## _cr04221 ## Source details **Canonical URL:** [_cr04221](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04221.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04221.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04221.pdf.json) --- ### Medium-Term Current Account Developments - Current account (percent of annual GDP): 2000: -3.9; 2001: -5.5; 2002: -3.4; 2003: -5.9; 2004Q1: -0.5. - 2003 widened deficit to almost 6 percent of GDP; increased macroeconomic risks. - Contributors to stronger domestic demand in 2003: - Sharp increase in credit to the private sector contributed 2½ percentage points to growth of domestic demand. - Final domestic demand grew by 7¼ percent in 2003, compared to 3½ percent in 2002. - Large minimum wage increase and ensuing strong economy-wide wage growth contributed 0.6 percentage point to higher domestic demand growth. - Delays in adjusting energy prices increased losses in the energy sector by 0.4 percent of GDP, adversely affecting the current account. - Trade and competitiveness: - Exports (year-on-year real growth): 2000: 23.4; 2001: 12.1; 2002: 17.6; 2003: 11.1; 2004Q1: 10.2. - Imports (year-on-year real growth): 2000: 27.1; 2001: 18.4; 2002: 12.0; 2003: 16.3; 2004Q1: 12.4. - CPI-based REER appreciated modestly in 2002–03; ULC-based REER depreciated. - Staff projections and scenarios (Box 1): - Non-debt-creating inflows projected at 3½ percent of GDP on average over 2004–08. - A current account deficit of 5¼ percent of GDP would cut gross external debt-to-GDP ratio by 1 percentage point. - With lower FDI and GDP growth of 3 percent, debt-to-GDP-stabilizing current account deficit = 4¼ percent of GDP. - If debt-to-GDP ratio limited to 40 percent, sustainable current account deficit = 4¾ percent of GDP. - A real effective depreciation of 15 percent would increase external debt-to-GDP ratio to 45 percent without putting external sustainability at risk based on available evidence. ### Energy Prices, Utilities, and SOE Implications - Energy prices (USD, excl. VAT): Electricity (USD/MWh): 2000: 37; 2001: 38; 2002: 47; 2003: 54; March 2004: 71. - Natural Gas (Households, USD/1000m3): 2000: 49; 2001: 60; 2002: 83; 2003: 100; March 2004: 129. - District Heating (USD/Gcal): 2000: 11; 2001: 12; 2002: 18; 2003: 20; March 2004: 21. - Two private oil refineries responsible for a large share of the increase, contributing 0.6 percent of GDP in 2003. - Energy sector policy and targets: - End-user gas prices in 2004 to increase by 5 percent every quarter. - Domestic producer gas price increase from US$29/tcm in 2003 to US$61/tcm in 2004; schedule for further increases through 2007. - Electricity prices adjusted to cost recovery (September 2003) and further increases needed to provide return on equity. - District heating: National Reference Price and Termoelectrica producer heating price to be raised by 12 percent in mid-2004; strategy for overhaul approved with World Bank input. - Implicit subsidies and losses (all energy, $m): 2000: 1,738; 2001: 2,574; 2002: 1,888; 2003: 1,323; 2004: 1,127. - Implicit subsidies and losses (percent of GDP): 2000: 4.7; 2001: 6.5; 2002: 4.7; 2003: 4.7; 2004: 2.9. ### Fiscal Policy, SOEs, and Public Sector Financing - General government deficit and targets: - Overall balance (general government, percent of GDP): 1999: -3.6; 2000: -4.0; 2001: -3.2; 2002: -2.6; 2003: -2.3; 2004 Proj.: -2.1. - Staff recommended general government deficit target of less than 2 percent of GDP over the medium term. - Authorities' stance: considered sustainable current account deficit 5½–5¾ percent of GDP consistent with general government deficit of 2½–3 percent of GDP. - 2004 fiscal tightening: - Supplementary budget to reduce 2004 general government deficit ceiling to no more than 2.1 percent of GDP (from 3 percent in approved budget). - Reduction achieved by saving surplus revenue estimated at 0.9 percent of GDP; staff estimates surplus could amount to at least 1.1 percent of GDP relative to approved 2004 budget. - Expenditures for motorway PPPs included in target unless meeting strict FAD TA criteria; limit expenditures for motorway construction (including PPPs and off-budget guarantees) to €260 million in 2004. - Table 5 (2003 Est. / Authorities / Staff projections, percent of GDP): - Total Revenue and Grants: 30.0 / 28.7 / 29.4. - Total Expenditure: 32.3 / 31.7 / 31.1. - Primary Expenditure: 30.2 / 29.6 / 29.2. - Primary Current Expenditure: 26.5 / 25.1 / 24.7. - Capital Expenditure: 3.5 / 4.4 / 4.4. - Overall Balance: -2.3 / -3.0 / -1.8. - SOE fiscal and wage measures: - SOE financing requirement (percent of GDP): 2000: 3.1; 2001: 3.3; 2002: 2.9; 2003: 2.8; 2004: 1.5. - Implicit subsidies in gas sector (percent of GDP): 2000: 3.6; 2001: 3.4; 2002: 1.9; 2003: 2.2; 2004: 1.4. - SOE wage program aim: improve financial performance of 72 large monitored companies by about ½ percent of GDP; limit wage bill growth to 7 percent (prior action); employment reductions planned (scheduled reduction of 19,000 positions). - Measures expected to improve SOE S-I balance relative to GDP by about 1 percentage point (gas and electricity price adjustments + SOE wage program less SOE investment increase). ### Monetary Policy, Exchange Rate, and Financial Conditions - Monetary framework and objectives: - NBR used exchange rate as implicit nominal anchor since early 2001; plans to adopt inflation targeting (IT) in 2005. - Authorities aim to reduce inflation to 9 percent by end-2004, 6 percent by end-2005, and 5 percent by end-2006. - NBR policy interest rate was 23½ percent (noted); NBR cut policy rate by 50 basis points in June 2004 to 22.8 percent. - Performance criteria and monetary anchors: - Quantitative performance criteria include ceilings on net domestic assets of NBR and floors on net foreign assets of NBR. - Table 1 key figures (lei billions unless noted): - Ceilings on Average Net Domestic Assets of the NBR: End-March: -122,235; End-June: -146,830; End-September: -171,896; End-December: -162,996. - Floors on Net Foreign Assets of the NBR (US$ millions): End-March: 7,304; End-June: 7,922; End-September: 8,786; End-December: 8,533. - Indicative targets for Broad Money: 481,460; 503,615; 535,999; 586,105. - Credit growth and systemic risks: - Credit growth: about 55 percent in real terms in 2003. - Credit expected to slow to about 35 percent in real terms on average in 2004. - Banks: well capitalized and liquid; loans classified as “doubtful” and “loss” stabilized at about 4 percent of total loans. - Banks insured about half of household loans with domestic insurers that reinsured some exposure abroad. - Measures to contain credit growth: tightened eligibility criteria for consumer and mortgage loans (effective February 1, 2004); NBR requested banks to organize a credit bureau (under way); possible increases in reserve requirements for FX sources of financing if needed. ### Structural Reforms, Privatization, and Governance - Privatization progress and pipeline: - 35 large companies with over 112,000 employees privatized in 2001–03. - Energy privatization: Petrom privatization advanced; two gas distribution companies and electricity distributors in pipeline (bids expected by mid-July/July 20, 2004). - Petrom prior actions: cancellation of arrears in litigation at share transfer; government assumption of environmental indemnities; relaxed constraints on reorganization. - AVAS portfolio: privatize or liquidate remaining 19 large SOEs by end-September 2004. - Governance and anticorruption: - Government approved package of judicial reform laws and strengthened asset declaration legislation (prior actions). - Office of special anticorruption prosecutor to be strengthened; ANC resources increased and prosecutors expanded. - Continued publication of largest tax nonpayers and financial statements of large SOEs. - Labor market and pension reforms: - Labor code to be reviewed and amended in early 2005 in line with World Bank recommendations. - Pension Fund medium-term projection (percent of GDP): - Total revenue: 2002: 6.3; 2004: 5.9; 2008: 5.1. - Total expenditure: 2002: 7.1; 2004: 7.1; 2008: 6.9. - Deficit: 2002: -0.9; 2004: -1.1; 2008: -1.8. - Replacement ratio (state pensioners): 2002: 31.1; 2004: 28.6; 2008: 28.6. - Dependency ratio (state pensioners): 2002: 103.7; 2004: 104.6; 2008: 106.9. - Staff recommendations: broaden tax base, accelerate increase in statutory retirement age, equalize retirement age for men and women. ### Stand-By Arrangement (SBA) — Precautionary Program Design and Conditionality - Arrangement features: - Proposed 24-month precautionary arrangement; total access: SDR 250 million (24.3 percent of quota), to be made available in nine purchases. - Quota: SDR 1,030.2 million. - Scheduled purchases (selected): July 8, 2004 — 27.778 SDR million (2.70 percent of quota) — Board approval; subsequent quarterly purchases of 27.778 SDR million. - Program objectives: - Strengthen macro stabilization ahead of EU accession; contain current account surge; bring inflation to single digits. - Fiscal consolidation and measures to contain credit growth to curb domestic demand. - Monitoring, phasing, and conditionality: - Front-loaded conditionality with quarterly reviews. - Quantitative PCs: ceilings on NBR net domestic assets, floors on NBR net foreign assets, ceilings on consolidated general government deficit, ceilings on cumulative nominal wage bill in monitored SOEs, floors on collection rates of main utilities, ceilings on guarantees and external debt contracting, ceilings on arrears of largest private debtors. - Structural conditionality: energy price adjustments, SOE reforms, privatization milestones (including Petrom), judicial reforms, and governance measures. - Performance criteria and benchmarks specified in the Technical Memorandum of Understanding (TMU). - Statement and approval: - IMF Executive Board approved the 24-month SBA (Press Release No. 04/137, July 7, 2004); authorities do not intend to draw and will treat the arrangement as precautionary. ### Vulnerabilities, Stress Tests, and External Sustainability - Vulnerability assessment: - Short-term risks "reasonably low"; medium-term prospects depend on prudent policy implementation. - External debt and public debt ratios on low side; official reserves comfortable. - Main risk: haphazard policy implementation, election-motivated fiscal slippage, or postponed reforms could reverse disinflation and raise current account pressures. - External debt dynamics and stress tests: - Total external debt/GDP (selected): 1999: 23.5; 2000: 25.6; 2001: 28.7; 2002: 30.7; 2003: 34.3; 2004: 34.6. - Stress tests: combined shocks (lower U.S. inflation, larger current account deficit, slower GDP growth) could raise external debt-to-GDP ratio to nearly 50 percent in extreme cases. - Policy implication: need for continued restraint in consumption growth and implementation of structural reforms to sustain sustainability. - Gross external financing requirements (US$ millions, selected): 2003: 8,530; 2004: 8,477; 2005: 9,176; 2006: 10,129; 2007: 10,991. - External financing composition: non-debt-creating inflows projected at 3½ percent of GDP on average over 2004–08 (reflecting privatization and pre-accession funds). ### Key Macro Indicators and Projections (selected) - Real GDP (year-on-year): 2000: 2.1; 2001: 5.7; 2002: 5.0; 2003: 4.9; 2004 Proj.: 5.0; 2005–2008 Proj.: 5.0 each year. - Final domestic demand (year-on-year): 2000: 2.1; 2001: 6.9; 2002: 3.5; 2003: 7.3; 2004 Proj.: 6.0. - CPI (end of period): 2000: 40.7; 2001: 30.3; 2002: 17.8; 2003: 14.1; 2004 Proj.: 9.0. - Real domestic credit (end-year, percent change): 1999: -7.6; 2000: 9.9; 2001: 27.9; 2002: 33.1; 2003: 55.4; 2004 Proj.: 21.4. - Savings-investment balance (percent of GDP): 2000: -3.9; 2001: -5.5; 2002: -3.4; 2003: -5.9; 2004 Proj.: -5.2; 2005–2008 Proj.: around -5.2 to -5.3. - Official reserves (end-year, US$ million): 2001: 3,466; 2002: 5,090; 2003: 6,975; 2004 Proj.: 7,994; medium-term: 2005: 9,664; 2006: 10,323; 2007: 11,075; 2008: 12,065. ### Staff Appraisal and Priority Policy Recommendations - Macroeconomic stabilization achievements: lower inflation (from 40 percent in early 2001 to 12½ percent in April 2004), solid growth, improved reserves and competitiveness. - Main policy priorities: - Keep general government deficit below 2 percent of GDP over the medium term. - Contain wage growth in line with productivity; maintain SOE wage and employment controls until hard budget constraints are established. - Complete energy price adjustments to reach import parity and bring electricity/heating to cost recovery; sustain collections and disconnection policies. - Slow credit growth through prudential measures, credit bureau reporting, and strengthened supervision/stress-testing. - Accelerate privatization (Petrom and energy distribution) and SOE restructuring while providing social mitigation. - Strengthen governance and judiciary; enhance anti-corruption efforts and transparency in privatization. - Prepare institutional and analytical prerequisites for inflation targeting for a 2005 transition while maintaining exchange-rate-guided framework as appropriate during the transition. - Staff recommendation: approve authorities’ request for the precautionary SBA, contingent on implementation of the program and structural conditionality. *Source: IMF staff report excerpt (Box 1: Medium-Term Current Account Developments and related sections from _cr04221).* ### Box 1. Medium-Term Current Account Developments .........................................................16 ### Box 1. Medium-Term Current Account Developments ### Key recent developments in the current account (2003–2004Q1) - Current account (percent of annual GDP): 2000: -3.9; 2001: -5.5; 2002: -3.4; 2003: -5.9; 2004Q1: -0.5. - In 2003, the current account deficit widened to almost 6 percent of GDP, increasing macroeconomic risks. - Contributors to stronger domestic demand in 2003: - Sharp increase in credit to the private sector contributed 2½ percentage points to the growth of domestic demand. - Final domestic demand grew by 7¼ percent in 2003, compared to 3½ percent in 2002. - A large minimum wage increase and ensuing strong economy-wide wage growth contributed 0.6 percentage point to higher domestic demand growth. - Delays in adjusting energy prices to higher import costs in early 2003 increased losses in the energy sector by 0.4 percent of GDP, adversely affecting the current account. ### Trade, exports, and competitiveness - Exports of goods and services (year-on-year real growth): 2000: 23.4; 2001: 12.1; 2002: 17.6; 2003: 11.1; 2004Q1: 10.2. - Imports of goods and services (year-on-year real growth): 2000: 27.1; 2001: 18.4; 2002: 12.0; 2003: 16.3; 2004Q1: 12.4. - Romania preserved competitiveness despite slower nominal depreciation and strong domestic demand: - Exports remained the strongest component of aggregate demand and Romania continued to increase market share in its main trading partners. - The CPI-based real effective exchange rate (REER) appreciated only modestly in 2002–03. - The ULC-based REER depreciated, with strong productivity gains and cuts in payroll taxes offsetting wage increases. ### Macroeconomic backdrop and indicators relevant for the current account - GDP growth (year-on-year real growth): 2000: 2.1; 2001: 5.7; 2002: 5.0; 2003: 4.9; 2004Q1: 6.1. - Final domestic demand (year-on-year real growth): 2000: 2.1; 2001: 6.9; 2002: 3.5; 2003: 7.3; 2004Q1: 7.9. - 12-month inflation (end of period): 2000: 40.7; 2001: 30.3; 2002: 17.8; 2003: 14.1; 2004Q1: 11.8. - Disinflation progress: annual inflation lowered from 40 percent in early 2001 to 12½ percent in April 2004. ### Fiscal and sectoral policy interactions with the current account - Public sector and SOE developments affected the current account: - Budgetary developments reduced the general government deficit and improved tax collections (tax revenue excluding contributions rose 17 percent in real terms in 2003). - State-Owned Enterprise (SOE) financing requirement (percent of GDP): 2000: 3.1; 2001: 3.3; 2002: 2.9; 2003: 2.8; 2004: 1.5. - Implicit subsidies in the gas sector (percent of GDP): 2000: 3.6; 2001: 3.4; 2002: 1.9; 2003: 2.2; 2004: 1.4. - Energy price adjustments and collections: - After delays in early 2003, gas prices were increased substantially in the second half of 2003 and early 2004. - Electricity prices were brought to cost recovery in September 2003, but further increases will be needed to provide an appropriate return on equity. - Consumer heating prices were raised toward cost recovery levels. - Collections in the gas and electricity sectors are now high; district heating collections remain weak but improved in Q1 2004. ### Summary assessment - The widening current account in 2003 reflected rapid domestic demand expansion driven by credit growth, wage policy, and delayed energy price adjustments that raised SOE losses and external deficits. - Strong export performance and maintained competitiveness (including a depreciated ULC-based REER) helped offset part of external pressures, but macroeconomic risks increased due to the scale of the deficit and the interaction of fiscal, monetary, and sectoral policies. *Source: IMF staff report excerpt (Box 1: Medium-Term Current Account Developments).