Romania and the IMF

Press Release: IMF Completes Fourth Review Under Stand-By Arrangement for Romania, Approves US$158 Million Disbursement and Grants Waivers
October 15, 2003


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

October 3, 2003

Use the free Adobe Acrobat Reader to view the Tables 1–3 (172k PDF file)

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

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

Dear Mr. Köhler:

The attached Supplementary Memorandum on Economic and Financial Policies (SMEFP-3) specifies understandings reached with staff in discussions on the completion of the fourth and final review of our program supported by a Stand-By Arrangement (SBA). Since the start of the program in October 2001, macroeconomic imbalances in our economy have been sharply reduced and structural reforms have advanced as well. All this was achieved in an environment of high growth and rising real incomes.

Macroeconomic developments in the first half of 2003 were generally favorable. We brought inflation down to 14.2 percent in August 2003, overperforming relative to projections. After a sharp reduction in 2002, the current account deficit somewhat exceeded the program target in January-June 2003, but we believe that the implemented policy adjustments will keep it contained within prudent limits. While the increase in foreign reserves lagged behind the program target, the recent improvement in market conditions makes us confident that the annual target for reserve accumulation will be achieved.

The SMEFP-3 specifies corrective measures, most of which are already implemented, to address the nonobservance of three quantitative and one structural performance criteria, for which we request waivers. Based on this, and the observance of other performance criteria under the program, we are requesting the completion of the fourth review under the arrangement.

We believe that the policies and measures described in the attached memorandum are sufficient to achieve the objectives of this program, but we will take any further measures that may become appropriate for this purpose. We will consult with the Fund on the adoption of these measures, and in advance of revisions to the policies contained in the original MEFP, the SMEFP-1, SMEFP-2, and SMEFP-3, in accordance with the Fund's policies on such consultation. Moreover, we will continue discussions on a successor arrangement with a view to ensure sustainable macroeconomic developments in 2004.

Yours sincerely,

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

Supplementary Memorandum on Economic and Financial Policies

I. Introduction

1. Since the conclusion of the third review on April 25, 2003, we have made progress toward achieving the main macroeconomic objectives of our program. However, higher imported energy prices have increased energy sector losses, and the weaker external environment and stronger domestic demand have put pressure on our current account and international reserve targets. These developments have prompted us to implement the corrective measures specified in this memorandum, which supplements the original memorandum as well as the previous two Supplementary Memoranda.

II. Background And Request for Waivers for Non-Observance of Performance Criteria

2. While strong macroeconomic performance has continued in 2003, domestic demand pressures have recently emerged. GDP growth slowed to 4.3 percent in the first half of 2003, reflecting slightly weaker export growth, following a period of exceptionally strong performance. At 14.2 percent in August, CPI inflation fell faster than expected, while rapid economy-wide wage growth and buoyant private sector credit led to a surge in imports, both for capital investment and household spending. As a result, the current account deficit reached 2½ percent of annual GDP in the first semester, exceeding projections by some ¼ percent of GDP. Delayed public and private sector borrowing slowed reserve accumulation in H1, but since then we have restarted purchases in the market and have maintained a comfortable import cover, equivalent to 3.7 months of prospective imports as of end-August.

3. Fiscal policy has been on track. The deficit target for the general government in the first half of the year was met with a considerable margin. Restrained spending and interest savings more than offset weaker social security collections.

4. A temporary reversal in capital flows created difficulties for monetary policy. Facing lower-than-expected public and private sector borrowing in January-June, the NBR accepted some US$250 million loss in reserves, while keeping its interest rate steady and managing the exchange rate in line with the program. In our view, the net outflows and the concomitant excess demand in the foreign exchange market were temporary and at that time did not appear to warrant policy tightening. However, compounded by the widening trade deficit, the end-June NFA of the NBR fell short of the program target by US$625 million, and the NDA target was exceeded by over 20 percent. Gross reserves have recently been replenished with the successful placement of a €700 million sovereign bond and the resumption of the NBR's market purchases in July-September. On the basis of the policy adjustments specified in paragraph 23, we request waivers for the non-observance of these performance criteria.

