Romania and the IMF
News Brief: IMF Approves 18-month, US$383 Million Stand-By Credit to Romania
Free Email Notification
Intent, Memorandum of Economic and Financial Policies,
Mr. Horst Köhler
Dear Mr. Köhler:
Notwithstanding the important progress in stabilization and reform over the past two years, Romania still has to fully achieve macroeconomic stability and bring inflation down to a low and stable level. Moreover, we continue to face a challenging agenda for accelerating the process of accession to the European Union and we will need to address the structural weaknesses of the economy to accelerate growth that will help us to reduce the development gap relative to the European Union. We have therefore formulated and started to implement a comprehensive program of stabilization and reform, which is described in the attached Memorandum of the Government of Romania on Economic and Financial Policies. In support of this program, we hereby request on behalf of the Government of Romania an 18-month Stand-By Arrangement in the amount of SDR 300 million, for a program period October 2001-March 2003.
We are determined to meet all of our commitments under the program and we believe that the policies and measures described in the attached memorandum are sufficient to achieve the objectives of the program, but we stand ready to take additional measures and seek new understandings with the IMF if necessary to keep the program on track. The Government of Romania will remain in close consultation with the IMF in accordance with the IMF's policies on such consultations, and it will provide the IMF with all the information that it requests to assess the implementation of the program. The program will be reviewed by the IMF on a quarterly basis during the period of the Stand-By Arrangement.
1. This memorandum sets forth the main economic and financial objectives and policies of the government and the National Bank of Romania (NBR) for the period 2001-02. The program described below reflects our strong commitment to fully achieve macroeconomic stability and address structural problems in the enterprise and banking sectors, with a view to setting our economy on a sustainable rapid growth path and accelerating the process of accession to the European Union (EU).
2. As a result of the implementation of the stabilization program in 1999 and 2000, we greatly improved our external position, and laid the basis for a return to positive output growth in 2000, following three years of declining output. On the back of the strengthened competitiveness, achieved by a combination of depreciation and fiscal tightening in 1999, exports of goods and services increased by 24 percent in volume terms in 2000, and real GDP by 1.6 percent, despite the large drought-related decline in agricultural production. The current account balance relative to GDP further improved by about 0.4 percentage points in 2000, to a deficit of 3.7 percent, while official reserves grew by about US$1 billion, to US$3.4 billion by end-2000. The improved external performance made it possible for our country to re-enter the international bond market in late 2000, and was also reflected in this year's upgrade of Romania's sovereign bond ratings.
3. Output strongly picked up in the first half of 2001, but the trade deficit widened. Exports have continued to perform well, as evidenced by merchandise export growth of about 15½ percent in U.S. dollar terms in January-July. However, imports continue to outpace exports, increasing in the same period by 27 percent, while the trade deficit reached US$1,452 million, compared with US$586 million in the same period of 2000. In addition to transitory drought-related factors, the growth in imports reflects an increase in domestic demand. In particular, following the large rises in public sector wages in late 2000 and early 2001, and the weakening in the financial performance of state-owned enterprises (as evidenced by the large increase in their arrears and the use of credit financing), domestic demand grew by 10 percent in real terms in the first quarter of 2001, a level which, if it persists, would endanger our disinflation objectives and external viability. These tendencies continued in the second quarter of 2001, albeit with somewhat lower intensity.
4. Notwithstanding the important progress in stabilization and reform over the past two years, Romania continues to face a challenging agenda for accelerating the process of accession to the EU. We need to achieve further progress in establishing macroeconomic stability, as evidenced by the fact that the inflation rate is still among the highest in Europe. Moreover, structural weaknesses in the large sector of state-owned enterprises remain to be addressed in the period ahead, in order to establish an efficient and fully functioning market economy. Romania also has yet to boost private investment to a level required to achieve a sustainable high growth rate and attract foreign direct investment, which has remained modest compared with other transition economies in the region.
III. Macroeconomic and Financial Policies
A. Basic Strategy and Objectives
5. The main macroeconomic objectives of our 2001-02 program are to reduce inflation to 22 percent by end-2002, achieve output growth of about 5 percent, to contain the external current account deficit below 6 percent of GDP, and to increase official reserves to about three months of imports. The macroeconomic policies to achieve these objectives will focus on a supportive fiscal stance; prudent wage policy in the budgetary sector and public enterprises; measures for reducing quasi-fiscal spending and losses in the energy sector and other public enterprises, including the acceleration of privatization; and tight monetary policy. Our disinflation strategy will not rely on the postponement of necessary adjustment in administered prices, and we will continue to eschew any direct intervention with respect to liberalized prices.
