## _cr1273 ## Source details **Canonical URL:** [_cr1273](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1273.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1273.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1273.pdf.json) --- ### Stand-By Arrangement and Program Modalities - A 24-month, SDR 3,090.6 million (€3.4 billion, US$5.0 billion, 300 percent of quota) Stand-By Arrangement approved March 25, 2011 and effective March 31, 2011. - SDR 430 million (€505 million) fifth tranche to be made available upon completion of this review. - Authorities treating the arrangement as precautionary; additional precautionary financing from the European Union and the World Bank. - Program phasing and disbursements (selected): SDR 60.0 on effectiveness; three disbursements totaling SDR 1.29 billion during June–December 2011; SDR 430 million subject to this review; four subsequent disbursements totaling SDR 1,310.6 million contingent on reviews. ### Status of the Current Program and Conditionality - All end-December quantitative performance criteria and indicative targets were met. - Prior action: government approval of a roadmap for deregulation of electricity prices expected to be met. - Proposed modifications to adjustors to the NFA and general government fiscal targets (end-March and end-June 2012). - Quantitative performance criteria (selected): floor on change in net foreign assets; floor on overall general government cash balance; ceilings on central government and social security domestic arrears and on general government guarantees; non-accumulation of external debt arrears (continuous). - Selected structural benchmarks and prior actions: - Prior Action: Approve a roadmap for the deregulation of electricity prices as specified in the MEFP. - New structural benchmark proposed: an increase of 5 percent in the electricity price for residential and nonresidential consumers by end-June 2012. - Structural benchmarks (examples): reduce small VAT payer registrations by 20 percent by end-September 2012; appoint transaction and legal advisors for SOE groups by specified dates. ### Macroeconomic Developments (Recent) - After two years of recession, economy grew by 2.5 percent in 2011 (driven by an exceptional agricultural harvest and strong industrial output). - Domestic demand strengthened: construction and retail sales recovered, supported by higher real disposable incomes. - Inflation developments: - CPI inflation fell to 2.7 percent in January; CPI inflation 3.1 percent in December 2011. - Core inflation (Core 3 indicator) declined to 2.4 percent. - Financial markets and external position: - Sovereign CDS spread declined by nearly 100 basis points to around 370 b.p.; five year CDS narrowed by around 50 basis points since end-February to near 300 bps. - Government issued a USD 1.5 billion 10 year dollar-denominated Eurobond in late January and reopened the issue for another US$ 750 million in late February. - International reserves: €37.3 billion (comfortable, fully covering short-term debt at residual maturity). - Current account deficit narrowed to 4.3 percent of GDP in 2011. - IFIs disbursed €390 million for project financing; World Bank finalized a DPL with a €400 million disbursement. - FDI declined by 14 percent compared to 2010; intercompany lending remained major source. - Non-resident exposure to domestic treasury bills declined to less than 10 percent of total stock from peak >20 percent. ### Macroeconomic Outlook and Projections - Growth: - Staff projects 2012 growth to be 1.5 percent (baseline), driven by gradual rise in domestic private demand and increased EU funds absorption. - Medium-term growth 2013–16 expected at 3.5 to 4 percent (staff) / projections show 2013: 3.0; 2014: 3.7; 2015–17: 4.0 each year. - Inflation: - Likely to stay within NBR target band of 3 ± 1 percent. - Expected below 3 percent in first half of 2012, then gradually climbing above midpoint later in year. - Current account: - Projected around 4-4¼ percent of GDP in 2012, stabilizing around 4½-5 percent thereafter. - Financial account and financing: - Government medium-term external bond placements and multilateral financing expected main financing sources. - Private sector likely to roll over short-term debt in first half of year. - Under staff baseline, no new financing gap envisaged — consistent with precautionary nature. - Tabulated macro indicators (selected): - Real GDP growth: 2009: -6.6; 2010: -1.6; 2011: 2.5; 2012: 1.5; 2013: 3.0 - CPI inflation, average: 2009: 5.6; 2010: 6.1; 2011: 5.8; 2012: 2.7; 2013: 3.0 - CPI inflation, eop: 2009: 4.9; 2010: 8.0; 2011: 3.1; 2012: 3.3; 2013: 3.0 - Current account balance (% of GDP): 2009: -4.2; 2010: -4.4; 2011: -4.3; 2012: -4.4; 2013: -4.9 - Gross international reserves (bn euros): 2009: 30.9; 2010: 36.0; 2011: 37.3; 2012: 37.5; 2013: 37.4 ### Risks to the Outlook - Growth risks tilted to the downside: - Main external risks: further slowdown in Europe and international financial market turbulence. - Transmission channels: lower external demand depressing exports and consumer sentiment; higher risk premia increasing banks’ funding costs and exchange rate pressures given high Euroization; bank deleveraging causing credit contraction. - Upside risks: rapid implementation of structural reforms and faster absorption of EU-funded projects; possible political stability improvement from recent government change. - Inflation risks mainly on the upside: - Potential administered price adjustments, exchange rate pressures due to euro area turbulence, rebound of food and oil prices. - Downside inflation risk from large negative output gap and slower-than-expected recovery. ### Fiscal Performance, Financing Strategy, and Policy Considerations - 2011 fiscal outturn: - General government cash deficit: 4.2 percent of GDP (below program ceiling of 4.4 percent of GDP). - Over-performance in tax revenue offset low EU grants. - Tight current expenditure control, especially on personnel and transfers. - Large personnel reductions led to increased outsourcing and higher goods and services spending. - End-year expenditure savings reallocated to capital spending, clearing arrears and unpaid bills in SOEs and health sector, and increasing cofinancing of EU-funded projects. - Total capital spending exceeded Q4 forecast by nearly ½ percent of GDP. - 2012 budget and composition: - Budget based on cash deficit of 1.9 percent of GDP; additional 0.2 percent of GDP off-budget under PNDI included. - Multiyear PNDI program: about RON 20 billion (4 percent of GDP) over 2012–20 with budgetary payments in 2015-20. - Contracts signed under PNDI: RON 3.5 billion (0.7 percent of GDP); expected work execution in 2012: RON 1 billion (0.2 percent of GDP); authorities committed to restrict works execution to RON 1 billion (0.2 percent of GDP) in 2013. - Fiscal policy imperatives: - Maintain fiscal discipline to meet budget deficit target of 1.9 percent of GDP (2.1 percent including some off-budget expenditures). - Contain current spending: freeze on public wages and pensions (possibility of modest increase later if conditions permit); replace only 1 employee for every 7 departures. - Implement clawback tax to contain health care costs; proceeds earmarked to pay unpaid pharmaceutical bills. - Prioritize EU-funded capital projects; reduce national co-financing of EU projects from 15 to 5 percent. - Build fiscal, financial, and foreign exchange buffers; maintain four months of gross financing needs objective. - Potential additional discretionary cuts in non-EU funded capital spending; increased means-testing of social programs; cuts in subsidies and transfers to SOEs. ### Arrears, SOEs, and Arrears-Reduction Measures - General government arrears at end-2011: less than 0.2 percent of GDP (mostly local government). - SOE arrears and performance: - SOE arrears fell to 2.9 percent of GDP at end-2011 (0.3 percentage points lower than end-Q3 2011); companies under program monitoring ran a deficit of 0.35 percent of GDP in 2011, had arrears of 2.6 percent of GDP, and received subsidies amounting to 0.5 percent of GDP. - Measures: swap operations to cancel tax arrears, payments from bankruptcy procedures, installment agreements, debt-equity swaps (with EU clearance). - These measures expected to reduce SOE arrears by RON 5 to 6 billion (1 percent of GDP) in second half of 2012. - Integration of treasury payment system with accounting reporting system underway to better control commitments and prevent arrears. ### Health Sector Reform and Cost-Containment Measures - Draft framework law withdrawn in January due to public objections; revised draft expected by mid-year (revised draft by end-June; public debate July–September; parliamentary approval by end-October). - Key objectives: define publicly provided basic healthcare package; increase private sector role (supplementary private insurance, private hospital management); align resources with needs. - Short-term measures and timelines: - Negative list of services/drugs to be excluded from coverage and revised reimbursement lists; reduction in hospitalization periods; national hospital bed plan — prepare by mid-April 2012 and implement by end-June. - Revision of copayment law to a modest flat rate; approve revision by emergency ordinance by mid-April 2012. - Transfer collection of health contributions for self-employed from Health House to ANAF from July 2012. - Auditing of patient registries by end-2012; distribute new health cards by end-April; electronic prescription module contract signed, operational by end-May 2012. ### Structural Reforms: Energy, SOEs, Transport, and Privatization - Energy sector: - Regulated gas prices increased roughly 24 percent since summer 2011. - Agreed adjustment of 5 percent in regulated electricity prices to non-residential and residential customers by mid-2012. - Roadmap commitments: gradual deregulation for non-households leading to full liberalization by January 2014; household deregulation starting 2013 ending 2017 with protections for vulnerable consumers. - Existing bilateral electricity contracts (notably Hidroelectrica) generate lost revenues of €175-220 million per year; government to seek termination/renegotiation where legally possible. - Draft legislation to transpose 3rd EU Energy Package prepared; amendments to ensure independence of regulator to be approved by emergency ordinance by mid-February / end-March 2012 (varied mentions). - SOE restructuring and privatization timetable (selected): - Privatization offers planned for four SOEs by end-April 2012 (group listings in text). - Appointment of transaction/legal advisors progressed for several firms; further appointments and privatizations scheduled through end-2012/early 2013. - Implementation of new governance law commenced; selection of private management teams for selected SOEs by end-April 2012. - Transport sector: - Progress in closing underutilized rail lines; application of standard costs yielded savings. - Increased tariffs and toll collection generated revenue gains for passenger rail, Bucharest subway, and national roads operator. - Without further restructuring, national rail system operator and national rail passenger carrier will require substantial government support to avoid new arrears. ### Financial Sector Developments, Risks, and Safety Net - Banking sector indicators: - Q4 recorded a loss of 1.4 percent of average equity over the year. - Non-performing loans ratio at end-Q4: 14.1 percent (marginally lower). - Total provisions at end-December covered 99.5 percent of non-performing loans. - Average capital adequacy ratio at end-December: 14.5 percent; capital injections of RON 1.6 billion. - Aggregate exposure to Romania of nine largest foreign banks at 101 percent of March 2009 level. - Policy measures and contingency planning: - NBR to revise tax treatment of bank loans sold to Romanian entities to remove tax disincentives by end-June. - World Bank assessment of insolvency and creditor rights scheduled for spring 2012. - NBR adopting flexible approach to allow extension of restructuring periods for performing restructured loans; staff cautioned against evergreening and urged prudent provisioning. - January 2012 amendments to bank resolution law introduced bridge bank and stabilization powers and measures to augment DGF resources by borrowing from MoPF. - Institutional coordination: DGF joined National Committee for Financial Stability; joint working group established; MOU between NBR and DGF to be signed by end-February; procedures for bank resolution to be finalized and operationalized by end-April 2012; crisis simulation exercise planned in spring 2012 with World Bank support. - NBR policy rate reduced cumulatively by 75 basis points since November to 5.5 percent; reserve requirements for local currency and FX deposits to be maintained. ### Monitoring, Reporting, and Data Transmission - Performance monitored from data supplied by NBR and MOPF; authorities to transmit promptly data revisions. - Reporting requirements (selected periodicities): - MOPF: preliminary monthly general government accounts on 25th day, quarterly final project execution and general government accounts on 35th/55th day, monthly data on EU project grants within three weeks, TSA balance monthly within two weeks, privatization receipts monthly within two weeks. - NBR: NFA weekly each Monday, monetary survey monthly within 30 days, schedules of contractual external payments monthly 45 days after month, financial soundness indicators monthly within 15 days, foreign currency reserves bi-weekly. - Immediate notification to IMF/EC if sudden loss of reserves exceeds EUR 600 million or if reserves fall below floor of EUR 23 billion. ### Debt and External Sustainability (selected figures) - Public debt and external debt trajectories (selected): - Gross public debt (including guarantees): 2007: 12.7; 2008: 13.6; 2009: 23.8; 2010: 31.2; 2011: 34.5; 2012 proj.: 33.7 / 35.0 - Baseline public sector debt (percent of GDP): 2007: 12.7; 2008: 13.6; 2009: 23.8; 2010: 31.2; 2011: 33.7; 2012 proj.: 35.0; 2013–17 proj.: 33.5 / 32.1 / 30.6 / 29.1 / 27.7 - Baseline external debt (percent of GDP): 2007: 47.1; 2008: 51.8; 2009: 68.6; 2010: 74.5; 2011: 73.8; 2012 proj.: 73.7; 2013–17 proj.: 71.8 / 67.5 / 63.4 / 61.4 / 59.9 - Fund credit stock projections (millions of SDR): - Stock of existing Fund credit (end of period): 2012: 9,262; 2013: 5,210; 2014: 1,329; 2015: 96; 2016: 0; 2017: 0 - Prospective disbursement under SBA: 2,150 (2012) - Stock of existing and prospective Fund credit (2012): 12,332 (millions of SDR) — 1,197 percent of quota — 10.8 percent of GDP. ### Staff Appraisal and Policy Recommendations (selected) - Macroeconomic stance: - Recovery resumed but losing momentum; prospects hinge on EU funds absorption and political stability. - Authorities should maintain foreign exchange buffers and capital buffers in banking system; Fund-EU precautionary program and World Bank credit line help cushion risks. - Fiscal policy: - Continued strong spending discipline and improved tax collections needed to achieve ambitious 2012 deficit target. - Prioritize completion and cofinancing of existing capital projects; halt off-budget capital projects such as PNDI if needed. - Health sector: - Revising comprehensive health law and wider consultations welcome; allow private sector involvement but ensure monitoring and regulatory mechanisms; revenue measures will be necessary. - Implementation risks with clawback tax and copayment law; copayment law as currently legislated is administratively unfeasible. - Structural reforms and SOEs: - Progress on SOE governance and privatization in several cases; in others, reforms delayed or inadequate. - More ambitious reforms, including deeper reforms and majority privatizations, necessary to attract investment; non-viable enterprises should be liquidated. - Energy deregulation (especially gas) lags; align prices with cost recovery while protecting vulnerable consumers. - Financial sector resilience: - With >80 percent of banking system controlled by foreign banks, Romania is vulnerable to euro area banking uncertainties. - Authorities should operationalize new bank resolution powers, ensure coordination and information sharing, and address impaired assets for faster credit recovery. - Monetary policy: - Cautious approach to further easing recommended given vulnerability to capital inflow declines; maintain sufficient foreign currency buffers and reserve requirements. - If growth slows further, room exists to let automatic stabilizers play given fiscal buffers and forthcoming World Bank DPL-DDO; in severe stress, use precautionary credit lines and allow exchange rate flexibility if needed. *Source: IMF Staff Report — EXECUTIVE SUMMARY and accompanying sections from _cr1273 (March 2012).