Use the free Adobe Acrobat Reader to view Table 1.
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
|
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.
|