6. Our main macroeconomic objectives over the medium term, 2001-05, are as follows: Although the inflation outcome in 2000 and early 2001 was higher than envisaged in our Medium-Term Economic Strategy, we intend to make steady progress to reach a single-digit inflation rate by 2004 or 2005 at the latest. With substantial projected foreign direct investment inflows and EU pre-accession aid, we expect that the current account deficit, after reaching about 6 percent of GDP in 2001, will decline to around 5 percent of GDP by 2005, a level that will assure that our overall foreign debt-to-GDP ratio increases only moderately, while the net foreign debt-to-GDP ratio will start declining already in 2002. We expect that our economy will grow in this period on average by 5-6 percent, helping to reduce the development gap relative to the EU.
B. Fiscal Policy
7. Fiscal policy in 2001 and in 2002 will strongly support the disinflation objective and help to contain the external current account deficit. In light of the larger-than-expected current account deficit in early 2001 and somewhat higher-than-targeted inflation, we have decided to tighten the fiscal target for 2001, and limit the deficit of the consolidated general government to 3.5 percent of GDP. For 2002, we will limit the deficit to 3.0 percent of GDP, in line with the Medium-Term Economic Framework submitted to the EU, and reflecting our expectation that the economy will grow by about 5 percent. Moreover, to improve the coordination of macroeconomic policies, we have decided to submit the 2002 budget to parliament in October 2001. We expect that the targeted reduction in the budget deficit and the measures to control wage growth in state-owned enterprises and improved financial performance will contain the recent strong growth in domestic demand and will result in an improvement in the external current account deficit in the second half of 2001 and 2002. However, should this not be the case, we stand ready to implement corrective measures, including further tightening fiscal policy in the first half of 2002, particularly if the external environment turns worse than currently assumed.
8. The following additional measures are intended to improve revenue performance in 2001. We have simplified the taxation of micro-enterprises introducing a 1.5 percent turnover based tax on September 1, 2001. Furthermore, we have revised the regulations for the rescheduling of tax arrears and the cancellation of associated penalties with a view to limiting the access to these facilities to a small number of companies under restructuring and eliminated the respective authority of regional tax administration offices. With respect to the rescheduling of tax arrears exceeding lei 500 billion or the cancellation of penalties exceeding lei 50 billion, each individual case has to be approved by the cabinet. In order to strengthen financial discipline, we will strictly limit the conversion of claims on account of called guarantees into equity (debt-for-equity swap) to special laws preparing individual companies for privatization and will abolish Emergency Ordinance 62/2001, which allowed for a substantially broader application of this instrument (prior action). Instead, we will explore the option of selling claims on account of called guarantees to the private sector. Emergency Ordinance 195/2000 granting the exemption from VAT and customs duties for selected imports of state-owned companies will be abolished by the end of September 2001 (for Termoelectrica the cancellation will be effective on March 1, 2002); this will be a prior action for the presentation of the program to the Board. We will review the ordinance on micro-enterprise taxation with the goal of eliminating distortionary tax incentives by end-2001.
9. To ensure that we can achieve the 2001 deficit target, we have implemented several precautionary measures on the expenditure side. First, the cumulative state budget spending at the end of the third quarter of 2001 was limited to 73.0 percent of total annual expenditure in the rectified state budget. Second, we have approved an ordinance that blocked 50 percent of the capital expenditure entitlement for the fourth quarter of 2001 (lei 2,580 billion) for the state budget, the social security budgets, and the special funds, which can be released only if revenue targets for September and the following months have been met (see Technical Memorandum of Understanding). Third, the government, at the proposal of the Ministry of Finance, can approve state budget expenditure ceilings for November and December that can be lower than the expenditure appropriations.
10. We remain strongly committed to keeping the growth in the budgetary sector wages and pensions as approved in the original 2001 budget. We firmly intend not to grant any increase in budget sector wages in 2001 in addition to what was stipulated in Emergency Ordinance 33/2001. The annual bonus, to be paid in January 2002, will be limited to an equivalent of one month's salary in 2001. Taking into account the need to consolidate the pension fund, we are determined not to exceed the scheduled rise in pensions in December.
11. The 2002 budget will be based on estimated revenues of the consolidated general government of lei 458.3 trillion, a general government deficit target of lei 43.2 trillion, implying an expenditure ceiling of lei 501.5 trillion. To achieve this deficit target, we will include in the 2002 budget law the possibility for the government to approve monthly expenditure ceilings for the state budget in the second half of the year, which can be lower than the expenditure appropriations in the budget if necessary. A prior action for the presentation of the program to the IMF Executive Board will be the submission of the 2002 budget, as agreed with the IMF staff, to parliament. In addition, approval by parliament of the 2002 budget consistent with this program will be a condition for the completion of the first review.
