## _cr1049

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---

### I. Executive summary
- Program performance broadly on-track since first review; second SBA review delayed by political difficulties.
- Most quantitative performance criteria for end-December 2009 were met, including the general government deficit target; ceiling on general government domestic arrears breached by a small margin.
- Key macro-financial developments since SBA approval in May 2009:
  - Pressures on the exchange rate have subsided.
  - Reserves have grown.
  - CDS spreads have come down.
  - Domestic interest rates have steadily fallen.
  - NBR policy rate reduced by 50 basis points to 7.0 percent in February 2010.
- Main program risks:
  - Spending-based consolidation strategy for 2010 faces political and implementation risks.
  - Banking sector vulnerability: NPLs continue to rise and credit conditions remain tight.
  - Sluggish output recovery and rising unemployment could increase social strains.

### II. Recent economic developments and outlook
- Growth and activity:
  - Q3 2009: contraction of 0.6 percent q-o-q and 7.1 percent y-o-y.
  - Flash Q4 2009: Real GDP shrank by 1.5 percent q-o-q (seasonally adjusted) and 6.6 percent y-o-y; full-year decline 7.2 percent.
  - Staff projection: GDP recovery of 1.3 percent in 2010.
  - Output gap expected to close by 2013–14.
- Inflation:
  - End-2009 CPI inflation: 4.7 percent.
  - January 2010 CPI: 5.2 percent (increase driven by excise tax increases).
  - CPI projected to fall to around 3.5 percent by end-2010; NBR inflation targets: 3.5 percent in 2010 and 3 percent in 2011 (±1 percentage point).
- External sector and financing:
  - Current account: estimated contraction from 12½ percent of GDP in 2008 to about 4½ percent in 2009 (staff estimate); projected to widen to about 5½ percent of GDP in 2010.
  - Net foreign assets: NFA was €5.1 billion above the end-2009 program target; gross international reserves about €31 billion at end-2009.
  - Rollover rates in 2009: banks about 90 percent; corporates about 75 percent.
  - FDI estimated decline: about 55 percent compared to 2008.
- Labor and demand:
  - Unemployment to remain high; household and corporate deleveraging and tight credit conditions expected to slow recovery.

### III. Could an export-driven recovery be expected? (Box 1)
- External linkages:
  - EU accounts for nearly 55 percent of total external trade.
  - Nearly 80 percent of FDI stock originates from the EU; FDI stock about 40 percent of GDP as of end-2008.
  - Virtually all remittances come from Romanians working in EU countries.
- Recent shifts:
  - Real effective exchange rate depreciated by about 10 percent between August 2008 and December 2009.
  - Exports have shown an important pick-up in recent months after the collapse in late-2008.
- Constraints on external-driven recovery:
  - Trade relatively low as a share of GDP; EU recovery expected to be tepid in the near term.
  - Bank-financed capital inflows likely to remain weak in the near term.
  - Employment recovery in EU countries expected to be slow; remittances to remain subdued in 2010.

### IV. Fiscal policy, consolidation and public finances
- 2010 budget and targets:
  - Budget deficit target: 5.9 percent of GDP for general government (prior action).
  - Without measures, deficit would rise to around 8.4 percent of GDP in 2010; adjustment of 2½ percent of GDP required to meet agreed target.
  - Authorities intend to decrease the deficit below the Maastricht criterion of 3 percent of GDP by 2012; envisaged structural adjustment of around 1¼ percent of GDP per year in 2011 and 2012.
- Composition of the 2010 adjustment (reported shares and amounts):
  - About 80 percent of total adjustment from baseline projection on expenditure side.
  - Wage bill measures:
    - Freeze on all but the lowest wages: 0.3 percent of GDP.
    - Replacement policy (1 of 7) and cuts in overtime/premia: 0.2 percent of GDP.
    - Structural reductions in public employment: 0.2 percent of GDP.
  - Pension-related savings: 0.1 percent of GDP.
  - Freeze on goods and services, pensions (except minimum social pension), and reorganization savings: 1.1 percent of GDP.
  - Revenue measures: turnover tax on medical distributors: 0.1 percent of GDP; repayments of net lending and other measures contributing 0.6 percent of GDP.
- Arrears management:
  - Government lowered arrears stock by around RON 100 million between June and December 2009.
  - Plan: repay two-thirds of end-2009 stock of outstanding arrears in 2010 and eliminate the remainder by end-April 2011.
  - Performance criterion on non-accumulation of domestic arrears (stock, in billions of lei):
    - End-November 2009 (actual): 1.40
    - End-March 2010 (PC): 1.27
    - End-June 2010 (PC): 1.09
    - End-September 2010 (IT): 0.81
    - End-December 2010 (IT): 0.48
    - End-April 2011 (IT): 0.00
- Structural fiscal reforms and benchmarks:
  - Fiscal Responsibility Law: draft sent to parliament; structural benchmark for approval by March 30, 2010.
  - Pension reform legislation: to be submitted and approved by end-June 2010 (structural benchmark).
  - Implementing legislation for public wage law: approval by end-September 2010 (structural benchmark).
  - Tax administration reforms by emergency ordinance by end-April 2010 and ratified by end-June 2010.

### V. Financial sector resilience, risks and reform agenda
- Capitalization and profitability:
  - Average capital adequacy ratio: 13.5 percent at end-December 2009.
  - System remained in slight profitability for the year despite rising provisions.
- Asset quality:
  - NPLs as percent of total loans: 15.3 percent at end-December 2009.
  - Ratio of total provisions to loans in doubtful and loss categories: around 50 percent.
- Parent banks and exposures:
  - Nine banks maintained their exposures between March and December 2009 as a group.
  - Greek banks hold about 20 percent of the Romanian banking market.
- Safety net and resolution framework (planned legal changes):
  - NBR drafted amendments to strengthen resolution framework, supplement special administrator powers, make NBR sole decision-maker on insolvent institutions, and give DGF claims same seniority as depositors; drafting to be finalized and legislative process expected to be completed by end-March 2010.
  - DGF own resources to be enhanced through increases in effective contribution rate; phase-out reliance on banks’ contingent credit lines and increase accumulation of own resources (structural benchmark end-September 2010).
  - Formal medium-term objective: raise minimum capital adequacy ratio from 8 percent to 10 percent.
  - Authorities committed to adopting IFRS for banks by 2012.
- Supervisory and prudential measures:
  - Liquidity requirements amended; reporting requirements for liquidity ratios across currencies established.
  - Loan classification and provisioning rules for rescheduled/restructured loans modified to preserve credit discipline and encourage workouts.
  - Authorities will not modify framework that allows banks to rely on in-house expertise for collections.

### VI. Monetary policy, reserves and exchange rate stance
- Monetary easing and liquidity:
  - NBR reduced reserve requirements (particularly on foreign exchange) and injected liquidity mainly through repo facilities.
  - Policy rate lowered to 7.0 percent in February 2010.
- Reserves and NFA:
  - Gross international reserves: about €31 billion at end-2009.
  - NFA overperformance: €5.1 billion above the end-2009 program target.
  - Coverage of gross international reserves increased from about 80 percent of short-term external debt prior to SBA approval to well over 100 percent at end-2009.
  - TMU proposal: increase NFA target for end-2010 to lock in part of 2009 overperformance and allow room for exchange rate intervention.
- Inflation anchoring:
  - Heightened inflation risks from international energy prices, administered price increases, and structural rigidities in nontradables.
  - Monetary policy should cautiously manage to anchor expectations while considering financial stability risks.