5. Credit to the non-government sector accelerated further. While the new regulation on loan classification and provisioning introduced in January brought Romanian bank standards in this area in line with international practice, it did not moderate banks' appetite for higher loan exposure as expected. The differentiation of reserve requirements in favor of lei assets, effective as of November 24, led to an increase in lei lending, but foreign currency credit has slowed only slightly since February, resulting in an overall credit expansion of 40 percent in real terms as of June 2003. Nevertheless, the major banks remain well-capitalized and liquid, and provisioning against credit risk is now adequate.

6. Progress in reducing energy sector losses has slowed in 2003. We have kept electricity and heating tariffs indexed to the dollar, as envisaged under the program, but owing to rising fuel prices and the depreciation of the dollar, these tariffs have fallen below cost-recovery levels. Similarly, while we raised the end-user price of natural gas beyond our original plans on July 1, the price of imported gas has increased further, sharply reducing wellhead prices paid to domestic producers. Collection rates of gas and electricity distributors have been in line with the program and are now above 95 percent. Collection in the heating sector has remained weak, however, reflecting non-payment of subsidies by local governments and disruptions in heating sector policy. As a result, the performance criterion on the collection rate of Termoelectrica was missed by 2½ percentage points. Given the corrective actions taken to reduce losses in the energy sector (paragraphs 16-17), we request a waiver for the non-observance of this performance criterion.

7. The January minimum wage increase and cuts in social security contribution rates have resulted in rapid real net wage growth. Net average wages in both the economy and the monitored SOEs increased by about 9 percent in real terms in the first half of 2003. While large-scale employment reduction in SOEs slated for privatization allowed us to meet our June target on the SOE wage bill, recent wage acceleration, and attempts by some companies to divert savings from outsourcing a large number of employees to increasing wages has put at risk the September and December targets. Measures to slow down SOE wage growth, which could endanger our 2003 macroeconomic objectives, are described in paragraphs 14-15.

8. We have made notable progress in privatizing companies under the Authority for Privatization. We implemented over 22,000 layoffs in these companies, thus meeting the end-June structural PC. Moreover, we signed contracts for the sale of seven large companies in Q2, compared with the structural benchmark of six. However, some of these contracts remain to be executed after agreement has been reached on rescheduling their arrears to energy suppliers. We currently have three large companies in the final negotiation phase and expect to sell them by end-September.

9. Privatization in the energy sector is taking more time than initially thought. We received only one non-binding offer for two electricity distribution companies, and are currently in negotiations with the bidder. Delays in approving the privatization strategy for PetROU, the largest company in the country, have resulted in missing our deadline for issuing the tender (June 30). The privatization schedule for the two gas distributors has been pushed backward by six months as the consultant's contract was finalized with a long delay.

10. The negotiations on the EBRD's and the IFC's equity participation in the largest bank BCR commenced in late July. Although technical work has proceeded well, more time than envisaged was needed to finalize the due diligence and hold additional discussions on the bank's institution-building plan, resulting in the non-observance of the end-July structural performance criterion.

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

11. Our main macroeconomic objective for 2003 is to consolidate macroeconomic stabilization, which requires moderation of domestic demand and decisive progress in reducing re-emerging energy sector losses. Despite recent overperformance in disinflation, we maintain our original inflation target of 14 percent for end-2003, as soon-to-be-implemented energy price increases are likely to result in temporary inflation pressures. The current account deficit in 2003 is now projected somewhat higher, at 4¾ percent of GDP, reflecting higher-than-projected wage growth and rapid credit expansion, as well as slowing export demand. Reaching this target requires reducing the broader public sector deficit by about ¼ percent of GDP in the second half of the year, coming from reducing SOE losses. The lower reserve import cover of 3.7 months reflects higher projections for prospective imports, as a result of the import expansion in 2003. We expect that GDP growth will be about 4¾ percent in 2003. Performance in meeting the quantitative performance criteria and indicative targets under the program is presented in Table 1. Table 2 contains the list of prior actions for completing the review and Table 3 outlines our energy price intentions.