* ### EXECUTIVE SUMMARY ### _cr1273 - EXECUTIVE SUMMARY ### Stand-By Arrangement and Program Modalities - A 24-month, SDR 3,090.6 million (€3.4 billion, US$5.0 billion, 300 percent of quota) Stand-By Arrangement was approved by the Executive Board on March 25, 2011 (Country Report No. 11/80) and became effective March 31, 2011. - The fifth tranche of SDR 430 million (€505 million) will be made available upon completion of this review. - The authorities are treating the arrangement as precautionary. - Additional funds under the program are provided by the European Union (also on a precautionary basis) and the World Bank. ### Status of the Current Program - All end-December quantitative performance criteria and indicative targets were met. - The prior action on government approval of a roadmap for deregulation of electricity prices is expected to be met. - Modifications are proposed to the adjustors to the NFA and fiscal targets. - The newly-formed government has publicly reaffirmed their commitment to the program. ### Key Issues Addressed in the Review - The review focused on four issues: - (i) the potential impact of a more pessimistic growth outlook on the public finances; - (ii) progress on health care and tax reforms; - (iii) advances on the structural reform agenda, with a focus on SOE restructuring, privatization and regulatory reforms in the energy sector; and, - (iv) strengthening of contingency planning and safety net mechanisms to ensure financial sector stability. ### Macroeconomic Developments (Recent) - After two years of recession, growth resumed in Romania in 2011: the economy grew by 2.5 percent in 2011, driven by an exceptional agricultural harvest and strong industrial output growth. - Domestic demand strengthened as construction and retail sales started to recover, fuelled by higher real disposable incomes. - Inflation developments: - CPI inflation fell to a record low 2.7 percent in January (food price deflation outweighed administered price increases and exchange rate depreciation effects). - Core inflation (Core 3 indicator) declined to 2.4 percent. - Financial markets and external position: - Sovereign CDS spread declined by nearly 100 basis points to around 370 b.p. - Government placed a USD 1½ billion 10 year dollar denominated Eurobond in late January. - International reserves remain comfortable at €37.3 billion, fully covering short-term debt at residual maturity. - The current account deficit narrowed to 4.3 percent of GDP in 2011. - IFIs disbursed €390 million for project financing and the World Bank finalized a DPL with a €400 million disbursement. - FDI declined by 14 percent compared to 2010; intercompany lending remained the major source. - Non-resident exposure to domestic treasury bills declined to less than 10 percent of total stock from the peak in July of over 20 percent. ### Macroeconomic Outlook and Projections - Growth: - Staff now projects 2012 growth to be 1.5 percent, driven by a gradual rise in domestic private demand and increased EU funds absorption. - Medium-term growth in 2013–16 is expected to remain strong at 3.5 to 4 percent. - Inflation: - Inflation is likely to stay within the central bank’s target band of 3 ± 1 percent. - Inflation will remain below 3 percent in the first half of 2012, before gradually climbing above the middle of the central bank’s target band later in the year. - Current account: - Projected to remain around 4-4¼ percent of GDP in 2012, stabilizing at around 4½-5 percent of GDP thereafter. - Financial account and financing: - Government’s medium term external bond placements and multilateral financing expected to be main sources of financing. - Private sector likely to continue rolling over short-term debt in the first half of the year. - Under staff’s baseline scenario, no new financing gap is envisaged, consistent with the program’s precautionary nature. - Tabulated macro indicators (selected): - Real GDP growth: 2009: -6.6; 2010: -1.6; 2011: 2.5; 2012: 1.5; 2013: 3.0 - CPI inflation, average: 2009: 5.6; 2010: 6.1; 2011: 5.8; 2012: 2.7; 2013: 3.0 - CPI inflation, eop: 2009: 4.9; 2010: 8.0; 2011: 3.1; 2012: 3.3; 2013: 3.0 - Current account balance (% of GDP): 2009: -4.2; 2010: -4.4; 2011: -4.3; 2012: -4.4; 2013: -4.9 - Gross international reserves (bn euros): 2009: 30.9; 2010: 36.0; 2011: 37.3; 2012: 37.5; 2013: 37.4 ### Risks to the Outlook - Growth risks tilted to the downside: - Main downside risks from external sources: further slowdown in Europe and increased international financial market turbulence. - Channels: lower external demand depressing exports and consumer sentiment; higher risk premia increasing banks’ funding costs and exchange rate pressures given high Euroization of banks’ balance sheets; ongoing bank deleveraging causing credit contraction. - Upside: rapid implementation of structural reforms and faster absorption of EU-funded projects; recent change in government could improve political stability. - Inflation risks mainly on the upside: - Potential additional adjustments of administered prices, exchange rate pressures due to euro area turbulence, and possible rebound of food and oil prices. - Downside inflation risk from large negative output gap and slower-than-expected recovery. ### Fiscal Performance and Policy Considerations - 2011 fiscal outturn: - General government cash deficit reached 4.2 percent of GDP, below the program ceiling of 4.4 percent of GDP. - Over-performance in tax revenue helped offset low EU grants. - Tight current expenditure control, especially on personnel and transfers, contributed to deficit containment. - Large personnel reductions led to increased outsourcing and higher goods and services spending. - End-year expenditure savings were reallocated to capital spending, clearing arrears and unpaid bills in SOEs and the health sector, and increasing cofinancing of EU-funded projects. - Total capital spending exceeded Q4 forecast by nearly ½ percent of GDP. - Policy imperatives: - Maintain steadfast commitment to fiscal discipline. - Contain current spending to meet the budget deficit target of 1.9 percent of GDP (2.1 percent of GDP including some off-budget expenditures). - Ensure smooth implementation of the clawback tax to contain health care costs. - Prioritize EU-funded capital projects. - Step up the pace of structural reforms, especially deregulation in the energy sector and SOE restructuring to attract investment and boost growth. - Build fiscal, financial, and foreign exchange buffers and strengthen contingency planning and safety net mechanisms for financial sector stability, supported by precautionary arrangements with international financial institutions. ### Program Implementation and Structural Measures - Structural benchmarks met and in progress: - Structural benchmark on designing measures to deregister a significant number of small VAT payers to improve collection efficiency has been met. - Progress on structural benchmarks for SOE reforms and investment prioritization, though some key steps remain to be implemented by the next review. - Draft legislation on health care framework law is being revised for wider consultations and expected to be completed by September. *Source: IMF Staff Report — EXECUTIVE SUMMARY (March 6, 2012).* ### 11. The authorities remain on track to ### 11. The authorities remain on track to ### 2012 fiscal target and composition - The 2012 budget is based on a cash budget deficit of 1.9 percent of GDP. - An additional 0.2 percent of GDP in off-budget spending under the Program for National Infrastructure Development (PNDI) is included as agreed between the MOPF and the implementing agencies. - The gap between ESA and cash deficits is traditionally on the order of 0.5 percent of GDP; in 2011 the gap is estimated to have narrowed to 0.2 percent of GDP. - The multiyear PNDI program approved in 2011 is about RON 20 billion (4 percent of GDP) undertaken over 2012–20 with budgetary payments made in 2015-20. - Contracts signed to date under PNDI: RON 3.5 billion (0.7 percent of GDP). - Expected work execution in 2012: RON 1 billion (0.2 percent of GDP). - Authorities committed to restrict works execution to RON 1 billion (0.2 percent of GDP) in 2013 as well. - RON 7 billion capital spending in December 2011 composition: - State budget: RON 1 billion for arrears clearance for Electrificare and CFR Infrastructura, RON 200 million for the National Guarantee Fund and RON 800 million in transfers to the education sector. - Local governments: RON 2.5 billion on transportation, public development and environment (partly financed by transfers from central government to clear arrears (RON ½ billion) and increased EU funds). - Road Company: RON 1.7 billion (partly funded by transfers from the central government of RON ½ billion). - Self-financed institutions: nearly RON 700 million funded through higher own revenues such as university fees. ### Measures supporting the 2012 fiscal outcome - Higher-than-projected tax yields carried over from last year and lower expenditures expected to help meet the target. - Implementation of the clawback tax, with proceeds earmarked to pay down unpaid bills in the pharmaceutical industry, to avoid accumulation of arrears in the health care sector. - Commitment to continued expenditure restraint, including: - Freeze on public wages and pensions (with possibility of a modest increase later if economic conditions permit). - Public employment reductions: replacing only 1 employee for every 7 departures, applied at a higher institutional level for flexibility. - Savings in capital expenditures by terminating low-performing projects and reducing national co-financing of EU-funded projects from 15 to 5 percent. - Potential additional discretionary cuts in non-EU funded capital spending to remain within the overall spending envelope. - Other savings from increased means-testing of social programs, cuts in subsidies and transfers to SOEs, and implementation of health sector reforms. ### 2013 fiscal objective - Authorities target a cash deficit of 1 percent of GDP in their medium term budget framework. - 1.2 percent including PNDI projects. - 1.5 percent on ESA basis. - Meeting this objective will require continued strong spending restraint and implementation of reforms to pensions and other social transfers. ### Arrears, SOEs, and arrears-reduction measures - At end-2011, general government arrears amounted to less than 0.2 percent of GDP, mostly at the local government level. - Improved enforcement and monitoring of the 2010 local public finance law (LGPFL) should enable further reductions in arrears. - Authorities plan to prioritize and conclude multi-year contracts for capital projects within medium term budgetary strategy ceilings to enable past debts to be restructured and paid. - Health sector arrears in registered bills have been completely eliminated; unregistered bills from the 2011 stocktaking exercise are fully recorded and scheduled for payment. - SOEs monitored under the program: - Arrears fell to 2.9 percent of GDP at end-2011, 0.3 percentage points lower than at end-Q3 2011. - In 2011, 22 companies under program monitoring ran a deficit of 0.35 percent of GDP, had arrears of 2.6 percent of GDP, and received subsidies from the budget amounting to 0.5 percent of GDP. - Measures to reduce SOE arrears include swap operations to cancel tax arrears with the government, payments from budget bankruptcy procedures, installment agreements, and other financial operations such as debt-equity swaps (with clearance by EU competition authorities). - These measures are expected to reduce SOE arrears by RON 5 to 6 billion (1 percent of GDP) in the second half of 2012. - Integration of the treasury payment system with the accounting reporting system is underway to better control spending commitments and prevent new arrears. ### Health sector reform and short-term cost-containment measures - A draft framework law for sweeping health system changes was withdrawn in January due to public objections; a revised draft is expected by mid-year. - Key objective: define a publicly provided basic healthcare package, increase private sector involvement (supplementary private insurance, private management of hospitals), and better align resources with needs. - Public healthcare spending in Romania is among the lowest in the EU as a share of GDP; population aging will aggravate the funding shortfall. - Short-term cost-containment initiatives include: - A negative list of health services and drugs to be excluded from coverage, including (i) revised lists of reimbursed drugs and (ii) a reduction in hospitalization periods, prepared in consultation with the World Bank; and implementation of the national hospital bed plan. - A revision of the copayment law to base it on a modest flat rate. - Transfer of responsibility for the collection of health contributions for the self-employed from the Health House to the tax authority (ANAF) from July 2012. ### Fiscal financing strategy and debt management - Authorities have been prefinancing funding needs in the domestic market amid declining yields and generally oversubscribed issuances. - Relaunched Medium Term Note program: - Issued a US$1.5 billion 10-year dollar-denominated eurobond in late January and reopened the issue in late February for another US$750 million. - Plan to continue regular external bond issuances as market conditions permit. - Building up foreign currency buffers (including €1 billion World Bank DPL-DDO financing) with a view to maintaining four months of gross financing needs. - Continued development of the yield curve, including a recent launch of a domestic bond with a 15 year maturity. ### EU structural funds absorption - At end-2011, certified absorption of Structural and Cohesion Funds amounted to €1.06 billion, or 5.5 percent of the 2007–13 allocation. - Authorities aim to absorb an additional €6 billion during 2012 (Total EU Funds absorption target, including agricultural funds). - Measures to improve absorption include identifying high priority projects, strengthening capacity of management authorities, limiting time to process reimbursement claims, and seeking external assistance for technical expertise. - Progress on compiling an investment portfolio of state budget funded projects to ensure monitoring, prioritization, and discontinuation of low priority and non-performing projects; expanding coverage to include state budget cofinanced projects at the local government level and stricter monitoring of PNDI projects. ### Tax administration and policy reforms - Progress in organizational restructuring, administrative efficiency, risk assessment, taxpayer segmentation, and indirect audit methods. - Administrative changes to reduce collection costs: - 141 regional offices closed. - Number of large taxpayers decreased from 3000 to 2000. - Staff