### VII. Program modalities, conditionality, and financing
- Stand‑By Arrangement (access and phasing):
  - Total access: SDR 11.443 billion; length: 24 months.
  - SDR 4.37 billion disbursed on May 4, 2009; second tranche SDR 1.718 billion disbursed on September 21, 2009.
  - Request to disburse SDR 2.175 billion at completion of combined second and third reviews; authorities requested half the disbursement be used for budgetary support.
  - Four subsequent disbursements totaling SDR 3.180 billion contingent on further quarterly reviews (June 15, 2010 to March 15, 2011).
- Program modifications proposed in Letter of Intent (February 5, 2010):
  - Rephase target on government domestic payments arrears to full elimination by end-April 2011.
  - Add adjustor to quarterly general government deficit targets if current spending exceeds indicative target in previous quarter.
  - Establish quarterly indicative target for operating balance of 10 loss-making SOEs.
  - Move some structural benchmark dates (e.g., pension law to end-June 2010).
  - New structural benchmarks: implementing legislation for organic wage law (end-September 2010); Fiscal Responsibility Law approval (end-March); measures to strengthen DGF (end-September 2010).
- Financing from partners:
  - EC disbursements: first tranche €1½ billion in July 2009; second tranche €1 billion expected in March 2010.
  - WB disbursement: first tranche €0.3 billion in September 2009; remaining tranches €0.7 billion in total expected in 2010 and early 2011.
- Romania’s capacity to repay the Fund:
  - Fund credit outstanding projected to peak in 2011 at 31.6 percent of gross reserves.
  - Peak payments projected in 2013–14 at 12.8 and 14.5 percent of gross reserves, respectively.

### VIII. Conditionality, targets and reporting (selected numeric highlights)
- Floor on cumulative change in NFA from beginning of year (in mln. euros):
  - 2009 December (Stock): 20,658
  - 2010 March (PC): -2,000
  - 2010 June (PC): -2,500
  - 2010 September (IT): -2,000
  - 2010 December (IT): -2,000
- Performance criterion on general government balance (cash, cumulative floor; in millions of lei):
  - End-December 2009 (actual): -36,101
  - End-March 2010 (PC): -8,250
  - End-June 2010 (PC): -15,540
  - End-September 2010 (IT): -21,800
  - End-December 2010 (IT): -31,900
- Indicative target on general government current primary spending (cumulative change; in millions of lei):
  - End-December 2009 (actual): 85,637
  - End-March 2010 (IT): 32,900
  - End-June 2010 (IT): 65,100
  - End-September 2010 (IT): 97,500
  - End-December 2010 (IT): 131,300
- External program disbursements – Baseline Projections (in mln. euros; cumulative from end-December 2009):
  - March 2010: 1,340
  - June 2010: 2,540
  - September 2010: 2,540
  - December 2010: 4,100
- Inflation consultation bands (12‑month CPI, year-on-year) — center point:
  - 2009 December: 4.7
  - 2010 March: 4.5
  - 2010 June: 4.0
  - 2010 September: 3.75
  - 2010 December: 3.5

### IX. IMF Executive Board action and policy messages
- Board completed second and third reviews and approved immediate disbursement of SDR 2.18 billion, bringing total disbursements to SDR 8.26 billion.
- Board approved a waiver for non-observance of the end-December 2009 performance criterion on accumulation of domestic arrears.
- Key policy guidance:
  - Continue full implementation of the program to strengthen macroeconomic stability and provide a basis for sustainable growth.
  - Fiscal consolidation is necessary to stabilize public debt and meet euro accession criteria; 2010 target balances weak demand and medium-term consolidation but requires politically difficult decisions.
  - Strengthen fiscal controls, contain contingent liabilities, and reform public entities outside central government.
  - Maintain cautious monetary policy to bring inflation within target band in 2010.
  - Sustain supervisory vigilance in the financial sector given rising NPLs and potential regional spillovers.

*Source: IMF staff report excerpt and related IMF documents contained in the supplied _cr1049 PDF content.*

### 1.   Could an Export Driven Recovery be Expected? ..........................................................6

### 1.   Could an Export Driven Recovery be Expected?

### I. Introduction and summary
- Program performance has remained broadly on-track since conclusion of the first review. Political difficulties prevented completion of the second SBA review scheduled for mid-December 2009.
- Most quantitative performance criteria for end-December 2009 were met, including the general government deficit target.
- The ceiling on general government domestic arrears was breached by a small margin; authorities reformed arrears monitoring and improved payments, and the arrears stock is now below June levels.
- The indicative target on general government current expenditure was exceeded.
- One structural benchmark (passage of revised pension legislation) was not met due to political uncertainties; staff assessment of the structural benchmark on passage of the wage bill is “partially met”.
- Since SBA approval in May, 2009:
  - Pressures on the exchange rate have subsided.
  - Reserves have grown.
  - CDS spreads have come down.
  - Domestic interest rates have steadily fallen.
  - These developments created room for a cautious reduction in the central bank policy rate and enabled the treasury to extend maturities and lower domestic borrowing costs.
- Temporary increase in spreads in late 2009 due to political uncertainties and delay in SBA review has been fully reversed.
- Remaining program risks:
  - Spending-based consolidation strategy for 2010 carries significant risks given past difficulties executing reforms (public wages, pensions).
  - Proposed fiscal remedies (cuts in public employment, tighter controls on current spending) may prove politically difficult.
  - Sluggish output recovery and rising unemployment could increase social strains and raise risk of populist backlash to fiscal adjustment.
  - Banking sector remains vulnerable: non-performing loans (NPLs) continue to rise, pressuring capital and liquidity and discouraging bank lending.
  - Need to address weaknesses in the unitary wage law via follow-up implementing legislation and to closely oversee passage of the fiscal responsibility law and pension reform.
- Political situation: normalized following President Basescu’s reelection confirmation and formation of a new government; both President and Prime Minister reaffirmed commitment to the Fund program.

