, Tourism Promotion and Development, Insured Protection, Civil Aviation, Solidarity, Education Sustenance, Diminishing Technological Risks, other extra-budgetary funds managed by the Ministry of Finance or other Ministries and agencies outside the budgetary framework; other extra-budgetary operations of ministries financed by foreign loans; the counterpart funds created from the proceeds of foreign loans; and the State Ownership Fund. Any new funds created during the program period to undertake operations of a fiscal nature as defined in the IMF's Manual on Government Finance Statistics will be incorporated within the definition of consolidated general government.

For program purposes, net credit of the banking system to the consolidated general government is defined as all claims of the banking system on the consolidated general government less all deposits of the consolidated general government with the banking system. Foreign-currency denominated credit to government outstanding at December 31, 1999 will be converted at the end-December 1999 exchange rate. Foreign-currency denominated credit newly issued in 2000 will be valued at the accounting exchange rates (lei/US$): 18,697; 20,347; 20,916; and 21,964 for such debt issued during January-March, April-June, July-September, and October-December, respectively. Government loans to banks at an interest rate less than the reference rate of the NBR to finance onlending to economic agents are excluded from government deposits; an agreed listing of the accounts to be treated as government deposits for program purposes is contained in the FAD aide memoir "Romania: Measuring the Fiscal Deficit", Part II, Appendix 11, February 1994.

For program purposes, the limits on net credit to the consolidated general government will be adjusted under the following circumstances:

(1) The ceilings will be adjusted downwards by the cumulative increase in the stock of government debt held by the nonbank public, starting from January 1, 2000, and upward for any decrease.

(2) The ceilings on net credit will be adjusted downwards by the full amount of the lei counterpart to external financing to the consolidated general government, in excess of the levels specified in table II, and using the following average exchange rates (in lei per U.S. dollar):

April–June 20,347
July–September 20,916
October–December 21,964

The ceilings will be adjusted upwards by 100 percent of the shortfall in external financing (compared to the levels given in table II) to the consolidated general government in June 2000 and for up to a maximum of US$200 million on a cumulative basis in the remainder of the year.

(3) The ceilings on net credit will be adjusted for the shortfall or excess of non-balance of payments support external financing, i.e., project external financing, to the consolidated general government, compared to the following path (cumulative from January 1, 2000):

end-June 2000:

US$287 million at 20,863 lei/dollar

end-September 2000:

US$428 million at 21,204 lei/dollar

end-December 2000:

US$543 million at 22,193 lei/dollar

  • The ceilings will be adjusted downward by 100 percent of any excess of non-balance of payments support external financing to the consolidated general government over and beyond US$150 million, compared to the above path;

  • The ceilings will be adjusted upward by 100 percent of any shortfall of non-balance of payments support external financing to the consolidated general government up to a maximum of:

end-June 2000: US$100 million at 20,863 lei/dollar
end-September, 2000: US$150 million at 21,204 lei/dollar
end-December 2000: US$200 million at 22,193 lei/dollar

(4) The ceilings will be adjusted downwards for any overdraft of the General Account of Treasury at the NBR in excess of the legal limit of lei 391 billion. (This limit would be changed, after consultation with Fund staff, in the event that the legal overdraft limit is changed as defined in the Legal Statutes of the NBR.)

(5) The ceilings will be adjusted upwards by any issue of government bonds associated with the closure of Bancorex3 and resolution of Banca Agricola, up to a maximum of US$250 million, at the prevailing exchange rate, and the associated interest expenditure.

(6) The ceilings will be adjusted downwards (upwards) by the excess (shortfall) of privatization receipts of the SOF and local authorities, as well as AVAB asset recoveries compared to the following levels cumulative from January 1, 2000:

end-June 2000:

lei 3,700 billion

end-September 2000:

lei 6,100 billion

end-December 2000:

lei 10,225 billion

IV.  Limits on the Assumption of Enterprise Debt to Banks by the Consolidated
General Government and the Issuance of Government Guarantees
on Bank Lending to Enterprises


Debt assumed and Guarantees
Extended by Government

Ceiling

Actual


  (In billions of lei)
     

March 31, 20004

 

200

     

Increase from March 31, 2000:

   

June 30, 2000 (performance criterion)

0

 

September 30, 2000 (performance criterion)

0

 

December 31, 2000 (performance criterion)

0

 

For program purposes, the assumption of enterprise debt to banks by the consolidated general government and the issuing of a guarantee to assume enterprise debt to banks are treated as being equivalent. This limit includes any loan on which the government pays or guarantees interest, even if the principal is not guaranteed. The consolidated general government is defined in table III. The criterion also applies to the use of SOF resources for recapitalizing enterprises.