12. Tax policy in 2002 will focus on reducing the payroll taxes, eliminating distortionary tax incentives and modernizing the tax system.
13. We are in the process of finalizing the expenditure side of the 2002 budget. We have already decided to maintain budgetary sector average wages constant in real terms in 2002. Toward that end, we will approve, before end-2001, legislation stipulating the schedule for the increase of budgetary sector wages in 2002 based on the forecast increase in the consumer price index. We will not distribute lunch vouchers to employees in public institutions financed entirely by or receiving subsidies from the state budget, the social security budget, the local authorities or the special funds. Following the substantial decline in employment in the civil sector of the state budget in 2001, we envisage reducing budgetary sector employment by at least 6,150 employees. To improve incentives for private as well as for public companies to become more competitive, we will continue our policy to gradually reduce subsidies from the general consolidated budget by limiting their increase to 11.6 percent in nominal terms in 2002. The reforms in the heating sector will allow us to reduce the subsidies from the local budgets in real terms and, concomitantly, to reduce the respective amounts out of income tax revenue transferred from the state budget to local authorities.
14. To improve the social safety net in the context of restructuring our economy, we will implement a new set of policies to promote social stability and reduce poverty. A means-tested income support (Minimum Income Guarantee) will become effective on January 1, 2002 for the poorest categories of the Romanian population, with the necessary financing provided from income tax revenue transferred from the state budget to the local authorities. Additional expenditure, as the new program will partially replace the existing programs, will not exceed 0.4 percent of GDP in 2002. At the same time, the new law on the prevention of and fight against social marginalization, which consolidates the responsibilities of the institutions involved in the delivery of social benefits and services, will become effective. Our efforts to reduce unemployment will focus on wage restraint and active labor market policies. Regarding the support of children, following the doubling of the state child allowance in November 2000, this allowance will be raised by 15 percent in January 2002, and by 20 percent in July 2002, while the benefits will be incorporated into the global income tax starting from January 1, 2002. The increases in the state child allowance allow us to keep the supplementary child allowance unchanged in nominal terms.
15. We are committed to recorrelating the pensions of those pensioners with full length of service, and their survivors, who retired before 1999. The recorrelation will be implemented in six steps over 2002-04, with the first step taking place on January 1, 2002. To provide a tangible increase for the pensioners with the lowest benefits as soon as possible, the distribution of the recorrelation amounts over time will be front-loaded for low pensions and back-loaded for higher pensions, with pensions above three pension points not benefiting from recorrelation. Taking into account the substantial financial resources needed for the recorrelation and the large deficit of the pension fund, the recorrelation can be achieved only by limiting the general indexation of pensions to 85 percent of the forecasted inflation in 2002, 88 percent in 2003, and 90 percent in 2004, while farmers' pensions will benefit from full indexation. This will allow us to limit the rise in total state social security pension expenditure to 7.3 percent in real terms in 2002, and to keep it at a prudent level in the following years. Furthermore, in order to restore the sustainability of the public pension system, we are committed to implementing further reforms that will tighten eligibility criteria for pension benefits and to strictly enforcing the criteria for invalidity pensions. To contain the non-pension related expenditure of the pension fund, we are committed to strengthening the control mechanisms for the issuance of medical certificates and payments of sick leave benefits.
16. We will implement several measures to strengthen fiscal transparency and contain extrabudgetary spending. All proceeds from privatization and the recovery of bad loans received by the Privatization Authority (APAPS) or other line ministries and the Assets Recovery Agency (AVAB), respectively, will be transferred to the treasury in order to retire public debt, except for amounts required to cover the operating costs of the two agencies and the directly related privatization costs of the respective line ministries. Furthermore, we will immediately discontinue the use by APAPS of privatization receipts as collateral for borrowing by state-owned companies. The use of privatization receipts from the sale of state-owned farms by the extrabudgetary "Romanian Agricultural Development Fund" under the Ministry for Agriculture to finance subsidies, will be discontinued at end-December 2002, and the fund will be incorporated into the state budget. We will establish a registry of local government foreign borrowing, which will complete our monitoring system for public and publicly guaranteed domestic and foreign debt (prior action). The overall ceiling for domestic government guarantees, as stipulated in Annex C, Table VII, will be a quantitative performance criterion under the program. To address the issue of arrears from the central and local governments as well as from special funds, we have established a quarterly reporting system effective end-June 2001 and approved an ordinance in order to reduce the arrears from hospitals that account for the largest share of total budgetary sector arrears.
