Romania and the IMF

Press Release: IMF Approves US$76 Million Disbursement Under Stand-By Credit with Romania

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Romania—Letter of Intent, Supplementary Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding
April 9, 2003

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

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

In the last two years, under the economic program supported by the Stand-By Arrangement, Romania's macroeconomic performance has been very favorable. In 2002, for a second year in a row, the economy grew by about 5 percent, inflation was reduced from 30 percent at end-2001 to 18 percent at end-2002, and the current account deficit was brought down to 3½ percent of GDP. Export performance was particularly impressive, despite sluggish growth in partner countries.

In 2003, we will continue with our policy to reduce inflation and contain the current account deficit, keeping our economy on a sustainable growth path, while also strengthening social support to segments of the population that have not yet fully benefited from recovery. Moreover, we are strongly committed to Romania's accession to the EU and to the implementation of all structural reforms necessary for completing the transition to a fully functioning market economy. This requires additional efforts to strengthen financial discipline, restructure and privatize the remaining state-owned enterprises, and complete the privatization in the banking sector. Further progress in these areas is also necessary to sustain macroeconomic stabilization and ensure that disinflation continues. For that purpose, we are requesting the completion of the third review and a 5½ month extension of the SBA to mid-October 2003, based on the policies presented in the attached Supplementary Memorandum on Economic and Financial Policies in 2003 (SMEFP-2). We are also requesting waivers for the nonobservance of the end-December 2002 quantitative performance criterion on the wage bill in state-owned enterprises, and the structural performance criterion on the privatization of BCR, the largest bank in Romania. The memorandum specifies corrective measures, some of which have already been implemented, to address these issues, and other measures necessary to achieve our macroeconomic objectives. We are also requesting that our purchases be rephased, with an amount equivalent to SDR 55.111 million made available following completion of the third review and the remainder under the SBA becoming available in mid-August 2003. The attached SMEFP-2 describes the structural performance criteria, including progress in the privatization of BCR, quarterly performance criteria for a June 30, 2003 test date, benchmarks and prior actions under the program. The fourth and final review under the Stand-By Arrangement is scheduled to be completed by August 14, 2003. In light of the rephasing, a fifth review will no longer be necessary and we are requesting that it be dispensed.

We remain determined to meet all our undertakings under the program. 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.

Yours sincerely,

/s/
Mihai Tanasescu
Minister of Public Finance
Ministry of Public Finance
  /s/
Mugur Isarescu
Governor
National Bank of Romania



Supplementary Memorandum on Economic and
Financial Policies in 2003

Use the free Adobe Acrobat Reader to view Tables 1-4 (PDF file 235 KB).

I. Introduction

1. Since the completion of the first and second reviews on August 28, 2002, we have made significant progress toward realizing the main macroeconomic objectives of our program, particularly in respect to inflation, the current account deficit and growth. This memorandum updates our policies for 2003 that were originally presented in the first Supplementary Memorandum on Economic and Financial Policies (SMEFP-1), dated August 12, 2002, and addresses setbacks that have recently occurred in the implementation of wage policy, enforcement of payments to energy utilities, and privatization of the remaining state-owned enterprises.

II. Background And Request for Waivers of Performance Criteria

2. Macroeconomic developments in 2002 were very favorable. We estimate that GDP grew by about 5 percent, led by strong export growth that reflected the cumulative effects of private investment in consumer goods industries over the past few years. The 12-month headline inflation rate fell to 16/ percent in February, and the 2002 current account deficit was reduced much more than envisaged under the program. Strengthened confidence in macroeconomic stabilization led to rapid growth in credit, supporting recovery in investment. Foreign reserves expanded faster than programmed, and have now reached a comfortable level of 4¼ months of prospective imports of goods and services.

3. Monetary and budget policies have been on track. The end-December performance criteria on NDA and NFA of the NBR were met with comfortable margins (Table 1). Somewhat faster growth in monetary aggregates reflected stronger demand for money than originally envisaged. The rapid drop in inflation initially resulted in high real interest rates, which prompted the NBR to cut its main policy interest rate by over 1,500 basis points since April 2002. The deficit target for the general government in 2002 was also met, although revenue was about ¼ percent of GDP lower than assumed in the second supplementary budget. This was offset by lower interest expenditure and payments of social benefits.

4. The financial results of the main energy utilities improved. Price adjustments in the energy sector continued as envisaged under the program. Payment enforcement measures in April and May 2002 improved the collection rates of the two gas distribution companies even more than targeted under the program, but further progress is needed in electricity and even more in heating collections. While we met our Q3 and Q4 collection targets, payments from commercial companies have slowed, which has put the March and June collection targets at risk. Particularly weak performance was reported for a group of 23 large state-owned companies slated for privatization that paid only about ¾ of their bills in Q4. Measures described in paragraphs 18 and 19 below address this issue.

