Romania and the IMF

Press Release: IMF Approves US$367 Million Stand-By Arrangement with Romania
July 7, 2004

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RomaniaLetter of Intent, Memorandum on Economic and Financial Policies, and Technical Memorandum of Understanding

June 22, 2004

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.

Use the free Adobe Acrobat Reader to view Tables 1 and 2.

Mr. Rodrigo de Rato
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. de Rato:

The attached Memorandum on Economic and Financial Policies (MEFP) specifies understandings reached with staff in discussions on a 24-month program supported by a Stand-By Arrangement (SBA) with access of SDR 250 million (24.27 percent of quota), which we intend to treat as precautionary.

Over the course of the previous program (2001-2003), macroeconomic imbalances in our economy were reduced, structural reforms advanced, and GDP growth and investment rose fast. We brought inflation from 40 percent in early 2001 to 14 percent at end-2003, in line with the program targets. After a sharp reduction in 2002, the current account deficit widened in 2003 as a result of rapid credit and wage growth, and FDI-related imports. Privatization and structural reforms advanced, albeit slower than targeted.

Our main macroeconomic objectives are to consolidate stabilization and gradually lower inflation to mid-single digits by 2006, keep the current account deficit below 5½ percent of GDP and maintain reserve coverage at 3½ months of imports. Moreover, in line with our strong commitment to accede to the European Union in 2007, we intend to decisively improve governance and the business climate and complete the privatization agenda. The MEFP specifies measures, some of which already implemented, to achieve these objectives. Based on this, we are requesting the approval of the arrangement.

The Government believes that the policies set forth in the attached MEFP are adequate to achieve the objectives of its program and ensure sustainable macroeconomic developments in 2004-2006, but it will take any further measures that may become appropriate for this purpose. Romania will consult with the Fund on the adoption of these measures, and in advance of revisions to the policies contained in the MEFP, in accordance with the Fund's policies on such consultation.

Yours sincerely,

/s/
  /s/
Adrian Nastase   Mugur Isarescu
Prime Minister   Governor
Government of Romania   National Bank of Romania

Memorandum on Economic and Financial Policies for 2004–06

I. Introduction

1. This memorandum describes the main economic and financial objectives and policies of the government and the National Bank of Romania (NBR) for the period 2004-06. The program reflects our strong commitment to consolidate and advance the macroeconomic stabilization achieved under the previous Stand-By Arrangement (SBA) and accelerate structural reforms with a view to establishing sustainable rapid growth and ensuring EU accession in 2007. Following the implementation of the comprehensive reform agenda and ambitious macroeconomic objectives under the program, we expect that Romania will no longer need Fund arrangements.

II. Background

2. With prudent fiscal and monetary policies, we achieved far-reaching progress in macroeconomic stabilization in 2001-03, and established the basis for robust economic growth. Fiscal tightening, reduction in losses in state-owned enterprises (SOEs), and prudent monetary policies reduced inflation from 40 percent in early 2001 to 12.5 percent in April 2004. Moreover, disinflation was achieved without adverse effects on GDP growth, which at about 5 percent during the last three years was among the highest in the region. Investment picked up strongly, with the fixed investment rate increasing from 18.9 percent of GDP in 2000 to 22½ percent in 2003. After a long decline, the number of salaried workers increased by 1/3 percent in 2003. Our external position strengthened remarkably, with official reserves increasing from 2½ months of prospective imports at end-2000 to about 3¼ months at end-2003. Ratings for our sovereign bonds have been raised several times, while spreads have declined rapidly.

3. However, extremely rapid credit expansion, and to a lesser extent wage growth, led to a widening of the current account deficit in 2003. On the back of improved confidence, banking credit to the private sector surged, growing at over 50 percent in real terms in 2003, led by consumer and mortgage loans. The resulting strengthening in domestic demand, which also reflected the spillover of the minimum wage increase in January 2003, pushed up imports, while the protracted economic weakness in the euro area slowed our exports. These developments widened the current account deficit from 3.4 percent of GDP in 2002 to 5.9 percent of GDP in 2003, exceeding our target by about 1.1 percent of GDP.

4. Following overperformance in reducing inflation in the first half of 2003, disinflation stalled in the second half of 2003. The slowdown reflected both the effects of the minimum wage adjustment, strong domestic demand and energy price increases. Nevertheless, we largely met our annual target of 14 percent by December, and disinflation resumed in early 2004.

5. Fiscal policy in 2003 stayed on track. The general government deficit came out 0.3 percent of GDP better than targeted. The SOEs' S-I balance improved by 0.1 percent of GDP, as the increase in arrears to the budget was lower than in 2002. We succeeded in keeping SOE wages within the approved company budgets. Moreover, the collection rates of the main utilities have stayed in the 95-98 percent range, except for heating.

6. Monetary policy has been tightened and bank supervision strengthened. In response to the temporarily slowing disinflation and rapid credit growth, the NBR raised the policy interest rate by cumulative 300 basis points since August 2003 and introduced prudential norms to tighten household eligibility for consumer and mortgage loans. In particular, the NBR limited the monthly payment-to-net-income ratio to 30 percent, imposed mandatory 25 percent downpayment or a co-signer/insurance for consumer loans and a co-signer, insurance or collateral for personal loans. The NBR and the Security Supervision Commission lowered the maximum payment-to-net income ratio to 35 percent for mortgage credit and introduced a maximum loan-to-value ratio of 75 percent. All these measures became effective on February 1, 2004. Similarly, the Insurance Supervision Commission issued a regulation limiting insurance companies' retained exposure to bank loans. The commercial banks are in the process of establishing a credit bureau to monitor consumer and business credit, expected to be operational in Q4 of 2004. We have also postponed the liberalization of leu deposits of nonresidents in local banks, scheduled for January 2004. Despite the rapid growth of credit so far, we consider the resulting prudential risks to be manageable as banks are well-capitalized and liquid. Following the introduction of a new regulation on loan classification in early 2003, provisioning against credit risk is in our view adequate, which was also confirmed by the FSAP conducted in 2003.

7. In 2003 and early 2004, we have made substantial progress in privatization and improving the business climate. Since the beginning of 2003, the Privatization Agency sold 23 large loss-making SOEs with over 70,000 employees. In about 70 largest SOEs monitored under the program, employment was reduced by 7½ percent, or over 34,000 thousand employees, with particularly large cuts achieved in the railway sector. We have completed negotiations on the investment of the IFC and EBRD in the largest bank, BCR, and the settlement is expected in early June. Moreover, we have received three binding bids for the privatization of the largest company Petrom and have selected the winning bidder. Delays have, however, been experienced in the privatization of the electricity and gas distributors. To improve the business climate, we have approved an anticorruption plan and established an anticorruption public prosecution office in 2003.