17. We will finance the 2002 budget deficit with a balanced composition of domestic and foreign financing. We will limit net foreign financing of the budget to1.8 percent of GDP in 2002, compared with 2.4 percent of GDP in 2001, which will help us to contain growth in foreign government and government-guaranteed debt and in avoiding unsustainable upward pressure on the exchange rate.
C. Quasi-Fiscal Deficits in the Energy Sector and Other Public Enterprises
18. We are aware that the performance of public companies in the energy sector is crucial to improving the overall financial discipline in the public sector and achieving a reduction in the quasi-fiscal deficit. As a first step, we have increased the electricity price by 15 percent as of July 11, the heating producer price of Termoelectrica by 50 percent as of July 17, the end-user heating price (National Reference Price) by 57 percent as of August 9, and the natural gas price for households by 90 percent on August 10. Moreover, we have allowed local governments to raise the end-user heating price above the level of the National Reference Price, which will create scope for a further reduction in across-the-board subsidies. To mitigate the impact of these price adjustments on low-income households, we have concurrently strengthened the system of targeted income-tested transfers to poor households under the new minimum-income guarantee scheme.
19. Further steps will, however, be needed to increase the electricity and heating prices to the cost-recovery level, eliminate losses due to weak collections, and to bring the gas prices to the import parity level. In particular:
20. We will also implement other measures to strengthen financial discipline in state-owned enterprises. We have passed an ordinance (EO79/2001) linking management salaries in these enterprises with key performance indicators, including reduction in the level of arrears and claims, and the observance of wage bill ceilings. This ordinance will be applied to all state-owned enterprises and institutions starting with the approval of 2001 enterprises' budgets, and the Ministry of Finance will monitor the performance of 86 large state-owned enterprises on a monthly basis. We intend to target a reduction of arrears and claims in nominal terms by the end of 2001 as compared with end-June 2001, excluding the effects of rescheduling. In addition, we have set up a monitoring system in the Ministry of Finance for tax arrears. This system currently covers some 1,000 entities, 2,600 accounts, representing about 70 percent of total payables to the budget, and it will be used to strengthen the efficiency of tax collections.
D. Wage Policy in Public Enterprises
21. Public sector wage discipline is essential to the financial performance of state-owned enterprises and, by providing a signal for private sector wage settlements, to reducing inflation and preserving external competitiveness. Owing to the carryover effects of the increases in late 2000 and the insufficient coordination in the approval of collective contracts, the budgets of state-owned companies, and the minimum wage regulations in early 2001, wage growth in state-owned enterprises will be higher this year than what we consider prudent and consistent with our objective of improving financial discipline among public sector enterprises. Although we had only limited means to address this issue late in 2001, we have decided to lay off in the remainder of the year about 5,213 employees in eight loss-making companies in the industry sector, to outsource another 3,724 positions, and to eliminate about 500 positions as a result of turnover and retirement. Moreover, in 11 companies with about 116,000 employees, only half of the December bonuses will be paid. We have also decided to resist firmly any pressures from enterprises for additional wage increases in the remaining period of 2001. For 2002, we have decided to implement a much stronger control over wages in public enterprises. In particular:
E. Monetary and Exchange Rate Policy, and Banking Supervision
22. Monetary policy will continue to be conducted in the current framework of a managed float. As the credibility of wage and fiscal policies is established, the National Bank of Romania (NBR) will attach more weight to the inflation objective, while not putting at risk the viability of the external accounts. The NBR will also provide wider room for fluctuation of the exchange rate to discourage short-term capital inflows. In its decisions on interventions in the foreign exchange rate, the NBR will gradually increase the weight of the euro in the notional basket used as a benchmark and reduce the role of the U.S. dollar. In view of the recent pickup in domestic demand and credit, we will step up our sterilization efforts and raise interest rates, which have recently declined due to the high volume of inflows, until after inflationary expectations have been credibly brought down. The Ministry of Finance will continue assisting the NBR in achieving this objective by retaining part of the proceeds from its recent Eurobond placement at the foreign currency account with the NBR. Should substantial pressures on the external position develop, the NBR will raise interest rates to defend the inflation objective and the exchange rate; the exchange interventions will be limited so as to safeguard official reserves. This objective will be supported by performance criteria under the program for the quarterly floors on net foreign assets of the NBR and ceilings on its net domestic assets. The NBR will also strictly enforce supervision requirements with the goal of preventing unhealthy credit expansion, particularly to state-owned enterprises.