* ### 0.6 percent of GDP in 2003, with two private oil refineries responsible for a large share of ### _cr04221 - 0.6 percent of GDP in 2003, with two private oil refineries responsible for a large share of ### Energy prices and utilities - Table 3. Romania: Energy Prices, 2000-04 (In U.S. dollars, excl. VAT): units of measurement: Electricity, USD/MWh; Gas, USD/1000m3; District Heating, USD/Gcal. - Electricity: 2000: 37; 2001: 38; 2002: 47; 2003: 54; March 2004: 71 - Natural Gas (Households): 2000: 49; 2001: 60; 2002: 83; 2003: 100; March 2004: 129 - Natural Gas (Other users): 2000: 49; 2001: 74; 2002: 80; 2003: 93; March 2004: 115 - Producer wellhead prices: 29; 52 - District Heating (National Reference Price): 2000: 11; 2001: 12; 2002: 18; 2003: 20; March 2004: 21 - Energy sector note: two private oil refineries were responsible for a large share of the increase, contributing to 0.6 percent of GDP in 2003. ### Wage trends and labor market outcomes - Real wage outcomes: - Net economy-wide real wages grew by about 8¾ percent in 2003, driven by a large minimum wage increase. - Strong wage growth continued in Q1 2004. - Labor costs increased by 5¾ percent in real terms in 2003, following a cut in payroll taxes. - State-owned enterprises (SOEs): - A ceiling on SOE wage bills was more successful in reducing employment than wages. - Wages in 76 large monitored SOEs moved in line with economy-wide wages in 2003. - Employment in those SOEs was reduced by 8.4 percent by attrition and layoffs. - Sectoral impact: - High wage growth particularly hurt railways and the mining sector, substantially increasing the losses and arrears in these sectors. ### Monetary policy, exchange rate, and financial conditions - Exchange-rate-based monetary policy: - Since early 2001, the NBR used the exchange rate as an implicit nominal anchor, gradually reducing the depreciation rate in line with its announced inflation target while allowing substantial short-term exchange-rate variability. - Restrictions on short-term capital inflows gave the NBR autonomy in setting the policy interest rate, which it used to support disinflation by keeping lei interest rates positive in real terms. - Nominal interest rates declined until mid-2003; in H2 2003 the NBR reversed the trend in response to weakening balance of payments, rapid credit growth, and slowdown in disinflation. - Interest rate and reserves indicators (figures referenced): - Figure 8: Romania: Nominal Interest Rates, 2001-04 (In percent) — series: NBR Auction; T-Bill; Commercial Bank Time Deposit; Commercial Bank Lending. - Figure 9: Romania: Reserves, Exchange Rates, and Bond Spreads, 2000-04 — series include Net Foreign Assets, Gross Foreign Assets, Monthly Depreciation Rate of Lei (lei/U.S. dollar, lei/euro, Basket, Three-month Moving Average), and Bond Spreads Against Comparable-Maturity German Bonds (EMBI 1/5 Year/7 Year, Basis points). - Credit growth and systemic risks: - Credit growth: about 55 percent in real terms in 2003. - Consumer and mortgage credit tripled in real terms in 2003 (from a low base); corporate credit remained strong. - 2003 FSAP assessment: systemic risks are low but growing. - Banks: well capitalized and liquid; loans classified as “doubtful” and “loss” stabilized at about 4 percent of total loans. - Banks have insured about half of their household loans with domestic insurance companies, which reinsured some exposure abroad. - Owing to strong credit growth, banks are rapidly increasing exposure to credit and market risks. ### Structural reforms, privatization, and governance - Private sector share: - Private sector accounted for 65 percent of GDP in 2002, the smallest share among new EU member states and accession candidates. - Privatization progress: - 35 large companies with over 112,000 employees were privatized in 2001–03, about half in the last year. - Energy sector privatization slow; key projects in pipeline, including privatization of Petrom and two gas distribution companies (estimated conservatively at US$1.1 billion). - Short deadlines for some privatization projects and write-off of tax arrears for minority private shareholders raised transparency concerns. - Governance and corruption: - Romania lags regional peers on government effectiveness and control of corruption based on World Bank governance database (Figures 10 and 11). - Government effectiveness indicator improved between 1996 and 2002; control of corruption indicator worsened over that period. ### Macroeconomic framework, risks, and medium-term targets - Staff recommendations and targets: - General government deficit target of less than 2 percent of GDP over the medium term. - Facilitate a current account deficit of about 5¼ percent of GDP (Box 1). - Potential GDP growth seen as 5 percent achievable with strong reform effort (Box 2). - Target to reduce inflation gradually to 4 percent by 2008. - Authorities’ stance: - Authorities considered a sustainable current account deficit range of 5½–5¾ percent of GDP, consistent with a general government deficit of 2½–3 percent of GDP. - Authorities planned to expand infrastructure investment and use public-private partnerships (PPPs); expected SOE financial performance improvement to offset expansionary budgetary stance. - Staff projected the authorities’ fiscal target would widen the external current account deficit to about 6½ percent of GDP, posing external risks. - Risks highlighted: - Large wage increases, rapid credit growth, and fiscal pressures could lead to overheating and an unsustainable real effective appreciation of the leu. - Need to reduce inflation to low single digits and keep current account deficit within safe range to sustain performance. - Box 1: Medium-Term Current Account Developments - Non-debt-creating inflows projected at 3½ percent of GDP on average over 2004–08 (reflecting large-scale privatization projects in the pipeline and utilization of pre-accession funds). - A current account deficit of 5¼ percent of GDP would cut gross external debt-to-GDP ratio by 1 percentage point. - With lower FDI (close to 1998–2003 average) and GDP growth of only 3 percent, the debt-to-GDP-stabilizing current account deficit would be 4¼ percent of GDP. - If debt-to-GDP ratio limited to 40 percent, sustainable current account deficit would be 4¾ percent of GDP (½ percentage point less than baseline). - A real effective depreciation of 15 percent would increase external debt-to-GDP ratio to 45 percent, which would not put external sustainability at risk based on available evidence. - Box 2: Medium-Term Growth Potential - Romania’s GDP growth averaged about 4½ percent in 2000–03. - Projection: an increase in fixed capital formation relative to GDP by 2¾ percentage points over the next five years could raise capital’s contribution to output growth to almost 3 percentage points. - Privatization and SOE restructuring could sustain annual productivity gains above 2 percent. - Employment expected to stabilize just below its present level, with private sector job creation broadly matching layoffs from restructuring. - Growth accounting table (Romania: Growth Accounting): - 1992-1999: GDP Growth 0.5; Contributions: Capital 0.4; Labor -1.7; TFP 1.9 - 2000-2003: GDP Growth 4.4; Contributions: Capital 2.0; Labor -0.6; TFP 2.9 - 2004-2008: GDP Growth 5.0; Contributions: Capital 2.8; Labor -0.2; TFP 2.4 ### Fiscal policy over the medium term - Authorities’ plans: - Intend to cut taxes and increase investment. - Envisage a revenue loss relative to GDP of about 1.3 percentage points by 2007 due to cuts in social security contributions, planned VAT rate differentiation, and lower dividends as privatization progresses. - Loss partly offset by higher excises and improved collections. - Investment to increase relative to GDP by about 1 percentage point; spending on maintenance and operating expenditure to decline substantially. - Staff advice: - Advised against tax cuts except for social security taxes; supported improvements in revenue administration. - Recommended not broadening the reduced VAT rate and opposed tax relief for reinvested profits. - Supported reducing income tax brackets from five to three only if revenue neutral. - Further cuts in still high social security taxes appropriate but should be compensated by broadening the tax base. - Welcomed progress in implementing FAD TA recommendations in tax administration. - Expenditure plans: - Authorities planned to reduce subsidies and sharply increase spending on motorway construction. - Agreed to seek World Bank advice on prioritizing motorway program; hired a consultant (World Bank financed) to assess fairness of unit prices in a contract. - Table 5. Romania: Fiscal Adjustment, 2003-07 (In percent of GDP) - 2003 Est. / Authorities / Staff projections: - Total Revenue and Grants: 30.0 / 28.7 / 29.4 - Total Expenditure: 32.3 / 31.7 / 31.1 - Primary Expenditure: 30.2 / 29.6 / 29.2 - Primary Current Expenditure: 26.5 / 25.1 / 24.7 - Capital Expenditure: 3.5 / 4.4 / 4.4 - Overall Balance: -2.3 / -3.0 / -1.8 ### Pension system - Box 3: Romania’s Pension System - Recent years: stable spending of about 7 percent of GDP and a deficit below 1 percent of GDP. - Staff projection: pension deficit could increase relative to GDP by almost 1 percentage point by 2008 due to: - Authorities’ intention to reduce social security tax rate by 5 percentage points; - Limited scope for further decline in replacement ratio; - Increase in dependency ratio as employment remains flat while retirees increase. - Long-run considerations: - Low replacement rate could create pressures to increase spending given discretion in annual pension adjustments. - Pension system’s dependency ratio is five times higher than the old-age dependency ratio, suggesting the current pension fund balance reflects a transition-induced early retirement surge. - Staff recommendations: - Broaden the tax base, accelerate schedule for increasing statutory retirement age, and equalize retirement age for men and women as recommended by the World Bank. - Advised against a new recorrelation scheme to compensate specific categories of pensioners. ### Article IV discussions — key focuses and conclusions - Main discussion topics: external current account risks, rapid credit growth, medium-term fiscal stance, governance issues, and need to accelerate privatization. - Staff view: continuing macroeconomic stabilization and tight fiscal policy crucial for sustaining strong growth; fiscal policy needed to be more supportive given incomplete monetary credibility and past wage slippages. - Agreed reforms: further structural reforms on financial and payment discipline, privatization, and governance necessary for EU accession; tension exists between socially acceptable and economically desirable speed of implementation. *IMF staff report content as provided in the source document.* ### 20. Staff and the authorities agreed that prudent wage policies are critical for ### _cr04221 - 20. Staff and the authorities agreed that prudent wage policies are critical for ### Wage Policy and Labor Contracts - Staff and authorities agreed that prudent wage policies are critical for maintaining macroeconomic stability and are a pillar of the disinflation strategy. - Wage and employment controls in SOEs must remain in place until hard budget constraints are firmly established. - The multi-layered collective contract framework preserves social peace but needs modification so labor contracts reflect specific conditions in each enterprise. - Further real increases in the minimum wage, which is now high compared to the economy-wide average wage, would be detrimental to competitiveness. - Authorities view the minimum wage as an instrument to ensure a fairer distribution between labor and capital but acknowledge wage policy’s macroeconomic importance. - 2004 wage program for 70 large SOEs: - Net wage growth contained at 1 percent in real terms. - Employment reduction of 5 percent. - Government action to prevent national collective contract from setting a minimum wage that deviates substantially from the statutory minimum wage (MEFP ¶ 21). ### Pension Fund Medium-term Projection (Table 6) - Romania: Pension Fund Medium-term Projection (in percent of GDP) - Total revenue: 2002 = 6.3, 2004 = 5.9, 2008 = 5.1, 2008/2002 = -1.1 - Total expenditure: 2002 = 7.1, 2004 = 7.1, 2008 = 6.9, 2008/2002 = -0.2 - Deficit: 2002 = -0.9, 2004 = -1.1, 2008 = -1.8, 2008/2002 = -0.9 - Replacement ratio (state pensioners): 2002 = 31.1, 2004 = 28.6, 2008 = 28.6, 2008/2002 = -2.5 - Dependency ratio (state pensioners): 2002 = 103.7, 2004 = 104.6, 2008 = 106.9, 2008/2002 = 3.2 - Source: Staff projection. ### Monetary and Exchange Rate Policies - Authorities favor a gradual disinflation strategy; rapid disinflation risks outweigh benefits given inflation persistence and need for relative price adjustment. - Framework used: anchor monetary policy on the exchange rate, restrict short-term capital inflows, and keep interest rates high. - Staff view this framework as capable of delivering further disinflation until the planned introduction of inflation targeting in 2005. - Recent developments suggest NBR might cut the policy interest rate, which was 23½ percent, relative to an inflation rate of 12½ percent. - Such a cut would likely reduce appreciation pressures on the leu without materially affecting domestic demand due to low interest-rate sensitivity. - No change in targeted depreciation rate seemed necessary; competitiveness and export performance require ongoing monitoring. - NBR intends to adopt inflation targeting (IT) in 2005 to focus policy on inflation and shift external current account responsibility to fiscal and income policies; IT seen as preferable to explicit fixed exchange rate regimes. - Move to IT requires substantial technical work in information gathering, analysis, and policy decision-making procedures; exchange rate interventions would still be needed to control inflation while transition challenges persist. ### Financial Sector Policies - Authorities consider the financial system strong but remain vigilant. - Staff recommendations (accepted by authorities): - Periodic stress-testing of banks' portfolios for credit, foreign exchange, interest rate, and interbank risks by simulating a broad range of shocks. - Ensure safe introduction of the RTGS payment system. - Improve oversight of the nascent capital market. - Rapid credit growth risks noted: - Banking sector capital adequacy ratios exceed BIS standards by large margins. - About half of the banking sector is owned by reputable foreign banks. - Stock of bank credit to the nongovernment sector was 16 percent of GDP at end-2003. - Staff concerned about large flows of consumer and mortgage credit raising domestic demand, slowing disinflation, and widening the current account deficit; lack of a credit bureau amplifies risk. - Authorities’ responses: - NBR tightened eligibility criteria for consumer and mortgage loans in January 2003. - Insurance Supervision Commission imposed limits on insurers’ retained exposure on consumer and mortgage loans. - NBR prompted commercial banks to organize a credit bureau (under way). - Measures slowed consumer credit growth in February and March. - Extended eligibility-tightening measures to non-bank financial and retail sectors; drafted a truth-in-lending act. - Willingness to implement additional measures, including mandatory reporting by all creditors to the credit bureau. - Preparing a study on macroeconomic and prudential risks of rapid credit growth with MFD staff, following up on 2003 FSAP recommendations. ### Structural Policies, Trade Regime, and Privatization - Structural reforms seen as crucial for rapid GDP growth; authorities concerned about adverse social effects. - Energy sector privatization acceleration intended; gas price adjustments to continue. - Privatization and restructuring: - Preference for joint ventures for Romgaz; consider privatization after successful Petrom privatization. - Restructure mining, railways, district heating; provide retraining and relocation support for redundant employees. - Accelerate privatization of the Savings Bank, to be completed in 2005. - Agency for Privatization plans to divest remaining companies by end-2004. - Authorities intend to sell remaining shares in BCR as soon as possible, in agreement with EBRD and IFC. - Labor market flexibility: - New labor code (March 2003) seen as overly restrictive by business community; issues on hiring/firing, collective contracts, wage-guarantee fund. - Authorities agreed to amend the law in early 2005 in line with World Bank recommendations (MEFP ¶ 44). - Trade liberalization: - Average effective tariff rate (import duty revenue relative to imports) was 1.6 percent in 2003. - Trade in industrial products with the EU free from tariffs; agricultural tariffs expected to be eliminated upon accession. - Romania maintains numerous Free Trade Agreements with CEE countries and negotiates with South East European countries; plans to lower MFN tariffs. ### Discussions on a Precautionary SBA — Program Objectives and Projections - Romania requested a new Fund arrangement to strengthen macroeconomic stabilization and structural reforms ahead of EU accession. - Program aims to address Article IV risks: surge in current account deficit and need to bring inflation to single digits. - Fiscal consolidation and measures to contain credit growth are crucial to contain domestic demand. - Fiscal stance of broad public sector will be tightened relative to GDP by 1¼ percentage points compared with the 2003 outcome. - Credit growth expected to slow to about 35 percent in real terms on average in 2004, reducing contribution to domestic demand growth by about 2 percentage points relative to 2003. - External current account deficit in 2004 projected to decline by ¾ percentage points relative to 2003, to 5¼ percent of GDP. - End-period inflation projected to be lowered to 9 percent in 2004. - Private sector saving-investment balance could worsen by about ½ percent of GDP as private consumption and savings react gradually. - Structural priorities: accelerated privatization (including Petrom), arrest accumulation of arrears, and improved governance. ### Fiscal Policy Adjustments for 2004 - Supplementary budget (to be approved in July) will reduce 2004 general government deficit ceiling to no more than 2.1 percent of GDP (from 3 percent in approved budget). - Reduction achieved by saving surplus revenue estimated at 0.9 percent of GDP; any surplus over that used to further reduce the deficit. - Based on April data, staff estimates this surplus could amount to at least 1.1 percent of GDP relative to the approved 2004 budget. - Spending on motorway PPPs included in target unless meeting strict FAD TA criteria. - Budget will provide resources to clear health system arrears accumulated in 2002; expenditure controls in health sector to be strengthened. - SOE measures to improve SOE financial position: - Gas and electricity price adjustments expected to increase savings relative to GDP by 1.1 percentage point. - SOE wage program expected to deliver savings relative to GDP of ½ percentage point. - SOE investment increase of 0.3 percent of GDP partially offsets savings. - Net improvement in SOEs’ S-I balance relative to GDP of about 1 percentage point. - Authorities will step up actions against tax nonpayment; reduction in tax arrears of largest private debtors will be a program performance criterion. - Prior action: bankruptcy procedures initiated against a large private refinery and other companies with arrears. ### Energy Sector Policies, Privatization and SOE Restructuring (Program Measures) - Collections improvement and district heating overhaul strategy being prepared with World Bank input; disconnection policy continues for other utilities. - Gas pricing: - Final user gas prices in 2004 to increase by 5 percent every quarter. - Domestic producer price increase from US$29/tcm in 2003 to US$61/tcm in 2004. - Schedule announced for further producer price increases through 2007. - Electricity prices to be adjusted in line with rising costs and to provide margin for return on equity to facilitate privatization. - Petrom restructuring constraints relaxed: restriction on major reorganizations shortened to four years; penalties for faster labor reduction eliminated; consideration of divesting one refinery before deadline; authorities to assume pre-privatization ecological indemnities. - Electricity distributors: contracts close for two distributors; two others scheduled for privatization later in year. - Gas distribution companies: bids expected by mid-July. - Mining and railways restructuring: - Close 30 mines and lay off 8,000 miners in two steps in 2004. - Strategy to phase out state support for minerals sector by 2007 and for coal sector by 2010; reduce employment in sector by over 40 percent by 2007 (EU commitments). - Railways: close or concession 3,000 kilometers of low-traffic lines. - Overall employment reduction proposed of 8,000 positions in railways, about half layoffs. - World Bank to provide support for social mitigation. ### Governance and Anticorruption Measures - Program includes conditionality for judicial reform, strengthening the Superior Council of the Magistrates to guarantee judicial independence (MEFP ¶ 41). - Law on declaration of politicians’ assets amended; office of the special anticorruption prosecutor to be strengthened (MEFP ¶ 42–43). - Legislation to eliminate immunity for former cabinet members agreed. - Reputable consultancy firm hired to review recent large tobacco company privatization (MEFP ¶ 31). - Continued publication of largest tax nonpayers on a web site and regular publication of financial statements of large SOEs. - Agreed measures to enforce tax collections against large nonpayers to improve business climate. ### Monetary Policy Under the Program - Monetary policy focus: lower inflation to single digits in 2004. - Current exchange-rate-based framework remains appropriate; NBR will use interest rate policy and selective market interventions to steer the exchange rate consistent with the inflation target and a modest real appreciation (MEFP ¶ 38). - Fiscal policy expected to lead in keeping the current account deficit within safe margins; NBR to closely watch credit growth and implement additional measures if necessary (MEFP ¶ 39). *Source: Staff report and MEFP excerpt from the provided IMF PDF content.