5. After encountering serious difficulties in enforcing our wage policies in Q3, we achieved a major improvement in Q4 of 2002. The end-September performance criterion on the wage bill in state-owned enterprises (SOEs) was exceeded by 4 percent as some large SOEs did not adjust their budgets after shifting large numbers of employees to newly established companies. This has also rendered the end-December performance criterion beyond reach. To meet the revised end-December target discussed with staff in October 2002 (prior action for the third review), we took decisive measures by adjusting down the budgets of these companies, and reducing by 4 percent the quarterly wage bill in all monitored SOEs. These objectives were largely achieved, and the average 2002 wage growth in the monitored group of SOEs was brought down to the economy-wide average1. Further measures in the area of wage policy are described in paragraphs 15 and 16 below. Based on this, we are requesting a waiver for the nonobservance of the end-December performance criterion on SOEs wage bill. Our efforts to reduce employment in SOEs in 2002 did not prove very successful. Employment on a net basis was reduced by only 2¼ percent, as about 80 percent of programmed layoffs were implemented, but new hiring exceeded the target.

6. Privatization is behind schedule, but we expect acceleration in the months ahead. We signed privatization contracts for six large companies in Q4, compared with eight set as a benchmark. We currently have seven large companies in the final negotiation phase and expect to sell all of them by end-March.

7. The relaunch of the invitation for expressions of interest in the privatization of the largest state-owned bank, BCR, proved unsuccessful. After consultation with Fund and World Bank staff, we decided to sell a blocking minority share (25 percent plus two shares) to the EBRD and the IFC with a view to better prepare the bank for sale to a strategic investor, as described in paragraph 26 below. We therefore request a waiver for the non-observance of the end-February 2003 structural performance criterion on the completion of the BCR privatization.

III. Policy Measures Agreed in the Context of the Third Review

8. Our main macroeconomic objective for 2003 is to consolidate stabilization, which requires decisive progress in strengthening financial discipline in state-owned enterprises. The program envisages to: (i) reduce inflation to 14 percent by end-2003; (ii) contain the current account deficit below 4½ percent of GDP in 2003; and (iii) raise official reserves to a level of around 4/ months of imports by end-2003. The widening of the current account deficit relative to 2002 and the inflation target reflect the impact of the increase in the minimum wage on demand and the effects of the recent oil and gas prices shocks. We expect that GDP growth will be close to 5 percent in 2003. We are aware that we can achieve and sustain these targets only by significantly strengthening financial discipline and accelerating privatization in the enterprise and financial sectors, areas in which the implementation of the program has so far been lagging. To ensure these results and fully complete the program supported by the SBA, we are requesting that the arrangement be extended by 5½ months until mid-October 2003 and purchases rephased. Quantitative performance criteria under the program for end-June 2003 are presented in Table 1, and Table 2 contains the list of prior actions, structural performance criteria and benchmarks.

A. Fiscal Policy

9. In 2003, fiscal policy will continue to support disinflation. The 2003 budget approved by parliament in November 2002 set the general government deficit target at 2.65 percent of projected GDP, ¼ percentage point below the 2002 target. In addition, we target a reduction of losses in the energy sector by ½ percent of GDP in 2003. The somewhat lower reduction than originally envisaged reflects a temporary increase in oil and gas prices, which we expect to be reversed toward the end of 2003. Moreover, we are committed to reduce the budget deficit target further should this prove necessary to offset excessive consumption growth that might develop if the effects of the minimum wage increase are not contained. To ensure sufficient room for such downward adjustment, we reached understandings with Fund staff on monthly revenue targets for the general consolidated budget and monthly expenditure ceilings for the state budget for the first half of 2003 (TMU; section III).

10. On revenue, the 2003 budget marks a major step in our strategy to gradually reduce payroll taxes, complemented with measures to broaden the tax base of the pension fund:

  • We cut payroll tax and social security contribution rates by 5 percentage points on January 1, 2003, thereby reducing far-reaching distortions in the labor market and incentives for the growth of the informal economy. The revenue loss of about ¾ percent of GDP will be partially compensated by the full-year impact of the recently implemented VAT and profit tax laws and higher taxes on land and buildings.

  • We will approve by April 20 a government decision to increase fuel excises on May 1, 2003 to restore their value in euro as of January 2003.

  • The new Labor Code, effective since March 1, 2003, no longer provides for the possibility of hiring employees on the basis of "civil contracts," most of which are exempt from pension fund contributions. To eliminate any remaining legal uncertainty, we will approve by April 10, 2003 an Emergency Ordinance canceling Articles 1-7, and Articles 15, 16 (b), 18, and 20 in law 130/1999, which provided the basis for exempting "civil contracts" from the obligation to pay pension fund contributions (prior action). By July 31, 2003 we will amend the legislation on labor inspection (law 108/1999) in order to strengthen its capacity to enforce the stipulations of the Labor Code to reduce the scope of the informal economy.

  • We will request by April 15, 2003, technical assistance from the World Bank, and the Fund on the issues of medium-term adjustment in gas prices and the concomitant reform in the tax regime in the gas sector (prior action). Moreover, the government will issue a decision no later than end July, thereby creating a clear pricing and taxation framework for bidders in the forthcoming privatization projects in this sector.

  • We remain firmly committed to refrain from any other tax cuts in 2003. In particular, we will not introduce a reduced VAT rate or modify income tax rates.