23. To lower the costs of intermediation, the NBR has decided to reduce the mandatory reserves requirement. The requirement on lei deposits has been lowered from 30 percent to 27 percent as of July 1, and further to 25 percent as of October 1, which should contribute to narrowing the wide spread between the lending and deposit rates, helping the commercial banks to keep the deposit rate positive in real terms, in line with the objective of reducing inflation. Monetary effects of this measure will be sterilized with open market operations. The NBR's decisions on monetary policy, and in particular on sterilization operations, will not be affected by their effects on profit and loss accounts, even if it results in an operating loss. We will consult the staff on a further reduction in the reserve requirements, with a view to eventual unification of lei and foreign exchange deposit reserve requirements.
24. We will further strengthen the legal and regulatory framework of the financial sector, and will complete the cleanup of the banking system. In particular, we will implement the following measures:
25. The NBR will adopt a yearly financial audit of its operations and financial position under the international accounting standards. In November 2000, the IMF completed a review of Romania's external audit mechanism as required under the IMF's safeguards assessment policy. Based on the review, the NBR has appointed a private sector accounting firm to undertake an audit of the NBR's financial statements in accordance with internationally accepted standards. The initial audit is expected to be completed by mid-October 2001, and publication of the audited financial statements is expected soon thereafter; we will fully cooperate with IMF staff in all aspects of the safeguard assessment.
F. Balance of Payments and External Debt Management
26. The current account deficit is projected to widen from 3.7 percent of GDP in 2000 to 6.0 percent of GDP in 2001, owing to the continued effects of the drought as well as further strengthening of domestic demand. Official reserves are projected to increase by about US$1.0 billion, to the equivalent of 3 months of imports. We are confident that with the programmed exceptional financing from the World Bank, EU, and the IMF, which will cover the projected financing gap, we will be able to meet this target. We will not issue any further sovereign-guaranteed international bonds in 2001. In 2002, though the impact of the drought will have passed, the current account deficit is projected to decline only modestly, owing to a continued buoyant demand for imports, driven in particular by private sector investment. Foreign direct investment is projected to grow thanks to accelerated privatization and greenfield investment, but the financing of the current account deficits and the reserve accumulation as programmed will also depend on continued public sector external borrowing as well as access to international capital markets.
27. We will limit the contracting and guaranteeing of new nonconcessional medium- and long-term external debt by the government to US$2,800 million for 2001, of which no more than US$300 million will have maturities between one and three years (excluding new Termoelectrica loans). Within these ceilings (which will be quantitative performance criteria), we will limit new off-budget guarantees from private creditors to US$165 million for 2001 (excluding Termoelectrica and Distrigaz loans). Borrowing by, or for, Termoelectrica in addition to the amounts borrowed up to end-May 2001 will be limited to US$400 million. Following the Petrom Eurobond placement, state-owned enterprises will not directly contract any new borrowing in 2001. For 2002, we will limit the contracting and guaranteeing of new medium- and long-term debt by the government to US$3,400 million, of which no more than US$100 million will be allowed for guarantees to off-budget entities. Within these ceilings, debt with maturities of one to three years will be limited to US$600 million, with no more than US$20 million allowed for off-budget entities (excluding Termoelectrica and Distrigaz). As a matter of good debt-management practice, we will not contract/guarantee debt instruments with embedded put options, and will seek to ensure a relatively smooth time profile for future debt service. In order to avoid allowing disbursements of external loans to line ministries to exceed the expenditure ceilings in the budget law, we are determined to strengthen the preventive control mechanism in the Ministry of Finance and have improved the reporting system for the disbursement of external loans based on reports from creditors.
28. We are determined not to introduce new, or intensify existing exchange restrictions, to 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 eliminated the import surcharge of 2 percent at the beginning of 2001. We will eliminate a ban on exports by the end of the year on logs and scrap metal, and refrain from resorting to preferential import tax rates for selected goods when domestic supply is scarce. We will amend Emergency Ordinance 93/2001 on the environment fund to remove taxes on exports. Until amended, the Emergency Ordinance will not be applied. Moreover, we have reached an agreement with Sweden on the settlement of disputed external arrears, under which we have agreed to pay Sweden US$120 million to settle the debt.
IV. Structural Reform
29. We are fully committed to privatization of the still very large state-owned sector, as this is a crucial requirement for establishing a vibrant market economy, attracting FDI, and catching up with other EU accession countries. To this end, we expect to complete negotiations soon with the World Bank on structural reforms and a privatization strategy under the Private Sector Adjustment Loan (PSAL) II program. The main elements of our privatization strategy for 2001 will be the following.