8. Energy sector reforms advanced significantly in 2001-03. Sharp increases in energy prices have reduced energy sector losses substantially. We have brought electricity prices close to cost-recovery levels, sharply increased heating prices, and raised domestic gas prices, though the latter remain substantially below import parity. Our fight against the non-payment culture has been effective in the gas and electricity sectors, but more efforts are needed in the heating sector.

III. Economic and Financial Policies

A. Objectives and Strategy

9. The main objectives of our 2004-06 program are to sustain and advance macroeconomic stabilization and accelerate structural reforms. Our key macroeconomic objectives are: (i) to reduce inflation to 9 percent by end-2004, 6 percent by end-2005, and 5 percent by end-2006; (ii) to contain the external current account deficit to below 5½ percent of GDP; and (iii) to maintain reserve cover at a comfortable level of 3½ months of prospective imports. We expect that our economy will grow at an average annual rate of 5 percent during 2004-06, helping to reduce the GDP per capita gap relative to the EU. Stabilizing inflation at single digits for the first time in Romania's transition history would in our view be a powerful signal that sound economic policies have taken hold. As about 2/3 of the current account deficit is projected to be covered by non-debt creating flows, we view its projected level as sustainable. With the private sector S-I balance expected to decline further, all the improvement in the external current account deficit will have to come from the public sector, the budget and S-I balances of SOEs. External risks remain manageable in light of our progress in structural reforms, low external and public debt-to-GDP ratios, and the favorable term structure of our debt.

10. The main elements of our macroeconomic policy package in 2004 will be as follows: The S-I balance of the broad public sector will be improved by about 1¼ percentage point of GDP, which will be achieved by tightening our 2004 budget target, a modest nominal increase in the minimum wage, a prudent wage program for SOEs, and further reforms in the energy, railway and mining sectors. Monetary policy will be appropriately tight and, together with prudential measures, should slow credit growth to facilitate disinflation and contain the current account deficit.

11. Structural reforms in 2004-2006 will aim at completing the privatization agenda, strengthening financial discipline and tax compliance in SOEs and private companies alike, and decisively improving governance and the business climate. The program will provide a strong impetus to privatization in the energy sector, including the largest company in the country, Petrom, the entire gas distribution sector, and many electricity generation and distribution companies. In this context, the reform of the pricing mechanism for natural gas with a view to raise domestic producer prices to import parity by January 2007 gains in urgency and importance. The program will also facilitate the privatization or liquidation of the remaining 19 large loss-making SOEs under the Privatization Agency. Decisive measures will be taken against private tax nonpayers, while the financial performance of the state-owned nonpayers—concentrated primarily in the railway and mining sector—will be improved by strong and credible loss-reduction programs. Other measures will aim at improvements in the important areas of governance, competition, and the business climate.

B. Fiscal Policy

12. Fiscal policy in 2004 will support disinflation and help contain the external current account deficit, while creating scope for further private sector investment. In particular:

  • In May 2004, we will publicly announce the decision to tighten the general government deficit target to 2.1 percent of GDP, with a view to assuring markets that we are taking appropriate measures to contain the current account deficit. We will approve a supplementary budget in line with this revised deficit target by July 20, 2004 (structural PC). Owing to much stronger revenue performance than assumed at the time of the 2004 budget approval, we will be able to achieve this objective by preserving the overall budgeted expenditure envelope, while compensating somewhat higher local government spending with cuts at the central government level. If revenue comes out stronger than consistent with the deficit target of 2.1 percent of GDP, we will not increase the expenditure envelope envisaged in the program, and will use all the additional revenue for reducing the deficit. Expenditures for all motorway projects, including projects on the basis of public-private partnerships and projects financed with off-budget guarantees, will be accommodated within the new budget deficit ceiling, unless a different treatment would be appropriate in line with the recommendations of the FAD technical assistance. Privatization proceeds will continue to be treated as a financing item in fiscal accounts (Technical Memorandum of Understanding (TMU), section III).

  • We will implement measures to improve the saving-investment balances of the SOEs to facilitate an overall adjustment in the broad public sector deficit of 1¼ percent of GDP. The measures are described in paragraphs 21-26 and 32-33. To help us ensure that the fiscal objective for the broad public sector is met, we will establish monthly monitoring of the public sector borrowing requirement (PSBR), which will be a quantitative benchmark in 2004. We will make every effort to improve the reliability of these data with a view to convert this benchmark into a quantitative PC starting with the first quarter of 2005.

13. We stand ready to tighten fiscal policy further if our current account or disinflation targets are at risk. We expect that the targeted reduction in the budget deficit and the measures to improve the saving-investment balance of SOEs are sufficient to contain the recent strong growth in domestic demand and will result in an improvement in the external current account deficit in the first half of 2004. Should this not be the case, we are firmly committed to implementing corrective measures, including tightening fiscal policy further. Supplementary budgets and possible revisions of expenditure ceilings will be discussed in the context of quarterly reviews under the arrangement.

14. On tax policy, we have decided to give priority to a further reduction in social security contribution rates. Following the reduction of payroll taxes by 3 percentage points in 2002 and 5 percentage points in 2003, we have cut the employers' pension fund contribution rate by 2.5 percentage points and the employers' unemployment fund contribution rate by 0.5 percentage points on January 1, 2004. The eligibility for the reduced VAT rate will be limited to pharmaceutical products, hotel accommodation, newspaper distribution, and a small group of previously VAT-exempted products. We will refrain from reducing profit tax and personal income tax rates in 2004, as they are comparable with rates in other EU accession countries and we cannot afford further loss of revenue. We have also decided to refrain from introducing interest deductibility for mortgage loans. We will not modify tax legislation in 2004 and will consult with Fund staff on any amendments that we may envisage for 2005. Moreover, we will refrain from introducing tax holidays or any other new distortionary tax incentives or postponing the discontinuation of expiring ones (continuous structural benchmark).

15. The implementation of the comprehensive tax administration reform will continue. On January 1, 2004 we established the National Agency for Fiscal Administration (NAFA) under the Ministry of Public Finance and transferred the collection of social security contributions to the new agency. The modernization of our revenue administration will now focus on operations, systems and processes, and human resources. We intend to create a function-based structure with strong supervision from headquarters, which will control automated business processes and implement risk-based compliance programs. In line with the recommendations of the Fund's Fiscal Affairs Department (FAD), we have established project structures for the recommended reforms. Detailed plans for the achievement of the main objectives will be approved by end-June 2004. In July 2004, we will begin discussions on potential funding with donor organizations. Moreover, to ensure that all revenue collection functions are integrated, the government will approve an act that would subordinate, as of January 1, 2005, customs administration and the Financial Guard to the Minister of Public Finance (structural performance criterion).