These limits exclude:

  • the contracting or guaranteeing of external debt, for which separate limits are set out in Table V and Table VI;

  • debt transferred to AVAB in the process of bank restructuring.

Data for monitoring purposes shall be supplied monthly to the Fund by the Ministry of Finance.

V.  Ceilings on Contracting or Guaranteeing of Medium- and Long-Term External Debt


More than one- and up to
three-year maturity
  More than one-year maturity
  Ceiling Actual   Ceiling Actual

   (In millions of U.S. dollars)
March 31, 2000   6     605
           
June 30, 2000 (performance criterion) 300     1,400  
September 31, 2000 (performance criterion) 450     2,100  
December 31, 2000 (performance criterion) 600     2,800  

The ceilings apply to the contracting or guaranteeing of external non-concessional debt with original maturities over one year by the consolidated general government, the NBR, the régies autonomes, and other enterprises and commercial banks in which the government or the State Ownership Fund has a majority interest. The ceilings also apply to any assumption of loans for debt outstanding which were not previously contracted or guaranteed by the consolidated general government.

The consolidated general government is defined in table III. As regards commercial banks, these are comprised of Romanian Commercial Bank (BCR), Banca Agricola, Eximbank, and the Savings Bank (CEC). Excluded from the ceilings are revolving import financing lines extended for over one year, short-term liabilities of the banking system, as well as liabilities to the IMF and bridge loans from the BIS, foreign banks, foreign governments, or any other financial institution. Debt falling within the ceilings shall be valued in U.S. dollars at the exchange rate prevailing at the time the contract or guarantee becomes effective. Excluded from the limits are sales of T-bills to non-residents, provided the sales go through the regular auction mechanism and involve no exchange rate guarantees and loans that are considered concessional.

The ceilings will be adjusted in the following circumstance:

In the event that any of the commercial banks in which the consolidated general government or State Ownership Fund has a majority interest is privatized, their contracting or guaranteeing of non-concessional medium- and long-term debt would be excluded from the ceilings. The concessionality of the new borrowing will be determined on the basis of the financing costs (interest charges and other) and repayment terms (maturity) as follows: concessional loans will be defined as those with a grant element of at least 35 percent. The concessionality of a loan will be determined by comparing the net present value of the interest and principal repayments with the nominal value of the loan. The net present value of interest and principal repayments will be discounted based on the OECD "Commercial Interest Reference Rates" (CIRR) for the currency of the loan plus a margin. For loans with a repayment period of less than 15 years, the discount rate will be equal to the CIRR rate of the six-month period preceding the date on which the loan was contracted plus a margin of 0.75 percent. For loans with maturities of 15 years or more, the discount rate will be equal to the average of the CIRRs in the ten years preceding the date on which the loan was contracted plus a margin that varies according to the maturity of the loan. For loans of more than 15 to 19 years, the margin will be 1.0 percent, for loans of 20 to 29 years the margin will be 1.15 percent, and for loans of 30 years or more 1.25 percent.

The ceilings shall be monitored from data supplied monthly to the Fund by the Ministry of Finance and the NBR.