30. To continue to reduce the government's role in the banking industry, we will attach the highest priority to the privatization of BCR. Although with a delay, privatization advisors have now resumed their work on updating the necessary documents for BCR's privatization. As a prior action for the program, in early October the government will approve a privatization strategy for BCR involving the complete sale of the state's share of the capital and transfer of the control over the bank to a strategic investor (either a bank or a consortium) by end-2002. By end-February 2002, we will announce a tender with an invitation for expressions of interest (structural performance criterion). By end-June, we will obtain a firm bid from a strategic investor on the sale of BCR as evidenced by a "bid bond." We expect to complete the privatization of the total state shareholding of BCR by end-December 2002 (structural performance criterion).
31. Reform measures will also be implemented concerning two other state-owned banks, CEC and Eximbank. We will adhere to the timetable agreed with the EU for the implementation of the restructuring plan for CEC, in preparation for the bank's privatization, and will prepare a feasibility study on refocusing Eximbank on the promotion of export and import activities while terminating its commercial banking activities.
32. In the enterprise sector, following the very slow pace in the second half of 2000 and the first half of 2001, we will accelerate privatization and focus on completing several large projects to send a strong signal. In particular:
V. PROGRAM MONITORING
33. The program will be monitored on the basis of the performance criteria and indicative targets as described in the next paragraphs. The program will be reviewed by the IMF on a quarterly basis during the period of the Stand-By Arrangement (September 2001-March 2003). In addition to the main financial performance indicators, the reviews will be devoted to assessing progress in implementing the structural elements of the program, in particular those regarding energy price adjustments, wage discipline, and steps to privatize BCR. An additional topic for the first review will be the 2002 budget, as approved by parliament. Agreement on the 2003 budget will also be a condition for completing a review.
34. The quantitative performance criteria are as follows: (i) quarterly ceilings on net domestic assets of the NBR; (ii) quarterly floors on net foreign assets of the NBR; (iii) quarterly ceilings on the deficit of the general government, with a downward adjuster in the case of lower-than-projected privatization proceeds; (iv) quarterly ceilings on cumulative nominal wage bills for selected state-owned enterprises (regies autonomes and large loss-making state-owned enterprises); (v) quarterly floors on collection rates of three utilities; (vi) quarterly ceilings on domestic guarantees by the general government under public debt law and other laws, excluding export promotion guarantees; (vii) quarterly ceilings on the contracting or guaranteeing by the government of nonconcessional external debt; and (viii) a continuous performance criterion of no accumulation of external payments arrears will also apply.
35. The indicative targets under the program are as follows: (i) quarterly ceilings on arrears of monitored state-owned enterprises to the consolidated general government; (ii) quarterly ceilings on average reserve money; (iii) quarterly ceilings on broad money; and (iv) the exposure of commercial banks to state-owned enterprises.
36. All quantitative performance criteria are specified in Table 1; the list of prior actions, structural performance criteria, and benchmarks appear in Annex B. The main definitions appear in the Technical Memorandum of Understanding as Annex C.
Prior Actions, Structural Performance Criteria and Benchmarks Prior Actions
Structural Performance Criteria
The average net domestic assets of the National Bank of Romania (NBR) are defined as the difference between average reserve money (as defined in Table IX of this attachment) and average of net foreign assets (as defined in Table II of this attachment for the indicated month, excluding the adjustment for foreign currency denominated treasury bills), 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 lei/U.S. dollar rates agreed with Fund staff. 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 IMF 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 the floor on NFA is adjusted downwards in Table II as a result of shortfalls in gross foreign financing.
(3) The ceilings would be adjusted for any change in reserve requirements as described in Table IX. Before undertaking any such changes, the NBR will consult IMF staff.
Net foreign assets of the NBR consist of reserve assets minus foreign
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 including, 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.
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. The NBR's Samurai bond will be valued at its swap rate of 111.9 Yen/U.S. dollar. 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 IMF 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 from end-September 2001).
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 December 2001, and by up to US$350 million to end-September 2002, and by up to 500 million by end-December 2002.
The NFA floor will be adjusted by the change in the stock of foreign currency denominated Ministry of Finance Treasury Bills. The outstanding stock on June 30, 2001 was $485 million evaluated at the above exchange rates.
The consolidated general government includes the state budget; the budgets of the local authorities; the social protection funds;2 the "Special Fund for Modernizing Roads", the "Special Fund for the Development of the Energetic System", the "Special Reinsurance Fund", the "Authority for Privatization" (APAPS), the "Fund for the Development of Romanian Agriculture", 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; and the counterpart funds created from the proceeds of foreign loans. 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.