* ### 42. Vulnerability indicators point to reasonably low short-term risks, but medium- ### _cr04221 - 42. Vulnerability indicators point to reasonably low short-term risks, but medium- ### Macroeconomic vulnerability and risks - Short-term risks are "reasonably low", but medium-term prospects depend on persevering with stability-oriented policies and structural reforms. - External debt, and public and publicly guaranteed debt-to-GDP ratios are on the low side. - Official reserves are high relative to money aggregates and short-term debt, and comfortable relative to prospective imports of goods and services. - Main source of macroeconomic risks: haphazard policy implementation. - Election-motivated deterioration in the fiscal stance and postponement of structural reforms in 2004–05 could: - lead to a loss of market confidence, - reverse disinflation, - create current account pressures, - be accompanied by rising sovereign spreads and weakening FDI. - While losing access to external financing seems unlikely, prospects of significantly improving living standards and implementing EU-competitive reforms could be pushed back. ### Growth, inflation, and external outlook - Outlook for growth and inflation expected to be robust to moderately adverse external changes. - Export resilience in 2003 despite slow partner demand suggests Romania could weather a slow recovery in the EU. - Balance of payments outlook in 2004 and over the medium term appears favorable: - Improved confidence in the run-up to EU accession expected to spur an increase in FDI and business confidence. - Foreign borrowing expected to be reduced in line with the lower budget deficit. ### Banking system and financial sector vulnerabilities - Banking system vulnerability remains low for the immediate future. - Recent speed of credit expansion has been "excessive." - Overall private sector indebtedness and exposure to foreign-currency-denominated credit are low compared with other accession countries. - If excessive pace of credit expansion does not abate, authorities would need to implement additional measures to protect bank solvency. - Financial soundness indicators suggest banks are liquid and well capitalized, but: - enhanced on-site supervision is required amid rapid credit growth, - systematic stress-testing of portfolios is needed, - additional measures required should rapid growth in foreign currency loans re-emerge. - Staff completing a safeguards assessment with respect to the precautionary SBA; preliminary conclusions do not indicate serious vulnerabilities. - The NBR has considerably strengthened its safeguards framework since the 2002 assessment conducted under the previous SBA. ### Access, phasing, monitoring, and conditionality - Authorities intend to treat the proposed 24-month arrangement as precautionary. - Total access: SDR 250 million (24.3 percent of quota), to be made available in nine purchases. - Precautionary nature and low access reflect the absence of an immediate balance of payments need. - Front-loaded conditionality to ensure implementation of crucial macroeconomic and structural policies, aligned with EPA recommendations, including: - quantitative performance criteria (PCs) on macro objectives and on the wage bill of SOEs, - structural measures to improve financial performance of the energy sector, - quantitative targets for collection rates of main utilities, targets for tax arrears, and other SOE arrears, - structural conditionality on reforms in the mining, railways, and district heating sectors, developed in close coordination with the World Bank. - The program includes conditionality on governance issues, building upon World Bank work and EU Commission discussions. - Reviews will be conducted on a quarterly basis, assessing financial performance indicators and progress on structural elements. - The Bank has considered that more frequent Fund reviews could be more effective in implementing energy price reforms. ### Staff appraisal and policy recommendations - Romania has made notable progress: reduced budget and public sector deficits, improved competitiveness after the 1999 devaluation, strong pick-up in growth, steadily falling inflation, and higher saving and investment rates. - Remaining structural challenges: - large public sector share (still largest among accession countries), - delayed privatization projects in the energy sector (no project completed), - weak financial performance of SOEs, notably railways and mining, - governance weaknesses and corruption hindering larger FDI. - Fiscal policy guidance: - General government budget deficit should be kept below 2 percent of GDP over the medium-term. - Efforts to contain the deficit must be paired with revenue/expenditure structure improvements: - lower social security contribution rates further, - increase excise taxes gradually to EU levels, - strengthen tax collection, - prioritize expenditures to make room for accession-related investment spending. - SOE sector reforms: - Impose hard budget constraints on SOEs to prevent undermining stabilization efforts. - In energy: raise gas prices to import parity; timely adjustment of electricity and heating prices in line with costs. - Continue fight against nonpayment of utility bills and tax arrears. - Downsize loss-making mining and railway sectors while enhancing social safety nets and retraining/relocation programs. - Wage and labor market policies: - Prudent wage policies critical for macro stability. - Prevent collective contracts from derailing SOE wage program or invalidating statutory minimum wage decisions. - Avoid further real increases in the minimum wage, currently high compared to the economy-wide average wage. - Continue employment and wage controls in SOEs. - Overhaul the Labor Code to increase labor market flexibility; staff welcomes authorities' willingness to amend the law. - Privatization: - Authorities plan to sell or close by end-2004 most companies remaining in the Agency for Privatization portfolio. - Privatization of Petrom and several distribution companies in the energy sector is crucial. - Governance and judiciary: - Step up fight against corruption; reform judiciary to improve effectiveness and independence. - Establish an efficient bankruptcy mechanism as a crucial element of a fully functioning market economy. - Monetary policy and the NBR: - Current guidance of the exchange rate consistent with the inflation target and real appreciation in line with sectoral productivity differentials remains appropriate for the near future, achieved with market interventions combined with interest rate policy. - Recent NBR measures have moderated consumer credit growth; authorities need to strengthen bank supervision and strictly enforce new regulations on consumer and mortgage lending. - With further stabilization and technical preparations, moving to an IT framework for monetary policy will be appropriate, after establishing institutional, operational, and analytical prerequisites. - Strengthening of the NBR’s independence via amendments to the NBR law in June 2004 is an important step. - If delays occur, authorities should consider postponing the switch to IT and consider introducing joint announcements by the NBR and the government of the annual inflation target to better coordinate policies and increase credibility. - Staff recommendation: - The authorities' program in the Letter of Intent and the Memorandum of Economic and Financial Policies includes policies necessary for further macro stabilization. - Staff recommends approval of the authorities’ request for the SBA, which they intend to treat as precautionary. *Source: IMF staff report text.* ### 63. It is suggested that the Article IV Consultation with Romania be held on the twenty- ### _cr04221 - 63. It is suggested that the Article IV Consultation with Romania be held on the twenty- ### Consultation timing - It is suggested that the Article IV Consultation with Romania be held on the twenty-four-month cycle, subject to the provisions of the decision on consultation cycles approved by the Board on July 15, 2002. ### Selected economic and financial indicators (1999–2004; highlights) - Real GDP (change in percent): 1999 -1.2; 2000 2.1; 2001 5.7; 2002 5.0; 2003 4.9; 2004 Proj. 5.0. - Final domestic demand (change in percent): 1999 -2.9; 2000 2.1; 2001 6.9; 2002 3.5; 2003 7.3; 2004 Proj. 6.0. - CPI (end of period): 1999 54.8; 2000 40.7; 2001 30.3; 2002 17.8; 2003 14.1; 2004 Proj. 9.0. - CPI (period average): 1999 45.8; 2000 45.7; 2001 34.5; 2002 22.5; 2003 15.3; 2004 Proj. 11.5. - Unemployment rate (end of period; percent): 1999 11.8; 2000 10.5; 2001 8.6; 2002 8.1; 2003 7.2; 2004 Proj. 6.5. - Gross national saving (percent of GDP): 1999 11.9; 2000 15.6; 2001 17.0; 2002 20.1; 2003 18.7; 2004 Proj. 19.6. - Gross domestic investment (percent of GDP): 1999 16.1; 2000 19.5; 2001 22.6; 2002 23.5; 2003 24.6; 2004 Proj. 24.8. - Overall balance (general government, percent of GDP): 1999 -3.6; 2000 -4.0; 2001 -3.2; 2002 -2.6; 2003 -2.3; 2004 Proj. -2.1. - Primary balance (percent of GDP): 1999 2.4; 2000 0.9; 2001 0.6; 2002 0.4; 2003 -0.2; 2004 Proj. 0.0. - Total public debt (percent of GDP): 1999 30.5; 2000 29.9; 2001 27.4; 2002 26.8; 2003 26.2; 2004 Proj. 26.5. - Real domestic credit (end-year, percent change): 1999 -7.6; 2000 9.9; 2001 27.9; 2002 33.1; 2003 55.4; 2004 Proj. 21.4. - Broad money (end of year, percent change): 1999 44.9; 2000 38.0; 2001 46.2; 2002 38.1; 2003 23.3; 2004 Proj. 27.2. - Official reserves (end-year, US$ million): 1999 2,472; 2000 3,466; 2001 5,090; 2002 6,975.0; 2003 7,994.0; 2004 Proj. 9,664.0. - Reserve cover (months of prospective imports): 1999 2.1; 2000 2.5; 2001 3.2; 2002 3.5; 2003 3.3; 2004 Proj. 4.2. - Lei per US$ (end of period): 1999 18,250; 2000 25,926; 2001 31,597; 2002 33,500; 2003 33,013; 2004 ... ### Balance of payments (quarterly 2003–2004 and annual medium-term) - Current account (Q1–Q4 2003, Q1–Q3 2004 data and 2004 Proj.): Selected quarterly figures (in US$ millions): 2003Q1 -172; Q2 -1,225; Q3 -459; Q4 -1,511. 2004Q1 -3,367; Q2 -337; Q3 -1,387; 2004Q4 Proj. -492. 2004 full year current account -3,483. - Ratio to annual GDP (quarterly): 2003Q1 -0.3; Q2 -2.2; Q3 -0.8; Q4 -2.7. 2004Q1 -5.9; Q2 -0.5; Q3 -2.1; Q4 -0.7; 2004 full year -5.2. - Exports (quarterly totals and annual): 2003Q1 4,051; Q2 4,208; Q3 4,580; Q4 4,779; 2003 total 17,618. 2004Q1 5,416; Q2 5,245; Q3 5,253; Q4 5,045; 2004 total 20,959. - Imports (quarterly totals and annual): 2003Q1 -4,499; Q2 -5,497; Q3 -5,521; Q4 -6,638; 2003 total -22,155. 2004Q1 -6,172; Q2 -6,554; Q3 -6,176; Q4 -6,737; 2004 total -25,639. - Trade balance (annual): 2000 -1,684; 2001 -2,969; 2002 -2,612; 2003 -4,537; 2004 Proj. -4,680. - Current account (annual 2000–2008 projections): 2000 -1,435; 2001 -2,223; 2002 -1,572; 2003 -3,367; 2004 Proj. -3,483; 2005 Proj. -3,862; 2006 Proj. -4,141; 2007 Proj. -4,544; 2008 Proj. -4,955. - Exports (annual, US$ millions): 2003 17,618; 2004 Proj. 20,959; 2005 Proj. 22,719; 2006 Proj. 24,642; 2007 Proj. 26,696; 2008 Proj. 28,963. - External debt (US$): 2003 19,693; 2004 Proj. 22,256. - Gross official reserves of the NBR (millions of US$; medium-term): 2001 3,466; 2002 5,090; 2003 6,975; 2004 7,994; 2005 9,664; 2006 10,323; 2007 11,075; 2008 12,065; 2009 Proj. 13,236 (table shows through 2008). ### Consolidated general government (2000–2004; selected fiscal aggregates) - Total revenue and grants (in billion lei): 2000 251,095; 2001 351,741; 2002 449,012; 2003 566,727; 2004 Budget 651,975; 2004 Staff 669,798. - Total revenue and grants (percent of GDP): 2000 31.2; 2001 30.1; 2002 29.7; 2003 30.0; 2004 Budget 29.1; 2004 Staff 29.9. - Total expenditure (in billion lei): 2000 283,351; 2001 389,321; 2002 488,523; 2003 610,603; 2004 Budget 716,274; 2004 Staff 716,904. - Total expenditure (percent of GDP): 2000 35.3; 2001 33.4; 2002 32.3; 2003 32.3; 2004 Budget 31.9; 2004 Staff 32.0. - Wages and salaries (billion lei / percent of GDP): 2000 26,998 (3.4); 2001 37,203 (3.2); 2002 41,661 (2.8); 2003 53,541 (2.8); 2004 Budget 64,921 (2.9); 2004 Staff 66,332 (3.0). - Social security (billion lei / percent of GDP): 2000 86,557 (10.8); 2001 125,106 (10.7); 2002 161,867 (10.7); 2003 186,147 (9.8); 2004 Budget 215,453 (9.6); 2004 Staff 211,502 (9.4). - Subsidies and transfers (billion lei / percent of GDP): 2000 115,905 (14.4); 2001 167,891 (14.4); 2002 212,293 (14.0); 2003 267,532 (14.1); 2004 Budget 334,970 (14.9); 2004 Staff 334,970 (14.9). - Overall balance (cash, including grants; billion lei / percent of GDP): 2000 -32,256 (-4.0); 2001 -37,580 (-3.2); 2002 -39,512 (-2.6); 2003 -43,877 (-2.3); 2004 Budget -64,299 (-2.9); 2004 Staff -47,106 (-2.1). - Primary balance (cash, including grants; percent of GDP): 2000 0.9; 2001 0.6; 2002 0.4; 2003 -0.2; 2004 Budget -0.8; 2004 Staff 0.0. - Financing (2000–2004): domestic and external financing components are reported; privatization proceeds and bank asset recoveries included (privatization proceeds 2004 Budget 5,000; 2004 Staff 12,600; bank asset recoveries 2004 Budget 1,200; 2004 Staff 1,200). ### Monetary survey and NBR (2002–2004; key monetary aggregates) - Net foreign assets (including valuation changes; NFA, monthly-average basis) NBR (end-period, in billions of lei): 2002 Dec 175,723; 2003 Dec 235,773; 2004 Dec program 289,203. - Net foreign assets (in millions of US$): 2002 Dec 5,221; 2003 Dec 7,142; 2004 Dec program 8,397. - Lei reserve money (end-period, lei): 2002 Dec 92,385; 2003 Dec 131,562; 2004 Dec program 126,207. - Broad money (end-period, lei): 2002 Dec 373,712; 2003 Dec 460,751; 2004 Dec program 586,105. - Broad money (M2X) growth (12-month percent change): 2002 Dec 38.2; 2003 Dec 34.2; 2004 Dec program 27.2. - Growth of credit to nongovernment, composite (12-month percent change): 2002 32.4; 2003 33.7; 2004 Proj. 40.3 (table later shows projections through 2004 with higher rates). - CPI inflation (in percent, monthly averages and end-period): 2002 Dec 17.8; 2003 Dec 14.1; 2004 Dec program 9.0. ### Energy sector: implicit subsidies and losses (2000–2004; electricity, heating, natural gas) - Total losses from operations (electricity and heating; $m): 2000 210; 2001 (w/o adjustments) 578; 2001 Program 432; 2001 Actual 346; 2002 Program 124; 2002 Actual 142; 2003 Actual 137; 2004 Program 124. - Total implicit subsidies and losses (all energy, $m): 2000 1,738; 2001 2,574; 2002 1,888; 2003 1,323; 2004 1,127; 2005 1,639; 2006 1,159 (table shows multi-year series). - Implicit subsidies and losses (percent of GDP): 2000 4.7; 2001 6.5; 2002 4.7; 2003 4.7; 2004 2.9; 2005 2.4; 2006 2.4; 2007 2.8; 2008 1.7. - Natural gas: Loss from low prices ($m): 2000 1,246; 2001 1,456; 2002 1,327; 2003 1,230; 2004 1,025; 2005 842; 2006 1,286; 2007 930. - Notes in source: cost recovery price estimates based on WEO fuel price projections; estimates as of September 2001 assume adjustments envisaged under the program were not implemented; reduction in losses only partially translates into an improvement in the saving-investment balance of public enterprises, owing to offsetting factors including increase in losses in other public enterprises, higher tax payments of the energy sector, and higher investment in the energy sector. ### Medium-term balance of payments and external financing (2000–2008 outlook) - Gross financing requirements (US$ millions): 1998 3,742; 1999 4,388; 2000 6,135; 2001 5,650; 2002 6,854; 2003 8,530; 2004 8,477; 2005 9,176; 2006 10,129; 2007 10,991. - Composition of financing (1999–2008 projections): FDI and capital transfers (net) shown (e.g., 2004 Proj. 1,691; 2005 Proj. 2,393); public sector borrowing and private sector borrowing detailed by loans, bonds, disbursements, amortization. - Financing gap (residuals): small positive residuals in some years (e.g., 1999 539; 2000 560; 2001 167; 2002 275; 2003 281; 2004 287; later years zero). ### Indicators of external vulnerability and Fund credit (2000–08) - Total external debt/GDP (percent): 1999 23.5; 2000 25.6; 2001 28.7; 2002 30.7; 2003 34.3; 2004 34.6; 2005 33.2; 2006 33.1; 2007 33.3; 2008 33.7. - Public and publicly guaranteed external debt/GDP (percent): 2003 21.1; 2004 21.6; 2005 20.8; 2006 20.4; 2007 19.9; 2008 19.7; 2009 19.8 (table shows through 2008). - Outstanding Fund credit (end of period): SDR millions: 2000 347.9; 2001 308.0; 2002 314.9; 2003 400.4; 2004 339.0; 2005 287.4; 2006 206.3; 2007 92.7; 2008 23.8. In US$ millions: 2000 458.8; 2001 392.1; 2002 407.8; 2003 546.9; 2004 460.7; 2005 389.5; 2006 278.8; 2007 124.7; 2008 31.9. - Outstanding Fund credit (in percent of quota): 2000 33.8; 2001 29.9; 2002 30.6; 2003 38.9; 2004 32.9; 2005 27.9; 2006 20.0; 2007 9.0; 2008 2.3. ### Medium-term projections (income, prices, saving-investment, 2000–08) - Nominal GDP (in trillions of lei): 2000 803.773; 2001 1,167.687; 2002 1,512.617; 2003 1,890.778; 2004 2,243.160; 2005 2,527.315; 2006 2,804.962; 2007 3,084.622; 2008 3,382.289. - Nominal GDP (in billions of US$): 2000 37.060; 2001 40.188; 2002 45.760; 2003 56.950; 2004 66.999; 2005 72.697; 2006 79.579; 2007 87.141; 2008 95.582. - Real GDP (% change): 2000 2.1; 2001 5.7; 2002 5.0; 2003 4.9; 2004 Proj. 5.0; 2005 Proj. 5.0; 2006 Proj. 5.0; 2007 Proj. 5.0; 2008 Proj. 5.0. - CPI, end of period: 2000 40.7; 2001 30.3; 2002 17.8; 2003 14.1; 2004 Proj. 9.0; 2005 Proj. 6.0; 2006 Proj. 5.0; 2007 Proj. 4.0; 2008 Proj. 4.0. - Total national saving (percent of GDP): 2000 15.6; 2001 17.0; 2002 20.1; 2003 18.7; 2004 Proj. 19.6; 2005 Proj. 20.1; 2006 Proj. 20.8; 2007 Proj. 21.3; 2008 Proj. 21.7. - Total investment (percent of GDP): 2000 19.5; 2001 22.6; 2002 23.5; 2003 24.6; 2004 Proj. 24.8; 2005 Proj. 25.4; 2006 Proj. 26.0; 2007 Proj. 26.5; 2008 Proj. 26.9. - Savings-investment balance (percent of GDP): 2000 -3.9; 2001 -5.5; 2002 -3.4; 2003 -5.9; 2004 Proj. -5.2; 2005 Proj. -5.3; 2006 Proj. -5.2; 2007 Proj. -5.2; 2008 Proj. -5.2. *Sources: Romanian authorities; and Fund staff estimates and projections.* ### 1. Percentage share of income or consumption held by poorest 20% ### _cr04221 - 1. Percentage share of income or consumption held by poorest 20% ### Millennium Development Goals — Key indicators and targets (Romania) - 1. Percentage share of income or consumption held by poorest 20%: 8.2 - 2. Prevalence of child malnutrition (percent of children under 5): 5.7; 2.9 - Goal 2. Achieve universal primary education - Target: Ensure that, by 2015, children everywhere will be able to complete a full curse of primary schooling. - 3. Net primary enrollment ratio (percent of relevant age group): 76.9; 92.0; 92.8; 100.0 - 4. Youth literacy rate ((in percent of ages 15-24): 99.3; 99.5; 99.6; 99.7; 100.0 - Goal 3. Promote gender equality - Targets: Eliminate gender disparity in primary and secondary education preferably by 2005 and to all levels of education no later than 2015 - 5. Ratio of girls to boys in primary and secondary education (in percent): 95.0; 96.3; 100.1 - 6. Ratio of young literate females to males (percent of ages 15-24): 99.9; 100.0; 100.2; 100.2 - 7. Proportion of seats held by women in national parliament (in percent): 34.0; 7.0; 11.0; 11.0 - Goal 4. Reduce child mortality - Target: Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate - 8. Under five mortality rate (per 1000): 35.7; 26.2; 21.0; 21.4; 11.9 - 9. Infant mortality rate (per 1000 live births): 26.9; 21.2; 19.0; 17.8 - 10. Immunization, measles (percent of children under 12 months): 92.0; 93.0; 98.0 - Goal 5. Improve maternal health - Target: Reduce by three quarters, between 1990 and 2015, the maternal mortality ratio. - 11. Maternal mortality ratio (modeled estimate per 100,000 live births): 60.0 - 12. Births attended by skilled health staff (percent of total): 99.0 - Goal 6. Combat HIV/AIDS, malaria and other diseases - Target: have halted by 2015, and begun to reverse, the spread of HIV/AIDS. Have halted by 2015, and begun to reverse, the incidence of malaria and other major diseases. - 13. Prevalence of HIV, female (percent of ages 15-24): 0.0 - 14. Contraceptive prevalence rate (percent of women of ages 15-49): 57.3; 48.0 - 15. Incidence of tuberculosis (per 1,000 people): 134.9 - 16. Tuberculosis cases detected under DOTS (in percent): 9.0 - Goal 7. Ensure environmental sustainability - 17. Forest area (percent of total land area): 27.4; 28.0 - 18. Nationally protected areas (percent of total land area): 4.6; 4.7; 4.7 - 19. GDP per unit of energy use (PPP in US$ per Kg. oil equivalent): 2.0; 2.8; 3.5 - 20. CO2 emissions (metric tons per capita): 6.7; 5.3; 3.6 - 21. Access to an improved water source (percent of population): 58.0 - 22. Access to improved sanitation (percent of population): 53.0 - Goal 8. Develop a Global Partnership for Development - 23. Youth unemployment rate (percent of total labor force of ages 15-24): 20.9; 19.5 - 24. Fixed line and mobile telephones (per 1,000 people): 131.2; 356.2 - 25. Personal computers (per 1,000 people): 2.2; 13.2; 35.7 - Source note: World Development Indicators database, April 2002. 