16. We remain strongly committed to keeping budgetary sector wages and pensions within the limits of the 2004 budget. We have limited the increase in budget sector wages in 2004 to 6 percent in nominal terms on January 1, 2004 and another 6 percent on October 1, 2004 by approving Government Ordinance 123/2003. The annual bonus for 2003, paid in early 2004, was limited to the equivalent of one month's salary in 2003, and we will apply this principle accordingly for the 2004 bonus to be paid in 2005. In the SOEs sector, to avoid that the use of SOE profits for wage bonuses undermine our wage program, we will amend by end-July 2004 Government Ordinance 64/2001 to limit the use of profits for this purpose to one monthly average base wage. Taking into account the need to consolidate the pension fund, we are determined not to exceed the scheduled increase in pensions and the pension expenditures in the 2004 budget. To ensure the medium-term sustainability of the public pension system, we will agree with the World Bank in the context of the Programmatic Adjustment Loan operation to accelerate the increase in the retirement age and to start the equalization of the retirement age for men and women starting with July 1, 2005. We will not decide on any new pension "recorrelation" after completing the current "recorrelation" by mid-2004 without prior consultations with Fund and World Bank staff.

17. We will step up the fight against expenditure arrears of the budget. We will ensure that the local authorities do not incur arrears, including with respect to subsidies to district heating companies. Moreover, the unpaid amount of the arrears to health sector suppliers accumulated in 2002, identified in protocols agreed with the supplier organizations in amount of lei 3,644 billion, will be repaid by end-September 2004 (structural performance criterion). To avoid the recurrence of arrears, we have approved in February 2004 legislation strengthening the procurement legislation for medical supplies. Based on World Bank recommendations to improve the efficiency of the hospital system, we will approve by end-June 2004 a strategy for the short-, medium-, and long-term rationalization of the entire health sector.

18. We will move decisively against large tax nonpayers and tax evasion. In addition to our efforts to ensure full tax payment by SOEs, we will vigorously address the issue of private sector arrears to the budget. In 2002-03, the largest private sector arrears to the general government were accumulated by three refineries. Bankruptcy procedures against one of these companies were initiated on January 22, 2004. As a prior action, on March 31, 2004 the Ministry of Finance initiated bankruptcy against the second largest refinery. Subsequently, the Ministry initiated bankruptcy procedures against 4 other private companies with the largest flow of arrears to the budget, as well as a large number of other companies. The largest private refinery has improved its tax compliance after the rescheduling of its stock of arrears. However, we will revoke the rescheduling if the company fails to pay taxes and service the rescheduled stock of arrears on time and in full. Reduction in arrears of the 452 largest private debtors to the state budget and the social security funds will be a quantitative performance criterion under the program (TMU, section V), while the reduction in SOE arrears to the general government will be an indicative target (TMU, section VI). Moreover, we will continue posting a list of the top 549 debtors to the state budget on the internet and update this list every quarter, while also including, as of January 1, 2004, arrears to the four social security funds (updated monthly data will be shared with Fund staff). We will step up the fight against tax evasion. For this purpose, we will approve by end-June 2004 a comprehensive plan to (a) eliminate the illegal trade in petroleum products and cigarettes, areas where corruption is perceived to be pervasive; and (b) to fight corruption in the customs administration. This plan will be prepared in close consultation with business associations and other stakeholders. In addition, we will request technical assistance from the Fund to review by end-June 2004 the legislation on prevention, discovery, control, and sanction of tax fraud. Moreover, decisions by the Competition Council on state aid, including on tax arrears rescheduling, will be made public on the internet together with the explanation.

19. In financing the 2004 budget deficit, we will give priority to domestic borrowing, to limit supply pressures for private sector credit. Taking into account large expected privatization receipts from abroad, we will limit our Eurobond issuance to not more than €600 million in 2004, €425 million of which will not be spent in the current year (the number is subject to revision in the first review). Domestic financing will aim at extending the maturity of lei-denominated securities.

20. We will contain the issuance of all external off-budget guarantees in 2004 to 2.3 percent of GDP (US$1.5 billion) compared to 2.2 percent in 2003, to ensure that the target for the overall fiscal stance of the broad public sector is met. The ceiling will apply to off-budget guarantees for fuels, loans from multilateral and official creditors, and other off-budget guarantees. Within the ceiling, we will give priority to projects for modernizing the energy and railway sectors. We will limit the issuance of domestic guarantees to a maximum of the lei equivalent of €20 million (excluding guarantees for bridge loans to local authorities for temporary financing of projects under the SAPARD 21 program), with guarantees limited to cases approved by the Competition Council. In addition, by end-September 2004, we will amend Emergency Ordinance 146/2002 (approved by Law 201/2003) to preclude any further loans from the treasury to state-owned enterprises.

C. Wage Policy

21. To protect the competitiveness of our economy, we only modestly increased the minimum wage in 2004. We approved a government decision, stipulating an increase of 12 percent in the statutory minimum wage on January 1, 2004, to lei 2.8 million, a level that will remain unchanged until end-2004 (continuous structural PC). All government officials attending the negotiations on the national collective contract will seek to ensure that the minimum wage in this contract does not significantly deviate from the statutory minimum wage. Moreover, the government will instruct the representatives of the state-owned companies (a) not to accept a minimum wage different from the statutory minimum wage; and (b) to request the employers associations which they are affiliated with to refuse accepting any such deviation. The government will also ensure that such a national contract or other collective contracts will in no way affect the SOEs wage program stipulated in the following paragraph, while it will use persuasion to moderate wage settlements in the private sector. The appropriate minimum wage increase in 2005 will be discussed with Fund staff in the context of the first review of the program.

22. Our SOE wage policy in 2004 aims at improving the financial performance of 72 large monitored companies by about ½ percent of GDP. To ensure prudent wage policy in the SOE sector, we will rectify the budgets of the monitored companies by end-April, 2004, limiting the wage bill growth to 7 percent (prior action). With the scheduled reduction of employment by 19,000 positions, this implies an average gross wage growth of about 11 percent in nominal terms, below the projected average inflation. To strengthen the credibility of our wage bill target, the ministries will block payments equivalent to 4 percent of the quarterly wage bill in monitored SOEs until the last month of the quarter and will release it only after it has become clear that the respective target will be reached.