### II. Recent developments
- Growth and activity:
  - Economic activity weakened in Q3 2009, contracting by 0.6 percent q-o-q and by 7.1 percent y-o-y.
  - High-frequency indicators confirm production levels stabilizing; positive euro-zone developments are starting to boost industrial production and exports.
  - Key real macroeconomic variables are now growing on a monthly basis; economic activity is expected to turn positive in the first quarter of 2010.
- Inflation:
  - End-2009 CPI inflation was 4.7 percent, down from 6.3 percent in 2008 but above the upper bound of the NBR’s inflation target range.
  - Year-end inflation edged slightly up due to excise tax increases on alcohol and tobacco.
  - Price developments in non-food items showed persistent inflationary pressures due to rigidities and asymmetric pass-through from currency depreciation.
  - As tax-hike impacts fade, inflation is expected to ease to within the central bank’s target band.
- External financing and trade:
  - Current account is shrinking faster than anticipated; net capital inflows are higher than initially projected.
  - Current account adjustment driven mainly by imports falling more rapidly than exports.
  - Export demand has recently rebounded; sharp nominal decline of the leu against the euro at the beginning of the crisis generated a real depreciation that helped competitiveness.
  - FDI estimated to have fallen by about 55 percent compared to 2008.
  - Net capital flows were better than anticipated under the program.
  - Rollover rates for 2009 averaged about 90 percent for banks and about 75 percent for corporates.
- Fiscal developments:
  - Downturn exacerbated fiscal vulnerability: tax collections fell sharply early in 2009.
  - Current spending proved difficult to restrain, with overruns including the public wage bill; compensating cuts were made in capital spending, lower interest payments, and improved late-year revenue collections.
  - Delayed implementation of late-2009 expenditure-cut measures (10-day furlough, restructuring of state agencies) reduced savings, but government met the end-year deficit target.
  - Government lowered arrears stock by around RON 100 million between June and December 2009.
- Financial markets and credit:
  - Financial market stress has eased; sovereign CDS spreads are close to pre-Lehman levels.
  - Government financed short-term needs in local bond market without significant pressure on local rates (partly due to easing of banks’ reserve requirements).
  - Banks sharply reduced credit growth to solidify positions; at end-October, credit to the private sector in local currency had contracted from its peak by almost 11 percent in real terms (deflated by CPI).
  - Loans in foreign currency in euro terms increased in recent months only because of repatriation of loan portfolios previously held off-shore and remained 3 percent below peak levels.

### Box 1 — Could an External Driven Recovery be Expected?
- Economic linkages:
  - Romania has had a high degree of business cycle correlation with EU countries; EU accounts for nearly 55 percent of total external trade.
  - Nearly 80 percent of Romania’s FDI stock originates from the EU; FDI stock had increased to about 40 percent of GDP as of end-2008.
  - Virtually all remittances come from Romanians working in EU countries.
- External channel prospects:
  - Real effective exchange rate depreciated by about 10 percent between August 2008 and December 2009.
  - Exports have shown an important pick-up in recent months after collapse in late-2008.
  - External-driven growth is likely limited because trade is relatively low as a share of GDP and the EU recovery is expected to be tepid in the near term.
- Financial/remittance channel prospects:
  - Bank-financed capital inflows are likely to remain weak in the near term.
  - Employment recovery in EU countries will be slow, implying remittances will remain subdued in 2010.

### III. Policy discussions
#### A. Revised macroeconomic framework
- Growth:
  - GDP is now expected to recover by 1.3 percent in 2010 (up from near zero in the revised program).
  - Recovery is expected to be slow due to rising unemployment, household and corporate deleveraging, and tight credit conditions.
  - Output gap expected to close by 2013–14.
- Inflation:
  - CPI inflation projected to fall to around 3.5 percent by end-2010.
  - Initial boosts from excise tax increases and regulated price adjustments (electricity) in January; remaining year-downward pressure from large output gap and weak labor market.
- Current account:
  - Staff estimates the current account deficit contracted from 12½ percent of GDP in 2008 to about 4½ percent in 2009 (compared to 7½ percent under the program).
  - In 2010 it is projected to widen to about 5½ percent of GDP, closer to its estimated sustainable medium-term level.
- Risks:
  - Downside: (i) negative feedback loops between real and financial sectors; (ii) regional financial market turbulence triggering capital outflows and exchange rate depreciation; (iii) negative political developments slowing program implementation (new government holds only a slim majority).
  - Upside: stronger global, especially EU, recovery would improve external demand and boost activity.

#### B. Fiscal policies
- Fiscal challenge:
  - Major fiscal challenges in 2010 and beyond to reduce deficit and stabilize public debt-to-GDP ratio, and meet Maastricht criteria for Euro area accession while avoiding undue social hardship.
  - Projected sluggish recovery and high unemployment complicate adjustment; further measures needed beyond 2010 to counter baseline deterioration driven by population aging and high recurrent spending.
- 2010 budget:
  - Targets a deficit of 5.9 percent of GDP for general government (agreed at the time of the first review).
  - With unchanged policies, deficit would rise to around 8.4 percent of GDP in 2010, requiring 2½ percent of GDP in adjustment to meet the agreed target.
- Adjustment composition:
  - Most measures to reach the deficit target will be on the expenditure side.
  - Key measures include:
    - Rationalization of public sector wage bill: wage freeze; cuts in overtime and premia; significant reduction in employment; implementation of new public wage law passed in October 2009.
    - Savings from better control on fraudulent disability pensions, early retirement claims, and social benefits.
    - Freeze on goods and services spending and pensions (except minimum social pension); savings from reorganization of state agencies.
  - Revenue-side measures: a new turnover tax on medical goods suppliers and net lending repayments to contribute about 20 percent of the deficit adjustment.
  - Government prepared to take contingency measures (including on revenue side) if desired savings are not on track by fourth review mission.
- Arrears and expenditure management:
  - Government has started to clear payment arrears; under proposed rephasing, two-thirds of end-2009 stock of outstanding arrears will be paid in 2010 and the rest by end-April 2011.
  - Most arrears are in the health sector; government will institute a new patient participation fee system to use revenues to help clear arrears.
  - Monitoring of arrears improved; further action to follow IMF technical assistance recommendations.
  - VAT refund repayment process will be improved per IMF technical assistance August 2009.
- Public compensation reform:
  - Initial reform law approved by parliament in September 2009 introducing unified and simplified pay scale, reforming and capping bonuses, and setting mandate to reduce wage bill to 7 percent of GDP by 2015.
  - Legal framework still lacks elements to ensure best-practice compliance; implementing legislation being prepared with World Bank advice. Adoption of implementing legislation is a structural benchmark for end-September 2010.
  - Staff noted issues: new organic law ties entire pay scale to single reference wage envisaged to increase by 56 percent between 2010 and 2015, not benchmarking pay to private sector, and more timid bonus reforms than recommended.
- Institutional reforms and legislative priorities for 2010:
  - Legislation to re-structure about 100 state agencies recently approved—expected savings in wage bill and goods/services.
  - Pension reform legislation to be submitted and approved by end-June 2010 (structural benchmark).
    - Reform measures include: (i) gradually indexing pensions to inflation; (ii) equalizing retirement ages between men and women at 65 by 2030; (iii) reducing early retirement and improving participation rates; (iv) tightening eligibility criterion of disability pensions.
  - Draft fiscal responsibility law prepared and sent to parliament for approval before end-March 2010 (structural benchmark). Draft law envisages: medium-term budgetary framework with binding targets on overall deficit and personnel spending for first two years and other fiscal aggregates for forthcoming budget year; limits on in-year budget revisions; creation of a fiscal council to assess official macroeconomic and revenue forecasts and monitor compliance.
  - Measures to improve monitoring and control of SOEs (end-June 2010 structural benchmark was already met); indicative program target set for operating balance of the 10 largest loss-making firms.
  - Commitment to approve legislation to improve financial controls in local governments (end-June 2010 structural benchmark).
  - Legislation to improve tax administration, based on IMF technical assistance, to be adopted by emergency ordinance by end-April 2010 (structural benchmark).