VI.  Ceilings on Short-Term External Debt Outstanding


  Ceilings Actual

  (In millions of U.S. dollars)
Stock as of:    
   December 31, 1999   1.7
   March 31, 2000   1.5
     
   June 30, 2000 (performance criterion) 0  
   September 30, 2000 (performance criterion) 0  
   December 31, 2000 (performance criterion) 0  

The ceilings apply to the stock of short-term debt with original maturities of up to and including one year contracted or guaranteed by the consolidated general government, the NBR, the régies autonomes, and other enterprises in which the government or the State Ownership Fund has a majority interest. The consolidated general government is defined in Table III. Short-term debt includes all short-term obligations (other than normal import-related credits) and outstanding balances under bilateral payments arrangements. The ceilings also apply to debt instruments with put options that could be triggered within one year after the contracting date. Excluded from the ceilings are short-term liabilities of the banking system, as defined in Table VIII. Debt falling within the limits shall be valued in U.S. dollars at the prevailing exchange rate. Such debt--corresponding to outstanding balances in bilateral payments agreements -amounted to US$1.7 million as of end-December 1999.

The ceilings will be adjusted in the following circumstance:

(1) In the event that any of the commercial banks in which the consolidated general government or State Ownership Fund has a majority interest is privatized, their short-term borrowing would be excluded from the ceilings.

The ceilings shall be monitored from data supplied monthly to the Fund by the Ministry of Finance and the NBR.

VII.  Ceilings on Domestic Arrears to CONEL, ROMGAZ, and PETROM


  Ceilings
  Actual
  Total CONEL ROMGAZ PETROM   Total CONEL ROMGAZ PETROM

  (In billions of lei)
Stock of arrears as of:
   December 31, 1999           15,708 6,557 3,351 5,800
                   
Stock of arrears as of:                  
   March 31, 2000           18,669 8,060 4,361 6,248
                   
   June 30, 2000
      (performance criterion)
18,735 8,091 4,237 6,407          
   September 30, 2000
      (performance criterion)
17,652 7,576 3,858 6,218          
   December 31, 2000
      (performance criterion)
16,997 7,095 3,626 6,276          

Arrears refer to accounts receivables more than 30 days overdue. For program purposes, payments arrears to CONEL, ROMGAZ, and PETROM include arrears from any domestic customers, including entities of the general government (as defined in Table III), enterprises with majority state ownership, mixed ownership, and private legal and physical persons. Any arrears which are rescheduled will be specified in the reporting.

Data for monitoring purposes shall be supplied monthly to the Fund by the Ministry of Finance.

VIII.  Floor on the Net Reduction of Arrears of CONEL, ROMGAZ, and PETROM to the Consolidated General Government


  Floor Actual

  (In billions of lei)
Estimated stock of arrears of CONEL, ROMGAZ,
      and PETROM to the consolidated general
      government at end-March 20005
10,445
     
Net cumulative reduction of arrears of CONEL,
      ROMGAZ, and PETROM to the
      consolidated general government
   June 30, 2000 (performance criterion) 250  
   September 30, 2000 (performance criterion) 700  
   December 31, 2000 (performance criterion) 1,388  

The consolidated general government is defined in Table III.

The floors will apply to any net decrease starting end-March 2000. Arrears include all overdue payment obligations to the consolidated government budget, i.e., including on taxes, excises, social security contributions, exploration royalties, and loan repayments.

Rescheduling of arrears will not be counted as a reduction of arrears under this performance criterion.

IX.  Ceiling on Aggregate Wage Bills of Régies Autonomes and National Companies,
Commercial Companies, and the State Budget Sector


The wage bills of the state budget and the Special Fund for Education, the régies autonomes and national companies, and 33 of the largest loss-making commercial companies will be restricted along the following lines:

The wage bill for the state budget and the Special Fund for Education will rise by 56 percent in nominal terms over the whole of 2000. The annual wage bills in RAs and national companies will be limited to four times their level in Q4 1999 (four times lei 5,768 billion for the RAs and national companies and four times lei 715 billion for commercial companies).

The cumulative ceilings for the aggregate wage bill of the state budget, RAs and national companies, and 33 of the largest loss-making enterprises will be:

January–March 2000: lei 13,856 billion (estimate)
January–June 2000: lei 32,480 billion (performance criterion)
January–September 2000: lei 45,572 billion (performance criterion)
January–December 2000: lei 62,095 billion (performance criterion)

Underlying these aggregate targets are the following ceilings by sector:

The cumulative wage bill ceilings for the state budget and the Special Fund for Education under this policy are: lei 7,583 billion for January-March; lei 19,023 billion for January-June; lei 25,387 billion for January-September; and lei 35,182 billion for January-December.