Under the program, the deficit of the consolidated general government will be measured based on revenue and expenditure data provided by the Ministry of Finance, and also based on "below the line", that is, by the sum of domestic and external financing of the budget as well as privatization proceeds received by all entities of the consolidated general government and proceeds from the recovery of bank asset by AVAB. All efforts will be made to reconcile the measurement of the deficit from "below" and from "above the line". However, should these efforts not succeed in eliminating the discrepancies, the respectively higher deficit number will be used for program purposes.
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, 2000 will be converted at the end-December 2000 exchange rate. Foreign-currency denominated credit newly issued in 2001 and 2002 will be valued at actual exchange rates at the time of disbursement. Government loans to banks at an interest rate less than the reference rate of the NBR to finance on lending 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 memoire "Romania: Measuring the Fiscal Deficit", Part II, Appendix 11, February 1994.
For program purposes, the ceilings on the quarterly cumulative deficit of the consolidated general government in 2002 will be adjusted downwards by a shortfall of the cumulative quarterly privatization proceeds received by the consolidated general government. Privatization receipts denominated in foreign currency will be converted into dollars using the exchange rates on December 31, 2000, and from dollars into lei using the above listed rates. The floor for these proceeds is as follows:
As a contingency measure to achieve the deficit target of 3.5 percent of GDP in 2001 the Government approved in the budget rectification ordinance the blocking of 50 percent of the capital expenditure entitlement for the fourth quarter of 2001 (lei 2,580 billion) for the state budget, the social protection funds; the "Special Fund for Modernizing Roads", and the "Special Fund for the Development of the Energetic System." The blocked expenditure can be released at the earliest as of October 25, 2001, provided that the end-September revenue target has been met. The revenue target refers to the estimate of total cumulative revenue agreed between the Ministry of Public Finance and IMF staff for the general consolidated budget for the first three quarters of 2001 (see below). If this revenue target is not met on October 25, the expenditures will be unblocked if and when the agreed cumulative monthly revenue targets are met in the two following months.
In addition, for November and December 2001 the Government at the proposal of the Ministry of Public Finance will approve by the end of October and November, respectively, after consultation with IMF staff expenditure ceilings for the state budget which can be lower than the expenditure appropriations approved in the budget rectification ordinance. These ceilings will depend upon the revenue performance for the general consolidated budget as of the end of September and October, respectively (measured against the agreed monthly revenue targets), while also taking into account the development of revenues, expenditures and the deficit of the state budget during October and November, respectively, as well as the expected trend through the end of the year.
The set of 53 régies autonomes (RAs) and national companies and 33 large state-owned commercial companies, whose wages are to be monitored under Emergency Ordinance 79/2001, is specified in Government Decision 866/2001.The wage bills of this set of state-owned enterprises will be restricted along the following lines:
The growth in the 2001 aggregate wage bills in the set of monitored state-owned enterprises will be limited to 44 percent relative to the annual wage bill in 2000. Additionally, employment cuts totaling 9,428 will be undertaken between September 1 and December 31, 2001 in eight companies under the Ministry of Industry: CN Huila, SN Carbune, CN Minvest, CN Remin, CN Lignit Oltenia, CN Transelectrica, SC Termoelectrica, and SC Electrica. Total employment in these enterprises should be no more than 123,439 on December 31, 2001.
For 2002, the growth in the aggregate wage bill for these enterprises will be limited to 22 percent relative to the 2001 wage bill, or proportionally less if "externalization" (defined as the spinning off of a unit or its transfer to another entity) is higher than 1 percent.
The cumulative ceilings for the aggregate wage bill of the set of monitored state-owned enterprises will be:
The wage bills will be measured on a cumulative basis across the different sectors, on a monthly basis. The Ministry of Labor and Social Protection will undertake the responsibility of collecting data from the various line ministries (RAs and national companies) and APAPS (commercial companies), and will report the wage bills and employment figures for each of the monitored enterprises (including aggregate figures for each ministry and for the overall total) to the IMF on a monthly basis.