A. Fiscal Policy

12. Despite weaker-than-projected revenue and substantial additional expenditure, the supplementary 2003 budget approved in late-August reduced our deficit target to lei 48,920 billion (2.7 percent of GDP):

  • Owing to a shortfall of revenues compared to the original budget of lei 7,733 billion, primarily reflecting weaker-than-expected pension fund collections, and the reduction in the deficit target, we cut expenditures of the general government in the supplementary budget by lei 8,333 billion. Separately, we will cancel arrears of the transport and mining sectors to the general consolidated budget in an amount of lei 1,700 billion and lei 2,500 billion, respectively, while respecting EU state-aid procedures.

  • Moreover, the supplementary budget accommodated additional expenditure equivalent to about 1 percent of GDP, most notably the severance payments under the labor retrenchment program, the doubling in heating-related transfers to low-income households, the payments for utility bills of SOEs that would otherwise have to be disconnected, and additional agricultural subsidies to mitigate the impact of the drought. We have also provided resources in an amount of lei 4,000 billion for the repayment of health institution arrears accumulated in 2002. Should it turn out that the arrears of the health system exceed this amount, we will approve by October 10, 2003 a second supplementary budget providing for the necessary resources. To ensure full transparency of the outstanding arrears in the health system and amounts already cleared, we published at end-August 2003 the report prepared by the National Control Authority (prior action).

  • The revenue shortfall and the additional expenditure will be financed by savings in an amount equivalent to about 1½ percent of GDP, in particular savings in interest expenditures, pension fund expenditure, unemployment fund expenditure, a reduction in capital expenditure and material expenditure, lower-than-forecasted compensatory payments for the non-restitution of land and buildings under Law 10/2001, and the slower-than-expected disbursement of EU grants.

13. The implementation of the comprehensive tax administration reform will continue. We established a tax administration department in the Ministry of Public Finance in early 2003, which will be transformed on January 1, 2004 into a national agency for tax administration to which all regional tax administration directorates will be directly subordinated. Moreover, we have decided to implement the unification of the collection, audit, and enforcement of social security contributions under the Ministry of Public Finance in four steps: (a) Audit and enforcement will be moved to the Ministry of Public Finance by January 1, 2004; (b) we will establish the joint administration of files for large taxpayers by April 1, 2004; (c) we will establish the joint administration of files for small- and medium-size companies by August 1, 2004; (d) we will establish the joint administration of files for self-employed by January 1, 2005. The transfer of the collection function will proceed gradually during 2004.

B. Wage Policy

14. We have decided to implement some adjustments, necessary to meet our wage bill targets for the remainder of the year. First, to prevent a number of companies under the Ministries of Transportation and Agriculture from exceeding their original budgeted wage bills, we will eliminate Christmas bonuses and reduce overtime and night-shift payments as appropriate. Moreover, we decided to lay off 19,300 workers in five railway companies and their subsidiaries (prior action), although we have later reduced this number to 16,500 while implementing offsetting measures to reduce wages in other companies. We have also laid off 4,000 workers in two agricultural companies between August 1 and September 15, 2003 (prior action). Second, as large-scale layoffs in a number of cash-poor companies under the Authority for Privatization have resulted in significant wage bill savings, we have already adjusted these companies' budgeted wage bills down by lei 175 billion and will use the money for paying utility bills. Finally, to prevent the use of wage bill savings resulting from outsourcing a large number of employees for sizable wage increases of the remaining employees, we will cut the budgeted wage bills in a number of industrial companies by lei 375 billion, with the corresponding adjustment in budgeted employment (prior actions). All these measures are expected to result in overall wage bill savings of about lei 900 billion, an amount sufficient to ensure compliance with the annual wage bill target. Details on the execution of these operations are specified in the Technical Memorandum of Understanding (TMU).

15. To strengthen the wage bill target's ex-ante credibility, we will immediately implement several measures. We have blocked 4 percent of the Q3 and Q4 wage bill in the monitored SOEs, which can only be released upon approval of the responsible Minister, after it becomes clear that the respective quarterly target will be reached (prior action). We have also imposed a complete hiring freeze in all monitored companies, except for unique positions, which cannot exceed 200 new employees in total from August 1 to December 31, 2003 (prior action).