reduced by 8 percent since end-2010. - Structural benchmark: reduce the number of small taxpayers registered for VAT purposes by 20 percent between September 2011 and 2012. - Strengthening tax compliance strategy for High Net Wealth Individuals (HNWI). - Plans (drawing on IMF technical assistance) to: - Simplify depreciation schedules. - Simplify payments of capital gains taxes. - Simplify deduction mechanism for personal income taxation. - Develop strategies for strengthening the property tax base and excise taxes to preserve real value. ### Structural reforms: energy, SOEs, and transport - Energy sector reforms: - Regulated gas prices increased by roughly 24 percent since summer 2011. - Agreed adjustment of 5 percent in regulated electricity prices to non-residential and residential customers by midyear. - Roadmap commitments: - Roadmap to be approved by mid-March (prior action) to gradually adjust regulated electricity prices for non-households, leading to full liberalization of this segment by January 2014. - Roadmap will specify gradual liberalization of regulated electricity price for households starting 2013 and concluding by end-2017, with protections for vulnerable consumers. - Roadmap for deregulation of gas prices to be developed by April; interim consultations and draft package of tax, royalty, and regulatory measures for oil and gas sector to be prepared. - Authorities will actively seek to avoid a parliamentary override of the presidential veto of the gas export ban law. - Existing bilateral electricity contracts (particularly Hidroelectrica) generate lost revenues on the order of €175-220 million per year; government agreed to seek ways to terminate or renegotiate these contracts as soon as legally possible. - A legal draft to transpose the 3rd EU Energy Package into Romanian legislation has been prepared; amendments necessary to ensure independence of the energy regulator. Authorities committed to approve amended legislation by emergency ordinance by mid-February. - Need for strict enforcement of recent legal changes to avoid accumulation of new arrears to energy producers for district heating. - SOE restructuring and privatization: - End-2011 targets for operating balance and arrears for companies under monitoring were met, in part through budgetary savings. - 2012 budgets for some SOEs are inadequate; line ministries asked to resubmit revised restructuring plans by end-February. - Privatization offers planned for four SOEs by end-April (instead of seven as intended at the time of the third review). - Implementation of the new governance law has commenced. - Ministry of Economy plans to select new management teams for selected SOEs where government retains majority share by end-April 2012; Ministry of Transport and Industry intends to start a similar process in February. - Transport sector: - Progress in closing underutilized rail lines and streamlining operations in certain transport SOEs. - Application of standard costs in contracts has yielded cost savings. - Increased tariffs and toll collection generated revenue gains for passenger rail, the Bucharest subway system, and the national roads operator. - Without significant further restructuring and aggressive implementation, the national rail system operator and the national rail passenger carrier will require substantial government support to avoid accumulating new arrears. ### Other reforms: labor market and social assistance - Implementation of labor market and social assistance reforms approved in 2011 continues. - New Social Dialogue Code has come into force with agreement among social partners on sectoral definitions for collective contracts under the new framework. - Authorities committed to continue consultations to ensure the new Social Dialogue Code respects core ILO conventions. - Secondary legislation on social assistance reform is being drafted to implement the 2011 Social Assistance Law to streamline social benefits and improve efficiency. - Labor and pension reforms outcomes: - New Labor Code contributed to employment recovery and increased the share of fixed-term contracts. - Enforcement of the new pension law has dramatically reduced early retirements and misuse of disability pensions. - National minimum wage increased from 670 lei to 700 lei, broadly in line with inflation. ### Financial sector developments and risks - Banking sector in Q4 recorded a loss of 1.4 percent of average equity over the year. - Lending remained weak; real-term lending flat over Q4; lending to individuals particularly weak. - Non-performing loans ratio ended Q4 marginally lower at 14.1 percent. - Total provisions at end-December covered 99.5 percent of non-performing loans. - Banking system well-capitalized with average capital adequacy ratio of 14.5 percent at end-December, supported by new capital injections of RON 1.6 billion. - Authorities proactively request additional capital from bank shareholders before banks approach the statutory minimum of 8 percent. - Aggregate exposure to Romania of the nine largest foreign banks that participated in the European Bank Coordination Initiative stood at 101 percent of the March 2009 level. - A potential loss of parent funding and resulting deleveraging remains a major risk due to the regional economic downturn and international financial turbulence. *Source: _cr1273 - 11. The authorities remain on track to* ### 24. The authorities are taking steps to ### _cr1273 - 24. The authorities are taking steps to ### Non-performing loans and bank balance sheets - The authorities will revise the tax treatment of bank loans sold to Romanian entities to remove current tax disincentives. - The authorities will undergo an assessment by the World Bank of the arrangements for insolvency and creditor rights in spring 2012. - The NBR is adopting a more flexible approach to allow banks to extend the restructuring period for loans which continue to perform under the restructured terms. - Staff emphasized the importance of close monitoring to mitigate the risk of ‘evergreening’ and ensure that loan-loss provisioning remains prudent. - The NBR will continue to intensively supervise the banking system and take necessary measures to ensure that banks have sufficient capital and liquidity. - Given difficult funding conditions and the economic outlook, further capital will be required, particularly at some small and medium sized banks with high cost ratios, rising loan impairments, and lower than average provisions. - Systemwide capital needs are likely to be lower in 2012 than in 2011. ### Financial safety net, liquidity, and bank resolution - The NBR conducted liquidity and solvency stress tests to identify where further support would be required from shareholders under various scenarios. - Emergency lending: - The NBR is placing contingency plans onto an advanced stage of operational preparedness, including the ability to widen collateral classes for emergency lending assistance. - Bank resolution framework: - Amendments adopted in January introduced bridge bank and other stabilization powers for dealing with failing banks. - Amendments also aim to improve the efficacy with which the Deposit Guarantee Fund (DGF) could augment its resources by borrowing from the MoPF. - Institutional coordination: - The DGF has joined the National Committee for Financial Stability (NCFS). - A joint working group overseen by the NBR’s banking supervision department has been established. - An MoU will be signed by the NBR and the DGF by end-February to ensure the DGF receives sufficient information on potential problem institutions early on. - Authorities will finalize procedures for deploying bank resolution powers (including bridge bank and purchase and assumption powers), building upon experience from other EU countries and lessons from a crisis simulation exercise to be undertaken in spring 2012 with World Bank support. - The NBR, DGF and MoPF will collectively review and approve operational preparedness and inter-agency arrangements for the financial safety net by end April 2012. ### Monetary policy and exchange rate stance - The NBR has gradually reduced its policy rate; since November the NBR eased by a cumulative 75 basis points to 5.5 percent. - The exchange rate has weakened slightly in recent months, leading to a further relaxation of the monetary stance. - Inflation is expected to stay within the central bank’s target band of 3+1 percent given weak domestic demand and muted pressures on global food and energy prices. - Staff recommended caution in further rate cuts and urged the authorities to maintain existing reserve requirements for both local currency and FX deposits. - The central bank has been active in providing weekly repos to ensure adequate liquidity; this eased RON liquidity conditions and led the overnight interbank market rate to decline sharply compared to November. - Euro funding from parent banks has improved, owing to the LTRO operation of the ECB, and the authorities have not intervened in the foreign exchange market lately. - Staff’s exchange rate assessment based on extended CGER analysis does not show a misalignment in the currency. ### Inflation targeting context and structural impediments - Since adopting inflation targeting in 2005, the NBR has been successful in achieving its end-year inflation target only twice (in 2006 and 2011). - Factors that prevented the NBR from reaching its target: - Fiscal dominance: public wages grew at around 20-30 percent and public employment expanded by 3 percent annually (2005–2008); excise increases related to EU harmonization and the 5 percentage VAT hike in 2010 impacted inflation. - Food and energy price shocks: food weight in CPI is 35 percent; energy share ~8 percent. - Weak monetary policy transmission: High FX lending (63 percent of the total) and a wide interest rate corridor of ± 400 b.p. around the policy rate. - Going forward: - Prudent fiscal policy remains crucial. - NBR should continue to enhance its operational framework to strengthen monetary policy transmission. ### Program modalities, external financing, and risks - One prior action and a new structural benchmark are proposed: - Government approval of a roadmap for the deregulation of electricity prices is proposed as a prior action. - An increase of 5 percent in the electricity price for residential and nonresidential consumers by end-June 2012 is proposed as a new structural benchmark. - Modifications proposed: - Modification in the end-March and end-June NFA target (end-quarter targets unchanged; end-March 2012 adjustor revised due to change in size of external bond placement; an adjustor on the size of the MoPF external bond placement is introduced for end-June 2012). - Modification in the end-March adjustor to the general government balance: the end-March 2012 adjustor on capital expenditures is increased and an adjustor for end-June 2012 is introduced. - Program modalities: - Romania is not expected to face actual balance of payments financing needs in 2012 under the baseline scenario. - The Stand-By Arrangement and financing commitments from the European Union will continue to be treated as precautionary. - Program risks and repayment capacity: - Fund credit outstanding would decline from 39.2 percent of gross reserves in 2012. - Peak payments would be in 2013–14 at 14.1 and 13.6 percent of gross reserves and around 8.7 and 7.4 percent of exports of goods and services. - Public indebtedness (including guarantees) is expected to remain under 36 percent of GDP. - Public external debt is expected to peak at around 18 percent of GDP in 2012. - Total external debt peaked at 74.5 percent of GDP in 2010 and will decline in the medium run. - A 2011 update of the 2009 safeguards assessment found a robust safeguards framework at the NBR while recommending measures to sustain NFA reporting standards, effective audit oversight, and enhanced accounting disclosures. ### Staff appraisal and policy recommendations - Macroeconomic outlook and policy stance: - Economic growth resumed but recovery is losing momentum; prospects depend on EU funds absorption and political stability. - Authorities have used improved market conditions to build fiscal financing buffers via higher-than-planned domestic debt issuances and a successful Eurobond issue. - Authorities should continue ensuring foreign exchange buffers and capital buffers in the banking system are maintained. - The Fund-EU precautionary program and forthcoming World Bank credit line should help cushion risks and provide a policy anchor. - Fiscal policy: - Continued strong spending discipline and improved tax collections are needed to achieve the ambitious 2012 deficit target. - Government postponed public wage and pension increases; strict employment rationalization has controlled the wage bill but greater flexibility is needed across institutions. - Prioritization of capital spending is necessary to ensure proper utilization of scarce resources and adequate funding for cofinancing of EU-funded projects. - Staff supports channeling resources towards capital projects nearing completion rather than initiating new projects; off-budget capital projects such as PNDI should be halted. - Health sector: - Revisiting the comprehensive health care law and wider consultations are encouraging. - Plans to allow more private sector involvement require adequate monitoring and regulatory mechanisms. - Revenue measures to adequately fund the system will be necessary. - Considerable implementation risks exist with the clawback tax; the copayment law as currently legislated is administratively unfeasible. - Structural reforms and SOEs: - Progress has been made: SOE governance legislation passed; appointment of private management in SOEs progressing; privatization steps advanced in several cases. - In other cases, privatization steps are delayed and reforms in some SOEs are inadequate. - More ambitious reforms, including deeper reforms and majority privatizations, are necessary to attract capital investment. - Non-viable enterprises should be liquidated. - Deregulation in the energy sector continues to lag, especially in gas; authorities should outline a plan to align prices with cost recovery while protecting vulnerable consumers. - Financial sector resilience: - With more than 80 percent of the banking system controlled by foreign banks, Romania is vulnerable to banking sector uncertainties in Europe. - Euro area bank deleveraging impact on Romania has been limited thus far. - Authorities should ensure newly acquired powers for banking resolution can be quickly operationalized and maintain clear coordination and information sharing. - Remain alert to difficulties in small local banks and pursue regulatory initiatives to address impaired assets to ensure faster credit recovery. - Monetary policy stance and contingency planning: - The 75 bp cumulative cut since November has not caused demonstrable exchange rate depreciation or capital outflow pressures. - Given vulnerability to a decline in capital inflows, the NBR needs to maintain sufficient foreign currency buffers and be vigilant against adverse exchange rate impacts. - Staff recommends caution in further monetary policy easing in the coming months. - If growth slows further, there is room to let automatic stabilizers play given increased fiscal financing buffers and forthcoming World Bank DPL-DDO. - In the event of a sudden stop of capital inflows or banking system stress from a disorderly credit event in the eurozone, some exchange rate flexibility and activation of the precautionary credit line with the IFIs would be needed. *Source: IMF staff report text as provided.