*Source: IMF staff report excerpt.*

### 18.      The authorities remain committed to reducing the fiscal deficit to more

### _cr1049 - 18.      The authorities remain committed to reducing the fiscal deficit to more

### Fiscal policy and medium-term consolidation
- Authorities intend to decrease the deficit below the Maastricht criterion of 3 percent of GDP by 2012.
- Envisaged path requires adjustment of the structural deficit of around 1¼ percent of GDP per year in 2011 and 2012, in addition to the anticipated cyclical recovery in revenues.
- Full implementation of institutional reforms under the new Fiscal Responsibility Law will help underpin fiscal discipline beyond the program period.
- Slated reforms in pension and wage legislation together should provide around 1 point of GDP of adjustment.
- Studies cited indicate sustained adjustment episodes generally rely mainly on spending reductions.

### Financial sector: resilience, risks, and reforms
- Banking system capitalization and profitability
  - Average capital adequacy ratio of 13.5 percent at end-December.
  - System remained in slight profitability for the year despite rising provisions, aided by improvements in efficiency and valuation gains.
- Asset quality
  - NPLs as percentage of total loans more than doubled during 2009, to 15.3 percent at end-December.
  - Ratio of total provisions to loans in the doubtful and loss categories remained stable at around 50 percent for the system.
  - Credit quality indicators continue to deteriorate.
- Parent banks and exposure monitoring
  - Parents of the largest foreign owned banks broadly complied with Bank Coordination Initiative commitments.
  - Nine banks maintained their exposures between March and December 2009 as a group.
  - New reporting format allows the NBR to monitor banking groups’ cross-border exposures to the country.
- Strengthening the safety net and resolution framework
  - NBR drafted legal amendments to: strengthen the resolution framework for problem banks; supplement special administrator powers; make the NBR the sole decision-maker on proceedings for insolvent institutions; give DGF claims same seniority as depositors.
  - Drafting expected to be finalized and legislative process expected to be completed by end-March.
  - Own resources of the DGF will be enhanced through increases in the effective contribution rate.
  - NBR has prepared contingency plans.
- Supervisory and regulatory improvements
  - Liquidity requirements amended and improved in the definition of effective and necessary liquidity matching; reporting requirement established for liquidity ratios across different currencies.
  - Loan classification requirements for rescheduled or restructured loans modified to preserve credit discipline and encourage loan workouts.
  - Formally raising minimum capital adequacy ratio from 8 percent to 10 percent is a medium-term objective.
  - Authorities remain committed to adopting International Financial Reporting Standards (IFRS) for banks by 2012.
- Cross-border and regional risks
  - Greek banks hold about 20 percent of the Romanian banking market.
  - NBR reserves are described as comfortable (well over 100 percent of short-term debt), providing a significant cushion against renewed capital outflows.
  - Authorities remain vigilant about broader negative confidence effects in the region.
- Policy recommendation highlights
  - Continue to implement measures to preserve financial stability, including promptly enhancing the funding regime of the DGF.
  - Carefully monitor risks from lending to households in foreign currency.
  - Authorities should not seek to modify the framework that allows banks to rely on in-house expertise for collection of claims.

### Monetary and exchange rate policies
- Easing during 2009
  - NBR reduced reserve requirements (particularly on foreign exchange).
  - NBR progressively lowered its policy rate, most recently by 50 basis points to 7.0 percent in February 2010.
  - NBR injected significant liquidity into domestic money markets (mainly through repo facilities).
- Reserves and external position
  - Gross international reserves rose to about €31 billion at end-2009.
  - NFA was €5.1 billion above the end-2009 program target.
  - Coverage of gross international reserves increased from about 80 percent of short-term external debt prior to the SBA approval to well over 100 percent at end-2009.
  - Given improved current and capital account outlook, NFA targets for 2010 have been adjusted to lock in about half of this overperformance.
- Inflation and policy stance
  - Heightened inflation risks reflect: recent rebound in international energy prices; pressures from future administered price increases; persistence of structural rigidities (such as import price stickiness).
  - Underlying price pressures have remained strong; monetary policy needs cautious management to anchor inflation expectations while adjusting for exchange rate pressures.
  - Monetary and exchange rate policy should continue to target inflation over the medium term, while taking into account risks to financial stability.
  - It is crucial for future credibility that the NBR attain its inflation target in 2010, after missing the target in the past three years (albeit by small margins).
  - Particular attention needed to address causes of persistence in nontradables inflation.

### Program modalities, financing, and conditionality adjustments
- Letter of Intent sets out commitments through end-June 2010 and proposes modifications to program conditionality:
  - Increase NFA target for end-2010 to lock in part of 2009 overperformance and allow room for exchange rate intervention.
  - Modify and rephase target on government domestic payments arrears to target full-elimination of arrears by end-April 2011.
  - Add an adjustor to quarterly general government deficit targets requiring deficit reduction if current spending exceeds the program’s indicative target in the previous quarter.
  - Establish a quarterly indicative target for the operating balance of 10 loss-making SOE’s.
  - Move structural benchmark on adoption of a new pension law from end-December, 2009 to end-June, 2010.
  - Move target date for approval of tax administration reforms to end-April, 2010 from end-March.
- New structural benchmarks proposed:
  - Approval of implementing legislation for the organic wage law (end-September 2010).
  - Approval by parliament of the Fiscal Responsibility Law (end-March).
  - Measures to strengthen financial footing of the Deposit Guarantee Fund (end-September 2010).
- Program financing and use of Fund resources
  - Fund arrangement remains adequate to meet Romania’s balance of payment needs through end-2010, alongside financing commitments from the European Union and the World Bank.
  - Estimated external financing needs for the year declined somewhat due to faster-than-envisaged current account adjustment; staff leaves phasing as initially programmed.
  - Authorities intend to draw SDR 2.175 billion at the completion of the reviews and requested half the disbursement be used for budgetary support.
  - Fund disbursement, together with a €1 billion disbursement from the EC in March, would facilitate Romania’s return to the Eurobond market later in the spring.
- External partners’ disbursements and schedule
  - EC disbursed first tranche of €1½ billion in July 2009 and second tranche expected in March 2010 (€1 billion).
  - WB disbursed first tranche (€0.3 billion) in September 2009, with remaining tranches (€0.7 billion in total) expected in 2010 and early 2011.
- Romania’s capacity to repay the Fund
  - Fund credit outstanding would peak in 2011 at 31.6 percent of gross reserves.
  - Peak payments would be in 2013–14 at 12.8 and 14.5 percent of gross reserves, respectively.
  - Romania’s political commitment to the SBA program and track record servicing external obligations provide comfort regarding timely fulfillment of obligations.
- Requests and staff recommendations
  - Staff supports authorities’ request for completing the second and third reviews, including a waiver for nonobservance of the end-December 2009 performance criterion on accumulation of domestic arrears.
  - Staff recommends establishment of quantitative conditionality for end-March and end-June 2010, and approval of modification of program conditionality as specified in the Letter of Intent.