C. Energy Sector Reforms

16. To improve the financial performance of the energy sector, we adjusted administered prices as of September 1, 2003 (prior actions), and will implement further measures to reform the pricing system in the energy sector (Tables 2 and 3). To offset losses resulting from higher-than-projected import prices and as a further step toward reaching import parity, we approved a decree on August 18 raising the end-user gas price by 22.5 percent for residential users and by 12.3 percent for non-residential users, which at the time of the decision was intended to result in a U.S. dollar equivalent of US$120/tcm for residential consumers and US$110/tcm for non-residential consumers (prior action), with a view to ensuring a producer (wellhead) price of over US$50/tcm. In line with our commitment to gradually adjust gas prices every quarter with a view to reaching import parity by 2007, we will implement another adjustment of 4 percent in lei prices for residential and non-residential users on November 1, 2003. We will announce, by end-2003, the schedule of future adjustments in gas prices in line with our commitment to reach import parity by 2007, which we consider crucial for providing incentives for new exploration, as recommended in a recent World Bank study, and for facilitating the privatization of Petrom.We also intend to reform the pricing scheme in the gas sector, to avoid having producer prices determined as a residual after import, distribution and storage costs. To mitigate the social impact of the price adjustment, we will provide sufficient budgetary resources for well-targeted transfers to low-income households. To restore cost-recovery pricing, we increased Termoelectrica's electricity tariff by 15 percent and its heating tariff by 14 percent on September 1 (prior action). We also raised all distribution tariffs for electricity by 16 percent, and all end-user electricity tariffs by 17½ percent (prior action). To mitigate the effects of higher energy bills on the most vulnerable households, we have provisioned in the supplementary 2003 budget an increase in the corresponding support allowance by lei 1,300 billion.

17. We will strengthen the fight against the nonpayment of utility bills. We will strictly enforce the disconnection deadlines for both electricity and gas payments, as specified in the TMU. However, throughout 2003, the budget will continue to assume payments of energy bills for a few large loss-makers (Siderurgica, Tractorul, Roman, ARO, C.M. Petrosani, Minvest and Remin), the disconnection of which would be socially disruptive. We will also intensify our efforts to improve collection from households, particularly on heating bills. For that purpose, we will enforce seizure of assets of nonpayers through the judiciary system, as specified in Government Decision 400/2003. Moreover, to ensure full payment of the subsidies to local heating distributors by the local authorities, we will implement the following measures: (a) for a small and predetermined number of local authorities in disadvantaged areas, we will increase the share of the state budget in the total heating subsidies up to 100 percent; and (b) the transfer from the central government to the local authorities of their share in income tax revenue will be contingent on the full payment by the local authorities of the subsidies to the district heating companies.

18. We will speed up the restructuring of the mining sector. In the first half of 2003, we already cut employment in the sector by 4,744 positions. We have also decided to implement additional layoffs of 1,500 employees in the sector before September 15, 2003. In addition, we raised the price of hard coal to the equivalent of $11/Gcal as of September 1, 2003, a level close to import parity (prior action).

19. We will achieve tangible progress in energy sector privatization, building on recommendations from the World Bank. We will invite a binding offer for the ongoing privatization of two electricity distribution companies by end-November, 2003. In close consultation with the World Bank, we will speed up the elaboration of the privatization strategy for the two gas distributors and approve it by November 1, 2003. After finalizing our discussions with the World Bank on the privatization strategy for PetROU, we issued the tender for expressions of interest on August 26, 2003 (prior action), with a view to sign the sale contract before end-March 2004.

D. Privatization and Liquidation

20. We will persevere in our privatization efforts. By September 30, we will finalize the twelve large privatization deals concluded in the first half of 2003 by facilitating the achievement of debt rescheduling agreements between these companies and the energy utilities. We will sell three companies with more than 1,000 employees by end-September.

21. We will initiate liquidation procedures against companies with particularly weak financial results. By September 15, the Authority for Privatization will submit the liquidation files for Rulmenti Slatina and Verachim to court. As regards the perennial large loss-makers ARO and Roman, if no sale purchase agreements for the privatization of these two companies are initialed, the Managing Board of APAPS will make a formal decision to start the liquidation of these two companies by September 25, 2003 (prior action).