1/ Includes only indicators for which data is available for any given year. 2/ Targets are indicated quantitatively wherever it is possible, but specifics are described in the goals' sections. ### Public Sector Total Financing, 2000–04 — Select figures - I. Consolidated General Government Financing (lei trillion annual totals shown): 34.6; 33.1; 41.7; 2.5; 4.7; -5.5; 21.9; 23.6; 6.8; 17.0; 4.9; 18.4; 47.1 - Percent of annual GDP (selected values): 4.3; 2.8; 2.8; 0.1; 0.2; -0.3; 1.2; 1.2; 0.3; 0.8; 0.2; 0.8; 2.1 - I.1 External Financing, net (lei trillion selected): 22.6; 25.5; 23.6; 3.5; 1.5; 31.6; -5.2; 31.5; 1.1; 31.7; 7.9; -1.5; 39.2 - sovereign bonds and BOP support loans (selected): 10.0; 15.1; 9.5; -1.4; -0.3; 26.9; -6.2; 19.0; -1.4; 27.2; 4.3; -1.4; 28.7 - project financing (selected): 12.6; 10.4; 13.3; 4.3; 1.9; 4.3; 1.1; 11.6; 1.7; 4.4; 3.6; -0.1; 9.6 - II. State Owned Enterprises Financing (lei trillion selected): 24.7; 38.8; 43.3; 13.8; 13.6; 6.7; 18.8; 52.9; -2.2; 1.2; 8.7; 11.3; 19.0 - Percent of annual GDP (selected): 3.1; 3.3; 2.9; 0.7; 0.7; 0.4; 1.0; 2.8; -0.1; 0.1; 0.4; 0.5; 0.8 - III. Overall Public Sector Financing (lei trillion selected): 43.5; 54.0; 67.0; 10.3; 15.3; -0.9; 37.3; 61.9; 3.9; 19.3; 14.6; 30.7; 68.4 - Percent of annual GDP (selected): 5.4; 4.6; 4.4; 0.5; 0.8; 0.0; 2.0; 3.3; 0.2; 0.9; 0.6; 1.4; 3.0 - Public Sector Borrowing Requirement (lei trillion selected): 35.9; 47.8; 57.2; 8.2; 13.7; -2.0; 35.7; 55.6; 1.9; 17.9; 5.6; 29.2; 54.6 - Percent of annual GDP (selected): 4.5; 4.1; 3.8; 0.4; 0.7; -0.1; 1.9; 2.9; 0.1; 0.8; 0.2; 1.3; 2.4 - Memorandum items: - General Government Deficit (above the line), percent of annual GDP (selected): 4.0; 3.2; 2.6; 0.3; 0.5; -0.2; 1.6; 2.3; 0.4; 0.6; 0.3; 0.8; 2.1 - Discrepancy (above-the-line minus below-the line General Government Deficit) (selected): -0.3; 2.5; 2.0; 0.2; 0.3; 0.1; 0.4; 1.1; 0.1; -0.2; 0.1; 0.0; 0.0 - Cash Financing of the SOEs, percent of annual GDP (selected): 1.1; 1.8; 1.7; 0.4; 0.6; 0.2; 0.8; 2.0; -0.1; 0.1; 0.4; 0.6; 1.0 - GDP (annual): 804; 1,167; 1,512; 1,891; 1,891; 1,891; 1,891; 1,891; 2,243; 2,243; 2,243; 2,243; 2,243 - Average Exchange Rate (LEI/US$) (selected): 21,693; 29,060; 33,055; 33,155; 32,940; 33,278; 33,428; 33,201; 32,430 - Notes: - 1/ Calculated as difference between the end-of-period stocks. The foreign currency flows are converted in lei at the monthly average exchange rate. - 2/ From the monetary survey. - 3/ T-bills issued domestically by the Ministry of Finance. - 4/ Including borrowing not guaranteed by the state. - 5/ Excludes arrears to the general government. - 6/ Excludes non-debt-creating financing. - 7/ Total privatization receipts of all components of the consolidated general government independent of whether they are transferred to the treasury. - 8/ AVAS receipts from asset recovery transferred to the consolidated general government. - 9/ Estimates for 2001 and Q3-Q4'2003. - 10/ Excludes lending to the National Road Administration in 2003 and 2004. ### Schedule of Purchases Under the Stand-By Arrangement - Quota: The quota is SDR 1,030.2 million. - Scheduled purchases (date — amount in millions of SDRs — In percent of quota — condition): - July 8, 2004 — 27.778 — 2.70 — Board approval of Stand-By Arrangement - August 15, 2004 — 27.778 — 2.70 — Observance of end-June quantitative performance criteria, structural performance criteria and completion of quarterly review - November 15, 2004 — 27.778 — 2.70 — Observance of end-September performance criteria and completion of quarterly review - February 15, 2005 — 27.778 — 2.70 — Observance of end-December performance criteria and completion of quarterly review - May 15, 2005 — 27.778 — 2.70 — Observance of end-March performance criteria and completion of quarterly review - August 15, 2005 — 27.778 — 2.70 — Observance of end-June performance criteria and completion of quarterly review - November 15, 2005 — 27.778 — 2.70 — Observance of end-September performance criteria and completion of quarterly review - February 15, 2006 — 27.778 — 2.70 — Observance of end-December performance criteria and completion of quarterly review - May 15, 2006 — 27.776 — 2.70 — Observance of end-March performance criteria and completion of quarterly review - Total Under Arrangement: 250 (in millions of SDRs) — 24.27 (In percent of quota) ### Romania—Relations with the Fund (As of April 30, 2004) — Key facts and figures - I. Membership: Joined 12/15/72; Article VIII - II. General Resources Account: - Quota: 1,030.20 SDR million — 100.00 percent of quota - Fund holdings of currency: 1,406.88 SDR million — 136.56 percent - III. SDR Department (SDR million): - Net cumulative allocation: 75.95 — 100.00 percent - Holdings: 2.75 — 3.62 percent - IV. Outstanding Purchases and Loans (SDR million / % Quota): - Stand-By Arrangements: 360.97 — 35.04 - Systemic Transformation: 15.71 — 1.52 - V. Financial Arrangements (selected lines): - Stand-By (approval 10/31/01 — expiration 10/15/03): Approved 300.00 (SDR million) — Drawn 300.00 - Stand-By (approval 08/05/99 — expiration 02/28/01): Approved 400.00 — Drawn 139.75 - Stand-By (approval 04/22/97 — expiration 05/21/98): Approved 301.50 — Drawn 120.60 - Stand-By (approval 05/11/94 — expiration 04/22/97): Approved 320.50 — Drawn 94.27 - Stand-By (approval 05/29/92 — expiration 03/28/93): Approved 314.04 — Drawn 261.70 - Stand-By (approval 04/11/91 — expiration 04/10/92): Approved 380.50 — Drawn 318.10 - VI. Projected Payments to Fund (Expectations Basis) (SDR million): - 2004 Principal: 91.32; Charges/interest: 6.69; Total: 98.02 - 2005 Principal: 102.80; Charges/interest: 6.80; Total: 109.60 - 2006 Principal: 113.67; Charges/interest: 4.25; Total: 117.91 - 2007 Principal: 68.89; Charges/interest: 2.02; Total: 70.91 - 2008 Charges/interest: 1.19; Total: 1.19 - VII. Exchange Rate Arrangements: - From August 1994, a decentralized direct dealing interbank market has been in operation. - The official reference rate published by the NBR is an average of rates reported for interbank and client transactions. - Romania accepted the obligations of Article VIII, Sections 2, 3, and 4, with effect from March 25, 1998. - Romania’s exchange system is free of restrictions on the making of payments and transfers for current international transactions. - De jure: a managed floating exchange rate regime with no preannounced exchange rate path. - De facto: an unannounced crawling band. - VIII. Article IV Consultation: - Romania is on the 24-month consultation cycle. - The last consultation was concluded on January 8, 2003. - IX. Technical Assistance: - More than 40 technical assistance missions since 1990. - Fund assistance focused on: fiscal reforms; modernization of the central bank and the banking system; creating a market-oriented legal structure; training; improving the collection and reporting of statistics. - Implementation of a comprehensive tax administration reform started in January 2003. - A ROSC on fiscal transparency was completed on November 6, 2002 (IMF Country Report No. 02/254). - X. Safeguards Assessment: - An assessment for the NBR under the new precautionary Stand-By Arrangement is being finalized by staff. - Preliminary conclusions do not indicate material weaknesses. - Staff found a substantial strengthening of the NBR's safeguards framework since the last assessment completed in 2002. - XI. Resident Representative: - The Fund has had a resident representative in Bucharest since 1991. - Mr. Graeme Justice assumed the post in January 2003. ### IMF–World Bank collaboration and Romania’s development strategy (summary) - Authorities’ strategy: maintain macroeconomic stability, establish sustainable economic growth and poverty reduction, and work toward EU accession. - Key policy elements: tightening payments discipline (especially in energy), hardening budget constraints for SOEs, enterprise and banking privatization and restructuring, strengthening the social safety net. - IMF role: lead on macroeconomic stability — fiscal framework, monetary policy, and structural reforms with direct macroeconomic implications; main vehicles include the Stand-By Arrangement covering October 31, 2001 to October 15, 2003 and the proposed precautionary SBA. - World Bank role: lead on structural issues — poverty reduction measures, private sector development, institution building, governance; instruments include PSAL 1 and PSAL 2, Programmatic Adjustment Loans, sector investment operations, PEIR, and CEM. - Coordination: - In some areas Bank analysis feeds IMF fiscal framework without direct conditionality in the SBA. - Where reforms have fiscal implications (e.g., energy sector reform), SBA conditionality may reflect Bank-led measures. - Joint responsibilities include the Financial Sector Assessment Program (FSAP). - Areas where the World Bank leads with no direct IMF involvement: strengthening the social safety net; revitalizing rural economy; institution building and governance; improving business environment. - Bank-supported programs: Employment and Social Protection Loan; Social Sector Development Loan; Social Development Fund; Mine Closure Loan. - Bank-supported studies and planned work: Poverty Profile; Local Services Delivery Study; planned studies on poverty and vulnerability, pension reform and gender assessment. *Source: _cr04221 - 1. Percentage share of income or consumption held by poorest 20% (excerpt).* ### 7. The Bank has a range of programs to revitalize the economy in rural areas. These ### 7. The Bank has a range of programs to revitalize the economy in rural areas. These ### Rural development and infrastructure programs - Rural Finance Loan: supports income generation activities. - Planned Rural/Urban Linkage Growth Study: intended to set the stage for a Rural Development Loan that will support infrastructure development and improved governance at the community level. - Irrigation Rehabilitation loan: supports infrastructure rehabilitation and institutional reform. - Other supporting economic work: Community Networks Study and Jiu Valley Development Study. ### Institution building and governance programs - Builds on recent reforms in local public finance, taxation and decentralization. - Policy dialogue facilitated by the Public Expenditure and Institutions Review (PEIR) which included analysis and recommendations relating to: - 1) improved resource allocation in the health sector; - 2) delivery of social assistance at the local level; - 3) pension reform; - 4) institutions for budget management; - 5) fiscal decentralization; - 6) reforms to the budget process in the judiciary. - Country Financial Accountability Assessment (CFAA) supported the policy dialogue. - Diagnostic Survey of Corruption in Romania completed prior to Government’s National Program for Prevention of Corruption. - Programmatic Adjustment Loans (PAL) to be launched shortly, focusing on institutional and governance reforms in the public service and the judiciary as well as public expenditure management and remaining structural reform agenda. - Technical assistance support: - $18.6 million Private and Public Sector Institution Building Loan (PPIBL) to provide technical assistance for institution-building, governance reforms and privatization-related activities. - Other institution-building financing: - cadastral and land titling project, - project on environmental aspects of mine closures, - hazards mitigation project cofinanced by a GEF grant focusing on damage from earthquakes, floods, toxic wastes and other hazards in high risk areas, - regional project on Trade and Transportation Facilitation in South East Europe. ### Business environment reforms and privatization support - PSAL 1 and PSAL 2: focus on reducing barriers to entry for firms and joint ventures, implementing internationally recognized accounting standards, and introducing improved bankruptcy and liquidation procedures. - PALs will address business environment issues; technical assistance under the PPIBL will support these initiatives. - PSAL 2 supports the Government of Romania’s (GOR’s) privatization program, including targets and timelines for privatization of commercial SOEs and financial institutions. - Program builds on PSAL 1 and identifies pools of SOEs for case-by-case privatization and workout. - Specific enterprises identified include Alro, Alprom, and Petrom. - Emphasis on agreement with the Bank on privatization strategies and adoption of clear, open and transparent tender processes using qualified investment advisors consistent with Bank policies. ### Energy, utilities, and infrastructure policy and reform - Bank-led dialogue on restructuring, reform and eventual privatization in electricity, district heating and gas industries and on adoption of regulatory legislation in preparation for privatization to strategic investors. - Bank supports energy tariff reforms and elimination of arrears in electricity, district heat and gas sectors; these objectives are included in PSAL 2 policy conditions. - Coordination with IMF’s SBA which includes provisions for structural reforms in the energy sector: tariff setting, arrears clearance and collection rates. - Bank leads IFI dialogue on: - power generation sector restructuring, - integration of the Romanian power sector with the South East European Regional Electricity Market and with the EU’s electricity market, - regulatory and market operation issues. - Technical assistance to the Ministry of Industry on system of pricing and taxation of gas to attract investment. - Ongoing dialogue with Government on the Energy and Infrastructure Strategy paper and operational recommendations. - PALs to be used as vehicles for incorporating policy advice into Bank lending operations. ### Financial sector and banking reforms - Bank-led regulation, restructuring, privatization and liquidation of banks. - Under PSAL 1: - Law on Bank Privatization modified and transparent privatization procedures established. - Liquidity and solvency requirements of the NBR tightened. - Provisions for improved compliance with prudential regulations and external audits conducted according to International Accounting Standards. - Legal and institutional reforms for orderly disposition of non-performing assets. - Outcomes: liquidation of Bancorex; restructuring and eventual privatization of Bank Agricola; privatization of two smaller state-owned banks. - Proposed PAL: steps to complete sale of Banca Comerciala Romana (BCR) and the Savings Bank (CEC). - Continued dialogue on improving legal and regulatory frameworks for securities and insurance sectors; PPIBL will fund these activities. ### Areas of shared responsibility between the Bank and IMF - High degree of consultation and coordination on privatization and structural reforms due to IMF interest in macroeconomic implications (use of privatization revenues to retire public debt; quasi-fiscal deficits of SOEs). - IMF introduced SBA conditions relating to electricity tariff rates, arrears in gas and electricity collections, and privatization of a subset of enterprises covered under the Bank’s program. - Distinct focuses: - Bank: efficiency of resulting market structures, improved enterprise operation, service delivery, financial performance, transparency of process, sector governance. - IMF: immediate revenue generation, expenditure control, containment of ongoing fiscal burdens. - Joint Financial Sector Assessment Program completed in June 2003. ### Areas in which the IMF leads and Bank takes inputs - IMF leads dialogue on fiscal matters and under the Stand-By program includes structural benchmarks and performance criteria relating to: - introduction of new VAT and profits tax laws, - increases in specific excises, - elimination of tax preferences under the customs duty and profit tax systems. - IMF provides technical assistance for unification of payroll tax systems. - IMF leads dialogue on policies to contain public sector expenditures including: - wage-setting in public service and SOEs, - budgets of SOEs, - requirements for disconnections of non-payers in gas and electricity sectors. - Bank ensures its policy advice takes into account IMF recommendations and is consistent. ### World Bank Group strategy and lending operations - Country Assistance Strategy (CAS) for Romania presented to the Bank’s Board on June 19, 2001; defines lending and advisory services based on Government priorities of poverty reduction and EU accession; builds on Comprehensive Development Framework. - FY02–04 lending program: about one half adjustment lending. - Two lending scenarios outlined: - Low case: hesitant pace of reforms leading to reductions in Bank Group support to a level of $60 million during FY02–04 focused on a few poverty interventions. - High case: Romania remained in high-case scenario with envisaged Bank commitments of up to $995 million during FY02–04, compared with $600 million in FY98–00, reflecting fulfillment of high-case triggers. - High-case triggers included progress on: - macroeconomic environment conducive to lower inflation and sustainable growth, - structural issues including privatization initiated under PSAL 1, - initiation of privatization and work-out for remaining large SOEs, - agreement on plan and schedule for reducing energy arrears, - agreement on method and timetable for privatization of Romanian Commercial Bank and the Savings Bank, - improvements in financial sector legal and supervisory framework, - agreement on an anti-corruption strategy, - approval of social assistance legislation. - Second stage following PSAL 2: series of Programmatic Adjustment Loans (PALs) focusing on institutional and governance reforms, completion of privatization agenda, implementation of Energy and Infrastructure Strategy Paper recommendations, improvements to business environment; plus a Country Financial and Accountability Assessment and a Country Economic Memorandum. - World Bank operational history and portfolio: - Active since 1991; portfolio of 39 Bank-financed operations with total commitments of US$3.9 billion. - Romania's portfolio: second largest in ECA in number of projects and fourth largest in commitments. - Active portfolio as of April 30, 2004: 19 projects with aggregate net commitments totaling $1,144.7 million and a total undisbursed balance of $749.2 million. - Sector composition by net commitments: energy and infrastructure 42 percent (seven projects); social sectors 15 percent (four projects). - Portfolio performance issues: - Improving quality over past several years, but persistent cross-cutting implementation issues: - (i) project management capacity: procedures, inter-agency coordination, project implementation unit staffing and facilities; - (ii) timely availability of counterpart contributions and the quality and processing of disbursement applications. - IFC involvement: - Committed US$393 million in 26 projects to advance structural reform, capital markets and infrastructure, and support SMEs. - As of end December 2003, IFC portfolio in Romania stood at $267 million. - Advisory assignments supporting privatization and restructuring