### Staff appraisal and macroeconomic outlook
- Economic and financial conditions
  - Financial tensions have eased and the economic downturn has bottomed out.
  - Industrial output and export volumes have stabilized and are now growing.
  - Exchange rate has stabilized and the risk premium on Romania has eased considerably.
  - Depreciation at the beginning of the crisis has improved external competitiveness; investor confidence appears to be growing.
  - Short-term outlook for growth and external financing is less worrisome, but sizeable macroeconomic risks remain and the country is highly vulnerable to external shocks.
- Assessment of authorities’ strategy
  - Strategy is broadly appropriate: fiscal policy geared to restoring sound public finances over the medium term while considering limits to consolidation during the downturn; monetary and financial policies focus on macro-financial stability; structural reform agenda aims to establish foundations for sustainable fiscal position and strong growth.
  - Government prepared to take additional measures if necessary to underline commitment to macroeconomic stability.
- Risks and implementation challenges
  - Government’s preferred fiscal adjustment strategy is ambitious and entails politically difficult decisions: cut public employment, freeze wages and pensions, and reduce current spending.
  - Implementation risks arise from past public sector reform experience; requires very strong and steadfast implementation effort in potentially difficult political setting.
  - Staff proposed a more balanced adjustment mix between revenue measures and spending cuts; authorities preferred not to rely heavily on revenue policies until consolidation in economic recovery is well underway.
  - To mitigate risks to program targets and medium-term sustainability, government should: continue and strengthen legal initiatives to improve expenditure controls; permanently reduce the wage bill; mitigate fiscal risks from decentralized entities.
  - Authorities will benefit from IMF technical assistance in tax administration, budget execution and controls, and expenditure rationalization.

### Stand-By Arrangement (Box summary)
- Access: SDR 11.443 billion.
- Length: 24 months.
- Phasing:
  - SDR 4.37 billion made available on May 4, 2009 upon Board approval.
  - Second tranche of SDR 1.718 billion made available upon completion of first review on September 21, 2009.
  - Third and fourth tranches, subject to completion of this combined second and third review, amount to SDR 2,175 billion.
  - Four subsequent disbursements contingent upon further quarterly reviews, starting from June 15, 2010 and ending on March 15, 2011, will equal SDR 3.180 billion.
- Conditionality highlights
  - Quantitative Performance Criteria include: floor on change in net foreign assets; ceiling on general government domestic arrears; floor on overall general government cash balance; ceiling on general government guarantees; non-accumulation of external debt arrears.
  - Quantitative Indicative Targets include: general government current primary spending; operating balance of the 10 largest loss-making SOEs.
  - Consultation band around the 12-month rate of inflation of consumer prices.
  - Prior Actions: Approval of agreed fiscal measures for 2010, including 2010 budget (Prior action for Board consideration of second and third reviews).
  - Structural Benchmarks with dates:
    - Passage of implementing public wage legislation. By September 30, 2010.
    - Approval of fiscal responsibility legislation by parliament. By March 30, 2010.
    - Passage of amendments to the banking and winding-up laws to enhance bank resolution framework, in consultation with the IMF. By March 31, 2010.
    - Passage of revised pension legislation. By June 30, 2010.
    - Approval of tax administration reforms. By April 30, 2010 and ratified by parliament by June 30, 2010.
    - Approval of reforms of local governments. By June 30, 2010.
    - Approval of reforms of SOE finances. By June 30, 2010 (Met).
    - Measures to enhance funding regime of the deposit guarantee fund. By September 30, 2010.

*Source: IMF staff report content as provided in the supplied document excerpt.*

### 1. Passage of Fiscal Responsibility Law March 30, 2010

### Passage of Fiscal Responsibility Law March 30, 2010

### Macroeconomic outlook
- The authorities expect modest positive growth in 2010 and forecast growth for 2010 of around 1.3 percent.
- Unemployment will remain high; stresses on firms and households will continue to weigh on banks’ balance sheets.
- End-2009 CPI inflation was 4.7 percent.
- 2010 inflation is expected to ease to around 3½ percent by year-end.
- The National Bank of Romania (NBR) inflation targets: 3.5 percent in 2010 and 3 percent in 2011 (plus or minus 1 percentage point).
- Net foreign assets exceeded the program target by some €5.1 billion at end-2009.

### Fiscal sector: outcomes, measures, and targets
- The 2010 budget (a prior action) is designed to achieve a fiscal deficit of 5.9 percent of GDP.
- The 5.9 percent of GDP target represents about 2½ percentage points of GDP adjustment (2 percent in structural terms).
- Composition of consolidation (approximate shares and amounts as stated):
  - About 80 percent of the total adjustment from the baseline projection is on the expenditure side.
  - Wage bill measures:
    - Freeze on all but the lowest wages: 0.3 percent of GDP in savings.
    - Continuation of replacement of only 1 of 7 departing workers and further cuts in overtime and premia: 0.2 percent of GDP.
    - Structural changes to reduce public sector employment: 0.2 percent of GDP.
  - Pension-related savings: 0.1 percent of GDP from broader contribution base, better control on fraudulent disability pension claims, and fewer earlier retirements.
  - Freeze on goods and services, pensions (except the minimum social pension), and certain transfers, plus reorganization savings: 1.1 percent of GDP.
  - Revenue measures:
    - Turnover tax on medical distributors: 0.1 percent of GDP.
    - Repayments of net lending: together contributing 0.6 percent of GDP in extra revenues.
- Contingency: If measures are not on track, authorities agree to implement contingency measures to close any anticipated gap.
- Public debt management: improve maturity profile and build up a financial buffer in first half of the year to avoid seasonal financing pressures.
- Domestic arrears:
  - Preliminary December data indicate arrears below June 2009 level but above program targets.
  - Authorities will utilize initial revenues from new medical patient participation fees to pay down arrears in the medical sector.
  - Plan to repay two-thirds of the remaining stock of arrears by end-2010, with full elimination of arrears slated for end-April 2011.
  - Request to rephase the corresponding performance criterion to reflect the revised timetable.
- Structural reforms and legislation:
  - Fiscal responsibility law sent to parliament; expected approval by end-March (structural benchmark).
  - Legislation to improve tax administration to be adopted by emergency ordinance by end-April (structural benchmark) and ratified by parliament by end-June 2010.
  - Legislation to improve financial relations with local governments prepared for end-June structural benchmark.
  - Implementing legislation for the unified wage law to be approved by parliament by end-September (structural benchmark).
  - Revised pension reform legislation to be submitted shortly and approved by end-June (structural benchmark).
  - Prepare a temporary, targeted income supplement in coming months to alleviate crisis impact on vulnerable households (to be consulted with World Bank, EC, and IMF).
  - Begin developing comprehensive public health system reforms in consultation with the World Bank.