D. Energy Sector Reforms

23. To reduce our growing dependency on gas imports, we will continue increasing domestic producer prices with a view to reaching import parity level by January 2007. On March 15, we announced a schedule for gas price increases (prior action). For 2004, the schedule specified that the end-user gas prices would be increased every quarter by 5 percent in lei terms (prior action for April 1 and July 1, structural PCs thereafter). For 2005-2007 the schedule specified the producer price for the regulated market, as envisaged in the ordinance approved on December 18, 2003. While under the current system domestic producers effectively receive the residual after the variable import costs of imports are covered (in addition to the costs of transport, storage, and distribution), under the new system the gas distributors and end-users will have to absorb variable import costs and the gradual increase in producer prices to import parity. The first yearly increase of the end-user regulated price according to the new pricing system will be effective as of January 1, 2005, when domestic producer prices for the regulated market will be increased by at least US$25/tcm, starting from the estimated 2004 level of US$60/tcm (structural PC; the exchange rate used for converting the U.S. dollar increase into lei prices is specified in the TMU, section VII). The following adjustment of the same size will be effective as of January 1, 2006.

24. We will continue adjusting the electricity and heating prices to cost recovery levels. End-user and Termoelectrica electricity and heating prices will be adjusted to cost-recovery levels (including return on capital for distribution companies) every semester on January 1 and July 1 (a prior action for July 1, 2004 and structural performance criteria thereafter). The regulatory agency will produce reports on these adjustments and share them with the staff (continuous structural benchmark). Moreover, in cooperation with the World Bank, in March 2004 we reviewed the structure of electricity prices, which has confirmed that the final-user distribution prices are consistent with the full payment to producers and will fully cover the distributors' margins once the Bank's proposal for the July 2004 price adjustment is implemented. The World Bank has also reviewed the electricity producer price for thermo-producers, concluded that they are at an appropriate level, and recommended that the government approve a plan to deal with the thermo-producers' high-cost units ("stranded assets"). The Bank has also recommended that the July 1, 2004 adjustment include a margin required to provide a return on capital at least equal to the cost of debt in the distribution sector, which is an important step for the commercialization and privatization of distribution companies. We will implement these recommendations, which will require a final-user price adjustment of about 6-7 percent. In the context of the first review, we will discuss with staff further steps in energy sector reform, including the elimination of the uniform retail tariff policy allowing the end-user price differentiation across regions, the elimination of the national development tax, and the steps for increasing hydro-power producer prices with a view to fully liberalizing the market by 2007.

25. We will approve a reform strategy for the district heating system in close cooperation with the World Bank (prior action). This strategy will envisage a switch to heating contracts or conventions with individual households, the installation of thermostatic valves and heat meters, and the introduction of a split-tariff structure. In addition, we will review social assistance for households and modify it if necessary. A timetable for introducing these measures was prepared in April 2004. We will approve an Emergency Ordinance by June 10, 2004, terminating all subsidies and delivery of fuel by state-owned companies to 15 inefficient heating plants (prior action) and we are committed not to resume such subsidies or deliveries, and hence encourage the local administrations to stop production and decide on the closure of the plants. By end-June, we will ensure that, for each of these plants, either the local administration has taken such a decision, or bankruptcy procedures have been started by the government (in case of debts to the budget) or by a state-owned fuel supplier (in case of debts to the fuel suppliers) (prior action). We will share the documents proving that these decisions were made with the Fund and World Bank staff. In addition, we together with the local administrations will take the necessary measures to assist the few remaining connected households to switch to individual heating systems. Termoelectrica's producer heating price will be raised by 12 percent as of July 1, 2004. The National Reference Price for heating will be raised by 12 percent as of August 1, 2004 (structural PC). The respective Government Decision will be approved by mid-July 2004. By end-September, we will prepare an analysis outlining the necessary steps for the elimination of the current system of producer subsidies by enhancing the existing targeted household support for heating and thus abolishing the National Reference Price.

26. We will continue our efforts to eliminate the nonpayment of electricity and gas bills by strict enforcement of the disconnection deadlines for electricity and gas payments. However, in 2004, the budget will continue to assume payments of energy bills for a few large loss-makers (the list of eligible SOEs will be approved through a Government Decision by end-July 2004), the disconnection of which would be socially disruptive. We will also intensify our efforts to improve collections from households. For that purpose, we will enforce seizure of assets of nonpayers through the judiciary system, as specified in Government Ordinance 85/2001 and Government Decision 400/2003. The largest industrial nonpayers to the four utilities will stay disconnected or on minimum supply until full payments for all bills from December 2002 onwards have been received by the utilities, while the bills for companies on minimum supply will be paid by the government (continuous structural benchmark).

E. Privatization, Liquidation, and Restructuring

27. The successful privatization of Petrom is our highest priority. We have eliminated some restrictions and uncertainties that could have adversely affected the success of the privatization. Specifically, as a prior action in March 2004, we decided that: (a) the entire amount of arrears to the general consolidated budget in litigation would be cancelled at the time of the share transfer; (b) the government would assume responsibility for environmental indemnities; and (c) there would not be any penalties for post-privatization deviations from employment levels included in the investors' business plan. Moreover, we subsequently clarified, by a letter to short-listed investors, that the government would assume environmental liabilities associated with abandoned wells, and limit restrictions on the restructuring of the company, including the sale of core assets, to at most four years, while also indicating that we would agree with the divestment of one refinery and the petrochemical complex even before that deadline. As indicated in paragraph 23, the schedule for gas price adjustments was announced on March 15, 2004. All these decisions have increased the value of the company and created conditions for successful privatization.

28. We aim to achieve substantial progress in the privatization of utilities, building on recommendations from the World Bank. In close consultation with the World Bank, we will accelerate preparations for the privatization of the two gas distributors by inviting binding bids by July 20, 2004 (prior action). We have received one binding offer for the privatization of two electricity distribution companies in March, for which negotiations are ongoing. We will not offer special tax incentives to investors or preferential treatment in subsequent privatizations. If this fails, we will either re-launch the privatization for these two companies, or select two others for privatization in 2004, in addition to the two in the pipeline. By end-September 2004, we will prepare a privatization strategy for Electrica-Muntenia Sud, with the aim of inviting binding offers by end-March 2005. We will start discussions with the World Bank on the privatization of Romgaz, and power generators Rovinari and Turceni.