* ### 37. On the basis of Romania’s ### _cr1273 - 37. On the basis of Romania’s ### Staff recommendation - Staff supports the authorities’ requests for completion of the fourth review under the arrangement. - Staff recommends approval of the modification of the program conditionality, as proposed in the attached MEFP. ### Stand-By Arrangement (Box 2) - Access: SDR 3,090.6 million, 300 percent of quota. - Length: 24 months. - Phasing: - SDR 60 million was made available upon effectiveness of the newly approved arrangement, which was approved on March 25, 2011, and became effective on March 31, 2011. - The subsequent three disbursements amounting to SDR 1.29 billion became available during June–December 2011 with the completion of the first through third reviews. - SDR 430 million will be made available subject to the completion of this review. - Four subsequent disbursements, totally SDR 1310.6 million, are contingent upon completion of the fifth to the eighth review. ### Conditionality: Quantitative Performance Criteria and Indicative Targets - Quantitative Performance Criteria: - A floor on the change in net foreign assets. - A ceiling on central government and social security domestic arrears. - A floor on the overall general government cash balance. - A ceiling on general government guarantees. - Non-accumulation of external debt arrears. - Quantitative Indicative Targets: - A ceiling on general government current primary spending. - A ceiling on local government domestic arrears. - A floor on the operating balance and a ceiling on arrears of the key loss-making SOEs. - A ceiling on the execution of the PNDI program. - Other elements: - A consultation band around the 12-month rate of inflation of consumer prices. - Prior Action: Approve a roadmap for the deregulation of electricity prices as specified in the MEFP. - Structural Benchmarks (selected): - Undertake SOE reforms, including (i) Appointment of legal advisors for privatization of CFR Marfa, TAROM, Transelectrica, Transgaz, and Romgaz; (ii) Preparation of action plans for the remaining SOEs of the central government; (iii) Design mechanisms to facilitate restructuring and securitizing SOE arrears. Target date: July 15, 2011. - Completion of a comprehensive review of the existing investment portfolio, with a final report and an action plan. Target date: September 30, 2011. - Prepare comprehensive amendments to the health care legislation. Target date: December 31, 2011. - Design measures to reduce registration of small VAT payers by 20 percent by end-September 2012 (compared to end-September 2011). Target date: December 31, 2011. - Appoint transaction advisor for group 2 and legal advisor for group 3 as specified in MEFP. Target date: February 15, 2012. - An increase of 5 percent in the electricity price for both residential and nonresidential consumers. Target date: June 30, 2012 (proposed). ### Performance against targets and benchmarks (selected figures and outcomes) - Table 1: Quantitative Program Targets (selected entries, stocks and flows preserved as in source) - Floor on the change in net foreign assets (mln euros): 20,026 (end-2010 stock); Quarterly/period figures include 119; 1896; 292.8; -500; -457; 0; 250; 250; 450. - Floor on general government overall balance (mln lei): -33,621 (2010 actual); Quarterly/period figures include -5,254; -11,260; -13,685; -23,953; -23,837; -3,100; -6,800; -8,500; -12,210. - Ceiling on stock of central government and social security arrears (bn lei): 0.19; 0.15; 0.11; 0.10; 0.10; 0.09; 0.08; 0.06; 0.04; 0.02. - Non-accumulation of external debt arrears: 000000000 0 (continuous performance criterion as shown). - 12-month rate of inflation in consumer prices (center point and bands): Actual/Center point series include 7.9; 8.0; 8.0; 3.5; 3.7; 3.1; 2.1; 2.4; 3.9; 3.2. Inner and outer band limits reported in the table (e.g., outer band upper limit 5.7; inner band upper limit 4.7; inner band lower limit 2.7; outer band lower limit 1.7; other band values shown). - Ceiling on general government current primary spending (excl. EU funds and social assistance, mln lei): 131,938 (2010); quarterly/period entries include 30,670; 62,578; 94,133; 130,700; 128,317; 32,000; 64,800; 96,350; 130,850. - Floor on operating balance of key SOEs (bn lei): -6.8; -0.7; -1.8; -2.4; -3.9; -2.0; -1.5; -2.2; -2.7; -3.2. - Ceiling on stock of arrears of key SOEs (bn. lei): 17.9; 19.2; 19.7; 18.5; 15.9; 14.9; 17.0; 15.0; 12.5; 9.0. - Ceiling on stock of local government arrears (bn lei): 0.91; 0.82; 0.81; 0.82; 0.80; 0.75; 0.70; 0.50; 0.45; 0.30. - Ceiling on the execution of the PNDI program (mln lei): indicative cumulative targets shown as 200; 400; 700; 1000. - Program implementation status (selected, as listed): - Approve a roadmap for the deregulation of electricity prices as specified in the MEFP: Prior Action — Quantitative performance criteria — Floor on net foreign assets: Dec. 31, 2011 — Met. - Floor on general government overall balance: Dec. 31, 2011 — Met. - Ceiling on central government and social security domestic arrears: Dec. 31, 2011 — Met. - Ceiling on general government guarantees: Dec. 31, 2011 — Met. - Non-accumulation of external debt arrears: Dec. 31, 2011 — Met. - Ceiling on general government current primary spending: Dec. 31, 2011 — Met. - Floor on operating balance of key SOEs: Dec. 31, 2011 — Met. - Ceiling on stock of arrears of key SOEs: Dec. 31, 2011 — Met. - Ceiling on stock of local government arrears: Dec. 31, 2011 — Met. - Inflation consultation band (Inner and Outer band): Dec. 31, 2011 — Met. - Structural benchmarks (selected outcomes): - SOE reforms (appointment of legal advisors, action plans, mechanisms to restructure/securitize SOE arrears): July 15, 2011 — Partially Met. - Comprehensive review of existing investment portfolio and final report/action plan: Sept. 30, 2011 — Partially Met. - Amendments to health care legislation: Dec. 31, 2011 — Partially Met. - Measures to reduce registration of small VAT payers by 20 percent by end-September 2012: Dec. 31, 2011 — Met. - Appoint transaction advisor for group 2 and legal advisor for group 3: Feb. 15, 2012 — Partially Met. ### Debt and external sustainability scenarios (figures summary) - Public Debt Sustainability: Bound tests present baseline and scenario averages: - Baseline public debt average in boxes: 27 (percent of GDP). - Scenario averages shown in boxes include Growth shock: 43; PB shock: 33; i-rate shock: 31; Combined shock: 34; 30% depreciation scenario: 37; contingent liabilities shock: 36; Historical: 31. - Notes include: Individual shocks are permanent one-half standard deviation shocks; Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance; One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occurring in 2013. - External Debt Sustainability: Bound tests present baseline and scenario averages: - Baseline external debt average in boxes: 60 (percent). - Scenario averages shown in boxes include i-rate shock: 61; Historical: 56; CA shock: 68; Combined shock: 68; Real depreciation shock (30 percent): 90; Growth shock: 66. - Notes include: Individual shocks are permanent one-half standard deviation shocks; Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance; One-time real depreciation of 30 percent occurs in 2013. *Source: _cr1273 - 37. On the basis of Romania’s* ### 1. An increase of 5 percent in the electricity price for bo ### _cr1273 - 1. An increase of 5 percent in the electricity price for bo ### Performance for Fourth Review and Prior Actions - Legal advisors were appointed for Electrica Serv and Nuclearelectrica; deadline for other Group 2 and Group 3 companies rescheduled. - Legal advisors were appointed for TAROM, Transelectrica, Transgaz, and Romgaz; mechanisms to facilitate restructuring of SOE arrears implemented. - Authorities committed to complete the action plan process by mid-February and to hire a legal advisor for CFR Marfa by end-April 2012. - Investment portfolio revised to include local government projects co-financed by the state budget. - Health care legislation being revised to better address lack of financial controls and adequacy of funding needs; provisions on private insurance for basic medical benefits reassessed. --- ### Key Macroeconomic Indicators (Selected, 2007–12; annual percent change or percent of GDP as shown) - Real GDP: 2007: 6.3; 2008: 7.3; 2009: -6.6; 2010: -1.6; 2011: 2.0; 2012 (3rd Rev.Est.Proj.): 2.5 / 1.5 - Contributions to GDP growth: - Domestic demand: 2007: 15.9; 2008: 8.3; 2009: -13.5; 2010: -1.6; 2011: 2.0; 2012: 2.9 / 1.7 - Net exports: 2007: -9.6; 2008: -1.0; 2009: 7.0; 2010: 0.0; 2011: 0.0; 2012: -0.4 / -0.3 - CPI (average): 2007: 4.8; 2008: 7.8; 2009: 5.6; 2010: 6.1; 2011: 5.9; 2012: 5.8 / 2.7 - CPI (end of period): 2007: 6.7; 2008: 6.4; 2009: 4.9; 2010: 8.0; 2011: 3.6; 2012: 3.1 / 3.3 - Unemployment rate (average): 2007: 6.4; 2008: 5.8; 2009: 6.9; 2010: 7.3; 2011: 7.2; 2012: 7.2 - Nominal wages (annual percent change): 2007: 22.7; 2008: 23.7; 2009: 8.5; 2010: 2.4; 2011: 5.3; 2012: 4.9 / 3.2 --- ### Saving, Investment, and External Accounts (selected) - Gross domestic investment (percent of GDP): 2007: 31.0; 2008: 31.3; 2009: 25.4; 2010: 24.8; 2011: 27.3; 2012 proj.: 27.0 / 28.0 - Gross national savings (percent of GDP): 2007: 17.6; 2008: 19.7; 2009: 21.2; 2010: 20.4; 2011: 23.3; 2012 proj.: 22.7 / 23.6 - Current account balance (percent of GDP): 2007: -13.4; 2008: -11.6; 2009: -4.2; 2010: -4.4; 2011: -4.0; 2012 proj.: -4.3 / -4.4 - Merchandise trade balance (percent of GDP): 2007: -14.3; 2008: -13.7; 2009: -5.8; 2010: -6.1; 2011: -3.5; 2012 proj.: -5.6 / -5.9 - Foreign direct investment balance (percent of GDP): 2007: 5.7; 2008: 6.7; 2009: 3.0; 2010: 1.8; 2011: 1.5; 2012 proj.: 1.4 / 1.9 --- ### General Government Finances (selected, percent of GDP) - Revenue: 2007: 32.3; 2008: 32.2; 2009: 31.2; 2010: 32.3; 2011: 33.0; 2012 proj.: 32.1 / 32.9 - Expenditure: 2007: 35.4; 2008: 37.0; 2009: 38.5; 2010: 38.7; 2011: 37.3; 2012 proj.: 36.3 / 34.8 - Fiscal balance: 2007: -3.1; 2008: -4.8; 2009: -7.3; 2010: -6.4; 2011: -4.3; 2012 proj.: -4.2 / -1.9 - Structural fiscal balance (actual fiscal balance adjusted for automatic effects): 2007: -5.8; 2008: -8.5; 2009: -7.2; 2010: -5.1; 2011: -2.8; 2012 proj.: -2.9 / -0.2 - Gross public debt (direct debt only, percent of GDP): 2007: 10.4; 2008: 11.8; 2009: 21.7; 2010: 28.2; 2011: 31.6; 2012 proj.: 30.9 / 32.3 - Gross public debt (including guarantees): 2007: 12.7; 2008: 13.6; 2009: 23.8; 2010: 31.2; 2011: 34.5; 2012 proj.: 33.7 / 35.0 --- ### Macroeconomic Framework Projections (2009–17, selected) - Real GDP growth (annual percent): 2009: -6.6; 2010: -1.6; 2011: 2.5; 2012 proj.: 1.5; 2013 proj.: 3.0; 2014 proj.: 3.7; 2015–17 proj.: 4.0 each year - CPI (average): 2009: 5.6; 2010: 6.1; 2011: 5.9; 2012 proj.: 5.8; 2013–17 proj.: 2.7 / 3.0 / 3.0 / 3.0 / 3.0 - Gross national saving (percent of GDP): 2009: 21.2; 2010: 20.4; 2011: 23.3; 2012 proj.: 22.7; 2013–17 proj.: 23.6 / 24.5 / 24.9 / 25.4 / 25.7 - Current account (percent of GDP): 2009: -4.2; 2010: -4.4; 2011: -4.0; 2012 proj.: -4.3; 2013–17 proj.: -4.4 / -4.9 / -5.1 / -5.0 / -5.0 --- ### Balance of Payments and External Outlook (2009–17, selected) - Exports (percent of GDP): 2009: 24.6; 2010: 30.1; 2011: 33.6; 2012 proj.: 33.7; 2013–17 proj.: 35.5 / 36.1 / 35.8 / 35.7 / 35.4 - Imports (percent of GDP): 2009: 30.4; 2010: 36.2; 2011: 37.1; 2012 proj.: 39.3; 2013–17 proj.: 41.5 / 42.1 / 41.7 / 41.7 / 41.4 - Gross international reserves (in billions of euros): 2009: 28.3; 2010: 30.9; 2011: 36.0; 2012 proj.: 37.8; 2013–17 proj.: 37.3 / 37.5 / 37.4 / 36.6 / 34.6 --- ### Gross Financing Requirements and Financing Sources (2010–12, quarterly 2012) - I. Total financing requirements (2012 Total Year): 38.2 - I.A. Current account deficit: 5.5 - I.B. Short-term debt: 21.0 - Public sector: 4.6 - Banks: 11.2 - Corporates: 5.2 - I.C. Maturing medium- and long-term debt: 11.3 - II. Total financing sources (2012 Total Year): 33.9 - II.A. Foreign direct investment, net: 2.2 - II.C. Short-term debt (rollover): 23.2 - II.D. Medium- and long-term debt: 8.2 - Financing gap (IV): 8.0 (2012 Total Year) - Program financing (V): 8.0 (2012 Total Year) - IMF: 4.3 (2012 Total Year) - Others: 3.7 (2012 Total Year) - Memorandum: Rollover rates for amortizing debt ST (in percent): Public sector: 118; Banks: 112; Corporates: 101 --- ### General Government Operations (2007–12, percent of GDP and amounts) - Revenue (percent of GDP): 2007: 32.3; 2008: 32.2; 2009: 31.2; 2010: 32.3; 2011: 33.0; 2012 proj.: 32.1 / 32.9 - Taxes (percent of GDP): 2007: 27.9; 2008: 27.9; 2009: 27.2; 2010: 26.5; 2011: 27.5; 2012 proj.: 27.2 - Social security contributions (percent of GDP): 2007: 9.5; 2008: 9.5; 2009: 9.5; 2010: 8.7; 2011: 9.0; 2012 proj.: 8.6 - Expenditure (percent of GDP): 2007: 35.4; 2008: 37.0; 2009: 38.5; 2010: 38.7; 2011: 37.3; 2012 proj.: 36.3 / 34.8 - Current expenditure: 2007: 30.7; 2008: 32.5; 2009: 34.6; 2010: 35.1; 2011: 32.3; 2012 proj.: 31.2 - Capital expenditure (percent of GDP): 2007: 4.7; 2008: 4.6; 2009: 4.4; 2010: 3.7; 2011: 4.1; 2012 proj.: 3.5 - Fiscal balance (percent of GDP): 2007: -3.1; 2008: -4.8; 2009: -7.3; 2010: -6.4; 2011: -4.2; 2012 proj.: -1.9 --- ### Monetary Survey and Banking Sector Indicators (selected) - Broad Money (M3, end period in millions of RON): Dec-09: 189,630; Dec-10: 202,763; Dec-11: 216,208; 2012 Proj. Q4: 230,393 - Net foreign assets (banking system, in millions of RON): Dec-09: 17,684; Dec-10: 18,776; Dec-11 Q4: 24,320 - Private sector credit (end period, in millions of RON): Dec-09: 199,887; Dec-10: 209,298; Dec-11 Q4: 230,121 - Reserve money (National Bank of Romania, end period): Dec-09: 51,662; Dec-10: 55,103; Dec-11 Q4: 66,237 - CPI inflation, eop (memorandum): 2009: 4.7; 2010: 8.0; 2011: 3.1; 2012 Proj.: 1.9 / 2.3 / 3.8 / 3.3 (quarterly notes in table) Banking soundness (selected, percent): - Capital to risk-weighted assets: 2008: 13.8; 2009: 14.7; 2010 Dec: 15.0; 2011 Dec: 14.5 - Nonperforming loans to total gross loans: 2008: 2.8; 2009: 7.9; 2010 Dec: 11.9; 2011 Dec: 14.0 - Return on assets: 2008: 1.6; 2009: 0.2; 2010 Dec: -0.2; 2011 Dec: -0.1 - Liquid assets to total assets: 2008: 47.1; 2009: 57.4; 2010 Dec: 60.0; 2011 Dec: 58.6 --- ### Schedule of Reviews and Purchases under the IMF Arrangement (SDRs) - March 25, 2011: 60.0 (5.82 percent of Quota) — Approval of arrangement - June 27, 2011: 430.0 (41.74 percent of Quota) — First review and end-March 2011 performance criteria - September 29, 2011: 430.0 (41.74 percent of Quota) — Second review and end-June 2011 performance criteria - December 19, 2011: 430.0 (41.74 percent of Quota) — Third review and end-September 2011 performance criteria - March 21, 2012: 430.0 (41.74 percent of Quota) — Fourth review and end-December 2011 performance criteria - June 15, 2012: 430.0 (41.74 percent of Quota) — Fifth review and end-March 2012 performance criteria - September 15, 2012: 430.0 (41.74 percent of Quota) — Sixth review and end-June 2012 performance criteria - December 15, 2012: 430.0 (41.74 percent of Quota) — Seventh review and end-September 2012 performance criteria - March 15, 2013: 20.6 (2.00 percent of Quota) — Eighth review and end-December 2012 performance criteria - Total: 3,090.6 (300 percent of Quota) --- ### Indicators of Fund Credit and Stock Projections (2012–17, in millions of SDR) - Stock of existing Fund credit (end of period): 2012: 9,262; 2013: 5,210; 2014: 1,329; 2015: 96; 2016: 0; 2017: 0 - Prospective Fund Credit under Stand-By Arrangement – Disbursement: 2,150 (2012); Stock: 3,070 (2012) rising to 3,091 (2013) then declining to 3 (2017) - Stock of existing and prospective Fund credit (in millions of SDR): 2012: 12,332; 2013: 8,301; 2014: 4,419; 2015: 2,358; 2016: 719; 2017: 3 - Stock of existing and prospective Fund credit (In percent of quota): 2012: 1,197; 2013: 806; 2014: 429; 2015: 229; 2016: 70; 2017: 0 - Stock (In percent of GDP): 2012: 10.8; 2013: 6.8; 2014: 3.3; 2015: 1.6; 2016: 0.5; 2017: 0 --- ### Public Sector Debt Sustainability (2007–17, selected) - Baseline public sector debt (percent of GDP): 2007: 12.7; 2008: 13.6; 2009: 23.8; 2010: 31.2; 2011: 33.7; 2012 proj.: 35.0; 2013–17 proj.: 33.5 / 32.1 / 30.6 / 29.1 / 27.7 - Debt-stabilizing primary balance (percent of GDP, implied): -0.7 (table footnote) - Primary deficit (percent of GDP): 2007: 2.4; 2008: 4.1; 2009: 6.1; 2010: 5.0; 2011: 2.6; 2012 proj.: 0.2; 2013–17 proj.: -0.7 / -0.7 / -0.8 / -0.8 / -0.8 - Identified debt-creating flows and automatic debt dynamics listed in table; change in public sector debt (percent of GDP): 2007: 0.1; 2008: 0.9; 2009: 10.1; 2010: 7.4; 2011: 2.5; 2012 proj.: 1.3; 2013–17 proj.: -1.4 / -1.5 / -1.5 / -1.5 / -1.4 - Gross financing need (percent of GDP): 2007: 4.4; 2008: 6.7; 2009: 18.4; 2010: 13.9; 2011: 12.8; 2012 proj.: 11.4; 2013–17 proj.: 11.3 / 9.4 / 7.4 / 6.1 / 5.7 --- ### External Debt Sustainability (2007–17, selected) - Baseline external debt (percent of GDP): 2007: 47.1; 2008: 51.8; 2009: 68.6; 2010: 74.5; 2011: 73.8; 2012 proj.: 73.7; 2013–17 proj.: 71.8 / 67.5 / 63.4 / 61.4 / 59.9 - Change in external debt (percent of GDP): 2007: 4.9; 2008: 4.8; 2009: 16.8; 2010: 5.8; 2011: -0.6; 2012 proj.: -0.1; 2013–17 proj.: -2.0 / -4.3 / -4.0 / -2.1 / -1.5 - Current account deficit, excluding interest payments (percent of GDP): 2007: 12.2; 2008: 10.1; 2009: 2.4; 2010: 2.9; 2011: 2.6; 2012 proj.: 2.6; 2013–17 proj.: 3.2 / 3.5 / 3.6 / 3.7 / 3.9 - Gross external financing need (in percent of GDP): 2007: 28.8; 2008: 33.1; 2009: 29.5; 2010: 25.9; 2011: 28.1; 2012 proj.: 31.0; 2013–17 proj.: 33.5 / 30.9 / 28.9 / 25.9 / 25.2 --- *Source: IMF staff estimates and projections as presented in the document.