11. On the expenditure side, the 2003 budget gives priority to increasing capital expenditure and strengthening the social safety net. Investment spending is set to increase by 0.6 percent of GDP, while total social transfers will increase by 5 percent in real terms. We have limited the increase in nominal gross wages in the budgetary sector to 6 percent in January and 9 percent in October 2003, consistent with our target for keeping the annual growth in the net wage bill in the budgetary sector at 3 percent in real terms. Moreover, while we will continue downsizing total budgetary sector employment, we will provide sufficient resources, including through the recruitment of well-qualified civil servants, for improving public administration, implementing the judicial reform, and strengthening the institutional capacity for adopting and implementing EU legislation and absorbing EU grants.

12. In February 2003, we adopted additional measures to mitigate the social impact of energy price increases and restructuring in state-owned companies:

  • To ensure the social acceptability of reforms in the energy sector, we have adopted an improved heating support scheme for low-income households, which increased available budgetary resources by lei 1.5 trillion. We will also introduce, in two steps, the option of equal monthly payments of heating bills. Moreover, as a one-off measure to address the problem of unpaid bills of the poorest households which are beneficiaries of the minimum guaranteed income, we have allocated another lei 1.4 trillion, which will be used to reduce their arrears to local heating companies.

  • To cover the additional costs imposed on the local district heating companies by mandatory equalization of charges for non-metered deliveries with the average consumption in households with meters, the regulatory agency (ANRSC) will review the need to increase the distribution tariffs by end-March. We will allocate in the rectified budget an amount equivalent to lei 400 billion to cover the resulting increase in subsidies.

  • In the context of accelerated restructuring of companies in the process of privatization, we have allocated additional resources in an amount of lei 1,166 billion to grant to laid off employees (a) severance payments up to two times the net average economy-wide wage in January 2003; and (b) supplementary income for 20-24 months (depending on the length of service) equal to the difference between regular unemployment benefits and individual net wages during the three months preceding the layoff, under the condition that individual wages doe not exceed the net average economy-wide wage in January 2003. In the mining sector, companies that will not be able to pay severance payments out of their own budget, will also utilize this scheme.

  • The above-referenced additional social measures will be financed through savings in interest expenditure (lei 1.3 trillion), the unemployment fund budget (lei 0.8 trillion), and nonpension expenditures of the pension fund (lei 4 trillion). The latter will require an amendment of law 19/2000 by April 15, 2003, with a view to strengthening eligibility criteria for the two-year maternity leave through an extension of the minimum contribution period from 6 to 10 months.

13. We made important progress in implementing the tax administration reform. To improve collection efficiency, in November 2002 we approved, as a prior action, an Emergency Ordinance providing for the establishment of a common agency for collection, audit, and enforcement of social security contributions as of January 1, 2004. In January 2003, we established a separate tax administration department in the Ministry of Public Finance, appointed the responsible Secretary of State (prior action), and created a large taxpayers office for Bucharest. By end-May 2003, we will approve legislation amending the laws on the pension, unemployment and health insurance funds (in particular Law 19/2000, Law 76/2002, and Emergency Ordinance 150/2002), which will harmonize procedures for collection, enforcement and auditing (structural performance criterion). We envisage to harmonize the tax base of the social security contributions in the coming months following appropriate studies of the impact of these changes on the various social security programs.

14. We intend to issue off-budget external guarantees of up to US$650 million in 2003 to facilitate investment, particularly in the railways and the second phase of the nuclear power plant Cernavoda. We consider the investment in the railway system as crucial to improving its safety and efficiency. The second phase project in Cernavoda (already at an advanced stage) is very important for our strategy to modernize Romania's energy sector. Both projects will generate resources for the repayment of the loans, and the guarantee will not impose a burden on the budget.

B. Wage Policy

15. We have approved the 2003 budgets of monitored SOEs, which limit the growth in their gross wage bill to 14 percent compared to 2002 (prior action). We are carefully monitoring the effects of the January minimum wage increase of 43 percent on the overall wage level. Financial plans of about 100 private and state-owned companies available in mid-February suggest that their take-home wages are set to grow by about 8 percent in real terms, and employers wage costs by 5 percent, primarily in small companies. While preliminary data available in mid-March for about 250 companies indicate a lower growth rate, more information is needed to assess the impact on the overall economy.

16. We have decided to implement further measures to strengthen our 2003 wage policy. Before April 15, we will issue instructions to all state-owned companies that their wage budgets will have to be adjusted for any externalization, temporary, or permanent transfer of staff to other firms. To strengthen the credibility of our wage program, and to accelerate restructuring in the over-staffed state-owned sector, the employment reduction described in paragraphs 22 and 24 will allow us to cut employment by 8,000 positions in addition to the 14,300 positions already envisaged in our 2003 wage and employment program and impose a hiring freeze in all monitored state-owned enterprises. The exceptions from this freeze will have to be approved by the Cabinet, and their total number cannot be higher than the 3,135 new positions included in the 2003 wage and employment program for January-December. To ensure that the Q1 target is met, we will block 4 percent of the Q1 wage bill in the monitored SOEs, which can only be released upon approval of the responsible Minister if the quarterly target is within reach.