29. We will either privatize or liquidate the remaining 19 large SOEs under AVAS by end-September 2004. In addition to the company already privatized in Q1 of 2004, we initiated bankruptcy for five large SOEs (companies with more than 1,000 employees), including Republica, CUG and Turnu (prior action). Thereafter, we will either privatize or liquidate six such companies in Q2 and another six in Q3 (structural benchmarks), leaving two for Q4 of 2004. To improve the prospects for successful privatization, we implemented an employment reduction program and eliminated 15,000 positions in March, including 2,600 layoffs in Roman (prior action). Moreover, as part of the approved 2004 wage program a wage-freeze will be imposed in all companies under AVAS that incurred losses (after taxes) in 2003 (prior action); those that have not incurred losses can benefit from a wage increase by up to 9 percent. For companies with particularly weak financial results, in March the Privatization Agency and the shareholder meetings decided on the voluntary liquidation of 15 unviable SOEs (including Republica, CUG, and Turnu) and is now appointing liquidators. We will also establish quarterly targets for the privatization or liquidation of smaller companies.

30. On the privatization of Roman, we are determined to prevent any parts of the company from returning to state ownership. As part of the privatization deal, 2,600 layoffs in the remaining units of Roman were implemented by April 15, 2004 (prior action). Should any parts not pay energy bills and taxes on time, we will immediately start foreclosure proceedings (continuous structural benchmark).

31. We will review the privatization of the National Tobacco Company. We concluded a contract with an internationally reputable accounting firm to carry out due diligence of the privatization contract, which will be finalized by end-June. We will re-tender the National Tobacco Company by end-June 2004 if the tender process is found to have been deficient.

32. Our efforts to restructure the railway sector will continue. Following the large layoffs and the privatization of 21 subsidiaries in the second half of 2003, we intend to close by end-June 2004 about 3,000 km of loss-making secondary lines (26 percent of the total network), if the respective segments are not taken over by investors in the form of concession contracts by June 15, 2004. We passed the corresponding government decision in January 2004. For the segments under subconcession contracts, we will not impose on the investors' obligations to maintain employment. Employees that are not taken over by the investors will be laid off by CFR by the date of the effectiveness of the concession contract but no later than end-June 2004. We will continue with reducing employment in the railway companies by 8,000 employees in January-September 2004. To improve the financial performance of railways, we raised the price of passengers' tickets by 6.3 percent on February 15 and will raise it by another 6 percent on July 15, 2004. We also increased the freight tariffs by 10 percent on March 1 and will raise it by another 10 percent on July 1, 2004. By July 1, 2004 we will complete the outsourcing of the CFR messenger service to a private company, which is expected to result in savings of about lei 200 billion. The 2004 budgets of the railway companies will be rectified to ensure that the remaining operating losses, as well as obligations to the utilities and the general government budget, are fully covered by the allotted budgetary subsidies. The railway companies will also continue with the privatization of four subsidiaries and the divestment of non-core assets.

33. We will implement an ambitious restructuring plan in the mining sector. We approved and published on May 28, 2004 a strategy for restructuring the mining sector in 2004-10, which was formulated in cooperation with the World Bank and in line with EU guidelines for environmental protection (prior action). The strategy set out detailed schedules for the mines to be privatized or closed, necessary employment reduction for each mine, as well as programs to address the social problems of the regions affected. It also includes the action plan and for 2004, with employment reduction plans and the list of mines to be closed, and a decision on 30 mines to be closed by June 30, 2004. In line with the strategy, 4,000 mining sector employees were made redundant by end-June 2004 (prior action), and another 4,000 will be made redundant by September 30, 2004 (structural PC). The 2004 budgets of the mining companies will be rectified to ensure that the remaining operating losses, as well as obligations to the utilities and the general government budget, are fully covered by the allotted budgetary subsidies.

34. As part of our plans to improve the overall efficiency of our medium-term expenditure plans for motorways, we are working with the World Bank to assess the overall affordability of the program. Prior to the finalization of motorway contracts currently under negotiation, we will seek the World Bank assistance on the following matters:

  • A report of an advisor, financed by the World Bank, assessing the unit prices and financial arrangements associated with the Bors-Brasov motorway project;

  • We asked the World Bank to prepare by end-July 2004, in consultation with the EBRD, a study assessing the priorities and the best routing of motorway construction. This study will also address the overall affordability and risk sharing associated with the PPP projects planned for the Brasov-Bucharest motorway, and the options for their re-tendering;

  • A review, prepared in consultation with EC and other stakeholders, of the implementation of the procurement legislation, including the relevant norms, used for awarding large infrastructure projects and guidelines for awarding such contracts in the future.

  • Following the preparation of the above reports, we will consult with Fund staff on the fiscal sustainability of the overall motorway program, including possible re-tendering, rerouting and phasing of the motorway program, before proceeding with the finalization of the existing projects under preparation.

  • We will limit expenditures for motorway construction (including expenditures under PPP contracts, the Bechtel project, and projects financed with off-budget guarantees) to €260 million in 2004.

35. Our efforts to complete the privatization in the banking sector will continue. In April, we decided the timetable for the privatization of CEC, the State Savings Bank, with a view to complete it in 2005. Furthermore, we will announce a tender for a privatization advisor for the bank by end-May 2004. We will also finalize settlement for the EBRD's and the IFC's purchase of a share package in BCR by end-June, 2004 (prior action).

36. We will implement several measures to fully improve transparency and accountability in the enterprise sector: (i) the government will decide by end-March 2004 (prior action) that all the 72 monitored SOEs publish on the websites of the responsible line-ministries their independently audited annual earnings statements, starting with the accounts for 2003; in the same vein, we will also publish their (unaudited) quarterly financial results on these websites; (ii) we will continue publishing on the internet regularly reports on state aid, including subsidies in the form of arrears; and (iii) the internationally accepted accounting standards will be fully mandatory for all economic agents above a certain size in 2005.

F. Monetary Policy and Banking Issues

37. The NBR will continue to focus on lowering inflation to single digits while managing monetary policy's transition to a new framework. The new NBR Law, to be passed by end-June 2004 (prior action), will ensure the independence of the NBR in accordance with the relevant EU acquis, as well as make price stability the Bank's primary monetary policy objective. This, together with our advances in forecasting inflation and elaborating transparency and accountability procedures, will provide the necessary legal, technical and institutional prerequisites for a gradual implementation of inflation targeting. The new regime will take into account that the exchange rate pass-through to prices still dominates interest rate changes in determining inflation developments.. With inflation firmly stabilizing in single digits and transmission from policy to market interest rates improving over time, the onus of policy action will gradually shift toward the interest rate.