of large SOEs, public utilities and the health sector. ### Statistical issues and data quality - Overall assessment: Romania’s data collection and reporting adequate for surveillance and program monitoring; progress made with Fund TA, but further work needed in balance of payments and fiscal statistics and in ensuring consistency between monetary and fiscal data. - Romania participation and missions: - Participated in the GDDS since February 2001. - November 2000 STA mission assisted in preparing GDDS metadata and prepared a ROSC for the data module. - STA monetary and financial statistics mission visited Bucharest during May 11–23, 2003 to review GDDS Plans for Improvement for the NBR and assist in adopting MFSM recommendations. - BOP mission between June 23–July 8, 2003 reviewed balance of payments and international investment position compilation methodology. - Romania nominated an SDDS Coordinator in October 2003 and is working towards SDDS subscription. - Real sector: - Quarterly and annual national accounts produced by National Institute for Statistics (INS) are methodologically sound and reported timely to the Fund for IFS publication. - Harmonization of quarterly and annual national accounts is not done regularly; late revisions can sometimes be significant. - INS moved from ESA79 to ESA95; ESA95-based data released at end-2000. - Constant price estimates in process of conversion to annual chain-linked indices as recommended by ESA95. - INS staff has been downsized significantly which might affect data quality and timeliness. - Prices: - Consumer Price Index (CPI) subject to standard annual re-weighting and considered reliable. - Producer Price Index (PPI) coverage was reduced in 1998 (shipments for domestic uses only) and as of January 2004 coverage changed back to include domestic and non-domestic markets. - Public finance: - Consolidated central government operations reported annually for GFS Yearbook and quarterly for IFS; EUR receives monthly budget data. - December 1999 STA multisector mission recommended quarterly and monthly reporting of all major fiscal categories and documentation/reporting of Agency for Bank Asset Recovery (AVAB) transactions; recommended introduction of detailed financing and debt classifications in the Treasury’s chart of accounts and budget classifications (not yet implemented). - Work continues on establishing an aid coordination unit to monitor external grants. - Monetary and financial statistics: - NBR reports monetary and financial statistics regularly and timely for IFS publication. - May 2003 monetary and financial statistics mission assessed that NBR implemented important recommendations; monetary statistics meet or exceed GDDS recommendations on coverage, periodicity and timeliness. - Need for reconciliation of monetary statistics with government finance statistics; accrued interest on deposits, loans, and securities other than shares should be incorporated in outstanding financial asset/liquidity amounts (in line with 1993 SNA and MFSM). - With harmonization to 1995 ESA and ECB reporting requirements, deviations from IMF statistical methodology expected to diminish over time due to concordance among 1995 ESA, 1993 SNA, and MFSM. *Source: IMF staff report (text provided).* ### 8. The NBR routinely reports balance of payments statistics to the Fund in a timely ### _cr04221 - 8. The NBR routinely reports balance of payments statistics to the Fund in a timely ### Balance of payments reporting and compilation - The NBR routinely reports balance of payments statistics to the Fund in a timely fashion. - Data collection and compilation have improved following technical assistance. - ROSC data module (November 2001) identified concerns with: - coverage of direct investment data (stocks and flows) and related income flows, - quality of data on current transfers, in particular for the general government sector. - The NBR decided to adopt a new balance of payments compilation system in consultation with Eurostat. - A balance of payments statistics mission (July 2003) concluded the proposed system is broadly appropriate and supported: - implementation of the new system in 2004, - conduct of the new FDI survey, - consideration of a switch from annual to quarterly frequency in the outward portfolio survey (implementation in 2004 or later), - collection of stock data on equity securities via the National Commission of Securities. ### External debt sustainability — summary findings - Romania’s external position following macroeconomic consolidation: - External debt to GDP ratio under the baseline scenario is expected to remain at about 34 percent, the level at end-2003. - Under standard stress tests, debt dynamics remain under control; gross external financing need projected to remain stable relative to GDP throughout the projection period. - Historical-average scenario (A1): - Debt to GDP ratio rises to only 35 percent, compared to 34 percent under the baseline. - Weak policy implementation scenario (A2): - Current-account deficit remains above 4 percent of GDP for 2004-2006, - GDP growth is lower, - Adjustment is delayed, - Gap financed largely by debt-creating flows; effect on debt ratio is minor relative to baseline. - Stress tests (B1-B6): - Debt appears most vulnerable to a shock to GDP growth or worsening of the current account. - Combined-shock scenario (lower U.S. inflation, larger Romanian current account deficit and slower GDP growth) increases the debt to GDP ratio to nearly 50 percent. - Policy implication: - Continued forbearance in consumption growth and implementation of structural reforms to increase long-term growth potential are important to maintain sustainability. ### Key external debt and financing numbers (selected, as presented) - External debt (percent of GDP), selected years: - 1999: 25.6 - 2000: 28.7 - 2001: 30.7 - 2002: 34.3 - 2003: 34.6 - 2004: 33.2 - 2005: 33.0 - 2006: 33.1 - 2007: 33.3 - 2008: 33.7 - 2009: 33.7 - Change in external debt (percent of GDP), selected years: - 1999: 2.1 - 2000: 3.1 - 2001: 1.9 - 2002: 3.6 - 2003: 0.3 - 2004: -1.4 - 2005: -0.2 - 2006: 0.1 - Identified external debt-creating flows (percent of GDP): - 1999: -15.1 - 2000: -13.2 - 2001: -10.9 - 2002: -7.9 - 2003: -4.1 - 2004: 0.2 - Current account deficit, excluding interest payments (percent of GDP): - 1999: 2.6 - 2000: 2.4 - 2001: 4.0 - 2002: 2.0 - 2003: 4.5 - 2004: 3.8 - 2005-2009 (projections): 3.8, 3.7, 3.7, 3.6, 3.7 - Exports (percent of GDP), selected years: - 1999: 27.6 - 2000: 28.3 - 2001: 33.4 - 2002: 35.3 - 2003: 35.2 - 2004: 36.0 - Imports (percent of GDP), selected years: - 1999: 32.3 - 2000: 38.0 - 2001: 41.1 - 2002: 41.0 - 2003: 44.1 - 2004: 43.2 - Net non-debt creating capital inflows (negative, percent of GDP): - 1999: -3.0 - 2000: -3.1 - 2001: -3.2 - 2002: -2.6 - 2003: -3.1 - 2004: -3.6 - Automatic debt dynamics (percent of GDP), selected years: - 1999: -14.7 - 2000: -12.5 - 2001: -11.8 - 2002: -7.3 - 2003: -5.5 - 2004: -0.1 - Residual, incl. change in gross foreign assets (2-3), selected years: - 1999: 17.2 - 2000: 16.3 - 2001: 12.9 - 2002: 11.5 - 2003: 4.4 - 2004: -1.5 - External debt-to-exports ratio (in percent): - 1999: 93.0 - 2000: 101.5 - 2001: 91.9 - 2002: 97.2 - 2003: 98.3 - 2004: 92.2 - Gross external financing need (in billions of US dollars), baseline projections: - 1999: 4.6 - 2000: 3.3 - 2001: 4.6 - 2002: 4.6 - 2003: 6.4 - 2004: 6.7 - 2005: 7.8 - 2006: 8.4 - 2007: 9.1 - 2008: 9.8 - 2009: 10.5 - Gross external financing need (in percent of GDP), baseline series includes earlier values in table (examples): - 1999: 13.0 - 2000: 9.0 - 2001: 11.5 - 2002: 10.0 - 2003: 11.2 ### Fiscal sustainability — summary findings - Public sector debt dynamics: - Public sector debt (percent of GDP), selected years: - 1999: 30.5 - 2000: 29.9 - 2001: 27.4 - 2002: 26.9 - 2003: 26.2 - 2004: 26.6 - 2005: 26.2 - 2006: 26.1 - 2007: 26.0 - 2008: 26.1 - 2009: 25.7 - Debt-stabilizing primary balance (percent of GDP): -0.5 - Public sector debt-to-revenue ratio, selected years: - 1999: 95.6 - 2000: 95.7 - 2001: 91.1 - 2002: 90.5 - 2003: 87.5 - 2004: 89.2 - Stress tests results (selected): - Scenario A1 (historical averages in 2005-09): public sector debt falls to 11.7 by 2009 (methodology caveat noted). - B5 (One time 30 percent real depreciation in 2005): public sector debt projected to rise to 37.9 in 2005 and remain near 37.4–36.8 thereafter. - B6 (10 percent of GDP increase in other debt-creating flows in 2005): public sector debt projected to rise to 36.2 in 2005 and remain near 35.7 thereafter. - Gross financing need (percent of GDP) and levels (selected): - Gross financing need (percent of GDP), baseline 1999-2009 exhibits values around single-digit percentages; in levels (billions of U.S. dollars) projections include 2004: 4.7, 2005: 5.0, 2006: 5.6, 2007: 5.8, 2008: 5.3, 2009: 5.7 (tables provide multiple scenario variants). - Stress-test sensitivity: - Bound tests using a 30 percent sustained real depreciation in 2005 project an increase in the debt-to-GDP ratio of some 10 percentage points (public debt). - Scenarios with lower primary balance, lower GDP growth, or real interest rates at 5 percent for 2005-06 increase public debt by less than 1.5 percentage points. ### Policy recommendations and implications - Fiscal policy: - Further fiscal adjustment over the medium term is necessary to sustain rapid medium-term growth without jeopardizing stabilization progress. - Medium-term fiscal plans should aim at further reducing the general government deficit and improving the financial performance of state-owned enterprises. - Fiscal policy must prevent widening of the external current account deficit amid expected strengthening in private sector investment. - Structural reforms: - Continued implementation of structural reforms to increase long-term growth potential is important. - Improve governance and business climate and complete privatization agenda (linked to EU accession strategy). - Data and statistics: - Implement the new balance of payments compilation system and conduct new FDI survey (2004 implementation supported). - Consider switching outward portfolio survey frequency from annual to quarterly and collect stock data on equity securities via the National Commission of Securities. *Source: IMF staff report (selected appendices and attachment summarized from the provided PDF content).* ### INTRODUCTION ### INTRODUCTION ### Background - The 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, aiming to consolidate macroeconomic stabilization achieved under the previous Stand-By Arrangement (SBA) and accelerate structural reforms to ensure EU accession in 2007. - Progress in 2001–03: - Inflation reduced from 40 percent in early 2001 to 12.5 percent in April 2004. - GDP growth at about 5 percent during the last three years. - Fixed investment rate increased 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. - Official reserves rose from 2½ months of prospective imports at end-2000 to about 3¼ months at end-2003. - Sovereign bond ratings raised several times and spreads declined rapidly. - Risks and imbalances in 2003: - Banking credit to the private sector surged, growing at over 50 percent in real terms in 2003, led by consumer and mortgage loans. - Current account deficit widened from 3.4 percent of GDP in 2002 to 5.9 percent of GDP in 2003, exceeding the target by about 1.1 percent of GDP. - Disinflation stalled in the second half of 2003 due to minimum wage adjustment, strong domestic demand, and energy price increases; annual target of 14 percent by December was largely met and disinflation resumed in early 2004. - Fiscal performance and SOEs: - General government deficit in 2003 came out 0.3 percent of GDP better than targeted. - SOEs’ S-I balance improved by 0.1 percent of GDP; SOE wages kept within approved company budgets. - Collection rates of main utilities stayed in the 95–98 percent range, except for heating. - Monetary and prudential measures: - NBR raised the policy interest rate by cumulative 300 basis points since August 2003. - Prudential norms introduced to tighten household eligibility for consumer and mortgage loans, effective February 1, 2004: - Limit monthly payment-to-net-income ratio to 30 percent for consumer loans. - Mandatory 25 percent downpayment or a co-signer/insurance for consumer loans. - Co-signer, insurance or collateral required for personal loans. - Maximum payment-to-net income ratio for mortgage credit set to 35 percent. - Maximum loan-to-value ratio of 75 percent for mortgage credit. - Insurance Supervision Commission regulation limiting insurance companies’ retained exposure to bank loans. - Commercial banks establishing a credit bureau expected to be operational in Q4 of 2004. - Postponed liberalization of leu deposits of nonresidents in local banks scheduled for January 2004. - New regulation on loan classification in early 2003; provisioning against credit risk considered adequate (confirmed by FSAP 2003). - Privatization and business climate: - Since beginning of 2003, Privatization Agency sold 23 large loss-making SOEs with over 70,000 employees. - In about 70 largest SOEs monitored, employment reduced by 7½ percent, or over 34,000 thousand employees, with large cuts in the railway sector. - Negotiations completed on IFC and EBRD investment in BCR; settlement expected in early June. - Three binding bids received for privatization of Petrom and winning bidder selected; delays in privatization of electricity and gas distributors. - Approved an anticorruption plan and established an anticorruption public prosecution office in 2003. - Energy sector reforms: - Sharp increases in energy prices reduced energy sector losses substantially. - Electricity prices brought close to cost-recovery levels; heating prices sharply increased; domestic gas prices raised but remain substantially below import parity. - Fight against non-payment effective in gas and electricity sectors; more efforts needed in heating sector. ### Economic and Financial Policies — Objectives and Strategy - Main objectives for 2004–06: - Reduce inflation to 9 percent by end-2004, 6 percent by end-2005, and 5 percent by end-2006. - Contain the external current account deficit to below 5½ percent of GDP. - Maintain reserve cover at a level of 3½ months of prospective imports. - Expect average annual GDP growth of 5 percent during 2004–06. - External finance and sustainability: - About 2/3 of the current account deficit projected to be covered by non-debt creating flows. - Private sector S-I balance expected to decline further; improvement in external current account deficit must come from the public sector (budget and SOE S-I balances). - External risks considered manageable given progress in structural reforms, low external and public debt-to-GDP ratios, and favorable term structure of debt. - Main macroeconomic policy package in 2004: - Improve the S-I balance of the broad public sector by about 1¼ percentage point of GDP through: - Tightening the 2004 budget target. - A modest nominal increase in the minimum wage. - A prudent wage program for SOEs. - Further reforms in the energy, railway and mining sectors. - Monetary policy to remain appropriately tight and, with prudential measures, slow credit growth to facilitate disinflation and contain the current account deficit. - Structural reforms 2004–2006: - Complete privatization agenda and strengthen financial discipline and tax compliance in SOEs and private companies. - Impetus to privatization in the energy sector: Petrom, entire gas distribution sector, many electricity generation and distribution companies. - Reform pricing mechanism for natural gas to raise domestic producer prices to import parity by January 2007. - Privatize or liquidate remaining 19 large loss-making SOEs under the Privatization Agency. - Decisive measures against private tax nonpayers; improve financial performance of state-owned nonpayers (railway and mining) via loss-reduction programs. - Measures to improve governance, competition, and the business climate. ### Fiscal Policy - Overall stance: - Fiscal policy in 2004 to support disinflation, contain external current account deficit, and create scope for private sector investment. - Budget tightening and targets: - In May 2004, publicly announce decision to tighten the general government deficit target to 2.1 percent of GDP. - Approve a supplementary budget in line with this revised deficit target by July 20, 2004 (structural PC). - Achieve objective by preserving overall budgeted expenditure envelope and compensating somewhat higher local government spending with cuts at the central government level. - If revenue comes out stronger than consistent with the 2.1 percent of GDP target, do not increase the expenditure envelope and use all additional revenue to reduce the deficit. - Expenditures for all motorway projects (including public-private partnerships and projects financed with off-budget guarantees) to be accommodated within the new budget deficit ceiling unless different treatment recommended by FAD technical assistance. - Privatization proceeds to continue to be treated as a financing item in fiscal accounts (TMU, section III). - SOEs and public sector borrowing: - Implement measures to improve SOEs’ saving-investment balances to facilitate an overall adjustment in the broad public sector deficit of 1¼ percent of GDP (measures described in paragraphs 21–26 and 32–33). - Establish monthly monitoring of the public sector borrowing requirement (PSBR), which will be a quantitative benchmark in 2004 and efforts made to convert it into a quantitative PC starting with Q1 of 2005. - Conditional tightening: - Stand ready to tighten fiscal policy further if current account or disinflation targets are at risk; supplementary budgets and possible revisions of expenditure ceilings to be discussed in quarterly reviews under the arrangement. - Tax policy and administration: - Priority to further reduction in social security contribution rates: - Payroll taxes reduced by 3 percentage points in 2002 and 5 percentage points in 2003. - Employers’ pension fund contribution rate cut by 2.5 percentage points and employers’ unemployment fund contribution rate cut by 0.5 percentage points on January 1, 2004. - Eligibility for reduced VAT rate limited to pharmaceutical products, hotel accommodation, newspaper distribution, and a small group of previously VAT-exempted products. - Refrain from reducing profit tax and personal income tax rates in 2004. - Refrain from introducing interest deductibility for mortgage loans. - Will not modify tax legislation in 2004 and will consult Fund staff on any amendments envisaged for 2005. - Refrain from introducing tax holidays or other new distortionary tax incentives or postponing discontinuation of expiring ones (continuous structural benchmark). - Comprehensive tax administration reform continuing: - National Agency for Fiscal Administration (NAFA) established on January 1, 2004 and transfer of collection of social security contributions to NAFA. - Modernization to focus on operations, systems and processes, and human resources; create function-based structure with strong HQ supervision and risk-based compliance programs. - Detailed plans for main objectives to be approved by end-June 2004; donor funding discussions to begin in July 2004. - Government to approve act subordinating customs administration and the Financial Guard to the Minister of Public Finance as of January 1, 2005 (structural performance criterion). - Wages, pensions, and SOE wage discipline: - Limit 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 via Government Ordinance 123/2003. - Annual bonus for 2003, paid in early 2004, limited to the equivalent of one month’s salary in 2003; same principle to apply for the 2004 bonus to be paid in 2005. - Amend Government Ordinance 64/2001 by end-July 2004 to limit the use of SOE profits for wage bonuses to one monthly average base wage. - Determined not to exceed the scheduled increase in pensions and pension expenditures in the 2004 budget. - Agree with the World Bank in the context of the Programmatic Adjustment Loan to accelerate increase in retirement age and to start equalization of retirement age for men and women starting with July 1, 2005. - Will not decide on any new pension “recorrelation” after completing current “recorrelation” by mid-2004 without prior consultations with Fund and World Bank staff. - Arrears and health sector: - Step up fight against expenditure arrears of the budget; ensure local authorities do not incur arrears, including subsidies to district heating companies. - Unpaid amount of arrears to health sector suppliers accumulated in 2002 identified as lei 3,644 billion to be repaid by end-September 2004 (structural performance criterion). - Approved February 2004 legislation strengthening procurement legislation for medical supplies. - Approve by end-June 2004 a strategy for short-, medium-, and long-term rationalization of the entire health sector (based on World Bank recommendations). - Tax arrears enforcement and transparency: - Move decisively against large tax nonpayers and tax evasion; initiate bankruptcy procedures against major private debtors (actions cited in early 2004). - Reduction in arrears of the 452 largest private debtors to the state budget and social security funds to be a quantitative performance criterion under the program (TMU, section V). - Reduction in SOE arrears to the general government to be an indicative target (TMU, section VI). - Continue posting list of top 549 debtors to the state budget on the internet and update quarterly; include arrears to the four social security funds as of January 1, 2004 (updated monthly data to be shared with Fund staff). - Approve by end-June 2004 a comprehensive plan to (a) eliminate illegal trade in petroleum products and cigarettes and (b) fight corruption in customs administration; plan to be prepared in consultation with business associations and stakeholders. - Request Fund technical assistance to review legislation on prevention, discovery, control, and sanction of tax fraud by end-June 2004. - Decisions by the Competition Council on state aid, including tax arrears rescheduling, to be made public on the internet with explanations. - Financing strategy and guarantees: - Give priority to domestic borrowing in financing the 2004 budget deficit to limit supply pressures for private sector credit. - Limit Eurobond issuance to not more than €600 million in 2004, €425 million of which will not be spent in the current year (number subject to revision in the first review). - Domestic financing to aim at extending the maturity of lei-denominated securities. - Contain issuance of all external off-budget guarantees in 2004 to [text truncated in source]. *Source: INTRODUCTION (IMF staff memorandum, _cr04221 - INTRODUCTION).