C. Energy Sector Reforms

17. We will continue with the adjustment of administered prices (Table 3). The unified end-user price for natural gas was raised from the equivalent of US$82.5/tcm to US$90/tcm on March 1, 2003 (prior action), and will be further increased to US$93/tcm on July 1, 2003 (structural performance criterion). The adjustment of the electricity prices on April 1, 2003 and July 1, 2003, as well as Termoelectrica's producer price for electricity on July 1, 2003 will maintain tariffs at their level in U.S. dollar terms at the time of the previous adjustment (structural performance criteria). Having been fixed in lei terms since July 2002, the National Reference Heating price will be raised to the equivalent of US$20/Gcal as of July 1, 2003 (structural performance criterion).

18. To achieve the 2003 collection targets, we will act decisively against industrial energy users with a weak payment record. The largest non-payers to the three utilities (DGN, DGS, and Electrica), as identified in Table 4, which had not fully paid by March 19, 2003, their bills (excluding penalties) for December 2002 and January 2003, were disconnected by March 25, 2003 (prior action; in the case of Siderurgica and Roman the payments were only completed on April 2). Each of these companies will stay disconnected until all bills from December 2002 onwards have been paid in full to the respective energy supplier (continuous structural benchmark). In cases where such a measure would have had unacceptable social consequences, the general consolidated budget paid the difference between amounts actually paid and total bills for December up to an amount of lei 211 billion. Starting with the bills for January 2003, if these companies do not pay in full, payments from the budget will not be available. However, given that we do not expect Siderurgica and the three mining companies to be able to fully pay their bills even in the coming months, the budget will provide additional support on an exceptional basis in an amount of up to lei 320 billion until June 30, 2003, by which time the restructuring measures described in paragraphs 22 and 24 will have led to their improved financial performance. We will also accelerate restructuring, including by labor retrenchment, and privatization of 22 companies in the APAPS portfolio, as described in paragraph 24. To provide Electrica with a strong incentive to persevere in improving collections, the June 2003 indicative target on its collection rate has been converted into a performance criterion.

19. To prevent moral hazard and strengthen financial discipline, we amended in March Emergency Ordinance 208 (prior action), which has provided for an open-ended cancellation of arrears owed by companies under privatization to utilities and the budget. In particular, the amendment:

  • removed the reference to the cancellation and rescheduling of arrears in 23 companies accumulated after January 1, 2003 in paragraph 12 (a) and (c) of the ordinance, limiting the cancellation of arrears to the stock on December 31, 2002;

  • eliminated paragraph 14, which transfers the loss resulting from the cancellation of arrears to utilities to the budget via a triangular offset;

  • deleted paragraph 5, thereby limiting the write-off of accrued penalties for arrears envisaged in Article 18 c.) (1) in law 137/2002 to the stock on December 31, 2001.

Moreover, we will not extend the special regime provided for in paragraph 2, which protects companies under privatization from creditors, beyond six months.

20. To speed up collections from households, we have reduced the deadline for payments to 15 working days, and for disconnections to 45 days. In addition, all subsidies to district heating companies from the state and local budgets will be paid fully and on time into the escrow accounts. At the same time, heating distributors with arrears as of April 1 will be again disconnected from heat and gas deliveries used to supply hot water until full payment, in line with the action plan adopted in consultation with the World Bank in spring 2002.

21. Despite delays in preparatory steps, privatization projects in the energy sector will be completed on time. We have signed the contract with the privatization advisor for Petrom (prior action) and will approve the privatization strategy agreed with the World Bank by end-May 2003, with a five-month delay relative to the original schedule. We will prepare the information memorandum and launch the tender for expressions of interest by end-June (structural benchmark). For the two electricity distribution companies, we announced the expression-of-interest tenders to acquire a majority holding of at least 51 percent (prior action) on January 8, have shortlisted bidders by end-March and will invite binding offers by end-May. We signed the contract with the privatization advisors for the two gas companies in early March 2003, and will approve the privatization strategy by end-April and announce the privatization tender by June 30. To facilitate faster privatization, we will closely coordinate the restructuring of the electricity sector with the World Bank.

22. Restructuring of the mining sector will be accelerated. With the help of a World Bank-supported program, we will continue to downsize unviable mines. In 2003, employment in the sector will be reduced by 6,000 positions, of which 1,300 have already been cut.

D. Privatization and Liquidation

23. Rapid growth and lasting macroeconomic stabilization are not possible without a decisive break-through in privatization. We will sell 6 companies with more than 1,000 employees by end-March, another 6 by end-June (structural benchmarks) and bring 10 such companies to the stage of negotiations with a selected bidder by mid-2003. We will refrain from imposing employment preservation conditions in the privatization contracts, and will continue to attach a weight of at least 50 percent to the offered price in the bid evaluation process.

24. We are aware that many large companies cannot be privatized unless their overstaffing is reduced. We have therefore decided to reduce employment in 22 companies by over 18,000 positions (excluding any externalization) by end-June, 2003 (performance criterion). At least 6,000 employees will be made redundant by April 5, including 1,750 positions in Siderurgica (prior action). To alleviate social effects, we approved a special time-limited program that will provide severance payments to employees as described in paragraph 12. This scheme will also be available for up to 2,000 layoffs in other companies in APAPS' portfolio. We will also impose a hiring freeze in these companies until end-year, effective April 1, 2003.