38. In 2004, monetary policy will continue to apply the current framework. The NBR will continue to guide the exchange rate along a path consistent with the inflation objective and modest real appreciation against the new 75/25 euro/U.S. dollar basket, in line with the estimated Balassa-Samuelson effect. This policy combines substantial short-term exchange rate flexibility with inflation-stabilizing guidance over a longer horizon. Tight fiscal and wage policy, as outlined above, will facilitate improvement in the external current account, allowing the NBR to focus on disinflation. We will begin to gradually lower the policy interest rate after we are assured that disinflation and the current account are firmly on track. We will continue with the liberalization of non-resident leu deposits with local banks when the interest rate differential between domestic and world markets would not create opportunities for large and potentially destabilizing inflows.

39. The NBR will continue to monitor credit growth and implement decisive measures to contain it as needed for both macroeconomic and prudential reasons. Should the rapid credit growth not subside following the eligibility-tightening measures introduced in February, we will introduce mandatory reporting by banks and non-banks to the newly established credit bureau and consider further measures to contain credit growth, including by increasing the reserve requirements for sources of financing denominated in foreign currencies. As of September 1, 2004, the NBR's credit bureau will expand its data base on delinquent loans with loans below lei 200 million, not monitored hitherto. As insurance companies have insured more than half of banks' household credit portfolio, the insurance supervisory commission will monitor insurers' pricing and re-insurance of that risk. Furthermore, for consumer protection we will adopt a law requiring truthful disclosure of lending terms and risks by all suppliers of consumer credit.

G. Governance Issues, Business Climate, and Labor Market

40. Our efforts to strengthen public administration, eliminate corruption and improve the business climate will continue in close cooperation with the EU and the World Bank.

41. We are intensifying our efforts to improve the functioning of the judiciary. By June 30, 2004 we will obtain parliamentary approval of laws on judicial organization, on the statute of magistrates, and on the Superior Council of the Magistracy (SCM) as a single, coherent package (prior action) after full consultation with the EU Commission, the World Bank, and local stakeholders. The new laws will strengthen the role of the Superior Council of the Magistracy as guarantor of the independence of the judiciary. In particular, the new laws will establish the full authority of the Council with respect to the recruitment, training, and professional careers of judges and render decisions in disciplinary actions in the judiciary (most of these powers have so far been vested with the Ministry of Justice). Having eliminated the extraordinary appeal procedure by the Attorney General for civil cases, we submitted to parliament on April 1, 2004 legislation to eliminate it for all other cases (prior action). We will ensure approval of this legislation by July 20, 2004 (structural performance criterion). Moreover, in consultation with the World Bank, we will review the issue of excessive length of court procedures in civil and commercial cases, particularly in restitution and bankruptcy cases, and decide by October 1, 2004 on the establishment of a monitoring system according to the law.

42. In consultation with the World Bank we have strengthened the legislation on the declaration of assets by government and parliamentary officials and near relatives (in particular, valuation and disclosure requirements). The new legislation improves the transparency of the asset declaration form, includes some itemization of assets, expands coverage of the declaration to candidates running for office, and lowers reporting thresholds. The legislation was approved in May, 2004 (prior action). Furthermore, we will explore the option of establishing special offices in each ministry responsible for checking the declaration of assets of all persons involved in the decision-making process and reach a decision by end-June 2004.

43. We will provide additional resources for the National Prosecutor's Anti-Corruption Office (ANC) in 2004. In particular, we will increase the number of ANC-prosecutors (currently 95) by about 50 percent. The ANC will give a higher priority to the investigation and prosecution of grand corruption. Moreover, we will approve by end-January 2005 legislation amending Article 24, paragraph 2, of the Law on Ministerial Responsibilities (Law 115/1999), which granted immunity also to former members of the government.

44. In cooperation with the World Bank, we will evaluate the impact of the new Labor Code on the labor market and employment and amend it accordingly with a view to preserving labor market flexibility. The comprehensive overhaul of the labor code in early 2005 will address concerns of the stakeholders, among which is the concern about the wage guarantee fund, regulations on hiring and firing, and red tape The overhaul of the code will be agreed upon with the World Bank within the framework of the EU acquis, and be submitted to parliament by end-March 2005. The corresponding PC will be set at the time of the second or third review under the program.

IV. Program Monitoring

45. The program will be monitored on the basis of the performance criteria and indicative targets as described below. The program will be reviewed by the IMF on a quarterly basis during the period of the SBA (June 2004-June 2006). 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, the reduction in arrears, and steps to privatize the remaining large SOEs, including Petrom. Agreements on the 2005 and 2006 general government budget, minimum wage decisions and SOEs' wage and employment program will be conditions for completing a review.

46. The quantitative performance criteria are as follows: (i) quarterly ceilings on the net domestic assets of the NBR; (ii) quarterly floors on the net foreign assets of the NBR; (iii) quarterly ceilings on the deficit of the consolidated general government; (iv) quarterly ceilings on the cumulative nominal wage bill in the monitored state-owned enterprises; (v) quarterly floors on collection rates of four 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; (viii) quarterly ceilings on the arrears of the 452 largest private debtors to the state budget and the four social security funds, and (ix) a continuous performance criterion of no accumulation of external payments arrears will also apply.

47. The indicative targets under the program are as follows: (i) quarterly ceilings on the total financing of the public sector; (ii) quarterly ceilings on arrears of monitored state-owned enterprises to the consolidated general government; (iii) quarterly ceilings on the exposure of commercial banks to SOEs; (iv) quarterly floors on collection rates for electricity and heating for Termoelectrica and its externalized units; and (v) separate quarterly floors on the collection rates of the gas distributors Distrigaz Nord and Distrigaz Sud. The second review will explore the feasibility of converting the ceiling on the total financing of the public sector into a performance criterion.

48. All quantitative performance criteria are specified in Table 1; the list of prior actions, structural performance criteria, and benchmarks are specified in Table 2. The main definitions appear in the TMU.

Technical Memorandum of Understanding for Stand-By Arrangement

I.   Ceilings on the Average Net Domestic Assets of the National Bank of Romania
II.   Targets for Floor on Net Foreign Assets of the National Bank of Romania
III.   Ceilings on the Cumulative Deficit of the Consolidated General Government
IV.   Ceilings on Aggregate Wage Bill of Monitored State-Owned Enterprises and Wage Bill and Employment Adjustments in Selected Companies
V.   Ceiling on the Stock of Arrears of Private Enterprises to the State Budget
and the Four Social Security Funds
VI.   Indicative Target for Ceilings on Arrears of Monitored State-Owned Enterprises to the Consolidated General Government
VII.   Floors on Cumulative Aggregate Collection Rates of Distrigaz Sud, Distrigaz Nord, and Termoelectrica
VIII.   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
IX.   Ceilings on Contracting or Guaranteeing of External Debt
X.   Indicative Targets for Ceilings on Broad Money
XI.   Indicative Targets for Ceilings on Banking Sector's Total Exposure to State-Owned Enterprises
XII.   Indicative Targets on the Total Public Sector Deficit Financing

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) for the indicated month are defined as the difference between average reserve money (as defined below) and average net foreign assets (as defined in Section II of this attachment), both expressed in local currency.