* ### 1. The Romanian authorities reaffirm our commitment to our economic program supported by ### _cr1273 - 1. The Romanian authorities reaffirm our commitment to our economic program supported by ### Commitment, program status, and review request - The Romanian authorities reaffirm commitment to the economic program supported by the International Monetary Fund (IMF), the European Union (EU), and the World Bank (WB). - Track record: "strong" to date; met all performance criteria for the fourth program review and advanced on a large and difficult structural agenda. - Request: Government of Romania and the National Bank of Romania (NBR) request completion of the fourth review and intend to treat the arrangement as precautionary. - Monitoring: program will continue to be monitored through quarterly reviews, prior actions, quantitative performance criteria and indicative targets, and structural benchmarks. - Proposed modifications: a modification of the March 30, 2012, quantitative performance criteria and establishment of criteria for June 30, 2012, including changes to adjustors on the performance criterion on Net Foreign Assets and general government balance (described in the Technical Memorandum of Understanding (TMU)). - Authorization: IMF and EC authorized to publish the Letter of Intent and attachments and related staff reports. ### Performance on quantitative targets and structural benchmarks - Quantitative results: "All end-December 2011 quantitative performance criteria were observed. All indicative targets were also met." - Inflation: "Inflation remained within the inner band of the inflation consultation mechanism." - Structural benchmarks: - Met: designing measures to deregister a significant number of small VAT payers to improve collection efficiency. - Healthcare reform legislation: "prepared; however, the draft was later withdrawn due to opposition." Alternative proposals to be prepared in consultation with the World Bank with a draft by end-June. - Partially met/ongoing: prioritization of the investment portfolio is advancing; appointment of legal and transaction advisors for the sale of stakes in SOEs remains a key objective; continuing remaining actions for SOE reforms to complete the July 2011 benchmark by April 2012. - New measures: a new structural benchmark and a prior action proposed in the attached MEFP (MEFP Table 2). ### Recent economic developments and outlook - 2011 growth: "around 2½ percent." - Drivers of 2011 outturn: "an exceptional domestic harvest and strong exports." - Inflation: "CPI inflation fell to 3.1 percent in December." - 2012 growth forecast: "around 1½–2 percent." - Risks: slowdown in Europe is a major drag; vulnerabilities to international financial markets and the euro area remain; continued firm policy implementation required. - Inflation projection: "projected to stay within the central bank’s target band in 2012, although upward risks remain." - Current account: "should stabilize at around 4-4½ percent of GDP, reflecting improved trade performance." ### Fiscal policy stance and targets - 2011 cash deficit: "4.2 percent of GDP," within the target of "4.4 percent of GDP." - Wage bill and employment: public employment reduced by "another 20,000 positions," bringing the wage bill "below 7 percent of GDP." - 2012 fiscal targets: - ESA deficit target: "bring the fiscal deficit in ESA terms below 3 percent of GDP" - Budget cash deficit: "1.9 percent of GDP (2.1 percent of GDP including spending under the National Development and Infrastructure Program (PNDI))." - Policy measures for 2012: - Public wages and pensions: "Public wages will remain frozen in the public sector as well as pensions." - Public employment policy: "replacing only 1 out of 7 employees" with more flexibility. - Capital budget savings: eliminating low-performing projects and reduced national co-financing of EU-funded projects (per EU regulation 1311/2011 for member states under an IMF/EU program). - Clawback tax: implementation to help ensure non-accumulation of arrears in the pharmaceutical industry. - SOE restructuring: budgetary transfers contingent on approval of viable restructuring plans for SOEs. - Means-testing of social benefits to continue generating savings. - Flexibility: "if economic conditions permit we will consider budget modifications later in the year in line with the Fiscal Responsibility Law." ### Arrears, reporting, and payment systems - General government arrears (excluding SOEs): "below 0.2 percent of GDP (almost entirely in local governments)." - SOEs monitored under the program: arrears fell in Q4 2011 by "some 0.8 percent of GDP to 2.6 percent of GDP." - Sector-specific arrears actions: - Health sector: "arrears in registered bills have now been completely eliminated"; unregistered bills revealed during stocktaking by end-2011 have been recorded and scheduled for payment. - Local government: arrears decreased in 2011; line ministries to conclude multi-year co-financing contracts by March 2012 and prioritize projects; upload relevant data in a capital investment database. - SOEs: anticipate arrears of companies under monitoring to be reduced by "RON 5 to 6 billion (1 percent of GDP) in the second half of 2012" through swaps, payments, and other operations. - Public financial management systems: - Integration of accounting reporting system with the Treasury payment system is underway; design to be finalized by "end-April 2012" and tendering process launched by "mid-May 2012." - Payment periods: over the next two years the period for paying bills submitted to the central government and social security system will be gradually reduced; EU directive to be transposed on a timely basis. - Use of clawback tax revenues: to begin shortening the period for paying bills for pharmaceuticals by "end-June." ### Healthcare reforms and interim measures - Legislative timetable: revised draft framework law by "end-June," public debate "between July and September," parliamentary approval "slated by end-October." - Medium-term intent: ensure adequate financing in line with the 2008 Presidential Commission recommendation while factoring population aging; reduce scope of public benefits package through greater reliance on cost-sharing and private supplementary insurance; explore greater private sector involvement. - Interim measures and timelines: - Copayment law revision: revise copayment to a "modest flat rate" and approve the revision by emergency ordinance by "mid-April 2012" for implementation shortly thereafter. - Negative list: prepare by "mid-April 2012" and implement by "end-June" a negative list of health services and drugs, including (i) revised lists of reimbursed drugs and (ii) a reduction in hospitalization periods and implement the national hospital bed plan; create legal framework for Health Technology Assessment and initiate implementation; adjust National Health Programs to match the new basic package. - Budget monitoring: monitor aggregate hospital budgets to ensure consistency with programmed general government budget and take all necessary actions to avoid new arrears; health reform legislation to facilitate monitoring of local government hospitals. - IT and registries: auditing of patient registries to be completed by "end-2012"; distribute new health cards to all participants by "end-April" to control fraud and better monitor spending commitments; contract for electronic prescription module signed and expected operational by "end-May 2012." ### Tax policy, public administration, and structural reforms - Tax system efficiency measures (building on IMF technical assistance) to include: - simplification of depreciation schedules for fixed assets; - simplification of declaration and payment of capital gains taxes; - simplification of the deduction mechanism for personal income taxation; - development of a strategy for revision of the property tax base; - development of a plan for adjustment of excise tax rates to preserve real value. - Public policy and planning: - Strategic Planning Committee to establish public policy priorities supported by the medium-term Fiscal Strategy. - Interministerial group coordinated by the Center of Government to follow up on implementation of action plans from functional reviews; first progress reports submitted in January; second set of quarterly progress reports due by "mid-April." - Center of Government to develop indicators to measure intermediate outcomes and government to approve an annual work plan of significant legal and policy proposals requiring approval up to "end-2012." ### Debt management, financing buffers, and EU funds absorption - Domestic debt issuance: extended maturity including issuance of a "15-year bond." - External issuance: successfully issued a "US$1.5 billion 10-year dollar-denominated bond in January" (after a late-2011 postponement); plan to return to external market in 2012 as market conditions permit per debt management strategy. - Financing buffers: objective of "four months of gross financing needs" to protect government finances; interest paid on these buffers considered a necessary cost. - Debt management improvements: project with World Bank support to strengthen the debt management office. - EU funds absorption target for 2012: additional "€6 billion" during 2012 composed of "€3.5 billion from Structural and Cohesion Funds and another €2.5 billion from Agricultural, Rural Development and Fisheries Funds." - Measures to boost EU absorption in 2012: - implementation and monitoring of the May 2011 Priority Action Plan; two progress reports submitted to the European Commission; - identified high priority projects, strengthened capacity of managing authorities, reduced procedural bottlenecks; - updated priority action plan submitted to the Commission including measures to increase transparency; - adopted a Code of Conduct for personnel working with EU funds; monitoring mechanism to be adopted by "end of February"; - fill "100 vacant and 211 newly-added positions" by "June 2012" across managing authorities; - limit time to process reimbursement claims to beneficiaries to "45 working days" across all managing authorities; - MOUs signed with the EIB and the WB for technical assistance; new MOU with the EBRD to be signed by "end-March." - Ensure sufficient cash allocations for funding EU-financed investment projects so no arrears are accumulated. ### Public investment portfolio and PNDI controls - Investment portfolio compilation in progress to monitor and prioritize government projects; focus on projects fundable within a medium-term horizon ("3–5 years") and discontinuation of low priority or non-performing projects. - Identified discontinuations: "14 projects, representing more than 10 percent of the total project value, which will be discontinued." - Improvements and commitments: - improve the investment portfolio database to include state budget cofinanced projects at the local government level and strengthen monitoring of PNDI projects by the capital monitoring unit of the Ministry of Public Finance (MOPF) by "end-March, 2012." - MRDT and MEF commit that execution spending under the PNDI will not exceed "RON 1.0 billion in 2012 (RON 820 million for MRDT and RON 180 million for MEF) and RON 1.0 billion in 2013." - Authorities overseeing PPPs commit to joint reporting by "mid-April 2012" on the functioning of working arrangements. - Medium term fiscal strategy underpinning the convergence program to be submitted to the EU will specify yearly amounts for PNDI spending; total authorization for contracts under the PNDI will be adjusted accordingly. *Source: Letter of Intent and Memorandum of Economic and Financial Policies attached to IMF staff materials in _cr1273.* ### 12. Improving tax administration and fighting tax evasion are crucial elements of our strategy to ### 12. Improving tax administration and fighting tax evasion are crucial elements of our strategy to ### Tax administration and tax compliance - Comprehensive reform of ANAF is underway with key developments: - Fiscal Code provisions revised to facilitate, under certain conditions, the cancellation of registration for VAT purposes for firms. - Plan to reduce the number of taxpayers registered for VAT purposes by 20 percent between September 2011 and 2012 using administrative measures. - Strengthening tax compliance strategy for High Net Wealth Individuals (HNWI): - Risk analysis procedure adopted in September 2011 will be used to select individual taxpayers for tax verification. - Accelerated data analysis and seeking access to new databases to start tax verifications of individuals by mid-2012. - Seeking financing for acquiring an IT tool for risk analysis and to cover training costs on indirect audit methods. - ANAF restructuring: government decision passed, 141 regional offices closed to reduce collection costs, staff reduced by 8 percent since end 2010. - Plan to increase capacity and efficiency with IMF FAD TA and World Bank support; prepare and have approved (by end-2012) a multiannual World Bank project for modernizing tax administration; approve by government memorandum an action plan with main measures and deadlines. - Reduced number of large taxpayers under the large taxpayer directorate to 2000 beginning in 2012. - Compliance risk strategy adopted in September 2011; a department for risk assessment established and operating. - Measures planned to prevent difficulties when the reverse charge derogation for cereals expires. - Expansion of e-filing and simplification of tax forms/payments toward a one-stop shop: - In December, 87 percent of all tax returns filed to ANAF used the new e-filing facilities, extended to all taxpayer categories and main administered tax liabilities. - By July 2012 finalize takeover of social contribution collections from natural persons required to be insured. ### Financial sector health and policy actions - Key developments and indicators: - Banking sector recorded a loss equivalent to 1.4 percent of average equity over the year. - Ratio of non-performing loans (NPLs) to total loans at end-Q4: 14.1 percent (marginally lower by 0.1 percentage points than previous quarter). - Total