* ### 2.3 percent of GDP (US$1.5 billion) compared to 2.2 percent in 2003, to ensure that the ### _cr04221 - 2.3 percent of GDP (US$1.5 billion) compared to 2.2 percent in 2003, to ensure that the ### Fiscal guarantees and off-budget operations - A ceiling will apply to off-budget guarantees for fuels, loans from multilateral and official creditors, and other off-budget guarantees to meet the target for the overall fiscal stance of the broad public sector. - Within the ceiling, priority will be given to projects for modernizing the energy and railway sectors. - Domestic guarantees limited 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. - By end-September 2004, 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 - Minimum wage: - Statutory minimum wage increased by 12 percent on January 1, 2004, to lei 2.8 million; level to remain unchanged until end-2004 (continuous structural PC). - Government officials negotiating the national collective contract will seek to ensure minimum wage in the contract does not significantly deviate from the statutory minimum wage. - State-owned companies (SOEs) representatives instructed (a) not to accept a minimum wage different from the statutory minimum wage; and (b) to request employers associations to refuse accepting any such deviation. - Appropriate minimum wage increase in 2005 to be discussed with Fund staff in the context of the first review of the program. - SOE wage program (2004): - Aim: improve financial performance of 72 large monitored companies by about ½ percent of GDP. - Budgets of monitored companies to be rectified by end-April, 2004, limiting wage bill growth to 7 percent (prior action). - Scheduled reduction of employment by 19,000 positions implies an average gross wage growth of about 11 percent in nominal terms, below projected average inflation. - Ministries to block payments equivalent to 4 percent of the quarterly wage bill in monitored SOEs until the last month of the quarter and release only after target verification. ### D. Energy Sector Reforms - Gas pricing: - Continue increasing domestic producer prices to reach import parity level by January 2007. - March 15 schedule for gas price increases (prior action). - For 2004: end-user gas prices to be increased every quarter by 5 percent in lei terms (prior action for April 1 and July 1, structural PCs thereafter). - For 2005–2007: schedule specified the producer price for the regulated market as envisaged in the ordinance approved on December 18, 2003. - First yearly increase under new pricing system effective January 1, 2005: domestic producer prices for the regulated market increased by at least US$25/tcm, starting from the estimated 2004 level of US$60/tcm (structural PC; exchange rate for conversion specified in the TMU, section VII). - Following adjustment of the same size effective January 1, 2006. - Electricity and heating prices: - End-user and Termoelectrica electricity and heating prices adjusted to cost-recovery levels every semester on January 1 and July 1 (prior action for July 1, 2004 and structural performance criteria thereafter). - Regulatory agency to produce reports on adjustments and share with staff (continuous structural benchmark). - World Bank review (March 2004) confirms final-user distribution prices consistent with full payment to producers and will fully cover distributors’ margins once Bank’s proposal for July 2004 price adjustment implemented. - World Bank recommends July 1, 2004 adjustment include a margin to provide a return on capital at least equal to the cost of debt in the distribution sector; implementation requires a final-user price adjustment of about 6–7 percent. - Further energy reform steps to be discussed in first review: elimination of uniform retail tariff policy, elimination of national development tax, steps for increasing hydro-power producer prices aiming to fully liberalize the market by 2007. - District heating reform: - Approve a reform strategy in close cooperation with the World Bank (prior action). - Strategy to envisage switch to heating contracts/conventions with individual households, installation of thermostatic valves and heat meters, and introduction of a split-tariff structure; review and modification of social assistance for households if necessary. - Timetable prepared in April 2004. - 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); committed not to resume such subsidies or deliveries. - By end-June, ensure for each of these plants either local administration has decided closure or bankruptcy procedures have been started by government or state-owned fuel supplier (prior action); share documents with Fund and World Bank staff. - Assist remaining connected households to switch to individual heating systems. - Termoelectrica’s producer heating price to be raised by 12 percent as of July 1, 2004. - National Reference Price for heating to be raised by 12 percent as of August 1, 2004 (structural PC); respective Government Decision to be approved by mid-July 2004. - By end-September, prepare analysis outlining steps for elimination of current system of producer subsidies by enhancing targeted household support and abolishing the National Reference Price. - Nonpayment and enforcement: - Continue strict enforcement of disconnection deadlines for electricity and gas payments. - 2004 budget will assume payments of energy bills for a few large loss-makers (list of eligible SOEs to be approved through Government Decision by end-July 2004) whose disconnection would be socially disruptive. - Intensify efforts to improve collections from households, enforce seizure of assets of nonpayers through judiciary as specified in Government Ordinance 85/2001 and Government Decision 400/2003. - Largest industrial nonpayers to the four utilities to stay disconnected or on minimum supply until full payments for all bills from December 2002 onwards have been received by utilities; bills for companies on minimum supply will be paid by the government (continuous structural benchmark). ### E. Privatization, Liquidation, and Restructuring - Petrom privatization (highest priority): - Prior actions (March 2004): (a) cancel entire amount of arrears to the general consolidated budget in litigation at time of share transfer; (b) government assume responsibility for environmental indemnities; (c) no penalties for post-privatization deviations from employment levels in investors’ business plan. - Clarified by letter to short-listed investors: government to assume environmental liabilities associated with abandoned wells; limit restrictions on company restructuring (including sale of core assets) to at most four years; indicated agreement to divest one refinery and the petrochemical complex even before that deadline. - Schedule for gas price adjustments announced March 15, 2004; decisions increased company value and conditions for successful privatization. - Utilities and other major privatizations: - Accelerate preparations for privatization of two gas distributors by inviting binding bids by July 20, 2004 (prior action). - Received one binding offer for privatization of two electricity distribution companies in March; negotiations ongoing. - No special tax incentives or preferential treatment to be offered to investors in subsequent privatizations. - If current process fails, either re-launch privatization for these two companies or select two others for privatization in 2004, in addition to the two in pipeline. - By end-September 2004, prepare privatization strategy for Electrica-Muntenia Sud with aim of inviting binding offers by end-March 2005. - Start discussions with World Bank on privatization of Romgaz, and power generators Rovinari and Turceni. - AVAS portfolio and SOE restructuring: - Privatize or liquidate remaining 19 large SOEs under AVAS by end-September 2004. - Initiated bankruptcy for five large SOEs (companies with more than 1,000 employees), including Republica, CUG and Turnu (prior action). - Plan: privatize or liquidate six such companies in Q2 and another six in Q3, leaving two for Q4 of 2004 (structural benchmarks). - Implemented employment reduction program eliminating 15,000 positions in March, including 2,600 layoffs in Roman (prior action). - Wage policy for AVAS companies: wage-freeze imposed in all companies under AVAS that incurred losses (after taxes) in 2003 (prior action); those not incurring losses can benefit from wage increase by up to 9 percent. - For particularly weak companies, voluntary liquidation of 15 unviable SOEs decided in March; liquidators being appointed. - Establish quarterly targets for privatization or liquidation of smaller companies. - Roman privatization: - 2,600 layoffs in remaining units implemented by April 15, 2004 (prior action). - Prevent parts of company returning to state ownership; foreclosure proceedings to start immediately if parts fail to pay energy bills and taxes on time (continuous structural benchmark). - National Tobacco Company: - Contracted internationally reputable accounting firm to carry out due diligence; to be finalized by end-June. - Re-tender by end-June 2004 if tender process found deficient. - Railway sector reforms: - Close about 3,000 km of loss-making secondary lines (26 percent of total network) by end-June 2004 if not taken over by investors via concession contracts by June 15, 2004; corresponding government decision passed in January 2004. - For subconcession segments, no obligations to maintain employment for investors. - Employees not taken over by investors to be laid off by CFR by date of effectiveness of concession contract but no later than end-June 2004. - Reduce railway employment by 8,000 in January–September 2004. - Passenger ticket prices: raised by 6.3 percent on February 15 and to be raised by 6 percent on July 15, 2004. - Freight tariffs: increased by 10 percent on March 1 and to be raised by 10 percent on July 1, 2004. - Outsource CFR messenger service to private company by July 1, 2004, expected savings of about lei 200 billion. - 2004 budgets of railway companies to be rectified to ensure remaining operating losses and obligations to utilities and general government budget fully covered by allotted budgetary subsidies. - Continue privatization of four subsidiaries and divestment of non-core assets. - Mining sector restructuring: - Approved and published on May 28, 2004 a strategy for restructuring the mining sector in 2004–10, formulated with the World Bank and in line with EU environmental protection guidelines (prior action). - Strategy sets schedules for mines to be privatized or closed, employment reduction for each mine, programs to address social problems, action plan for 2004 including employment reduction plans and list of mines to be closed, and decision on 30 mines to be closed by June 30, 2004. - In line with strategy, 4,000 mining sector employees made redundant by end-June 2004 (prior action), and another 4,000 to be made redundant by September 30, 2004 (structural PC). - 2004 budgets of mining companies to be rectified to ensure remaining operating losses and obligations fully covered by allotted budgetary subsidies. - Motorway program and World Bank engagement: - Working with World Bank to assess overall affordability of motorway program prior to finalization of contracts. - Requests to World Bank: - Advisor report (WB-financed) assessing unit prices and financial arrangements for Bors-Brasov motorway project. - Study by end-July 2004, in consultation with EBRD, assessing priorities and best routing of motorway construction, affordability and risk sharing of PPP projects planned for Brasov-Bucharest motorway, and options for re-tendering. - Review, prepared in consultation with EC and other stakeholders, of implementation of procurement legislation used for awarding large infrastructure projects and guidelines for future awarding of such contracts. - Consult Fund staff on fiscal sustainability of overall motorway program (including possible re-tendering, rerouting and phasing) before finalizing existing projects. - Limit expenditures for motorway construction (including PPP contracts, the Bechtel project, and projects financed with off-budget guarantees) to €260 million in 2004. - Banking sector: - Timetable decided in April to privatize CEC, the State Savings Bank, with a view to complete in 2005. - Announce tender for privatization advisor for CEC by end-May 2004. - Finalize settlement for EBRD’s and IFC’s purchase of a share package in BCR by end-June, 2004 (prior action). - Transparency and accountability measures: - Government decision by end-March 2004 (prior action) that all 72 monitored SOEs publish independently audited annual earnings statements on responsible line-ministries’ websites, starting with accounts for 2003; publish unaudited quarterly financial results on these websites. - Continue publishing on the internet regularly reports on state aid, including subsidies in form of arrears. - Internationally accepted accounting standards to be fully mandatory for all economic agents above a certain size in 2005. ### F. Monetary Policy and Banking Issues - National Bank of Romania (NBR) objectives and legal framework: - NBR to focus on lowering inflation to single digits while managing transition to a new monetary policy framework. - New NBR Law to be passed by end-June 2004 (prior action); will ensure NBR independence in accordance with relevant EU acquis and make price stability the Bank’s primary monetary policy objective. - Advances in forecasting inflation and elaborating transparency and accountability procedures to provide legal, technical and institutional prerequisites for gradual implementation of inflation targeting. - New regime will account for the exchange rate pass-through to prices still dominating interest rate changes in determining inflation developments. - With inflation stabilizing in single digits and transmission from policy to market interest rates improving, policy action’s onus will gradually shift toward the interest rate. *Source: _cr04221 - 2.3 percent of GDP (US$1.5 billion) compared to 2.2 percent in 2003, to ensure that the (PDF).