The wage ceilings for the RAs are: lei 5,510 billion for January-March; lei 11,997 billion for January-June; lei 17,996 billion for January-September; and lei 23,994 billion for January-December.

The wage ceilings for the 33 commercial companies: lei 763 billion for January-March; lei 1,460 billion for January-June; lei 2,189 billion for January-September; and lei 2,919 billion for January-December.

This performance criterion will be measured in a cumulative way across the different sectors, and over time.

The Ministry of Labor and Social Protection will undertake the responsibility of collecting data from the Ministry of Finance (budgetary sector), various line ministries (RAs and national companies), and the SOF (33 commercial companies), and will report to the Fund on a monthly basis.

X.  Indicative Targets for Floor on Net Foreign Assets of the Banking System


  Floor Actual

  (In millions of U.S. dollars)      
Stock as of:    
   December 31, 1999   1,397
     
   March 31, 2000   1,486
   June 30, 2000 1,767  
   September 30, 2000 1,878  
   December 31, 2000 2,281  

Net foreign assets of the banking system consist of foreign reserve assets minus foreign liabilities.

For the purposes of the program, reserve assets shall be defined as monetary gold, holdings of SDRs, any reserve position in the IMF, and holdings of foreign exchange in convertible currencies by the NBR and the commercial banks. Excluded from reserve assets are long-term assets, any assets in nonconvertible currencies, and precious metals other than gold. Monetary gold shall be valued at an accounting price of US$280.4 per ounce and SDRs at US$1.355109 per SDR. On December 31, 1999, reserve assets of the banking system as defined above amounted to US$ 3,623 million, including gold valued at US$932 million.

For the purposes of the program, foreign liabilities shall be defined as short- and medium- and long-term liabilities of the NBR and the commercial banks in convertible currencies to nonresidents, as well as liabilities arising from IMF purchases and bridge loans from the BIS, foreign banks, foreign governments, or any other financial institution, irrespective of their maturity. For the program purpose, foreign liabilities of the NBR are as defined in Table II above. On December 31, 1999, the foreign liabilities of Romania's banking system, as defined above, amounted to US$2,226 million.

All assets and liabilities denominated in convertible currencies other than the U.S. dollar, including the SDR, shall be converted at their respective exchange rates against the U.S. dollar on December 31, 1999. All changes of definition or valuation of assets or liabilities as well as details of operations concerning sales, purchases, or swap operations of gold shall also be communicated to the Fund staff.

The floor on the net foreign assets of the banking system will be adjusted for the amounts the actual gross foreign financing deviates from the programmed levels (specified in (c) below on a cumulative basis). Specifically, if the proceeds from foreign financing:

(a) exceed the program limits, the NFA floor for the quarter will be increased by 100 percent of the additional financing;

(b) fall short of the program limits, the NFA floor will be reduced by 100 percent for June 2000, but up to a maximum of US$200 million for the remainder of the year.

(c) June 2000 US$295 million
  September 2000: US$490 million
  December 2000: US$640 million

XI.  Indicative Targets for Ceilings on Average Reserve Money


  Ceilings Actual

  (In billions of lei)      
Stock as of:    
   December 31, 1999   34,658
   March 31, 2000   37,262
     
   June 30, 2000 40,706  
   September 30, 2000 44,308  
   December 31, 2000 49,084  

Average reserve money is defined as the sum of average currency in circulation outside the NBR and average deposits (required plus excess reserves) of the commercial banks at the NBR. Commercial bank deposits exclude required and excess reserves in foreign exchange for foreign exchange deposits.

Data on reserve money will be monitored from the daily indicators data of the NBR, which shall be supplied to the Fund weekly by the NBR. On March 31 2000, currency in circulation outside the NBR amounted to lei 17,238 billion, while average deposits of the commercial banks at the NBR amounted to lei 20,024 billion. Estimates of the stock of average reserve money derived from NBR accounts will be provided on a weekly basis to the Fund.