25. We will initiate liquidation procedures for companies with particularly weak financial results. We will immediately start liquidation procedures for the three companies PoliROU, Siderca, and Sidermet. For the companies Corapet, Rulmentul Slatina, Verachim, Oltplast, Chimcomplex, Tepro, and CaROU, the liquidation procedure will be initiated by end-June, unless privatized (structural benchmark).

26. Although the sale of BCR proved unsuccessful in the current business environment, we remain firmly committed to its privatization once market conditions have improved. The completion of the sale of a blocking minority share to the EBRD and the IFC will be an end-July structural performance criterion. To achieve this objective, on April 8 we provided the two IFIs complete access to all requested data, BCR staff and BCR auditors (prior action). By April 10, we will modify the bank privatization law and approve the revised privatization strategy. To facilitate the timely preparation of the 2002 accounting statements, the Ministry of Finance issued all necessary norms and regulations on February 20, 2003. We will share the preliminary 2002 balance sheet and income statement with the two IFIs by March 31, 2003.

E. Monetary Policy and Banking Issues

27. Monetary policy will continue to be conducted in a managed float framework. The NBR will guide the exchange rate along a path consistent with our inflation target and a modest real appreciation. The current policy of less frequent but sizable interventions, allowing for wider exchange rate fluctuations, will continue, and the NBR will consider exchange rate movements of the leu against both the euro and the U.S. dollar. The targeted depreciation rate and further interest rate adjustments will be reconsidered after the effects of the minimum wage increase can be assessed with greater precision. Our 2003 monetary program also targets an increase in official reserves by US$1 billion, to about 4¼ months of prospective imports of goods and services. Velocity is expected to decline further, in line with continued progress in reducing inflation and strengthened confidence.

28. The rapid growth in foreign-currency-denominated credit poses increasing financial risks. The effect of the December reserve requirement differentiation for lei and foreign currency to 18 percent and 25 percent, respectively (from the common level of 22 percent) has yet to fully materialize. The NBR will continue to exercise close supervision of the most active lenders, to ensure their adequate assessment of credit risk. The tightening of loan provisioning in January 2003 should also help moderate credit growth. If necessary, later in the year we will consider increasing capital requirements for lending in foreign currencies.

29. We have started to implement the measures recommended in the Safeguards Assessment report. We have clarified the reconciliation procedure between accounting statements and monetary data and submitted to the Fund the first and second such quarterly reconciliation, certified by the Internal Audit Department. An investment committee has been working in the NBR since September 2001 to exercise its foreign reserve management function. We are also actively implementing the other recommendations of the Safeguards Assessment report.

F. Governance Issues

30. Our efforts to improve the business climate continue. The parliament has approved in December 2002 an anti-corruption program and legislative changes required for its implementation are under way. We will conduct all privatizations in an open and transparent manner. In protecting the rights of minority shareholders, we will refrain from introducing measures that impose an undue burden on strategic investors. We will prepare a report on our efforts to prosecute individuals involved in financial wrongdoings, including FNI, Banca Romana de Scont, and other recent cases and share it with Fund staff. In cooperation with the World Bank, we will reassess the impact of the new Labor Code on labor market flexibility and amend it as needed.


1Three railway companies did not adjust their budgets after transferring employees to nonmonitored companies. As a result, the outcome for the SOEs wage budgets was 0.2 percent higher than the revised target. This small deviation does not have macroeconomic significance, but we are aware that such operations might hurt the credibility of our wage policies. The possibility to transfer employees has been eliminated under the new labor code, effective as of March 2003.

Supplementary Technical Memorandum of Understanding
for Stand-By Arrangement

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

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

  3. Ceilings on the Cumulative Deficit of the Consolidated General Government

  4. Ceilings on Aggregate Wage Bill of Monitored State-Owned Enterprises and List of Twenty-two State-Owned Companies to Operate Layoffs

  5. Indicative Target for Ceilings on Arrears of Monitored State-Owned Enterprises to the Consolidated General Government

  6. Floors on Cumulative Aggregate Collection Rates of Distrigaz Sud, Distrigaz Nord, and Termoelectrica

  7. Ceilings on the Assumption of Enterprise Debt to Banks by the Consolidated General Government and on the Issuance of Domestic Government Guarantees on Bank Lending to Enterprises

  8. Ceilings on Contracting or Guaranteeing of External Debt

  9. Indicative Targets for Ceilings on Average Reserve Money

  10. Indicative Targets for Ceilings on Broad Money

  11. Indicative Targets for Ceilings on Banking Sector's Total Exposure to State-Owned Enterprises

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

The average net domestic assets of the National Bank of Romania (NBR) are defined as the difference between average reserve money (as defined in Section IX of this attachment) and average of net foreign assets (as defined in Section II of this attachment for the indicated month, excluding the adjustment for foreign currency denominated treasury bills), both expressed in local currency. 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 specified in consultation with Fund staff. The average stock of NFA is defined as the average of the daily NFA as defined in Section II. The limits will be monitored from daily data on the accounts of the NBR supplied weekly to the IMF by the NBR. The average NDA as of September 2001 was lei 39,559 billion.