### Financial sector: performance and reforms
- Banking sector performance:
  - Non-performing loans increased to 15.3 percent at end-December 2009.
  - Ratio of total provisions to loans in the doubtful and loss categories, on a gross basis, remained stable at around 50 percent.
  - Average capital adequacy ratio remained at 13½ percent as of end-December 2009, with all banks above 10 percent.
  - All committed capital increases were fully paid in as of September 30 (2009).
- Bank Coordination Initiative: by end-December 2009 the nine banks had restored their March 2009 committed exposure to Romania.
- Safety net and resolution framework:
  - Intention to strengthen resolution framework by upgrading domestic legal norms in line with EU requirements.
  - Supplement authority of the special administrator to implement measures including purchase and assumption, sales of assets, and transfer of deposits.
  - Amend bank insolvency regime to require NBR’s authorization prior to initiation of winding-up or liquidation proceedings; expected completion by end-March 2010 (structural benchmark).
  - Abolish Subparagraph 3 of Article 4 of the DGF law (introduced by Ordinance 80/2009) which provided for automatic special administration regime upon activation of the DGF.
- Deposit Guarantee Fund (DGF):
  - Provide the same seniority to the DGF’s claims as that of depositors (end-March 2010 structural benchmark).
  - Gradually enhance the funding regime of the DGF over the medium term; phase out reliance on banks’ contingent credit lines by increasing accumulation of own resources.
  - Begin process by increasing the effective contribution rate for 2011 (structural benchmark end-September 2010).
- Household debt and bank workout practices:
  - Current decentralized bank approaches to rescheduling and restructuring are broadly adequate; authorities will not modify framework allowing banks to rely on in-house expertise for collections.
  - Authorities will encourage continued bank restructuring efforts and monitor results closely.
- Supervision and prudential framework:
  - Liquidity requirements amended; reporting requirement established for liquidity ratios by currency.
  - Provisioning requirements adjusted to allow up to 25 percent of collateral to be deducted.
  - Loan classification requirements for rescheduled or restructured loans modified to preserve credit discipline and encourage loan workouts.
  - No further adjustments to the prudential framework currently envisaged.
  - Formally and permanently raising minimum capital adequacy ratio from 8 percent to 10 percent remains a medium-term objective.
  - NBR and Ministry of Public Finance committed to adopting legal framework by end of the program period for implementing comprehensive International Financial Reporting Standards (IFRS), with a view toward applying IFRS as of the beginning of 2012.

### Monetary and exchange rate policy
- The NBR gradually adjusted monetary policy over 2009 by reducing reserve requirements and progressively lowering its policy rate.
- Policy rate: lowered by 50 basis points to 7.0 percent in February 2010.
- Inflation path: inflation fell from 6.3 percent in 2008 to under 5 percent by September 2009, but the slowdown stalled in Q4 2009; NBR missed its target band on headline inflation by 0.2 percentage points at year-end.
- NBR will continue to prudently use monetary instruments to anchor inflation expectations and reach the inflation targets specified above.
- Net foreign assets (NFA) performance:
  - Better-than-anticipated net capital flows and faster improvement in the current account led to sustained overperformance on the NFA criterion at end-September and end-December.
  - Proposal to revise NFA targets for 2010 to lock in half of the 2009 overperformance while allowing flexibility (see TMU).

### Program modifications, monitoring, and requests to the IMF
- Request to complete the second and third reviews under the Stand-By Arrangement and to combine the second and third reviews.
- Request a waiver for the end-December performance criterion on general government arrears, given corrective measures and additional explanations.
- Request that disbursements under the original program be rephased to allow the portion related to the third review to be disbursed on February 19, 2010.
- To cover higher fiscal financing needs in 2010 relative to the original program target, request that half of the disbursement for both the second and third reviews (SDR 2,175 million) be channeled directly to the government.
- Program monitoring will use regular reviews, prior actions, quantitative performance criteria and indicative targets, and structural benchmarks (quantitative targets for end-March and end-June 2010 and continuous performance criteria set out in Table 1; structural benchmarks set out in Table 2).

*Source: Romania: Letter of Intent, Bucharest, February 5, 2010.*

### 6. Ceiling on general government domestic arrears September, 2009 Not met.

### _cr1049 - 6. Ceiling on general government domestic arrears September, 2009 Not met.

### Program conditionality outcomes (selected)
- Ceiling on general government domestic arrears September, 2009: Not met.
- Non-accumulation of external debt arrears December, 2009: Met.
- Ceiling on general government current primary spending September, 2009: Not met.
- Ceiling on general government current primary spending December, 2009: Not met.
- Inflation consultation band:
  - Inner band December, 2009: Met.
  - Outer band December, 2009: Met.
- Prior Action:
  - Passage of an agreed 2010 budget December 31, 2009: Met in January 2010.

### Structural benchmarks (status and timing)
- Ratification by parliament of fiscal measures equivalent to 1.1 percent of GDP
  - Target: August 31, 2009 — Met in April 2009
- Passage of revised public compensation legislation
  - Target: October 30, 2009 — Partially met
- Presentation of fiscal responsibility legislation and implementation plan to parliament
  - Target: November 30, 2009 — Met
- Passage of revised pension legislation
  - Target: December 31, 2009 — Revised to end-June 2010
- Approval of legislation and internal regulations necessary to implement tax administration reforms
  - Target: April 30, 2010
- Approval of institutional reforms measures to mitigate fiscal risks from local governments
  - Target: June 30, 2010
- Legislative changes to improve monitoring and control of SOEs
  - Target: June 30, 2010 — Met
- Passage of amendments to the banking and winding-up laws to enhance the bank resolution framework
  - Target: March 31, 2010

### New conditionality to be proposed (timing)
- Passage of Fiscal Responsibility Law — March 30, 2010
- An indicative target on the floor for the financial balance of the largest SOE — March 30, 2010
- Passage of implementing legislation for the organic wage law — September 30, 2010
- Measures to enhance the funding regime of the deposit guarantee fund — September 30, 2010

### TMU scope and exchange rate assumptions
- TMU dated: February 5, 2010 (updates and replaces TMU dated September 8, 2009).
- Program exchange rates (as of December 31, 2008, NBR website):
  - RON 3.9852 = €1
  - RON 2.8342 = $1
  - RON 3.1419 = ¥100
  - RON 4.1169 = ₤1

### Definitional scope
- General government for program purposes includes: central government (state budget, treasury, self-financed state entities included in the budget, etc.), local governments, social security funds (pension, health, and unemployment), road fund company, and administration of the property fund; also any new funds or special budgetary/extra-budgetary programs created during the program period as defined in the IMF’s Manual on Government Finance Statistics 2001.

### Net Foreign Assets (NFA) — definitions and adjustments
- NFA (program): NFA of the NBR minus Treasury liabilities to the International Monetary Fund.
- NFA of the NBR: euro value of gross foreign assets of the NBR (including reserve requirements of the commercial banking system held at the NBR) minus gross foreign liabilities of the NBR; measured on NBR’s operational definitions.
- Exclusions from gross foreign assets: (i) gold and other precious metals; (ii) assets in nonconvertible currencies; (iii) illiquid assets; (iv) any assets that are pledged, collateralized, or otherwise encumbered, unless there is also a gross foreign liability associated with it; (v) claims on residents; and (vi) claims in foreign exchange arising from derivatives in foreign currencies vis-à-vis domestic currency.
- Exclusions from gross foreign liabilities: (i) banks’ foreign currency deposits against reserve requirements; (ii) government foreign currency deposits at the NBR.
- NFA targets adjustments:
  - Adjusted by surplus/shortfall in program disbursements from official creditors (World Bank and the EC) usable for central government financing.
  - Adjusted upward by the increase in commercial bank reserve requirements held with the NBR relative to end-December, 2009 (€7,874.4 million), measured at program exchange rates.