The ceilings on average reserve money will be adjusted in the following circumstances:

(1) Should reserve requirements be changed from 30 percent on all required reserves held in lei, the reserve money targets would be adjusted by multiplying the change in the reserve requirements by the programmed deposits for which required reserves are held in lei.. Before making any such changes, the NBR will consult with Fund staff.

(2) The reserve money targets for September and December assume that reserve requirements on all deposits are observed. The target for June assumes that reserve requirements for Banca Agricola and Bancoop deposits are fully observed, but excludes the reserve requirements on the portion of deposits transferred from Bancorex to BCR for which the matching t-bills have not matured.

(3). The reserve money targets will be lowered proportionally to the extent the total reserve of the banking system falls short of the minimum reserve requirements. The adjuster could be reconsidered during program reviews.

XII.  Indicative Targets for Ceilings on Broad Money


  Ceilings Actual

  (In billions of lei)         
Stock as of:    
   December 31, 1999   134,114
   March 31, 2000   136,105
     
   June 30, 2000 147,808  
   September 30, 2000 156,576  
   December 31, 2000 172,463  

Broad money is defined as the liabilities of the banking system with the non-bank public. Broad money includes foreign currency deposits of residents, but excludes government deposits and deposits of foreign monetary institutions and other non-residents.

For the purposes of the program, net foreign assets and deposits which are denominated in foreign currency will be converted into lei at the accounting end-of-period exchange rates: June 30, 2000, 20,648 lei/dollar; September 30, 21,173 lei/dollar; December 31, 2000, 22,430 lei/dollar. Foreign currency denominated credit will be converted into lei at the end-December 1999 exchange rate of 18,255 lei/dollar. The exchange rate at end-March 2000 was 19,480 lei/dollar.

Data on broad money will be monitored from the monthly data on the accounts of the banks and the banking system, which shall be supplied to the Fund monthly by the NBR. On March 31, 2000, broad money comprised currency outside banks of lei 16,070 billion; lei deposits of lei 68,815 billion; and foreign currency deposits of US$2,629 million, valued at the March 31, 2000, exchange rate of 19,480 lei/dollar.

The ceiling for end-December 2000 includes estimates of end-year interest payments by the Savings Bank (CEC). The program assumes interest payments of lei 3.5 trillion at end-December 2000.

XIII.  Summary of Understandings on Targets for Arrears Reduction

Arrears Reduction of the Three Big Utilities - Performance Criteria

  • The reduction in arrears to CONEL, PETROM and ROMGAZ constitutes a performance criterion (MEP, ¶26), and the details are shown in Table VII.

  • The reduction in the arrears of CONEL, PETROM and ROMGAZ to the consolidated general government ("budget") constitutes a performance criterion (MEP, ¶26), and the details are shown in Table VIII.

Other Targets on Arrears Reduction

  • Total arrears of the group of régies autonomes and national companies as a whole, and for the group of 33 largest loss-making commercial enterprises as a whole (MEP, ¶23).

  • Arrears to the budget of the régies autonomes and national companies, excluding the three big utilities (MEP, ¶26).

  • Arrears to the budget of the 33 largest loss-making commercial enterprises (MEP, ¶26).

  • Arrears to the budget of the 30 largest debtors, excluding the three major utilities (MEP, ¶24).


1Foreign financing is defined as disbursements of balance of payments support loans to the government with a maturity of more than a year from multilateral and bilateral creditors and resources with a maturity of more than one year raised in the international capital markets by the government. This excludes use of IMF resources.
2These include the State Social Security Fund, the Unemployment Fund, the Health Fund, the Health Social Insurance Fund, and the Risk and Accident Fund.
3While the closure of Bancorex had been completed at end-December 1999, some of its contingent liabilities transferred to BCR have been guaranteed by the MOF, which would issue T-bills to BCR once these liabilities mature and are realized throughout 2000 and beyond.
4The actual for March 31, 2000, includes loans extended to ROMAN, and TRACTORUL, guaranteed by SOF deposits.
5This figure excludes arrears to social security funds and local governments, which are, however, covered under the performance criterion.

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