provisions at end-December covered 99.5 percent of non-performing loans. - New capital injections of RON 1.6 billion supported system capitalization. - Average capital adequacy ratio at end-December: 14.5 percent. - Policy and regulatory measures: - By end-June ensure tax treatment of bank receivables sold to Romanian firms is neutral to mitigate impaired loans and improve balance sheet efficiency. - NBR to monitor bank practices on loan restructurings to ensure prudent loan-loss provisioning and risk assessment in line with good international practices. - World Bank assessment of insolvency and creditor rights arrangements scheduled for spring 2012. - January 2012 amendments to bank resolution legislation to introduce bridge bank and other stabilization powers and strengthen arrangements to augment Deposit Guarantee Fund (DGF) resources quickly. - Strengthened institutional arrangements and coordination among financial safety net participants: - DGF joined the National Committee for Financial Stability (NCFS). - Joint working group between NBR and DGF established; an MOU to be signed by NBR and DGF by end-February to ensure early warning and information sharing. - NBR and DGF to finalize intra- and inter-agency procedures for bank resolution powers, building on recent EU experience and crisis simulation exercise in spring 2012. - NBR, DGF, and MOPF to review and approve operational preparedness and arrangements by end-April 2012. - Law amending Law 503/2004 on bankruptcy of insurance undertakings to be enacted by end-April 2012. - Authorities will consult with IMF and EC staff before introducing/amending other regulatory framework aspects and avoid adopting initiatives that could undermine debtor discipline (e.g., draft personal insolvency law or debt collecting law). ### Monetary policy and inflation outlook - Recent outcomes and stance: - Headline inflation fell to 3.1 percent in December, within the central bank’s inflation target band for the second year since adopting inflation targeting in 2005. - Drivers of decline: food price deflation from exceptional harvest, disappearance of first-round VAT hike effects, decline in core inflation. - For 2012, given weak domestic demand and muted global food and energy pressures, inflation likely to stay within the Central Bank’s target band of 3+1 percent. - Policy easing: policy rate lowered by 75 basis points in three steps since November. - Monetary conditions described as appropriate; limited impact so far on exchange rate and capital flows from rate cuts. - Upside risks: additional administered price adjustments, possible rebound in domestic food prices, exchange rate depreciation pressures, instability in international financial markets. - Operational policy commitments: - Maintain banks’ reserve requirements ratios unchanged in coming months. - Act judiciously on the monetary policy rate. - Continue regular repo operations as needed to ensure adequate liquidity in the banking system. ### Structural reforms — Transport sector - Strategy and operational steps: - Developing a new general transport strategy and master plan balancing demand and fiscal means, ensuring complementarities across transport modes, and defining medium- and long-term investment priorities. - Expenditure cuts and arrears clearance schemes have improved SOEs’ financial positions in transport. - Finalizing plans for a government-guaranteed loan or budgetary resources to clear CFR rail infrastructure arrears to energy providers by end-June 2012 to realize savings via cancellation of penalties. - Develop by end-March 2012 ways to improve revenue generation and real estate management of transport SOEs, possibly via a special real estate company. - Reconstitute boards and hire private management in SOEs as required by the Corporate Governance Law of November 2011. - Closed 1,000 kilometers of underutilized rail line, bringing CFR network under management closer to goal of 15,500 line kilometers. ### Structural reforms — Energy sector and regulatory changes - Legislative and market measures: - Drafted legislation to transpose the EU 3rd Energy Package, providing for unbundling regime and definition of vulnerable consumers; will consult EC staff and agree with World Bank and IMF on amendments to ensure full financial and operational independence of ANRE. - Approve electricity legislation by emergency ordinance by end-March 2012; gas legislation prepared by end-April 2012. - Implement earlier agreed phasing out of regulated electricity prices in full compliance with EU regulation; sent English translation of electricity roadmap on February 22, 2012 to EC, World Bank, and IMF. - Electricity sector roadmap specifics: - Adjustment of 5 percent in regulated prices to non-residential and residential tariff customers later in 2012. - ANRE to increase share of electricity sourced from deregulated market for non-residential customers: 15 percent in September 2012, reaching 100 percent by end-2013. - Regulated prices to non-residential consumers removed from January 1, 2014. - For households, non-regulated tariffs phased in beginning in 2013 and finishing by 2017. - Apply pass-through mechanism for electricity purchases by distribution companies as provided in electricity supply regulation. - Gas sector measures: - Prepare by end-April 2012 a draft package of tax, royalty and regulatory measures for oil and gas covering exploration, production, storage, distribution and supply; include roadmap for gradual removal of regulated prices and measures to protect vulnerable consumers. - Accelerate negotiations on Inter-Governmental Agreement (IGA) with Russia and pursue gas supply diversification. - Commit to developing a gas trading platform; name a system operator by April 1, 2012 aiming to begin operations on January 1, 2013. - Note: parliamentary override of presidential veto of gas export ban law could lead to program suspension as it contravenes EU single market principles; authorities will seek to avoid such an override. - Termination/renegotiation of bilateral energy contracts concluded outside OPCOM underway: - Short-term un-terminable contracts to be renegotiated to avoid extensions, reduce quantities, adjust prices as permitted, and publish terms. - Ministry of Economy (supported by Ministry of Justice) to assess options to terminate all existing bilateral contracts and inform IFIs by end-February 2012. - New bilateral contracts to be made transparently through OPCOM (electricity) and competitive procedures (gas); bilateral gas contracts to be traded via new gas trading platform when operational. - Prepare by end-March 2012 a report on final end-consumer prices for district heating versus regulator recommendations and municipal budgets, to assess finance of district heating system after Emergency Ordinance 69/2011. ### State-Owned Enterprises (SOEs), corporate governance, and privatization - SOE performance and restructuring: - Preliminary data indicate fourth quarter indicative targets on operating balance and arrears in key companies were met. - Most restructuring plans for central government SOEs submitted; quality varies. - By mid-February 2012 line ministries to send revised plans to MOPF for entities with more than 20 employees or turnover over RON 1 million in 2010. - Privatization strategy and timetable (planned offerings and actions): - First group to be offered by end-April 2012: - Oltchim (sale of remaining public shares to strategic investor) - Transelectrica (SPO of a 15 percent stake plus a later capital increase of about 12 percent) - Transgaz (SPO of a 15 percent stake) - Cuprumin (full privatization) - Second group: - Posta Romana (minority stake) - Romgaz (IPO of a 15 percent stake) - Electro Serv (majority privatization of company created by merger of Transilvania Sud, Transilvania Nord, and Muntenia Nord) - Tarom (IPO of 20 percent) - Appointment of transaction advisors for this group to be completed by April 2012. - Third group: - Hidroelectrica (IPO of 10 percent to increase capital) - Electrica Serv (majority privatization of all remaining regional companies) - Nuclearelectrica (IPO of at least 10 percent via capital increase) - S.C. Electrica Furnizare S.A. (including supply activity transferred from SC Electrica SA, majority privatization) - CFR Marfă (majority privatization) - Appointment of legal advisors for this group concluded by end-April 2012. - Companies to be offered by end-December 2012/early 2013: - New energy producer Hunedoara (to be created by April 2012 by merging power plants in Paroşeni and Mintia and four viable mines of CNH; majority privatization) - New energy producer Oltenia (to be created by merging SNLO and energy complexes in Craiova, Rovinari and Turceni; majority privatization) - Elcen Bucuresti (majority privatization) - Additional SOE measures: - Prepare to resolve Termoelectrica’s financial situation; valuable assets to be extracted or sold and remaining part placed into voluntary liquidation (end-April 2012). - Implementing general corporate governance law: Ministry of Economy solicited bids for firm to assist selection of private management for key majority government-owned SOEs. - New management teams and board members to be selected by end-April 2012 to take office as soon as legally possible; timeline may adjust where significant minority stakes are to be sold. - For SOEs under Ministry of Transport and Infrastructure, process to start by end-February. - Commitment to increase number of SOEs with private management during 2012. ### Other structural reforms and labor/social measures - Labor market and social assistance: - Continuing implementation of labor market and social assistance reforms approved in 2011. - New Social Dialogue Code to begin taking effect in 2012; agreement reached among social partners on sector definitions of collective contracts. - Continued consultation with International Labor Organization (ILO) to ensure Social Dialogue Code respects core ILO conventions. - Social Assistance Law approved by parliament to streamline social benefits and improve social protection efficiency; working on secondary legislation. - New Labor Code contributed to employment recovery and increased share of fixed-term contracts. - Enforcement of new pension law reduced early retirements and fraud rate in handicapped pension applications; however, pensions system deficit remains. - Market entry and competition: - Eliminated undue barriers for opening large surface retail stores in early February 2012 to improve entry into retail markets and maintain competitive environment. *Source: _cr1273 - 12. Improving tax administration and fighting tax evasion are crucial elements of our strategy to* ### 2. Floor on general government overall balance (mln lei) 3/ ### _cr1273 - 2. Floor on general government overall balance (mln lei) 3/ ### Cumulative floor on general government overall balance (in millions of lei) - End-December 2010 (actual) -33,621 - End-March 2011 (actual) -5,254 - End-June 2011 (actual) -11,260 - End-September 2011 (actual) -13,685 - End-December 2011 (actual) -23,837 - End-March 2012 (performance criterion) -3,100 - End-June 2012 (performance criterion) -6,800 - End-September 2012 (indicative) -8,500 - End-December 2012 (indicative) -12,210 - Note: Cumulative figure during calendar year (e.g., March 2012 figure is cumulative from January 1, 2012). ### Quantitative program targets and outcomes (selected) - Floor on net foreign assets (Dec. 31, 2011): Met - Floor on general government overall balance (Dec. 31, 2011): Met - Ceiling on central government and social security domestic arrears (Dec. 31, 2011): Met - Ceiling on general government guarantees (Dec. 31, 2011): Met - Non-accumulation of external debt arrears (Dec. 31, 2011): Met - Indicative targets and other ceilings for Dec. 31, 2011: Met (listed below under Indicative Targets and SOE measures) ### Inflation consultation bands (12-month CPI rate) - Actual / Center point (selected dates): 7.9, 8.0, 8.0, 3.5, 3.7, 3.1, 2.1, 2.4, 3.9, 3.2 - Outer band (upper limit) (selected target/indicative): 4.1, 4.4, 5.9, 5.2 - Inner band (upper limit) (selected target/indicative): 3.1, 3.4, 4.9, 4.2 - Inner band (lower limit) (selected target/indicative): 1.1, 1.4, 2.9, 2.2 - Outer band (lower limit) (selected target/indicative): 0.1, 0.4, 1.9, 1.2 - Consultation mechanism: If observed year-on-year CPI inflation falls outside the outer bands, authorities will complete a consultation with the IMF before requesting further purchases under the program; NBR will discuss with IMF staff if inflation falls outside the inner bands. ### Indicative target on general government current primary spending (excl. EU funds and social assistance, mln lei) - 131,938 - 30,670 - 62,578 - 94,133 - 130,700 - 128,317 - 32,000 - 64,800 - 96,350 - 130,850 ### SOE operational and arrears targets (as defined in TMU) - Floor on operating balance (earnings before interest and tax, net of subsidies) of key SOEs (bn. lei): - -6.8 - -0.7 - -1.8 - -2.4 - -3.9 - -2.0 - -1.5 - -2.2 - -2.7 - -3.2 - Ceiling on stock of arrears of key SOEs (bn. lei): - 17.9 - 19.2 - 19.7 - 18.5 - 15.9 - 14.9 - 17.0 - 15.0 - 12.5 - 9.0 ### Local government arrears and PNDI execution ceilings - Ceiling on stock of local government arrears (bn lei): - 0.91 - 0.82 - 0.81 - 0.82 - 0.80 - 0.75 - 0.70 - 0.50 - 0.45 - 0.30 - Ceiling on the execution of the PNDI program (mln. lei) (cumulative during calendar year): - ... - ... - ... - ... - ... - ... - 200 - 400 - 700 - 1000 ### Ceiling on new general government guarantees issued since end-2008 (face value, bn lei) - End-December 2010 (actual) 7.6 - End-March 2011 (actual) 8.1 - End-June 2011 (actual) 6.0 - End-September 2011 (actual) 5.8 - End-December 2011 (actual) 6.5 - End-March 2012 (performance criterion) 14.0 - End-June 2012 (performance criterion) 14.0 - End-September 2012 (indicative) 14.0 - End-December 2012 (indicative) 14.0 - Program note: Ceiling is set at RON 14 billion but may be adjusted upward by up to RON 9.6 billion for guarantees for financing the Nabucco project. ### Monitoring, definitions, adjustments, and reporting - General government definition: central government, local governments, social security funds (pension, health, unemployment), road fund company, administration of the property fund; includes any new funds or special budgetary/extra-budgetary programs created during the program period (per IMF’s Manual on Government Finance Statistics 2001). - Budget deficit monitoring: measured quarterly through the cash balance of the general government in GFS 1986 classification; authorities to consult with IMF staff on corrective measures if shortfalls occur. - Measurement change: Starting from end-March 2012 performance criterion, budget deficit measured from above the line using budget execution data; expenditure includes works executed under PNDI contracts. - Reporting: MOPF to provide monthly data to measure the deficit from below the line; below-the-line balance includes: - (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. - Reconciliation trigger: If the difference between above-the-line and below-the-line general government deficit exceeds lei 200 million each quarter during 2011 and 2012, MOPF will consult with IMF staff. - Adjustment to performance criterion: For end-March 2012 and end-June 2012, the general government balance performance criterion will be adjusted downward by the amount that capital spending (including spending related to EU funds and arrears reduction plans, but excluding PNDI works) exceeds lei 6,970 million and lei 15,230 million, respectively, up to a limit of lei 1,800 million. *Source: Table and text from the IMF staff report and Technical Memorandum of Understanding (TMU) contained in the provided document.