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 March 2004 was lei 111,778 billion.

The reported figures of average reserve money will be adjusted in the following circumstances:

(1) Should reserve requirements be increased/decreased from 18 percent on all required reserves held in lei, the reported reserve money figures 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 242,609 billion for June 2004, lei 258,598 billion for September 2004 and lei 293,672 for December 2004.

(2) The reported reserve money figures 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.

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 March 2004 was lei -122,235 billion.

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

(1) Downwards (upwards), prorated for the fraction of the month that gross foreign financing exceeds (falls short of) programmed levels, specified in Section II, by the lei equivalent of the said excess (shortfall).

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

(3) Upwards (downwards) by the lei equivalent of the decrease (increase) in the stock of foreign currency denominated Treasury bills (cumulative from end-March 2004).

(4) Downwards by the lei equivalent of the increase in foreign currency receipts from large privatizations (sale price above $10 million, cumulative from end-March 2004), excluding proceeds from the sale of BCR, as specified in Section II.

(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$407 per ounce and SDRs at US$1.48597 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, 2003. 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-March 2004 as follows:

June 2004

US$756.87 million

September 2004

US$756.87 million

December 2004

US$756.87 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-March 2004. The outstanding stock on March 31, 2004 was US$450.891 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-March 2004), excluding proceeds from the sale of BCR, which are already included in the target.

The end-of-period NFA will be monitored on the basis of the monetary survey. Daily data will still be used, however, to calculate average NFA. All data is provided by the NBR. The end-of-period NFA figure was US$7,304 million on March, 2004.

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 the Sale of State Assets" (AVAS)3, the "Fund for the Development of Romanian Agriculture", the "National Administration of Roads (AND)", other extra-budgetary funds managed by the Ministry of Public 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 (a) revenue and expenditure data provided by the Ministry of Public Finance as well as (b) on "below the line" financing data, i.e., 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 and other state assets 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, 2003 will be converted in U.S. dollars at the end-December 2003 exchange rate and from dollars into lei using the rates specified in consultation with Fund staff. Foreign-currency denominated credit newly issued in 2004 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 memoir "Romania: Measuring the Fiscal Deficit", Part II, Appendix 11, February 1994.

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

The set of 72 state-owned enterprises, whose wages are to be monitored under Emergency Ordinance 79/2001, is specified in Government Decision 393/2004.

The wage bill targets 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 gross wage.

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

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 (regie autonomes and national companies) and AVAS (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.

V. Ceiling on the Stock of Arrears of Private Enterprises to the State Budget
and the Four Social Security Funds

The ceiling applies to the outstanding stock of arrears of the set of 452 private companies (fully private or with state-ownership of less than 50 percent) monitored by the National Agency for Fiscal Administration (NAFA). These 452 companies are a subset of the 549 companies (private as well as state-owned) with the largest arrears to the state budget and the four social security funds as of December 31, 2003. Data on the stock of arrears of these 549 companies are published on a quarterly basis on the external website of the Ministry of Public Finance (with a breakdown into arrears to the state budget and each of the four social security funds; separately for the stock of arrears including and excluding interest and penalties). The complete data set is provided to Fund staff on a monthly basis with a reporting lag of at most 35 calendar days following the end of the respective month. The performance criterion refers to the stock of arrears excluding interest and penalties. Changes in the stock of arrears owing to the cancellation of arrears will not be reflected in the data used for measuring the stock of arrears under the program. Fund staff has to be notified on a company-by-company basis about all cancellations of arrears within at most 5 business days following the approval of the cancellation. 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. In particular, in the case of the privatization of a fully state-owned company or a majority state-owned company on the above-referenced list of the 549 companies, the respective company will be added to the list of private companies (for the base date as well as for future test dates) to which the performance criterion applies. These companies will be added to the list in the moment of the final and binding signature of the privatization contract. In the case of the initiation of bankruptcy procedures against a company on the above-referenced list of 452 companies, the respective company will be removed from the list (for the base date as well as for future test dates) to which the performance criterion applies. These companies will be removed from the list in the moment in which the file requesting bankruptcy is submitted to court. The stock of arrears at end-March 2004 was lei 54,866 billion.

VI. 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 72 monitored state-owned enterprises, whose arrears are to be monitored under Emergency Ordinance 79/2001 and Government Decision 393/2004. 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 and Government Decision 393/2004. For changes to the set of monitored companies owing to privatization or the initiation of bankruptcy procedures, 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 Fund staff by the Ministry of Public Finance by at most 35 calendar days after the end of the respective month. The stock of arrears at end-March 2004 was lei 42,262 billion.

VII. 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 externalized to local authorities (performance criterion). Indicative targets will be set on the collection rates for (i) electricity for both Termoelectrica and the production units externalized to local authorities; (ii) Termoelectrica's district heating; (iii) heating in the externalized units;

  • on Electrica's collection rate (performance criterion).

The 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 including the externalized units at end-December 2003 was 87.9, of Electrica 98.1, and of the two gas companies 98.8.

Data for these companies will be collected by the Ministry of Economy and Commerce and reported to the IMF on a monthly basis. Revenue resulting from obtaining shares through debt-equity swaps will be excluded from collections, unless the shares are sold for cash. The Ministry of Economy and Commerce 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, Enet Focsani, Cet Braila, Cet Govora, RA Termo Craiova, Ram Buzau, RA Termo Brasov, Aquaterm Tg. Jiu, Aquaterm 98 Pitesti.

Also, to monitor actual payments in the electricity sector, the Ministry of Economy and Commerce will include in these reports the following tables on monthly payments.

a) a table containing amounts billed to Electrica by power generators, paid by Electrica to power generators, and the payment rate (i.e. the second column divided by the first column). The table will contain a separate line for amounts billed and collected related to the developments tax and hence amounts billed an collected by Electrica itself should exclude the development tax.

b) Four collection rate tables from Termoelectrica containing amounts billed to and received from electricity distribution companies. Table one contains the total amounts billed and received, table two contains amounts billed and received from Electrica, table three contains amounts billed and received from Hidroelectrica, and table four contains amounts billed and received from other TE customers. Hence the amounts in tables 2-4 should add up to the amounts in table 1. Each table should be split up according to the amounts billed and received by the various Termolectrica plants, i.e. Termoelectrica-core, Rovinari, Turnceni, Craiova, Deva.