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

(1) Downwards (upwards) in a proportional fashion, for the fraction of the month that gross foreign financing exceeds (falls short of) programmed levels, specified in Section II.

(2) For any change in reserve requirements as described in Section IX. Before undertaking any such changes, the NBR will consult IMF staff.

(3) Upwards (downwards) in a proportional fashion, by the lei equivalent of the decrease (increase) in the stock of foreign currency denominated Treasury bills (cumulative from end-December 2002).

(4) Downwards in a proportional fashion by the lei equivalent of the increase in foreign currency receipts from large privatizations (sale price above $10 million) (cumulative from end-December 2002)

(5) Downwards by the shortfall in actual reserves from required reserves for any individual bank.

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

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. NFA stocks are measured at the last working day of the respective month.

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. 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 adjusted:

(i) upwards/downwards by 100 percent of the excess/shortfall of gross foreign financing1 from the programmed levels:

on a cumulative basis from end-September 2001:
  December 2001 US$248 million
  March 2002 US$248 million
  June 2002 US$953 million
  September 2002 US$953 million
  December 2002 US$953 million

on a cumulative basis from end-December 2002:
  March 2003 US$50 million
  June 2003 US$450 million

(ii) by the change in the stock of foreign currency denominated Ministry of Finance Treasury Bills including those issued for bank restructuring (on a cumulative basis from end-December 2002). The outstanding stock on December 31, 2002 was $478.9 million evaluated at the program exchange rates.

(iii) upwards by the amount of foreign currency receipts from large privatizations (sale price above $10 million) (cumulative from end-December 2002).

The NFA will be monitored on the basis of daily operational data through to end-March 2002, after which monetary survey data will be used. Daily data will still be used to calculate average NFA. All data is provided by the NBR. The NFA figure was US$ 3,311 million on September 30, 2001, and US$ 5,257 million on December 31, 2002.

III. Ceilings on the Cumulative Deficit of the Consolidated General Government

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", the "National Administration of Roads (NAR)", 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" data, 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, 2001 will be converted in U.S. dollars at the end-December 1999 exchange rate and from dollars into lei using the rates specified in consultation with Fund staff. Foreign-currency denominated credit newly issued in 2001 and 2002 will be valued at the exchange rates specified in consultation with Fund staff. 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 2003 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 U.S. dollars using the exchange rates on December 31, 1999, and from dollars into lei using the rates specified in consultation with Fund staff. The floor for these proceeds is as follows:


    Floor Actual

    (In billions of lei)
Cumulative quarterly privatization proceeds of the general consolidated government for 2003:
  March 31, 2003 (minimum target) 1,000  
  June 30, 2003 (minimum target) 2,000  
  September 30, 2003 (minimum target) 3,000  
  December 31, 2003 (minimum target) 4,000  

To achieve the deficit target of lei 49,520 billion in 2003 and to ensure sufficient room for a downward adjustment of this target in the course of 2003, should this prove necessary to contain the effects of the minimum wage increase, the cumulative monthly expenditure entitlements for the state budget during January-June 2003 will be limited to the ceilings agreed with Fund staff. In addition, should the cumulative monthly revenues of the general consolidated budget fall short of the revenue targets agreed with Fund staff, the monthly state budget expenditure ceilings will be adjusted downwards to compensate for this shortfall.


    Agreed revenue targets Actual

    (billion of lei)
Consolidated General Government (excluding "National Administration of Roads"; cumulative total revenues including grants)
  January 31, 2003 (actual)   44,246
  February 28, 2003 (indicative revenue target) 85,732 82,348
  March 31, 2003 (indicative revenue target) 128,797  
  April 30, 2003 (indicative revenue target) 177,248  
  May 31, 2003 (indicative revenue target) 221,602  
  June 30, 2003 (indicative revenue target) 267,507  




    Agreed expenditure Ceilings Actual

    (billion of lei)
State Budget
(cumulative total expenditure)
  January 31, 2003 (actual)   19,616
  February 28, 2003 (indicative ceiling) 39,901 38,042
  March 31, 2003 (indicative ceiling) 65,215  
  April 30, 2003 (indicative ceiling) 88,987  
  May 31, 2003 (indicative ceiling) 113,120  
  June 30, 2003 (indicative ceiling) 137,764  

IV. Ceiling on Aggregate Wage Bill of Monitored State-Owned Enterprises and List of Twenty-Two State-Owned Companies to Operate Layoffs

A. Ceiling on Aggregate Wage Bill of Monitored State-Owned Enterprises.

The set of 76 state-owned enterprises, whose wages are to be monitored under Emergency Ordinance 79/2001, is specified in Government Decision 866/2001.The wage bill of this set of state-owned enterprises has been adjusted for the decrease in the number of enterprises from 82 in 2002 and 86 in 2001.

The wage bill will be adjusted as follows:

(i) downwards by the amount of savings due to "externalization" (defined as the spinning off of a unit or its transfer to another entity, or temporary/permanent transfers of employees when the sum of these transfers exceeds 100 employees per month). In each month, savings from externalization will be calculated on a company by company basis as the product of the number of externalized employees so far and the company's average wage.