The set of 53 régies autonomes (RAs) and national companies and 33 large state-owned commercial companies, whose arrears are to be monitored under Emergency Ordinance 79/2001, is specified in Government Decision 866/2001. Under the ordinance, arrears are defined as accounts payable past the due date stipulated explicitly in the contracts, or if no such explicit date exist, 30 days after services/products are provided. The reporting on total arrears will have the following subcategories: to the state budget, to the social security budget; to the local budget; to special funds; and to other creditors. Arrears to the consolidated general government are defined as the sum of the first four categories. For arrears which have been rescheduled, the rescheduled amount (including penalties) cannot be counted as arrears reduction, and has to be reported. Data for monitoring purposes shall be supplied monthly to the IMF by the Ministry of Finance. The report will include arrears data, including a breakdown by creditor (as well as the subtotal for arrears to the government), for each of the companies in the monitored list; it will also include aggregate figures for each ministry and for the overall total. The report will also include data on overdue claims of each of the monitored companies, as reported under Emergency Ordinance 79/2001.
The reports collected by the Ministry of Finance will also include data
indicating the breakdown of arrears to the ten largest creditors for each
company, which will be available for review by IMF staff during missions.
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 of this attachment. The criterion also applies to the use of APAPS resources for recapitalizing enterprises or as collateral for bank loans. Foreign currency denominated loans will be converted at lei/$ exchange rates of 29,835 for 2001, and 36, 867 for 2002.
These limits exclude:
Data for monitoring purposes shall be supplied monthly to the IMF by the Ministry of Finance.
The ceilings apply to the cumulative stock for each year of newly contracted or guaranteed external debt by the consolidated general government, The consolidated general government is defined in Table III of this attachment. This performance criterion applies not only to debt as defined in point No. 9 of the IMF Guidelines on Performance Criteria with Respect to Foreign debt adopted on August 24, 2000 (Executive Board Decision No. 12274-(00/85)) but also to commitments contracted or guaranteed for which value has not been received. The ceilings also apply to any assumption of loans for debt outstanding which were not previously contracted or guaranteed by the consolidated general government. Excluded from the ceilings are 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. Loans considered concessional are also excluded from the ceilings. Off-budget debt includes all debt to non-budget entities from private sector creditors guaranteed by the Ministry of Finance. Loans for fuel imports for Distrigaz and Termoelectrica are included in the overall ceilings, but not in the off-budget guaranteed debt ceilings, and Termoelectrica's fuel import loans are excluded from the ceilings on debt with maturities between one and three years.
Concessional loans are defined as those with a grant element of at least 35 percent of the value of the loan, using currency-specific discount rates based on the commercial interest reference rates reported by the OECD (CIRRS) in effect at the time of contracting or guaranteeing the loan.
The ceilings shall be monitored from data supplied monthly to the IMF by the Ministry of Finance.
Nonaccumulation of external payment arrears of the government will be a performance criterion monitored on a continuous basis.
For Program purposes, arrears with respect to called-up soverign loan guarantees are defined as external payments overdue more than 30 days.
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 for the indicated month. 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 IMF weekly by the NBR.
The ceilings on average reserve money will be adjusted in the following circumstances:
(1) Should reserve requirements be increased/decreased from 25 percent on all required reserves held in lei, the reserve money targets would be increased/decreased by the product of the change in the reserve requirements and the programmed deposits for which required reserves are held in lei.
(2). 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.
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, deposits which are denominated in foreign currency will be converted into lei at the accounting exchange rates agreed with staff.
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 IMF monthly by the NBR.
Total exposure covers all loans, advances, holdings of debt and off-balance sheet exposure of resident banks to state-owned enterprises. State-owned enterprises are all regies autonomes and commercial companies with majority ownership by the government or APAPS. For the purposes of monitoring, foreign currency denominated debt will be converted in lei at end-month lei/dollar exchange rates agreed with Fund staff. Foreign currency denominated credit in convertible currencies, other than the U.S. dollar, shall be converted at their respective exchange rates against the U.S. dollar as specified in Table II of this attachment. Data on banking sector lending to state-owned enterprises will be monitored from monthly data provided by the NBR.
The amount of total exposure, as reported by the NBR, will be adjusted upwards by:
(i) exposure to companies where the majority ownership shifted to the private sector since June 30, 2001. For this purpose, APAPS and the relevant ministries will provide a quarterly update of their portfolio to the NBR;
(ii) any amount of debt or off-balance sheet write-offs;
(iii) any assumption of debt or off-balance sheet items by the government or other public bodies.
Additionally, the NBR will report monthly on total exposure of the banking system to state-owned enterprises with outstanding exposure over lei 90 billion, on a company-by-company basis.
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, and the Health Social Insurance Fund.
3The actual for March 31, 2000, includes loans extended to ROMAN, and TRACTORUL, guaranteed by APAPS deposits.
4 Based on lei deposit reserve requirement of 27 percent; starting October 1, it will be decreased to 25 percent.