### Floor on cumulative change in NFA from the beginning of the year (in mln. euros)
- 2009 December (Stock): 20,658
- 2010 March (PC): -2,000
- 2010 June (PC): -2,500
- 2010 September (IT): -2,000
- 2010 December (IT): -2,000
- Memorandum Item: Gross Foreign Assets
  - 2009 December (Stock): 28,418
  - 2010 March: 300
  - 2010 June: 700
  - 2010 September: 2,000
  - 2010 December: 2,800
- Note: PC = performance criterion; IT = indicative target. Data for end-month. Flows in 2010 are relative to end-2009 stock.

### Inflation consultation bands (12-month CPI, year-on-year)
- Outer band (upper limit) by period:
  - 2008 December: 6.5
  - 2009 December: 6.5
  - 2010 March: 6.0
  - 2010 June: 5.75
  - 2010 September: 5.5
- Inner band (upper limit):
  - 2008 December: 5.5
  - 2009 December: 5.5
  - 2010 March: 5.0
  - 2010 June: 4.75
  - 2010 September: 4.5
- Center point:
  - 2008 December: 6.3
  - 2009 December: 4.7
  - 2010 March: 4.5
  - 2010 June: 4.0
  - 2010 September: 3.75
  - 2010 December: 3.5
- Inner band (lower limit):
  - 2008 December: 3.5
  - 2009 December: 3.5
  - 2010 March: 3.0
  - 2010 June: 2.75
  - 2010 September: 2.5
- Outer band (lower limit):
  - 2008 December: 2.5
  - 2009 December: 2.5
  - 2010 March: 2.0
  - 2010 June: 1.75
  - 2010 September: 1.5

### Performance criterion on general government balance (cash, cumulative floor; in millions of lei)
- End-December 2009 (actual): -36,101
- End-March 2010 (performance criterion): -8,250
- End-June 2010 (performance criterion): -15,540
- End-September 2010 (indicative target): -21,800
- End-December 2010 (indicative target): -31,900

### External program disbursements – Baseline Projections (in mln. euros; cumulative flows from end-December 2009)
- March 2010: 1,340
- June 2010: 2,540
- September 2010: 2,540
- December 2010: 4,100

### Monitoring definitions for general government deficit (above/below the line)
- Below-the-line financing components include:
  - (i) net external financing, excluding valuation gains and losses;
  - (ii) change in net domestic credit from the financial system, excluding valuation gains and losses from deposits denominated in foreign currency and including adjustments for:
    - (a) received EU funds not yet spent (advance payments);
    - (b) claims of the government on EU funds;
    - (c) property fund obligations not yet paid;
  - (iii) change in the stock of issued government securities, net of valuation changes;
  - (iv) net changes in other financing.
- If the difference between above-the-line and below-the-line measures exceeds lei 200 million each quarter during 2010, the Ministry of Public Finance will consult with IMF staff.
- If non-grant revenues exceed projections, the deficit target will be adjusted downward by one half of the surplus to allow for additional capital spending while reducing the deficit further.
- Cumulative projected non-grant revenue of general government, net of EU funds (in millions of lei):
  - End-December 2009 (actual): 151,508
  - End-March 2010 (projection): 37,800
  - End-June 2010 (projection): 77,600
  - End-September 2010 (projection): 119,500
  - End-December 2010 (projection): 161,800

### Ceiling on new general government guarantees (from end-2008) (in billions of lei)
- End-December 2009 (actual): 2.1
- End-March 2010 (performance criterion): 12
- End-June 2010 (performance criterion): 12
- End-September 2010 (indicative target): 12
- End-December 2010 (indicative target): 12
- Note: Ceiling may be adjusted upward by up to RON 4.3 billion relative to original ceiling of RON 7.7 billion for guarantees financing EU counterpart payments or cofinanced by EBRD, IFC, or EIB.

### Performance criterion on non-accumulation of domestic arrears (stock, in billions of lei)
- End-November 2009 (stock, actual): 1.40
- End-March 2010 (performance criterion): 1.27
- End-June 2010 (performance criterion): 1.09
- End-September 2010 (indicative target): 0.81
- End-December 2010 (indicative target): 0.48
- End-April 2011 (indicative target): 0.00
- Definition: arrears = accounts payable past due date by 90 days (in line with ESA95 definitions for expenditures).

### Continuous performance criterion on non-accumulation of external debt payment arrears
- Definition of external debt payment arrear: a payment by the general government not made within seven days after falling due.
- Applies on a continuous basis.

### Indicative target on general government current primary spending (cumulative change; in millions of lei)
- End-December 2009 (actual): 85,637
- End-March 2010 (indicative target): 32,900
- End-June 2010 (indicative target): 65,100
- End-September 2010 (indicative target): 97,500
- End-December 2010 (indicative target): 131,300
- Definition: spending on personnel, goods and services excluding EU funds, subsidies, transfers to public entities, pensions (social security budget in social assistance category and one-third of the state budget in the same category), state aid and other spending in other transfers category, Reserve Fund, and other expenditure as classified in the monthly reporting tables.

### Monitoring of public enterprises and SOE targets
- Monitoring system implemented by Ministry of Public Finance, Ministry of Labor and Social Protection, and other institutions as of 2009.
- Enforcement: sanctions—decline in remuneration and dismissal of management according to Ordinances 37/2008 and 79/2008—if budgets and restructuring targets are not met.
- Quarterly indicative target for 2010 on aggregate operating balance (earnings before interest and tax), net of subsidies, for 10 specified public enterprises; data reported by firm.
- Targets for end-March and end-June 2010:
  - End-March 2010: RON -1381 million
  - End-June 2010: RON -2619 million

### Reporting requirements (selected timing)
- Ministry of Finance:
  - Preliminary monthly data on general government accounts: Monthly, on the 25th day of the following month.
  - Quarterly final data on general government accounts: Quarterly cash data, on the 35th day past the test date; Quarterly accrual data, on the 55th day past test date.
  - The budget deficit of the general government using ESA95 definition: Quarterly, with a lag of three months.
  - Preliminary data on below-the-line financing: Monthly, with a lag of no more than 35 days past the test date.
  - Final quarterly data on below-the-line financing: Quarterly, no later than 45 days past the test date.
  - Total accounts payable and arrears of the general government: Preliminary monthly, within the next month; Quarterly, within 55 days.
  - Stock of the central government external arrears: Daily, with a lag of not more than seven days.
  - Public debt and new guarantees: Monthly, within one month.
  - Preliminary monthly data on general government primary spending, net of EU disbursements: within 25 days.
  - Final quarterly data on general government primary spending, net of EU disbursements: Quarterly, within 35 days from the test date.
  - From 2010, operating balance, profits, arrears, and personnel expenditures of 10 largest public enterprises by total expenditures: Quarterly, within 55 days.
  - Data on EU project grants, capital expenditures and subsidies covered by EU advances or eligible for EU reimbursement on EU supported projects: Monthly, within three weeks of the end of each month.
- National Bank of Romania (NBR):
  - NFA data, by components, in both program and actual exchange rates: Weekly, each Monday succeeding the reporting week and with a 3 working day lag in the case of end-quarter data.
  - Monetary survey data in the format agreed with IMF staff: Monthly, within 30 days of the end of the month.
  - Schedule of contractual external payments of the banking sector falling due in the next four quarters (interest and amortization for medium and long-term loans): Monthly, 45 days after the end of each month.
  - Schedule of contractual external payments of the corporate sector falling due in the next four quarters (interest and amortization for medium and long-term loans): Monthly, 45 days after the end of each month.
  - Stock of short-term external debt of banks and corporates: Monthly, 45 days after the end of each month.
  - Balance of payments in the IMF format currently used to report: Monthly, 45 days after the end of each month.
  - Exposure (deposits, loans, subordinated loans) of (i) foreign parent banks to their subsidiaries in Romania; (ii) IFI and (iii) other creditors to banks in Romania (by national and foreign currency): Monthly, 20 days after the end of each month.