22. We remain firmly committed to completing the sale of a minority share package in BCR to the EBRD and IFC. On September 19, we agreed with the EBRD and IFC on the contract (prior action), which was approved by the cabinet on September 25. We now expect the EBRD and IFC boards to approve the operation in late October or early November.

E. Monetary Policy and Banking Issues

23. Monetary policy will continue to pursue gradual disinflation, a strategy which has delivered positive results. The NBR will guide the exchange rate along a path consistent with our inflation target and a sustainable real appreciation, considering movements of the leu against the euro/U.S. dollar basket. Following this policy under the recently re-emerging excess supply on the foreign exchange market, as well as achieving the targeted international reserve accumulation (paragraph 11) would require sizable (sterilized) purchases in the remainder of 2003. To fight off second-round effects from the forthcoming energy price increases, as well as to moderate booming credit, the NBR raised the interest rate by one percentage point on August 6; should this prove insufficient, the Bank will raise rates further or take other appropriate measures.

24. We realize that accelerating credit to the non-government sector poses increasing macroeconomic and financial risks. In addition to raising the policy interest rate, the NBR will continue to exercise close supervision of the most active lenders, including intensified on-site inspections, to ensure adequate credit risk assessment. If necessary, it will impose credit restrictions on imprudent risk-takers. The NBR will conduct stress tests on banks' portfolio on a high-frequency basis, using the methodology developed in the context of the FSAP.

F. Business Climate and Governance Issues

25. Our efforts to improve the business climate and eliminate corruption continue. In cooperation with the World Bank, we will evaluate the impact of the new Labor Code on the labor market and employment and amend it accordingly. We will conduct all privatizations in an open and transparent manner and refrain from introducing measures that impose a burden on private investors. On September 12, we published a report on our efforts to prosecute individuals involved in financial wrongdoings, including FNI, Banca Romana de Scont, and other recent cases (prior action).


Supplementary Technical Memorandum of Understanding
for Stand-By Arrangement

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

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

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

  4. Ceilings on Aggregate Wage Bill of Monitored State-Owned Enterprises and Wage Bill and Employment Adjustments in Selected Companies

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

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

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

  8. Ceilings on Contracting or Guaranteeing of External Debt

  9. Indicative Targets for Ceilings on Average Reserve Money

  10. Indicative Targets for Ceilings on Broad Money

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

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

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

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

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

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

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

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

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

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

Net foreign assets of the NBR consist of reserve assets minus foreign liabilities. For the purposes of the program, reserve assets shall be defined as monetary gold, holdings of SDRs, any reserve position in the IMF, and holdings of foreign exchange in convertible currencies by the NBR. Excluded from gross reserves are long-term assets, NBR redeposits at the commercial banks, any assets in nonconvertible currencies, encumbered reserve assets, reserve assets pledged as collateral for foreign loans, reserve assets pledged through forward contracts, and precious metals other than gold. Monetary gold shall be valued at an accounting price of US$280.4 per ounce and SDRs at US$1.355109 per SDR. NFA stocks are measured at the last working day of the respective month.

For the purposes of the program, foreign liabilities shall be defined as loan, deposit, swap (including any portion of the NBR gold that is collateralized), and forward liabilities of the NBR in convertible currencies including, foreign currency deposits of resident commercial banks at the NBR; IMF purchases; borrowing from international capital markets; and bridge loans from the BIS, foreign banks, foreign governments, or other financial institutions, irrespective of their maturity.

All assets and liabilities denominated in convertible currencies, other than the U.S. dollar, shall be converted at their respective exchange rates against the U.S. dollar on December 31, 1999. All changes of definition or valuation of assets or liabilities as well as details of operations concerning sales, purchases, or swap operations of gold shall also be communicated to the IMF staff.

The NFA of the NBR will be adjusted:

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

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

March 2003

US$50 million

 

June 2003

US$450 million

 

September 2003

US$450 million

 

December 2003

US$620 million.