* ### 17. The performance criterion established on the stock in domestic payments arrears of the ### _cr1273 - 17. The performance criterion established on the stock in domestic payments arrears of the ### Central government and social security sector — definition and objective - The performance criterion on the stock in domestic payments arrears of the central government and social security sector contemplates their elimination during the program period. - The stock will be measured net of intergovernmental arrears, but both gross and net arrears will be reported by the government. - In case of need, the government will take corrective measures to prevent the accumulation of new spending arrears. - For the purpose of the program, arrears mean accounts payable past due date by 90 days (in line with ESA95 definitions for expenditures). ### Stock of central government and social security arrears (In billions of lei) - End-December 2010 (actual) 0.19 - End-March 2011 (actual) 0.15 - End-June 2011 (actual) 0.11 - End-September 2011 (actual) 0.10 - End-December 2011 (actual) 0.09 - End-March 2012 (performance criterion) 0.08 - End-June 2012 (performance criterion) 0.06 - End-September 2012 (indicative) 0.04 - End-December 2012 (indicative) 0.02 ### Continuous performance criterion on non-accumulation of external payments arrears (general government) - The general government will not accumulate external payment arrears during the program period. - An external payment arrear is defined as a payment by the general government that has not been made within seven days of falling due. - The performance criterion will apply on a continuous basis. ### Indicative target on general government current primary spending — definition - Defined as spending on personnel, goods and services excluding EU funds (specified under external grant category), subsidies, transfers to public entities, pensions (social security budget in social assistance category), state aid and other spending in other transfers category, Reserve Fund, and other expenditure as classified in the monthly reporting tables. - Actual data (to which the target will be compared) should include payments related to arrears reduction plans. - Cumulative figure during calendar year (e.g., March 2012 figure is cumulative from January 1, 2012). ### Cumulative change in general government current primary expenditures (In millions of lei) - End-December 2010 (actual) 131,938 - End-March 2011 (actual) 30,670 - End-June 2011 (actual) 62,578 - End-September 2011 (actual) 94,133 - End-December 2011 (actual) 128,317 - End-March 2012 (indicative) 32,000 - End-June 2012 (indicative) 64,800 - End-September 2012 (indicative) 96,350 - End-December 2012 (indicative) 130,850 ### Indicative target on the execution of the PNDI program — ceiling (In million of lei) - End-March 2012 (indicative) 200 - End-June 2012 (indicative) 400 - End-September 2012 (indicative) 700 - End-December 2012 (indicative) 1,000 - Cumulative figure during calendar year (e.g., March 2012 figure is cumulative from January 1, 2012). ### Indicative target on local government arrears — definition and objective - The target contemplates no accumulation of new arrears and their reduction during the program period. - In case of need, the government will take corrective measures to prevent the accumulation of new spending arrears. - For the purpose of the program, arrears mean accounts payable past the due date by 90 days (in line with ESA95 definitions for expenditures). ### Stock in local government arrears (In billions of lei) - End-December 2010 (actual) 0.91 - End-March 2011 (actual) 0.82 - End-June 2011 (actual) 0.81 - End-September 2011 (actual) 0.82 - End-December 2011 (actual) 0.75 - End-March 2012 (indicative) 0.70 - End-June 2012 (indicative) 0.50 - End-September 2012 (indicative) 0.45 - End-December 2012 (indicative) 0.30 ### Absorption of EU funds - The EU funds contribution mentioned in the MoU conditionality is to be measured taking into account the eligible expenditure from both the structural and cohesion funds (SCF) and the European Agricultural Fund for Rural Development (EAFRD). ### Monitoring of public enterprises — scope and reporting - Public enterprises are defined as all companies, research institutes and regii autonome with a cumulative public capital share of 50 percent or more, held directly or indirectly by local governments and the central government. - Data shall be reported with operating results by firm and arrears reported at the firm level. ### Aggregate operating balance (earnings before interest and tax) net of subsidies — floor (In billions of lei) - Actual 2010–2011 (selected actuals): - End-December 2010 (actual) -6.8 - End-March 2011 (actual) -0.7 - End-June 2011 (actual) -1.8 - End-September 2011 (adjusted preliminary) -2.4 - End-December 2011 (adjusted preliminary) -2.0 - Indicative 2012 targets: - End-March 2012 (indicative) -1.5 - End-June 2012 (indicative) -2.2 - End-September 2012 (indicative) -2.7 - End-December 2012 (indicative) -3.2 - Notes: - Cumulative figure during calendar year (e.g., March 2011 figure is cumulative from January 1, 2011). - End September and end-December preliminary 2011 data exclude operating balance of S.C. Electrica Furnizare Transilvania Nord S.A. ### Ceiling on stock of arrears for monitored public enterprises (In billions of lei) - Actual 2010–2011 (selected actuals): - End-December 2010 (actual) 17.9 - End-March 2011 (actual) 19.2 - End-June 2011 (actual) 19.7 - End-September 2011 (adjusted preliminary) 18.5 - End-December 2011 (adjusted preliminary) 14.7 - Note: End September and end-December preliminary 2011 data exclude arrears of S.C. Electrica Furnizare Transilvania Nord S.A. - Indicative 2012 ceilings: - End-March 2012 (indicative) 17.0 - End-June 2012 (indicative) 15.0 - End-September 2012 (indicative) 12.5 - End-December 2012 (indicative) 9.0 ### Adjustments and treatment of firm-level changes - If a monitored firm is liquidated, its majority share is privatized, or it is merged with a company not listed, the aggregate targets will be adjusted by the original target for that firm. - If a listed company is split into new companies, both new companies will remain under monitoring. - If listed companies are merged, the newly created companies will remain under monitoring. ### Private management for key state-owned enterprises - Private management will be selected, in line with MEFP ¶21, at least for the following state-owned enterprises: - i) C.N. Poşta Românã S.A. - ii) C.N. Tarom S.A. - iii) S.C. Electrificare CFR S.A. - iv) SNa Lignitului Oltenia S.A./Complexul Energetic Oltenia - v) S.C. Electrica Furnizare S.A. - vi) S.C. Hidroelectrica - vii) C.N. Romarm aparat central - viii) S.C. Oltchim S.A. - Additional companies envisaged for private management in the course of 2012: - i) C.N. Căi Ferate CFR S.A. - ii) S.N. Transport Feroviar de Călători “CFR Călători” S.A. - iii) SN Nuclearelectrica - iv) S.N. Transgaz - v) CN Transelectrica - vi) S.N. Romgaz - vii) C.N. Adm. Port. Maritim Constanta S.A. *Source: Excerpt from _cr1273 PDF chapter on performance criteria and indicative targets (IMF).* ### 32. Performance under the program will be monitored from data supplied to the IMF and EC by ### _cr1273 - 32. Performance under the program will be monitored from data supplied to the IMF and EC by ### Monitoring framework and transmission - Performance under the program will be monitored from data supplied to the IMF and EC by the NBR and the MOPF. - The authorities will transmit promptly to IMF and EC staff any data revisions as well as other information necessary to monitor the arrangement with the IMF and EC. ### To be provided by the Ministry of Finance — periodicity and items - Preliminary monthly data on general government accounts, including public enterprises as defined by ESA95 - Monthly, on the 25th day of the following month - Quarterly final data on project execution under the Program for National Infrastructure Development - Quarterly, on the 25th day past the test date - Quarterly final data on general government accounts, including public enterprises as defined by ESA95 - 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 for the general government - Monthly, with a lag of no more than 35 days past the test date - Final quarterly data on below-the-line financing for the general government - Quarterly, no later than 45 days past the test date - Total accounts payable and arrears of the general government, including local governments - 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 issued by the general government - Monthly, within one month - Preliminary monthly data on general government primary spending, net of EU disbursements - Preliminary monthly data within 25 days - Final quarterly data on general government primary spending, net of EU disbursements - Quarterly, within 35 days from the test date - Preliminary data on the operating balance, profits, stock of arrears, and personnel expenditures for each key public enterprise as defined in ¶22 - Quarterly, within 30 days - Final data on the operating balance, profits, stock of arrears, and personnel expenditures for each key public enterprise as defined in ¶22 - Quarterly, end May for the previous year and end-August for first half of the current year - Data on EU project grants (reimbursements and advances), capital expenditures and subsidies covered by EU advances or eligible for EU reimbursement on EU supported projects specifically agreed with the EU - Monthly, within three weeks of the end of each month - The balance of the TSA in RON - Monthly, within two weeks of the end of each month - The balance of the two foreign currency accounts used for budget financing and public debt redemption purposes (average, and end-of-period) - Monthly, within two weeks of the end of each month - The balance of the privatization receipts registered in the account of the State Treasury, details on any claims on these receipts and projected net outflows - Monthly, within two weeks of the end of each month - Reporting of progress in the implementation of the Romanian public administration's functional review - Quarterly, to be sent two weeks before each mission for each of the 12 ministries ### To be provided by the National Bank of Romania — periodicity and items - 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 and EC staff - Monthly, within 30 days of the end of the month - The 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 - The 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 - The stock of short-term external debt of banks and corporate - 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 - Financial soundness indicators - Monthly, 15 days after the end of each month - Note: Data on solvency should be provided on quarterly basis. - Foreign currency reserves including information on FX market interventions and swaps by the NBR - Bi-weekly - Immediate notification requirements for major reserve events: - The IMF and the EC shall be immediately informed in case of sudden loss of reserves exceeding EUR 600 million, or if the stock of foreign exchange reserves falls below the floor of EUR 23 billion - Immediately, upon occurrence ### Annex — Measures to Improve Performance of SOEs under Monitoring (high-level selections) - C.N. Căi Ferate CFR S.A. - Revise the activity contract by end-February 2012 - Develop ways to improve management of the real estate of the transport sector SOEs, possibly through the establishment of a special real estate company by end-March 2012 - Reduce personnel by 28 positions that were originally with Interventii by end-March 2012 - Reduce personnel and maintenance expenditures and reorganize and rationalize the sectioning points, starting April 1, 2012 - Renegotiate construction and rehabilitation agreement for the railway line Ramnicu Valcea- Valcele and Portile de Fier and identify financing source, including possibility of a state guarantee, by end April - Continue tendering for public service obligations and infrastructure maintenance for 1,600 line kilometers, bringing total under private management to 4,000 kilometers; close lines for which tenders failed, bringing network under management of CFR down to 15.500 line kilometers, by end-April 2012 - Identify, together with the Ministry of Public Finance, possible compensation schemes for debts to be collected from the National Health Insurance Agency to reduce arrears to the general government budget by end-April 2012 - Develop terms of reference and contract consultancy for detailed analysis of the national railway network by end-April 2012 - Use budgetary means and/or a state credit guarantee to reduce arrears to electricity suppliers by end-June 2012 - Implement agreement between CFR-SA and Eurostation to set up a joint venture for modernization of the North Station by end-June 2012 - Repair and put into circulation the Bucharest railway ring for passenger transport by end-July 2012 - Increase by 10 percent y/y rental revenue by end-December 2012 - Appoint private management and board members in the course of 2012, if experience with private management in SOEs is positive - Present a short report on measures implemented during the last month, key findings of studies and new measures envisaged, during first week of every month - S.C. Electrificare CFR S.A. - Appoint private management and board members by mid-2012 - Continue restructuring and modernization program, including reduction of 85 positions by end-2012 (compared with September 1, 2011) - Ensure acquisition of electricity via OPCOM when taking over supply and distribution activity for traction energy for the whole railway system - S.C. Telecomunicatii C.F.R. S.A. - Complete administrative formalities for subordinating SC Telecomunicatii S.A. under the Ministry of Transports and Infrastructure - Continue to elaborate legislation establishing the new framework for supplying telecommunication services within an integrated system - S.N. de Transport Feroviar de Marfă “CFR Marfă” S.A. - Provide analysis on potential merger of maintenance companies by mid-April 2012 - Negotiate arrears cancellation schemes with ministries by mid-March 2012 - Send notification to DG Comp for envisaged state-aid scheme by April 2012 - Appoint privatization consultant for majority privatization by end-April (formerly mid-February 2012) - Publish shares selling announcement by mid-June 2012, with view to conclude privatization by end-October 2012 - Scrap and valorify 3,000 depreciated cars by end-August 2012 - Implement integrated system for assets and management remuneration by end-November 2012 - Reinforce collection efforts for outstanding invoices continuously - S.N. Transport Feroviar de Călători “CFR Călători” S.A. - Provide analysis on potential merger of maintenance companies by mid-April 2012 - Identify compensation schemes for debts collected from the National Health Insurance Agency to reduce arrears by end-April 2012 - Contract consultant to evaluate necessary services for achieving minimum social package by end-May 2012 - Identify financing possibilities for renewing and repairing old rolling stock by end-June 2012 - Scrap and valorify 240 depreciated cars by end-June 2012 - Identify an arrears reduction scheme possibly amounting to 300 mil RON by end-June 2012 - For 2012, after taking over subsidiaries, personnel should not exceed 2011 level - Increase 2012 revenues by 6 percent over 2011 from activities connected to public railway transport - Appoint private management and board members in 2012 if private management experience is positive - S.C. Metrorex S.A. - Adopt new circulation schedules to align transport capacity with market demand by end-June 2012 - Increase revenues by introducing 16 new metro trains into circulation starting early 2013 - Include S.C. Metrorex S.A. in the list of potential