(ii) if a company is privatized, downwards by the budgeted wage bill of the privatized company, starting with the month following the month of signing the privatization contract.

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. Employment reduction resulting from all forms of outsourcing will be reported in the "externalization" column of the respective tables, with a footnote, if necessary.

B. List of Twenty-Two State-Owned Companies to Operate Layoffs

The set of 22 state-owned companies that will operate at least 18, 000 layoffs, as discussed in paragraph 24 of the SMEFP-2, consists of:

  1. Tractorul-UTB SA Brasov.
  2. Turnu SA Turnu Magurele.
  3. Electroputere SA Craiova.
  4. CSR SA Resita.
  5. Republica SA Bucharest.
  6. Iasitex SA Iasi.
  7. Mefin SA Sinaia.
  8. Mecanica SA Marsa.
  9. Chimcomplex SA Borzesti.
  10. Letea SA Bacau.
  11. Rempes SA Deva.
  12. CUG SA Cluj.
  13. Fortpres SA Cluj Napoca.
  14. Siderurgica SA Hunedoara.
  15. Tepro SA Iasi.
  16. Fortus SA Iasi.
  17. ARO SA Campulung.
  18. Carom SA Onesti.
  19. Roman SA Brasov.
  20. Faur SA Bucharest.
  21. Industria Sarmei SA Campia Turzii
  22. Rulmentul SA Brasov

V. Indicative Target for Ceilings on Arrears of Monitored State-owned Enterprises to the Consolidated General Government

The ceiling applies to the outstanding stock of arrears of the set of 76 monitored state-owned enterprises, whose arrears are to be monitored under Emergency Ordinance 79/2001 and 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. Amounts reflecting tax arrears exclusive of penalties will be reported separately. For arrears which have been rescheduled/canceled, the rescheduled/canceled amounts (including penalties) will not be counted as arrears reduction, and has to be reported. The report will include a breakdown of arrears to the ten largest creditors for each company. The report will also include data on overdue claims of each of the monitored companies, as reported under Emergency Ordinance 79/2001. For changes to the set of monitored companies, the targets will be adjusted downwards/upwards by the amount of arrears of the companies removed/added to the set. Data for monitoring purposes shall be supplied monthly to the IMF by the Ministry of Finance. The stock of arrears at end-December 2000 was lei 47.2 trillion.

VI. Floors on Cumulative Aggregate Collection Rates of Distrigaz Sud, Distrigaz Nord, Termoelectrica and Electrica

Floors will be set on the cumulative collection rates of the following companies:

  • the combined rate (performance criterion) of Distrigaz Nord and Distrigaz Sud (indicative targets on the individual company collection rates);

  • on the combined collection rate for heating and electricity of Termoelectrica, including the production units transferred to local authorities (performance criterion). Indicative targets will be set on the collection rates for (i) electricity for both Termoelectrica and the production units transferred to local authorities; (ii) Termoelectrica's district heating; (iii) heating in the transferred units;

  • on Electrica's collection rate (indicative target till March 2003, performance criterion as of June 2003).

The floors and outcomes for end-September, end-December 2001, and end-March 2002 are measured using cumulative collection rates defined as the ratio of collections to billings, measured from the start of the year to the specified date. For the remaining test dates floors on collection rates are defined as follows:

(i) Termoelectrica and local authority units (Heating sector), Distrigaz Nord and Sud: Heating and gas bills are lagged by one month. Definition of 12-month moving collection rate c(m) for the month m=1,2..12.:

c(m) =    sum(heating collections(m):heating collections(m-12) divided by
sum(heating bills(m-1):heating bills(m-13)).

(ii) Termoelectrica and local authority units (Electricity sector); Electrica; Definition of 12-month moving collection rate c(m) for the month m=1,2..12:

c(m) =    sum(electricity collections(m):electricity collections(m-12) divided by
sum(electricity bills(m):electricity bills(m-12)).

Using these definitions the collection rate of Termoelectrica at end-December 2001 was 85.5, of Electrica 92.9, and of the two gas companies, 85.5.

Data for these companies will be collected by the Ministry of Industry and reported to the IMF on a monthly basis. The Ministry of Industry will include in this report data on billings and collections registered by Distrigaz Nord, Distrigaz Sud, Electrica and Termoelectrica, as well as information on possible dis- and reconnections for the following industrial (a) and heating (b) companies.

a) SC Siderurgica, COS Targoviste, Minvest SM-Rosia Poieni, Moldomin, Minvest-SM, Balan, Snif, SC Industria Sarmei, Gavazzi Steel, Minvest-SM Baia de Aries, SC Turnu, CUG Cluj, SC Apaterm Galati, SC Tractorul UTB, SC Chimcomplex, Minvest- SM Brad, Apa Nova (RGAB), Minvest -SM Coranda Certej, Minvest -SM Poiana Rusca Teliuc, Siderca, SC Electrocarbon, Tepro, Nitramonia, Viromet, Amonil, Oltchim, Sere Codlea, US Govora, Republica, Zahar Bod, Stirom Bucuresti, Danubiana, Gerom Buzau, Colorom Codlea, Roman Brasov, Metrom Brasov, Carfil Brasov, Stiaz Azuga, Faur Bucuresti, UPSOM SA Ocna Mureş, Bicapa SA Târnăveni, SC Ind.Sârmei C.Turzii, SC Stipo SA Dorohoi, Ampellum SA Zlatna, SC Cugir SA, SC Melana Săvineşti, Letea Bacau, Rafo SA Oneşti, SC Fortus SA Iaşi, Ambro SA Suceava, Stratusmob SA Blaj, SC Sticla Turda, Iris SA Cluj, Metalurgica Aiud.