*Source: Technical Memorandum of Understanding, Romania, February 5, 2010 (attachment II).*

### 22.      Legal amendments to the bank resolution framework, drafted in consultation with the

### Legal amendments to the bank resolution framework, drafted in consultation with the IMF, to be enacted by end-March 2010

### Banking Law: triggers, special administrator powers, and legal protections
- The credit institutions law will specify a clear trigger for the early and mandatory appointment of a special administrator based on a regulatory threshold.
- The special administrator will be granted new authority to implement promptly a broad range of restructuring measures, which shall include:
  - purchase and assumptions,
  - sales of assets,
  - transfers of deposits,
  - and the write-down of capital to absorb losses.
- The law will authorize the National Bank of Romania to determine the specific powers and tasks of the special administrator among a broad set of powers set forth in the law, which may include broad managerial powers, including those of the Board of Directors, Directorate or Supervision Council.
- The law will provide that purchase and assumptions and sales of assets are not subject to the approval of the credit institution shareholders or of the general assembly of shareholders. To this effect, the law will carve out the application of provisions in the companies law that require the above mentioned approvals, such as when the transfer of assets is substantial.
- The law will provide legal protection for the special administrator’s good faith actions in the performance of his duties.
- The law will provide greater certainty for bank resolution measures, including purchase and assumptions, sales of assets and transfers of deposits decided or carried out in respect of a credit institution under special administration so that these measures may not be suspended or reversed by litigation (including by means of avoidance powers under the winding-up or insolvency proceedings); it will also clarify that the above measures are not subject to creditors’ or debtors’ consent.

### Winding-up Law: supervision and priority in insolvency
- The initiation of winding-up proceedings of credit institutions, or of their liquidation under the companies law will require the NBR’s prior approval.
- The law will provide seniority in insolvency to depositors’ claims and the same priority ranking to the Deposit Guarantee Fund.

### Deposit Guarantee Fund: phasing out reliance on credit lines
- The reliance on credit lines in the financing of the Deposit Guarantee Fund will be phased out by increasing the financial resources of the Fund.
- The NBR will decide on a gradual reduction in the fees for the credit lines and an increase in the contribution rate to levels to be determined at the time of the 4th review (structural benchmark end-September 2010).

### Public Wage Legislation: implementing the organic public wage law
- An implementing legislation will be approved before end-September 2010 that will abide by the following principles:
  - It will ensure the respect of the quantitative targets for the public wage bill included in the organic public wage law and the proposed changes will be fully costed.
  - It will ensure that new salary grading structure is simplified and that pay will be linked based on job responsibility and qualification. The established new pay system will be benchmarked on private sector wages (through a salary survey) to ensure that public pay is broadly aligned with actual labor market conditions, within affordability constraints.
  - The regulation would phase in a limit of 30 percent on non-wage personnel expenditures with respect to total personnel expenditures and caps on individual bonuses for non-military personnel. For the purpose of this law, “stimulus” payments will be treated as bonuses.

### IMF staff observations and recent economic indicators (Statement by the IMF Staff Representative, February 19, 2010)
- Real output:
  - Real GDP shrank by 1.5 percent q-o-q (seasonally adjusted) and 6.6 percent y-o-y in the last quarter of 2009 (flash estimate), bringing the full-year decline to 7.2 percent.
  - Short term indicators confirm an incipient recovery in manufacturing, construction and exports, but consumer spending indicators (e.g. retail sales and services) are still declining.
- Inflation:
  - Annual inflation picked up from 4.7 percent in December to 5.2 percent in January, largely on account of increases in excise taxes on tobacco and fuels.
  - Core inflation continued to decelerate on the back of weak domestic demand.
- Structural reforms and monitoring:
  - Pension reform legislation was approved by the cabinet last week and sent to Parliament for debate and approval (end-June structural benchmark). The draft law aims to improve long-term financial sustainability while adequately safeguarding the average replacement rate for pensioners.
  - Authorities report little sign of significant spillover effects from dynamics in Greece and remain comfortable with the level of liquidity and capitalization of local subsidiaries of Greek banks.

### IMF Executive Board action and policy messages (Press Release No. 10/54, February 19, 2010)
- Program reviews and disbursement:
  - The Executive Board completed the second and third reviews of Romania’s performance under a 24-month Stand-By Arrangement (SBA) and approved the immediate disbursement of SDR 2.18 billion (about €2.45 billion or about US$3.32 billion), bringing total disbursements under the program to SDR 8.26 billion (about €9.32 billion or about US$12.60 billion).
  - The SBA was approved on May 4, 2009 (Press Release No. 09/148) in the amount of SDR 11.443 billion (about €12.91 billion or about US$17.45 billion). The arrangement entails exceptional access to IMF resources, amounting to 1,111 percent of Romania’s quota.
- Waiver:
  - The Executive Board approved Romania’s request for a waiver of non-observance of the end-December 2009 performance criterion pertaining to the ceiling on the accumulation of general government domestic arrears.
- Policy guidance from Mr. John Lipsky, First Deputy Managing Director and Acting Chair:
  - Continued efforts to fully implement the economic program remain essential to strengthen macroeconomic stability and provide the basis for strong, sustainable growth.
  - Romania faces major fiscal challenges; the deficit needs to be reduced to stabilize the public debt-to-GDP ratio and to comply with the criteria for accession to the euro area.
  - The 2010 deficit target strikes an appropriate balance between accommodating the still weak economic situation and medium-term consolidation objectives, but achieving it will require politically difficult spending decisions and strong implementation; authorities are prepared to take additional measures if necessary.
  - Additional reforms to strengthen fiscal controls are crucial, including in expenditure commitments, contingent liabilities, and public entities outside the central government.
  - Authorities are strongly committed to pursue further structural reforms: pension reform, public employment and wage reforms, and improvements in public sector efficiency will be key.
  - The inflation targeting regime and flexible exchange rate policy have helped cushion the impact of the crisis; in 2010, the central bank will give priority to bringing inflation within its target band, which will require a cautious approach to further monetary easing.
  - The Romanian financial sector continues to weather the crisis well despite increasing non-performing loans; continued supervisory vigilance will be necessary to respond to threats to the stability of the system, as well as to possible spillover effects.

*Source: _cr1049 - 22. Legal amendments to the bank resolution framework, drafted in consultation with the IMF (IMF staff statement and Press Release excerpts).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1049.pdf_