beneficiaries of SOP –Transport 2014 – 2020 to use European Structural Funds - C.N. de Autostrãzi si Drumuri Nationale din România S.A. - Customize internal management control standards: by end March 2012, 12 out of necessary 25 standards finalized and implemented - Increase revenues by extending information system for toll system; contract for installation of 63 new fixed control points: - Sign the contract by end April 2012 - Ensure that 50 percent of the fixed control points are functional by end October 2012 - Finalize and take over the information system by end January 2013 - C.N. Tarom S.A. - Redeliver the third Boeing B 737-800 leased-in aircraft (or reduce the rental rate to market prices) by end-March 2012 - Develop restructuring program based on Roland Berger diagnosis and include measures in Annex to the TMU by mid-April 2012 - Publish prospectus for privatization of at least a 20 percent stake via IPO by end-May 2012, with view to conclude privatization by end-June 2012 - Renegotiate contract with Globeground to reduce ground-handling operations costs - Appoint private management and board members shortly after conclusion of privatization - Reduce costs and increase revenues via multiple commercial and operational initiatives - C.N. Poşta Românã S.A. - Hire legal and transaction advisor for capital increase by at least 20 percent by end-March 2012 - Reduce staff by at least 600 employees by end-March 2012 - Reduce postal subunits from 5,835 at end-2011 to below 5,700 by end-April 2012 - Publish prospectus for capital increase of strategic investor by end-May 2012 - Finalize capital increase by end-June 2012 - Implement installment plan for clearance of past tax arrears - Appoint private management and board members shortly after capital increase - S.C. Oltchim S.A. - Select new management team and board members as soon as possible - Publish announcement for SPO by mid-March 2012, with view to conclude privatization around end-April 2012, contingent on DG Comp decision - Neither Oltchim nor the government will acquire the refinery in Arpechim prior to privatization - C.N. a Huilei S.A - Complete transfer to ANAF of non-viable parts of CNH by mid-February 2012 - Create independent company for non-viable mines within 90 days of EC decision on state aid to close mines in line with EU regulations - Offer viable mines in open and transparent tendering process shortly after DG Comp decision - Start CNH liquidation by end-September 2012 - S.C. Termoelectrica S.A. and subsidiaries - Use forced execution by ANAF for Electrocentrale Bucuresti by mid-February 2012 and put it under direct ownership of the Ministry of Economy - Use forced execution by ANAF for Paroseni and Deva by mid-February 2012 and start forming new energy company Hunedoara by merging the two - Extract remaining valuable assets of Termoelectrica via forced execution by ANAF or sell them and place remaining part into voluntary liquidation by end-February 2012 - Put group 1 of Electrocentrale Deva of 210 MW into conservation by end-April 2012 - Appoint legal advisor for majority privatization of new energy company Hunedoara by end-June 2012; appoint transaction advisor by end-August 2012, with view to complete privatization by end-2012 - S.C. Electrocentrale Bucuresti S.A. - Complete forced execution by ANAF against Termoelectrica by mid-February 2012 and put it under direct ownership of the Ministry of Economy - Complete transfer of ownership of CTE Iernut to SNGN ROMGAZ SA in payment of arrears by end-March 2012 - Develop strategy for clearing outstanding payments between Elcen Bucuresti and Radet Bucuresti and Radet Constanta, in conjunction with the Ministry of Economy and the municipalities of Bucharest and Constanta, by end-March 2012 - Appoint transaction advisor by end-August 2012; publish prospectus by end-October 2012, with view to conclude privatization by end-2012 - SNa Lignitului Oltenia S.A. and S.C. Complexul Energetic Turceni/Craiova/Rovinari S.A. - Sign contract with consultant for merger by end-February 2012 - Appoint private management and board members as from formation of new Complexul Energetic Oltenia - Turceni: Reduce personnel by 80 (compared with end-2011) by end-March 2012 - Create new energy producer by merging entities and publish merger in Official Gazette by end-April 2012 - Appoint legal advisor for majority privatization via IPO or to strategic investor by summer 2012; appoint transaction advisor by summer 2012 - Publish prospectus for privatizations by late 2012, with view to conclude privatization by end-2012 or shortly thereafter - Continuous reduction of underground operation of SNLO with aim to terminate it by end-March 2013 - S.C. Hidroelectrica S.A. - Conclude renegotiation of bilateral contracts as permitted to market conditions by February 15, 2012; if not possible, cancel contract where legally permissible - Select new management team and board members by end-April 2012 - Appoint investment bank for IPO by mid-February 2012 - Publish prospectus by end-August 2012; with view to conclude IPO by end-October 2012 - S.C. Electrica S.A. including subsidiaries - Keep remaining 3 distribution subsidiaries in separate companies to avoid competition restrictions - Appoint legal advisor for majority privatization of regional Electrica-Serv companies via IPO or to strategic investor by mid-February 2012 - Transfer own supply activity of SC Electrica SA to SC Electrica Furnizare SA by mid-March 2012 - Appoint investment bank for privatization of all six new companies created by splitting Electrica Serv by end-April 2012 - Appoint investment bank for all other privatizations, including majority privatization of SC Electrica Furnizare SA, by mid-June 2012 - Publish prospectus for privatization of new Electrica Serv company active in Transilvania Sud, Transilvania Nord and Muntenia Nord by end-May 2012, with view to conclude privatization by end-June 2012 - Publish prospectus for all other privatizations by mid-August 2012, with view to conclude privatization by end-October 2012 - File for liquidation for all Electrica-Serv companies for which privatization failed immediately thereafter - Reduce personnel of Electrica in parallel to privatization of subsidiaries and own supply activity *Source: Fourth Review Under the Stand-By Arrangement and Request for Modification of Performance Criteria—Supplementary Information* ### 1. This supplement provides an update on economic and policy developments ### This supplement provides an update on economic and policy developments ### Recent economic activity and short-term outlook - 2011 GDP confirmed annual growth of 2.5 percent, in line with staff expectations. - Q4 GDP showed a slight contraction of 0.2 percent quarterly (+1.9 percent y-o-y). - Composition of demand in Q4 2011: - Private consumption and fixed investment grew faster than expected. - Public consumption and inventories continued to drag down domestic demand. - Export growth slowed, but net exports contributed positively due to a contraction in imports. - High-frequency indicators for January pointed to moderate growth: - Industrial production and construction posted modest gains. - Retail trade volumes, consumer confidence, and employment improved further. - New industrial orders fell. - Q1 GDP growth is expected to be negative due to the adverse impact of severe weather in February. ### Inflation - Annual inflation fell further to 2.6 percent in February (supplement paragraph 3). - Press release reports inflation at 2.56 percent at end-February, reflecting a large decline in food prices and elimination of the first-round effect of the 2010 VAT increase. - Staff expectation: inflation to remain below 3 percent in the first half of 2012, then gradually climb and stay within the central bank’s target band of 3 plus/minus 1 percent. ### Financial markets and external financing - Five year CDS spreads narrowed by around 50 basis points since end-February to near 300 bps. - Equity prices have been stable in March following an increase of over 10 percent in February. - Authorities issued and reopened Eurobond issuance: - Issued a US$ 1.5 billion 10 year dollar-denominated Eurobond in January. - Reopened the issue in late February for another US$ 750 million. - Authorities continue to build foreign currency buffers, including 1 billion Euros from the World Bank DPL-DDO financing, aiming to maintain four months of gross financing needs. - Recent launch of a domestic bond with a 15 year maturity to build the yield curve. ### Fiscal policy and public finances - Pre-election political pressures are rising, increasing risks to the 2012 budget deficit. - Senior officials publicly discussed possible public sector wage increases and/or reductions in social contribution rates. - Authorities reaffirmed commitment to program targets. - 2011 fiscal performance: - Cash deficit target for 2011 was met with a significant margin. - At end-2011 general government arrears amounted to less than 0.2 percent of GDP. - Arrears mostly concentrated at the local government level. - Arrears in registered bills in the health sector have been completely eliminated. - 2012 budget: - Based on a cash deficit of 1.9 percent of GDP, well below 3 percent of GDP on ESA terms. - Measures to achieve target include freezing public wages and pensions and continuing reductions in public employment. - Authorities may consider later increasing the wage bill if economic conditions permit. - Expenditure measures and EU funds: - Authorities approved a list of 100 EU-funded priority projects whose implementation will be strictly monitored. - Possible reduction in national co-financing of EU-funded projects from 15 to 5 percent to free up capital spending. - Health sector reform: - Authorities will implement a comprehensive package to address structural deficits, with a revised draft framework by mid-year. - Framework law to define a publicly provided basic healthcare package and increase private sector involvement (supplementary private insurance and private management of hospitals). - Revenue side: - VAT rate to be kept at 24 percent. - With IMF technical assistance, the tax code will be reviewed to close loopholes and improve efficiency. - Ongoing improvements to tax administration: organizational restructuring, administrative efficiency, risk assessment, taxpayer segmentation, and indirect and audit methods. ### Monetary policy and financial sector - Central bank actions: - Since November 2011, cumulative easing of 75 basis points to 5.5 percent. - Reserve requirements on local and FX currencies maintained. - Central bank remains vigilant to inflation risks, exchange rate pressures, and possible capital outflows. - Banking sector metrics and policies: - Banking system average capital adequacy ratio of 14.5 percent at end-December 2011. - New capital injections of RON 1.6 billion (about 400 million Euros). - Non-performing loans (NPLs) stagnated at 14 percent at end-2011. - Provisioning covered 99.5 percent of NPLs. - Policy actions: revise tax treatment of bank loans sold to Romanian entities to remove tax disincentives; World Bank assessment of insolvency and creditor rights arrangements. - Regulatory and preparedness improvements: - January 2012 amendments to bank resolution legislation introduced bridge bank and stabilization powers and strengthened arrangements to augment the Deposit Guarantee Fund. - Central bank refining contingency measures and stands ready to provide liquidity as necessary. ### Structural reforms and state-owned enterprises (SOEs) - Energy sector: - Government approved a roadmap to gradually adjust regulated electricity prices for non-households, leading to full liberalization of this segment by January 2014. - Gas sector roadmap for deregulation of gas prices targeted by April 2012. - Legislation submitted to transpose the 3rd EU Energy Package, including functional and financial independence of the energy regulator. - Roadmap approved for liberalization of electricity prices for both household and non-household consumers (government approved memorandum on March 14). - New structural benchmark: an increase of 5 percent in the electricity price for both residential and nonresidential consumers by June 30, 2012. - SOE reform actions and status (structural benchmarks): - Undertake SOE reforms including appointment of legal advisors for privatization of CFR Marfa, TAROM, Transelectrica, Transgaz, and Romgaz; preparation of action plans; design mechanisms to facilitate restructuring and securitizing SOE arrears (July 15, 2011) — Partially Met. - Completion of comprehensive review of existing investment portfolio and action plan (Sept. 30, 2011) — Partially Met. - Prepare comprehensive amendments to health care legislation (Dec. 31, 2011) — Partially Met. - Design measures to reduce registration of small VAT payers by 20 percent by end-September 2012 (Dec. 31, 2011) — Met. - Appoint transaction advisor for group 2 and legal advisor for group 3 as specified in MEFP (Feb. 15, 2012) — Partially Met. - Legal advisors were appointed for TAROM, Transelectrica, Transgaz, and Romgaz; legal advisors were also appointed for Electrica Serv and Nuclearelectrica; deadlines for other hires were rescheduled. - Implementation of the new corporate governance law has commenced; three companies will introduce private management this year. - Transport sector: - Measures to cut expenditures and raise revenues continue. - Progress in closing underutilized rail lines and streamlining operations in certain transport SOEs. - Major infrastructure projects using EU funds are advancing; revenues increasing through tariff adjustments and enhanced toll collection. ### Program performance, financing, and risks - IMF Stand-By Arrangement (SBA) status: - Completion of fourth review makes an additional amount equivalent to SDR 430 million (about €500 million, or about US$662 million) available for disbursement. - Total resources currently available under the SBA to Romania: SDR 1.78 billion (about €2 billion, or about US$2.74 billion). - Original SBA approved on March 25, 2011 in the amount of SDR 3,090.6.1 million (about €3.6 billion, or about US$4.77 billion) and came into effect on March 31, 2011. - Authorities indicated they will continue to treat the arrangement as precautionary and do not intend to draw under it. - Executive Board and mission assessments: - All program targets were met for the fourth review; policy implementation remained strong. - Growth resumed after two years of decline, but 2012 outlook weighed down by deteriorating growth prospects in the euro area. - 2012 growth expected to be mainly driven by domestic demand, reaching around 1.5–2 percent. - External position: current account deficit projected to remain around 4–4.5 percent of GDP in 2012, stabilizing at 4.5–5 percent of GDP thereafter. - FDI inflows expected to remain depressed; further privatizations could generate some recovery. - Risks and recommended vigilance: - Recovery vulnerable to adverse developments in international markets and weaker than expected growth in Western Europe. - Spillovers from euro area turbulence could dampen exports and affect capital flows through the banking system. - Banking system risks remain significant due to high NPLs and potential financial spillovers, though sizable capital buffers exist. - Authorities urged to maintain strict spending discipline to meet the 2012 budget deficit target of well below 3 percent of GDP and to continue structural reforms, especially in health care, SOEs, energy, and transport. - Continued supervisory vigilance, contingency planning, and actions to improve tax administration and EU funds absorption are emphasized. *International Monetary Fund — Supplement and Press Release materials (March 2012).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1273.pdf_