b) Radet Bucuresti,Radet Constanta, Apaterm Galati, RA Termoficare Craiova, SC Apaterm, SA Deva, Termica SA Targoviste, Termoficare Petrosani, Dalkia Ploiesti, SC Termoficare Petrosani, SC Universal Lupeni, Aptercol Braila, SC Citadin Aninoasa, RA Termoficare Cluj, SC Aqua Calor P. Neamt, RA Energomur Tg Mures, SC Energ. Temica Sibiu, Termoloc Populatie Bacau, RA Goscom Roman, Proditerm Bistrita, Rail Hunedoara, Comunala RA Satu Mare, Termica SA Botosani, Radet Bucuresti, Enet Focsani, Cet Braila, Cet Govora, RA Termo Craiova, Ram Buzau, RA Termo Brasov, Aquaterm Tg. Jiu, Aquaterm 98 Pitesti.

VII. Ceilings on the Assumption of Enterprise Debt to Banks by the Consolidated General Government and on the Issuance of Domestic Government Guarantees on Bank Lending to Enterprises

The ceilings apply to the cumulative stock from end-September 2001 of newly guaranteed or assumed domestic debt by the consolidated general government. 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 Section 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 accounting exchange rates specified in consultation with Fund staff. These limits exclude:

  • the contracting or guaranteeing of external debt, for which separate limits are set out in Section VIII of this attachment;

  • debt transferred in the process of bank restructuring, privatization or liquidation of state-owned enterprises.

  • the assumption of debt as a result of an activation of a guarantee or collateral.

  • domestic guarantees for loans for fuel imports for the 16 heat-producing units which were transferred from Termoelectrica to local authorities, to the extent that external off-budget guarantees issued for this purpose (see Section VIII) fall short of US$120 million (i.e., the sum of domestic and external guarantees issued for this purpose must not exceed US$120 million).

Data for monitoring purposes shall be supplied monthly to the IMF by the Ministry of Finance. The stock of guarantees and debt assumed as described in this section was lei 469 billion as of end-September 2001.

VIII. Ceilings on Contracting or Guaranteeing of External Debt

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 Section 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, Termoelectrica, and the 16 heat-producing units which were transferred from Termoelectrica to local authorities are included in the overall ceilings, while being excluded from the off-budget guaranteed debt ceilings. With respect to new loans contracted to ensure fuel imports for the heating period 2002/2003, they are excluded from the off-budget guaranteed debt ceilings up to an amount of US$200 million for Termoelectrica and US$120 million for the transferred heating units. Fuel import loans contracted by Termoelectrica and the transferred heating units 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. The stock of debt at end-June 2001 was $1,194 million for maturities over one year ($83 million of which was off-budget), $196 million for the subceiling of debt with maturity of one to three years (none of which was off-budget), zero for debt with less than one year maturity.

Nonaccumulation of external payments arrears of the government will be a performance criterion monitored on a continuous basis. For program purposes, arrears with respect to called-up sovereign loan guarantees are defined as external payments overdue more than 30 days.

IX. Indicative Targets for Ceilings on Average Reserve Money

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 stock of average reserve money as of September 2001 was lei 60,442 billion.

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. The level of the programmed deposits is lei 189,866 billion for March 2003 and lei 204,549 billion for June 2003.

(2) The reserve money targets will be lowered by the shortfall in actual reserves from required reserves for any individual bank, measured from the 24th of the previous month to the 23rd of the test-date month, as provided for in the relevant NBR regulation.

X. Indicative Targets for Ceilings on Broad Money

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 specified in consultation with Fund 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. The stock of broad money at program exchange rates as of September 30, 2001 was lei 235,363 billion.

XI. Indicative Targets for Ceilings on Banking Sector's Total Exposure
to State-Owned Enterprises

Total exposure covers all loans, advances, holdings of debt and off-balance sheet exposure of resident banks to state-owned enterprises. Data on loans will also be reported separately from total exposure. State-owned enterprises are all regis 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 specified in consultation 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 Section 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 include (on a cumulative basis from end-March 2002):

(i) exposure to companies where the majority ownership shifted to the private sector. For this purpose, APAPS and the relevant ministries will provide a monthly 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 100 billion, on a company-by-company basis. The stock of banking sector exposure to state-owned enterprises at program exchange rates as of September 30, 2001 was lei 27,052 billion of which lei 13,541 billion was to BCR.


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 Insurance Fund for Work-Related Accidents, the Unemployment Fund, and the Health Social Insurance Fund.