* ### 38. In 2004, monetary policy will continue to apply the current framework. The NBR ### _cr04221 - 38. In 2004, monetary policy will continue to apply the current framework. The NBR ### Monetary policy, exchange rate guidance, and financial liberalization (Paragraphs 38–39) - The NBR will 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. - Policy approach: substantial short-term exchange rate flexibility combined with inflation-stabilizing guidance over a longer horizon. - Fiscal and wage policy stance: tight fiscal and wage policy will facilitate improvement in the external current account, allowing the NBR to focus on disinflation. - Interest rate strategy: gradual lowering of the policy interest rate will begin after assurance that disinflation and the current account are firmly on track. - Liberalization of non-resident leu deposits with local banks will continue when the interest rate differential between domestic and world markets would not create opportunities for large and potentially destabilizing inflows. - Credit growth monitoring and containment measures: - NBR will monitor credit growth and implement decisive measures for macroeconomic and prudential reasons. - If rapid credit growth does not subside after the eligibility-tightening measures introduced in February, authorities will: - introduce mandatory reporting by banks and non-banks to the newly established credit bureau; - consider further measures including increasing reserve requirements for sources of financing denominated in foreign currencies. - As of September 1, 2004, the NBR’s credit bureau will expand its database on delinquent loans with loans below lei 200 million, not monitored hitherto. - Insurance sector oversight: because 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. - Consumer protection: adopt a law requiring truthful disclosure of lending terms and risks by all suppliers of consumer credit. ### Governance, judiciary reform, anti-corruption, and business climate (Paragraphs 40–43) - Continued efforts to strengthen public administration, eliminate corruption, and improve the business climate in close cooperation with the EU and the World Bank. - Judiciary reform commitments: - By June 30, 2004 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. - New laws will strengthen SCM’s role as guarantor of judicial independence, establishing full authority over recruitment, training, professional careers of judges, and disciplinary decisions. - Elimination of the extraordinary appeal procedure by the Attorney General for civil cases completed; legislation submitted on April 1, 2004 to eliminate it for all other cases (prior action) and ensure approval by July 20, 2004 (structural performance criterion). - Review by October 1, 2004, in consultation with the World Bank, on establishing a monitoring system (according to the law) for excessive length of court procedures in civil and commercial cases, particularly restitution and bankruptcy cases. - Asset declaration and integrity measures: - Strengthened legislation on declaration of assets by government and parliamentary officials and near relatives (valuation and disclosure requirements); legislation approved in May, 2004 (prior action). - New legislation: improves transparency of asset declaration form, includes some itemization of assets, expands coverage to candidates running for office, and lowers reporting thresholds. - Explore establishing special offices in each ministry responsible for checking asset declarations of all persons involved in decision-making, decision by end-June 2004. - Anti-corruption resources and legal changes: - Additional resources for the National Prosecutor's Anti-Corruption Office (ANC) in 2004. - Increase the number of ANC-prosecutors (currently 95) by about 50 percent. - ANC will give higher priority to investigation and prosecution of grand corruption. - 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. ### Labor market and Labor Code reform (Paragraph 44) - In cooperation with the World Bank, evaluate the impact of the new Labor Code on the labor market and employment and amend it to preserve labor market flexibility. - Comprehensive overhaul of the labor code in early 2005 to address stakeholder concerns, including the wage guarantee fund, regulations on hiring and firing, and red tape. - Overhaul 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 performance criterion (PC) will be set at the time of the second or third review under the program. ### Program monitoring, performance criteria, and targets (Paragraphs 45–48 and Table 1) - Review schedule: program reviewed by the IMF on a quarterly basis during the period of the SBA (June 2004–June 2006). - Reviews will assess progress on structural elements: energy price adjustments, wage discipline, reduction in arrears, and steps to privatize remaining large SOEs, including Petrom. - Conditions for completing a review include agreements on the 2005 and 2006 general government budget, minimum wage decisions, and SOEs’ wage and employment program. - Quantitative performance criteria (as listed): - (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; - (ix) a continuous performance criterion of no accumulation of external payments arrears. - Indicative targets (as listed): - (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; - (v) separate quarterly floors on the collection rates of the gas distributors Distrigaz Nord and Distrigaz Sud. - The second review will explore converting the ceiling on the total financing of the public sector into a performance criterion. - Key quantitative figures from Table 1 (End-March 2004; End-June 2004; End-September 2004; End-December 2004): - 1. Ceilings on the Average Net Domestic Assets of the National Bank of Romania 2/: - -122,235 - -146,830 - -171,896 - -162,996 - 2. Floors on Net Foreign Assets of the National Bank of Romania 2/: - 7,304 - 7,922 - 8,786 - 8,533 - 3. Indicative Targets for Ceilings on Broad Money: - 481,460 - 503,615 - 535,999 - 586,105 - 4. Indicative Targets on Banking Sector Exposure to State-owned Enterprises: - 49,260 - 50,569 - 52,491 - 55,998 - Of which: BCR Exposure: - 17,377 - 17,851 - 18,737 - 20,355 - 5. Ceilings on Aggregate Wage Bills of Monitored State-owned Enterprises (cumulative): - 13,581 - 28,378 - 42,621 - 57,698 - 6. Ceilings on the Deficit of the General Government (cumulative) 4/: - 9,917 - 24,727 - 28,735 - 47,106 - 7. Ceilings on Arrears of Private Enterprises to the General Government 5/: - 54,866 - 54,318 - 53,367 - 52,033 - 8. Indicative Targets for Ceilings on Arrears of Monitored State-owned Enterprises to the General Government 6/: - 42,262 - 41,206 - 40,176 - 39,171 - 9. Indicative Targets on Total Public Sector Financing (cumulative): - 3,852 - 23,139 - 37,704 - 68,416 - 10. Floors on Cumulative Aggregate Collection Rates of: - a. Distrigaz Nord and Distrigaz Sud (aggregate): - 96.0 - 96.0 - 96.0 - 96.0 - Distrigaz Nord (indicative target): - 96.0 - 96.0 - 96.0 - 96.0 - Distrigaz Sud (indicative target): - 96.0 - 96.0 - 96.0 - 96.0 - b. Termoelectrica, including transferred units (aggregate of electricity and heating): - 88.0 - 89.0 - 90.5 - 92.0 - Aggregate of Termoelectrica and externalized units in electricity (indicative target): - 90.0 - 91.5 - 93.0 - 94.5 - Termoelectrica district heating (indicative target): - 82.0 - 83.0 - 84.0 - 85.0 - Heating in the externalized units (indicative target): - 82.0 - 83.0 - 84.0 - 85.0 - c. Electrica: - 96.0 - 96.0 - 96.0 - 96.0 - 11. Ceilings on Assumption of Enterprise Debt to Banks and Issuance of Domestic Guarantees Extended by Government (cumulative): - 746 - 746 - 1600 - 1600 *Source: _cr04221 (excerpts provided).* ### 12. Ceilings on Contracting or Guaranteeing of External Debt (cumulative) 3/ ### 12. Ceilings on Contracting or Guaranteeing of External Debt (cumulative) 3/ ### Reported ceilings and composition - a. One-year or less maturity - 0000 - b. More than one- and up to three-year maturity - 1 - 20 - 300 - 600 - Of which: off-budget - 1 - 20 - 300 - 400 - c. More than one-year maturity - 157 - 1,375 - 3,400 - 4,550 - Of which: off-budget - 1 - 775 - 1,100 - 1,553 ### Monitoring and related program definitions (selected) - The performance criteria and indicative targets envisaged under the program are defined in the Technical Memorandum of Understanding (TMU).1/ - The figures for end-June, end-September and end-December are performance criteria, unless indicated otherwise. End-March figures are for information only.2/ - At cross exchange rates as of December 31, 2003 (as specified in the TMU, Section II), and a mandatory reserve requirement of 18 percent.2/ - Nonaccumulation of external payments arrears of the government will be a performance criterion monitored on a continuous basis.3/ - The general government is defined in the TMU.4/ - The methodology for measuring private sector arrears is defined in the TMU.5/ - The methodology for measuring SOE arrears is defined in the TMU.6/ ### Relevant prior actions and structural performance criteria (high-level summary) - Prior actions completed (status reported as Done) include: - Rectification of the budgets, by end-April, of the monitored SOEs in line with the 2004 wage and employment program. - Imposing a wage freeze on loss-making companies under AVAS. - Official publication by March 15, 2004 of a quarterly schedule to bring gas wellhead prices in line with import parity by 2007. - Increase in end-user gas prices by 5 percent as of April 1, and July 1, 2004. - Decisions on the privatization of Petrom concerning cancellation of arrears in litigation to the general consolidated budget at time of share transfer, government assumption of environmental indemnities, and no penalties for post-privatization deviations from employment levels in investors’ business plans. - Government approval and publication of a strategy for restructuring the mining sector, including an action plan for 2004 and decision on 30 mines to be closed by end-June 2004. - Reduction in employment in mines by making 4,000 employees redundant by end-June. - Government Decision by end-March 2004 on publication via website of audited annual income statements and balance sheets of the monitored SOEs, and their quarterly financial statements. - Initiation of bankruptcy procedures by end-March 2004 against the top five private non-payers of tax obligations, including RAFO. - Reduction of employment by 15,000 employees in 33 large companies in the portfolio of AVAS, including 2,600 layoffs in Roman. - Signing of a privatization contract for one company and initiation of liquidation procedures by general assemblies of shareholders for 5 large SOEs during January 1 – April 15, 2004. - Submission to Parliament by April 1, 2004 of legislation to eliminate the extraordinary appeal procedure of the Attorney General for all cases. - Government approval by May 31, 2004 of a strategy to reform the district heating system, agreed with the World Bank. - Final settlement with the EBRD and the IFC on their purchase of a share package in BCR. - Adjustment of end-user electricity prices, effective July 1, 2004, to bring them to cost-recovery levels (including return on capital for distribution companies); adjustment of Termoelectrica's electricity and heating prices, effective July 1, 2004, to keep them at cost-recovery levels. - Adoption of a new NBR law by June 30. - Approval of an Emergency Ordinance by June 10, 2004 terminating all subsidies and delivery of fuel by state-owned companies to 15 inefficient heating plants. - For each of 15 inefficient heating plants, by June 30, initiation of bankruptcy procedures by the state or a state-owned fuel supplier, or a decision by the local administration in charge on closure of the plant. - Parliamentary approval of a package of laws on the powers of the Superior Council of the Magistracy, the status of magistrates, and judicial organization by June 30. - Approval of legislation strengthening existing procedures on declaration of assets by June 30. - Invitation of binding bids for the two gas distributors DGN and DGS. - Structural performance criteria and benchmarks (selection): - Continuous: The minimum wage will not exceed lei 2.8 million during 2004. - By July 20: Approval of supplementary state budget in line with the revised deficit target; Government Decision to increase the National Reference Price for heating by 12 percent, effective August 1, 2004; Approval of legislation to eliminate the extraordinary appeal procedure of the Attorney General for all cases. - By September 30: Increase in the end-user gas prices by 5 percent, effective October 1; Implementation of 4,000 layoffs in the mining sector; Repayment of the amount of health system arrears accumulated in 2002 as identified in the protocols agreed with the suppliers. - By December 31: Increase in end-user gas prices as per the new pricing mechanism, effective January 1, 2005; Adjustment of end-user electricity prices, effective January 1, 2005, to maintain them at cost-recovery levels (including return on capital for distribution companies); Subordination of the customs administration and the Financial Guard to the Minister of Public Finance effective January 1, 2005. - Structural benchmarks (continuous): disconnection or minimum supply for largest industrial nonpayers until full payments from December 2002 onward received by utilities; government refrain from introducing tax holidays or other new distortionary tax incentives or postponing discontinuation of expiring ones; regulatory agency in electricity sector to produce biannual reports on needed adjustments in electricity and heating prices and share with Fund staff; immediate foreclosure proceedings where parts of Roman do not pay energy bills or taxes. - By May 31, 2004: Appointment of liquidators by AVAS for 15 non-payers to the utilities. - By June 30, 2004: AVAS will privatize or liquidate 6 large companies. - By September 30, 2004: AVAS will privatize or liquidate another 6 large companies. ### Technical Memorandum excerpts relevant to monitoring and ceilings - The TMU lists program targets and monitoring frameworks, including: - 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 - Selected definitions and operational rules: - Average net domestic assets (NDA) = average reserve money minus average net foreign assets (NFA), both in local currency. - Average reserve money = average currency in circulation outside the NBR + average deposits (required plus excess reserves) of commercial banks at the NBR for the indicated month. Commercial bank deposits exclude required and excess reserves in foreign exchange for foreign exchange deposits. - The stock of average reserve money as of March 2004 was lei 111,778 billion. - Reported reserve money figures adjusted if reserve requirements change from 18 percent on all required reserves held in lei, using programmed deposit levels: lei 242,609 billion for June 2004, lei 258,598 billion for September 2004 and lei 293,672 for December 2004. - Reported reserve money figures 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. - The average stock of NFA is defined as the average of the daily NFA. The average NDA as of March 2004 was lei -122,235 billion. - Adjustments to the ceiling on average NDA include: (1) prorated change for gross foreign financing deviations from programmed levels; (2) changes for reserve requirement adjustments (with prior consultation with IMF staff); (3) upward/downward adjustments for changes in stock of foreign currency denominated Treasury bills (cumulative from end-March 2004); (4) downward adjustment for foreign currency receipts from large privatizations (sale price above $10 million, cumulative from end-March 2004), excluding proceeds from the sale of BCR; (5) downward adjustment for shortfalls in actual reserves from required reserves for any individual bank. - Net foreign assets (NFA) of the NBR = reserve assets minus foreign liabilities; reserve assets include monetary gold, holdings of SDRs, any reserve position in the IMF, and holdings of foreign exchange in convertible currencies by the NBR. Exclusions from gross reserves are listed (long-term assets, NBR redeposits at commercial banks, assets in nonconvertible currencies, encumbered reserve assets, reserve assets pledged as collateral or through forward contracts, and precious metals other than gold). - Monetary gold valuation: US$407 per ounce. SDR valuation: US$1.48597 per SDR. - NFA stocks measured at the last working day of the respective month. - Foreign liabilities defined to include loans, deposits, swaps, forward liabilities in convertible currencies, 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 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, (text truncated in source). *Italic: Source: _cr04221 - 12. Ceilings on Contracting or Guaranteeing of External Debt (cumulative) 3/_* ### 2003. All changes of definition or valuation of assets or liabilities as well as details of ### Section IX of this attachment; ### Section IX of this attachment ### IX. Ceilings on contracting or guaranteeing of external debt - Coverage: - Ceilings apply to the cumulative flow since the beginning of each year of newly contracted or guaranteed external debt by the consolidated general government (as defined in Section III of this attachment). - Applies to debt as defined in point No. 9 of the IMF Guidelines on Performance Criteria with Respect to Foreign debt (Executive Board Decision No. 12274–(00/85)) and to commitments contracted or guaranteed for which value has not been received. - Also applies to any assumption of loans for debt outstanding which were not previously contracted or guaranteed by the consolidated general government. - Exclusions: - Liabilities to the IMF. - Bridge loans from the BIS, foreign banks, foreign governments, or any other financial institution. - Loans considered concessional (defined below). - Valuation: - 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. - 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 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: - 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. - Eurobond adjustor: - The ceiling on contracting and guaranteeing external debt with maturity over one year includes an Eurobond in the amount of €600 million. - If 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. - Monitoring and reported stocks/flows: - 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. - The accumulated since January 1 flow of contracted or guaranteed debt at end-March 2004: - 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 is 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 - Definition: - Broad money is defined as the liabilities of the banking system with the non-bank public. - Includes foreign currency deposits of residents, but excludes government deposits and deposits of foreign monetary institutions and other non-residents. - For program purposes, deposits denominated in foreign currency will be converted into lei at the accounting exchange rates specified in consultation with Fund staff. - Monitoring: - Data on broad money will be monitored from the monthly monetary survey data, which shall be supplied to the IMF monthly by the NBR. - Stock: - 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 - Coverage and definition: - Total exposure covers all loans, advances, holdings of debt and off-balance sheet exposure of resident banks to state-owned enterprises (SOEs). - 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 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. - Reporting requirements: - Data on banking sector lending to SOEs 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 (AVAS and relevant ministries to provide monthly updates 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 SOEs with outstanding exposure over lei 100 billion, on a company-by-company basis. - Stock: - 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 - Scope: - Public Sector Deficit Financing is monitored monthly and compiled by the Ministry of Finance, with data also supplied by the NBR and the National Securities and Exchange Commission (CNVM). - Consists of financing of the consolidated general government (as defined in Section III) and the state-owned enterprises. - Components — Consolidated general government financing: - Net External Financing: 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: 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: 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). - Components — State-owned enterprises financing: - Net External Financing: 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: 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). - Accumulation of arrears: 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. - Methodologies for monthly flows: - (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). - Principal data providers: - (i) 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 accumulation of SOE arrears to the general government by the group of 72 large monitored SOEs. - (ii) 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; 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) National Securities and Exchange Commission on local government bonds. ### Statement by the IMF Staff Representative (July 7, 2004) — key updates - Macroeconomic data broadly in line with the agreed program: - Industrial production rose 5.2 percent year-on-year in April, compared to 4.2 percent in Q1. - The 12-month headline inflation rate fell to 12.3 percent in May, about ½ percentage point below the program projection. - The current account deficit for the four months through April reached 1.2 percent of annual GDP, in line with the annual program target. - In May, economy-wide net wage growth was relatively high (9 percent in real terms compared to a year earlier); real wage growth in the monitored state-owned enterprises is hovering around zero. - The general government budget deficit was contained to 0.5 percent of annual GDP in January-May. - To prevent nominal appreciation, the NBR bought €390 million in June, bringing total purchases to €1.1 billion in Q2. - The NBR cut its policy rate by 50 basis points on June 7, to 22.8 percent. - Prior actions: - All prior actions have been fully met, except one concerning permanent closure of 15 inefficient district heating plants; the government approved a decree terminating subsidies and requesting local councils to adopt measures for permanent closure or reorganization. Staff recommends Board approval of the program. - On May 25, authorities eliminated the prosecutor general’s authority to reopen civil cases after adjudication by courts (“extraordinary appeal procedure”); the corresponding structural performance criterion has been met. - NBR safeguards assessment: - FIN completed the safeguards assessment of the NBR on June 17, 2004. The safeguard framework was found to be considerably improved and generally adequate. - Main recommendations: (i) NBR establish a statutory deadline for completing external audits within three to four months after the end of the financial year; and (ii) strengthen procedures for reviewing compilation of data reported to the Fund under the program. Authorities agreed and implementation will be monitored under the Stand-By Arrangement. ### Press Release No. 04/137 (July 7, 2004) — IMF approval summary - The Executive Board approved a 24-month Stand-By Arrangement for an amount equivalent to SDR 250 million (about US$367 million) for Romania. The Romanian authorities do not intend to make any drawings and treat the arrangement as precautionary. - Context and objectives: - The program aims at strengthening the external current account balance, further reducing inflation, sustaining rapid GDP growth, and preparing the economy for EU accession. - Key stabilization policies: reduction in the general government budget deficit; strengthening finances of SOEs through energy price adjustments and wage restraint; measures to contain credit growth. - Emphasis on wage restraint by SOEs and a prudent statutory minimum wage policy to keep economy-wide wage growth in line with productivity growth. - Efficiency-enhancing fiscal revenue and expenditure adjustments; further cuts in social security taxes envisaged; measures to broaden the tax base and improve tax administration. - VAT and profit tax reforms should not be undermined by exemptions. - Prioritization of expenditure to help finance infrastructure investment. - Monetary and structural measures: - Monetary and exchange rate policies to balance reducing inflation and maintaining external competitiveness. - Authorities preparing for inflation targeting; new central bank law approved to strengthen central bank independence. - Strengthened supervisory procedures and regulation to stem risks from rapid household credit growth; authorities ready to take further measures if necessary. - Measures to address tax arrears and nonpayment of utility bills by large loss-making SOEs; largest loss-makers to be downsized with employee assistance. - Continued privatization focus, notably a strong commitment to privatize Petrom. - Judicial system overhaul underway with new and amended laws to improve business climate, judicial independence, and capacity to address corruption. *Source: Section IX of this attachment; Statement by the IMF Staff Representative (July 7, 2004); Press Release No. 04/137 (July 7, 2004).