For the period January 2004-April 2004, these tables will be compiled retrospecitively. From April 2004 onwards, these tables will be included in the monthly reports on collection rates.

The exchange rate (ROL per USD) used to calculate the annual producer gas price increase of at least $25/tcm (LoI paragraph 23) per January 1 of each of the years 2005-2007, will not be lower than the average exchange rate in the month of November preceding the date of the increase.

VIII. Ceiling 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 ceiling applies to the cumulative stock from end-March 2004 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 AVAS 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.

This ceiling excludes:

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

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

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

    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 746 billion as of end-March 2004.

IX. Ceilings on Contracting or Guaranteeing of External Debt

The ceilings apply to the cumulative flow since the beginning of 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, Romgaz, Termoelectrica, and the 23 heat-producing units which were transferred from Termoelectrica to local authorities, and any further units externalized during the program, are included in the overall ceilings, and the appropriate off-budget guaranteed debt ceilings.

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 ceiling on contracting and guaranteeing external debt with maturity over one year includes an Eurobond in the amount of €600 million (see paragraph 19 of the MEFP). In case an Eurobond is not issued or is issued for a smaller amount, the ceiling will be adjusted downwards by 100 percent of the shortfall on a cumulative basis from end-March 2004 as follows:

June 2004

US$ 0 million

September 2004

US$780 million

December 2004

US$780 million

For the purposes of this adjustor only, an exchange rate of US$1.3/€1 will be used.

The ceilings shall be monitored from data supplied monthly to the IMF by the Ministry of Finance. The accumulated since January 1 flow of contracted or guaranteed debt at end-March 2004 was US$157 million for maturities over one year (US$1 million of which was off-budget), US$1 million for the subceiling of debt with maturity of one to three years (all 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.

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 monetary survey data, which shall be supplied to the IMF monthly by the NBR. The stock of broad money was lei 481,460 billion as of March 31, 2004.

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 regie autonomes, national and commercial companies with majority ownership by the general government, as defined in Section III of this attachment. For the purposes of monitoring, foreign currency denominated debt will be converted in lei at end-month leu/U.S. 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. 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 2004):

(i) exposure to companies where the majority ownership shifted to the private sector. For this purpose, AVAS 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; and

(iii) any assumption of debt or off-balance sheet items by the general 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 March 31, 2004 was lei 49,260 billion of which lei 17,377 billion was to BCR.

XII. Indicative Targets on the Total Public Sector Deficit Financing

The Public Sector Deficit Financing is monitored on a monthly basis and compiled by the Ministry of Finance, with data also supplied to the Ministry by the NBR and the National Securities and Exchange Commission (CNVM). It consists of the financing of the consolidated general government as defined in Section III and the state-owned enterprises.

The consolidated general government financing consists of net external financing, non-bank financing, and bank financing. Net External Financing comprises sovereign bond and BOP support loans, on-budget project financing, leasing operations of ministries and local governments, and T-bills, issued domestically, held by non-residents (computed separately in lei and foreign exchange). Non-Bank Financing comprises privatization receipts (total privatization receipts of all components of the general government independent of whether they are transferred to the treasury), asset recovery (AVAS receipts from asset recovery transferred to the consolidated general government), municipal bonds (bonds issued by the municipalities either domestically or internationally, computed as the difference between issuance and redemptions during the month), and T-bills and bonds held by the non-bank public (computed separately in lei and foreign exchange). Bank Financing is defined as the sum of T-bills and bonds in lei held by banks, T-bills and bonds in foreign currencies held by banks, bank loans in lei and foreign currencies, decrease in government deposits in lei (a positive number indicates a decline in deposits), and decrease in government deposits in foreign currencies (a positive number indicates a decline in deposits).

The state owned enterprises financing consists of net external financing, bank financing, and the accumulation of arrears. Net External Financing comprises of state-guaranteed bills and bonds (excluding called guarantees and including state-guaranteed fuel imports), bills and bonds without state guarantee, state-guaranteed loans (excluding called guarantees), and loans without state guarantee. Bank Financing is defined as the sum of the increase in credit to SOEs (computed separately in lei and foreign exchange), and decrease in SOEs deposits (computed separately in lei and foreign exchange; a positive number indicates a decline in deposits). The accumulation of arrears is defined as increase of arrears to the general government by the group of 72 large monitored SOEs, excluding interest and penalties as specified in the law.

The monthly flows of financing are approximated by the following methodologies:

(i) for stocks in lei—change of stocks between the end of the respective months;

(ii) foreign exchange stocks expressed in lei are first converted in U.S. dollar stocks using the end-month leu/U.S. dollar exchange rate. Then the change in U.S. dollar stocks is converted in lei by using the monthly average leu/U.S. dollar exchange rate;

(iii) foreign exchange flows expressed in U.S. dollars are converted in lei by using the monthly average leu/U.S. dollar exchange rate; and

(iv) conversion of stocks and flows in foreign currency other than the U.S. dollar in U.S. dollars is done according to the convention of the reporting institution (usually, the market exchange rate either at the time of the transaction or at the end of the month).

The principal providers of data are:

(i) the Ministry of Finance on:

- sovereign bonds and BOP support loans
- on-budget project financing
- privatization receipts
- asset recovery
- state-guaranteed bills and bonds;
- state-guaranteed loans (excluding called guarantees); and
- the accumulation of SOE arrears to the general government by the group of
     72 arge monitored SOEs.

(ii) the NBR on:

- leasing operations of ministries and local governments;
- T-bills, issued domestically, held by non-residents;
- T-bills and bonds held by the non-bank public;
- T-bills and bonds in lei and foreign currencies held by banks;
- T-bills and bonds in foreign currencies held by banks;
- bank loans in lei and foreign currencies, including to the "National Road
     Administration" (AND);
- decrease in government deposits in lei and foreign currencies, including deposits
     of the National Road Administration"(AND);
- externally issued bills and bonds by SOEs without state guarantee,
- external loans to SOEs without state guarantee;
- domestic bank loans to SOEs; and
- decrease in SOEs deposits with domestic banks.

(iii) the National Securities and Exchange Commission on local government bonds.


1
Foreign 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.
3AVAS emanated from the merger of the "Privatization Agency" (APAPS) and the "Asset Recovery Agency" (AVAB) on May 1, 2004. Before this merger, APAPS was a component of the consolidated general government, while AVAB was not.

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