* ### 2.6 percent in 2002. ### _cr04221 - 2.6 percent in 2002. ### Macroeconomic performance and recent developments - Real GDP growth: "5.2 percent a year in 2001-03, and 6.1 percent in the first half of 2004." - Inflation and disinflation: - 12-month inflation (eop): "40.7" (2000), "30.3" (2001), "17.8" (2002), "14.1" (2003), "11.8" (2004). - From "41 percent at end-2000" to "12 ⅓ percent in May 2004." - End-2004 inflation target: "9 percent" (staff/authorities projection). - External sector and reserves: - Official reserves (eop, US$ million): "3466" (2000), "5090" (2001), "6975" (2002), "7994" (2003), "8303" (2004). - Current account (percent of annual GDP): " -3.9" (2000), " -5.5" (2001), " -3.4" (2002), " -5.9" (2003), " -0.5" (2004). - Credit and financial sector: - Very rapid credit growth in 2003: "about 55 percent in real terms." - Consumer and mortgage credit "tripled in real terms" in 2003 (from a low base); corporate credit remained strong. - Authorities tightened eligibility criteria for consumer and mortgage credit in early 2004, successfully mitigating credit expansion. - Privatization and SOE reforms: - Privatization accelerated in 2003–2004 after a decade of slow progress; major energy-sector privatizations, including Petrom, are "now close to completion." - "35 large companies with over 112000 employees" privatized in 2001-03, half in the last year; further progress in Q1 2004. ### Program objectives, projections, and fiscal stance - Program goals: - Strengthen macroeconomic stabilization and structural reforms in run-up to EU accession in 2007. - Address surge in current account deficit, rapid credit growth, and bring inflation to single digits. - Fiscal tightening and targets: - Broad public sector fiscal stance to be tightened by "1¼ percentage points" of GDP relative to 2003 outcome. - Authorities will reduce the 2004 general government deficit ceiling to "2.1 percent of GDP," compared with "3 percent of GDP" in the approved budget. - Owing to very strong revenue performance, reduction achievable by saving surplus revenue, estimated at "0.9 percent of GDP." - Measures to improve SOE finances: "Energy price adjustments and wage policy" to be main instruments. - Additional public sector adjustment: measures envisaged to improve saving-investment balances of SOEs (energy price adjustments and wage control in "72 large SOEs") would allow for an overall adjustment in the broad public sector deficit of "more than 1 percent of GDP." - Monthly monitoring of the public sector borrowing requirement to be established in the year. - Credit growth and external balance projections: - Credit growth expected to slow to "about 35 percent in real terms on average." - External current account deficit for 2004 projected to decline by "¾ percentage points" to "5¼ percent of GDP" relative to 2003. - End-2004 inflation projected to be lowered to "9 percent" from "14.1 percent" at end-2003. - Fiscal policy instruments and tax measures: - Employers’ contributions reduced in January 2004: pension fund by "2.5 percentage points" and unemployment fund by "0.5 percentage point." - Eligibility for reduced VAT limited to pharmaceutical products, hotel accommodation, newspaper distribution, and a small group of previously VAT-exempted products; "No other modification in tax legislation is planned for 2004." - Modernization of revenue administration will focus on operations, systems and processes, and human resources. - Bankruptcy procedures initiated against large private firms that incurred tax arrears. ### Monetary, exchange-rate, and financial-sector policy - Monetary strategy and inflation targeting: - In 2004 the NBR will continue the existing exchange-rate-guided strategy and prepare to adopt inflation targeting (IT) in 2005. - The NBR reduced the policy interest rate by "50 bps" on "June 9" and is contemplating further reductions. - The NBR will use interest rate policy and selective market interventions to steer the exchange rate consistent with the inflation target and a modest real appreciation. - Legal underpinnings for IT: recently adopted NBR Law "fully transposes EU central banking acquis," guaranteeing price stability as a primary objective and consolidating central bank independence. - Moving to full IT will require strengthened information gathering, analysis and forecasting techniques; formalized decision-making; and improved communication/transparency. - Financial supervision and credit risk management: - NBR will enhance on-site supervision and perform systematic risk assessments via stress-testing of portfolios; more conservative regulatory practices to be adopted if necessary. - The NBR will closely watch credit growth and implement additional measures if needed to keep the current account deficit within safe margins. ### Wage policy and labor measures - Statutory minimum wage: "prudent annual increase of 12 percent" on "January 1, 2004." - SOE wage and employment controls: - Government limited average net real wage growth in SOEs to "about 1 percent" and decided to reduce employment by "5 percent." - Ministries will block payments equivalent to "4 percent of the quarterly wage bill" in "72 monitored SOEs" until the last month of the quarter, releasing amounts only if targets are met. - Pension reform commitment: authorities committed to World Bank proposal to accelerate increase in retirement age and equalize it for men and women starting with "July 1, 2005." ### Structural reforms, privatization, and sectoral strategies - Privatization priorities and timelines: - Accelerate privatization including sale of Petrom; privatization of SOEs in the privatization authority’s portfolio to be completed by "end-2004." - Four electricity distribution companies scheduled for privatization in 2004; authorities close to signing contracts for two of them. - Bids for two gas distribution companies expected by "mid-July" (2004). - Discussions to start with World Bank on privatization of Romgaz and two big power generators. - Remaining shares in BCR to be sold "as soon as possible" in agreement with EBRD and IFC; privatization of CEC targeted for completion in "2005." - Restructuring and closures: - Railways: intention to close by "end-June 2004" about "3000 km" of loss-making secondary lines if segments are not taken over by investors. - Mining: agreed to close "30 mines," laying off "8,000 miners" in 2004; phasing out state support for mineral and coal sector by "2007" and "2010" respectively. - Energy sector price and collection reforms: - Losses from quasi-fiscal activities in the energy sector decreased from "4.7 percent of GDP in 2000" to "2.8 percent in 2003." - Gas sector: final user gas price to be increased by "5 percent every quarter in 2004"; schedule announced to increase producer gas prices to reach import parity in "2007." - Electricity prices to be adjusted to cover rising cost and provide margin for return on equity to facilitate privatization. - District heating reforms: increase heating price by "12 percent as of July 1, 2004" (already met) and increase National Reference Price for heating by "12 percent as of August 1, 2004"; termination of subsidies to at least "15 inefficient heating plants" (already implemented); move to individual heating contracts; enhance targeted support for households. - Measures to increase collection rates: closure of unviable industrial consumers with large arrears, seizure of assets from nonpayers through judiciary, intensified collection from households. ### Governance, judicial reform, and anti-corruption - Judicial reforms and independence: - Laws approved on judicial organization, status of magistrates, and Superior Council of the Magistrates; strengthened role of the Superior Council as guarantor of judicial independence. - Conditionality for judicial reform included in program. - Anti-corruption and transparency: - Strengthened legislation on declaration of assets by government and parliamentary officials and near-relatives. - National Prosecutor's Anti-Corruption Office (ANC) to be provided with additional resources in the year. - Strengthening of the office of the special anticorruption prosecutor and increased transparency on privatization and financial disclosure are program priorities. - Labor code and labor-market flexibility: - In early 2005, authorities will overhaul the new labor code in cooperation with the World Bank and within the framework of the EU acquis to promote greater labor market flexibility. ### Key quantitative indicators (selected rows from Romania: Main Economic Indicators, 2000-2004Q1) - GDP (year-on-year real growth unless indicated otherwise): "2.1" (2000), "5.7" (2001), "5.0" (2002), "4.9" (2003), "6.1" (2004 Q1). - Final domestic demand: "2.1" (2000), "6.9" (2001), "3.5" (2002), "7.3" (2003), "7.9" (2004 Q1). - Total consumption: "1.5" (2000), "6.3" (2001), "2.4" (2002), "6.9" (2003), "8.1" (2004 Q1). - Gross fixed capital formation: "5.5" (2000), "10.1" (2001), "8.2" (2002), "9.2" (2003), "7.3" (2004 Q1). - Net exports (contribution): " -2.3" (2000), " -3.1" (2001), "0.9" (2002), " -2.8" (2003), " -1.1" (2004 Q1). - Exports of goods and services: "23.4" (2000), "12.1" (2001), "17.6" (2002), "11.1" (2003), "10.2" (2004 Q1). - Imports of goods and services: "27.1" (2000), "18.4" (2001), "12.0" (2002), "16.3" (2003), "12.4" (2004 Q1). - Current account (percent of annual GDP): " -3.9" (2000), " -5.5" (2001), " -3.4" (2002), " -5.9" (2003), " -0.5" (2004). - Official reserves (eop, US$ million): "3466" (2000), "5090" (2001), "6975" (2002), "7994" (2003), "8303" (2004). *Prepared from IMF staff report text and authorities’ statement contained in _cr04221 - 2.6 percent in 2002.* ### 12.3 percent in May 2004. Macroeconomic stabilization, which preserved the competitiveness ### _cr04221 - 12.3 percent in May 2004. Macroeconomic stabilization, which preserved the competitiveness ### Macroeconomic performance and external sector - Positive supply response and rapid growth over the last three years were driven by macroeconomic stabilization (including the 1999 depreciation) and prospects for EU accession. - In 2003 domestic demand picked up, and the current account deficit widened reflecting a sharp increase in credit to the private sector and a large minimum wage increase in January 2003. - Final domestic demand grew faster than output in 2003 and the current account deficit widened to 5.9 percent of GDP. - Selected external indicators (percent of GDP or levels as reported): - Trade balance: -3.5 (1999), -4.6 (2000), -7.4 (2001), -5.7 (2002), -7.9 (2003), -7.0 (2004) - Current account balance: -4.0 (1999), -3.7 (2000), -5.5 (2001), -3.4 (2002), -5.8 (2003), -5.2 (2004) - External debt: 25.6 (1999), 28.7 (2000), 30.7 (2001), 34.3 (2002), 34.6 (2003), 33.2 (2004) - Official reserves (end-year, US$ million): 2,472 (1999), 3,466 (2000), 5,090 (2001), 6,975 (2002), 7,994 (2003), 9,664 (2004) - Reserve cover (months of prospective imports): 2.1 (1999), 2.5 (2000), 3.2 (2001), 3.5 (2002), 3.3 (2003), 4.2 (2004) - Lei per U.S. dollar (end of period): 18,250 (1999), 25,926 (2000), 31,597 (2001), 33,500 (2002), 33,013 (2003), ... - NEER appreciation (+) (annual average in percent): -39.8 (1999), -22.8 (2000), -22.3 (2001), -14.4 (2002), -11.1 (2003), ... - REER appreciation (+) (CPI-based, annual average in percent): -15.0 (1999), 9.3 (2000), 1.5 (2001), 2.6 (2002), 0.4 (2003), ... - REER appreciation (+) (CPI excl. admin prices, annual average in percent): ... (1999), 6.0 (2000), 1.8 (2001), 1.0 (2002), 0.0 (2003), ... - REER appreciation (+) (ULC-based, annual average in percent): -21.8 (1999), -0.3 (2000), -0.9 (2001), -6.7 (2002), -5.6 (2003), ... ### Inflation, output, and domestic demand - Real GDP growth (change in percent): -1.2 (1999), 2.1 (2000), 5.7 (2001), 5.0 (2002), 4.9 (2003), 5.0 (2004 Proj.) - Final domestic demand (change in percent): -2.9 (1999), 2.1 (2000), 6.9 (2001), 3.5 (2002), 7.3 (2003), 6.0 (2004) - CPI (end of period): 54.8 (1999), 40.7 (2000), 30.3 (2001), 17.8 (2002), 14.1 (2003), 9.0 (2004) - CPI (period average): 45.8 (1999), 45.7 (2000), 34.5 (2001), 22.5 (2002), 15.3 (2003), 11.5 (2004) - Unemployment rate (end of period; percent): 11.8 (1999), 10.5 (2000), 8.8 (2001), 8.4 (2002), 7.2 (2003), 6.5 (2004) - Gross national saving (percent of GDP): 11.9 (1999), 15.6 (2000), 17.0 (2001), 20.1 (2002), 18.7 (2003), 19.6 (2004) - Gross domestic investment (percent of GDP): 16.1 (1999), 19.5 (2000), 22.6 (2001), 23.5 (2002), 24.6 (2003), 24.8 (2004) ### Fiscal policy and public finance - Fiscal policy provided continued support for macroeconomic stabilization through VAT and profit tax reforms and improvements in tax administration. - Revenue collections strengthened despite sizable cuts in social security contribution rates. - With interest payments declining, the budget deficit was reduced relative to GDP from 2.6 percent in 2002 to 2.3 percent in 2003. - Authorities reduced losses from quasi-fiscal activities and raised gas prices substantially since mid-2003; electricity prices were brought to cost recovery level in September 2003. - Budget balances and public debt (general government, percent of GDP): - Overall balance: -3.6 (1999), -4.0 (2000), -3.2 (2001), -2.6 (2002), -2.3 (2003), -2.1 (2004) - Primary balance: 2.4 (1999), 0.9 (2000), 0.6 (2001), 0.4 (2002), -0.2 (2003), 0.0 (2004) - Total public debt (in percent of GDP): 33.2 (1999), 31.3 (2000), 28.6 (2001), 28.3 (2002), 26.6 (2003), 26.5 (2004) ### Monetary policy, credit, and financial sector - Current monetary framework: a gradually declining targeted depreciation rate as a nominal anchor; credited with success in reducing inflation. - Directors noted that once inflation reaches single-digit levels and wage discipline in state-owned companies is strengthened, inflation targeting could become viable for the medium term. - Banking system considered healthy; recent measures effective in containing household credit growth, but vigilance recommended if brisk credit growth resumes. - Money and credit indicators: - Real domestic credit (end of year, percent change): -7.6 (1999), 9.9 (2000), 27.9 (2001), 33.1 (2002), 55.4 (2003), 21.4 (2004) - Broad money: 44.9 (1999), 38.0 (2000), 46.2 (2001), 38.1 (2002), 23.3 (2003), 27.2 (2004) - NBR interest rates (end of period): 88.7 (1999), 60.1 (2000), 39.9 (2001), 21.5 (2002), 23.4 (2003), ... - Treasury bill rate (end of period): 104.8 (1999), 59.4 (2000), 38.4 (2001), 17.4 (2002), 18.4 (2003), ... ### Structural reforms, privatization, and labor market - After a decade of slow privatization, a large-scale employment reduction program accelerated privatization: 35 large companies with over 112,000 employees were privatized in 2001–03, half in the last year. - Energy sector privatization progressed slowly, but important projects (including the privatization of oil and gas producer Petrom) were close to completion. - Directors emphasized completion of the privatization agenda and improving the business climate, especially governance and transparency in privatization and public procurement. - Labor market and wage policy recommendations: - Maintain prudent wage policies and tight state-owned enterprise wage program; keep wage settlements in collective labor contracts in line with productivity growth. - Review provisions in the newly-approved Labor Code that adversely affect flexibility and increase the burden on small and medium-sized enterprises. - Support closing unviable operations with appropriate provision for relocating and retraining employees. - Utilities and quasi-fiscal activities: - Continue efforts to eliminate losses and quasi-fiscal activities in state-owned enterprises. - Reduce subsidies and prioritize expenditure to make room for planned increases in infrastructure investment. - Implement the recently-approved strategy for the district heating sector and sustain increases in collection rates in gas and electricity. ### Executive Board policy recommendations and conditional steps - Sustain disinflation and contain the current account deficit within a safe range through: - Further reducing the budget deficit over the medium term. - Eliminating losses and quasi-fiscal activities in state-owned enterprises. - Implementing a strict wage policy. - Maintain a sufficiently tight fiscal policy over the medium term; use additional revenue for further deficit reduction. - Improve revenue and expenditure structure to support budget consolidation; broaden tax base and improve tax administration if further cuts in social security contribution rates proceed. - Avoid eroding value added and profit tax bases through exemptions. - Articulate a medium-term expenditure framework to prioritize expenditure and accommodate infrastructure investment. - Strengthen central bank independence in line with Maastricht requirements and prepare institutional, operational, and analytical prerequisites for inflation targeting in 2005. - Accelerate privatization (especially in the energy sector), continue employment reductions in state-owned enterprises, and sustain judiciary reform and anti-corruption measures to improve the business climate and attract higher private investment. *Sources: Romanian authorities and IMF staff estimates (Selected Economic Indicators and Executive Board Assessment as provided).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04221.pdf_