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

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

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

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

The consolidated general government includes the state budget; the budgets of the local authorities; the social protection funds;2 the "Special Fund for Modernizing Roads", the "Special Fund for the Development of the Energetic System", the "Special Reinsurance Fund", the "Authority for Privatization" (APAPS), the "Fund for the Development of Romanian Agriculture", the "National Administration of Roads (NAR)", other extra-budgetary funds managed by the Ministry of Finance or other Ministries and agencies outside the budgetary framework; other extra-budgetary operations of ministries financed by foreign loans; and the counterpart funds created from the proceeds of foreign loans. Any new funds created during the program period to undertake operations of a fiscal nature as defined in the IMF's Manual on Government Finance Statistics will be incorporated within the definition of consolidated general government.

Under the program, the deficit of the consolidated general government will be measured based on revenue and expenditure data provided by the Ministry of Finance, and also based on "below the line" data, that is, by the sum of domestic and external financing of the budget as well as privatization proceeds received by all entities of the consolidated general government and proceeds from the recovery of bank asset by AVAB. All efforts will be made to reconcile the measurement of the deficit from "below" and from "above the line". However, should these efforts not succeed in eliminating the discrepancies, the respectively higher deficit number will be used for program purposes.

For program purposes, net credit of the banking system to the consolidated general government is defined as all claims of the banking system on the consolidated general government less all deposits of the consolidated general government with the banking system. Foreign-currency denominated credit to government outstanding at December 31, 2001 will be converted in U.S. dollars at the end-December 1999 exchange rate and from dollars into lei using the rates specified in consultation with Fund staff. Foreign-currency denominated credit newly issued in 2001 and 2002 will be valued at the exchange rates specified in consultation with Fund staff. Government loans to banks at an interest rate less than the reference rate of the NBR to finance on lending to economic agents are excluded from government deposits; an agreed listing of the accounts to be treated as government deposits for program purposes is contained in the FAD aide memoir "Romania: Measuring the Fiscal Deficit", Part II, Appendix 11, February 1994.

For program purposes, the ceilings on the quarterly cumulative deficit of the consolidated general government in 2003 will be adjusted downwards by a shortfall of the cumulative quarterly privatization proceeds received by the consolidated general government. Privatization receipts denominated in foreign currency will be converted into U.S. dollars using the exchange rates on December 31, 1999, and from dollars into lei using the rates specified in consultation with Fund staff. The floor for these proceeds is as follows:


 

Floor

Actual


   

(billion of lei)

Cumulative quarterly privatization proceeds of the general consolidated government for 2003:

   
     

   March 31, 2003 (minimum target)

1,000

1,589

   June 30, 2003 (minimum target)

2,000

2,611

   September 30, 2003 (minimum target)

3,000

 
   December 31, 2003 (minimum target)

4,000

 

To achieve the 2003 deficit target the cumulative monthly expenditure entitlements for the state budget during January-June 2003 will be limited to the ceilings agreed with Fund staff. In addition, should the cumulative monthly revenues of the general consolidated budget fall short of the revenue targets agreed with Fund staff, the monthly state budget expenditure ceilings will be adjusted downwards to compensate for this shortfall.


 

Revenue targets

Actual


   

(billion of lei)

Consolidated General Government (excluding "National Administration of Roads"; cumulative total revenues including grants)    
     
January 31, 2003 (actual)     44,246
February 28, 2003 (indicative revenue target)   85,732   82,348
March 31, 2003 (indicative revenue target) 128,797 121,965
April 30, 2003 (indicative revenue target) 177,248 171,187
May 31, 2003 (indicative revenue target) 221,602 216,694
June 30, 2003 (indicative revenue target) 267,507 260,162


  Expenditure ceilings Actual

  (billion of lei)
State Budget (cumulative total expenditure)    
     
   January 31, 2003 (actual)    19,616
   February 28, 2003 (indicative ceiling)   39,901 38,042
   March 31, 2003 (indicative ceiling)   65,215 58,701
   April 30, 2003 (indicative ceiling)   88,987 81,400
   May 31, 2003 (indicative ceiling) 113,120 105,103
   June 30, 2003 (indicative ceiling) 137,764 125,802

IV. Ceiling on Aggregate Wage Bill of Monitored State-Owned Enterprises and Wage Bill and Employment Adjustments in Selected Companies

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

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

The wage bill will be adjusted as follows:

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

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

The wage bills will be measured on a cumulative basis across the different sectors, on a monthly basis. The Ministry of Labor and Social Protection will undertake the responsibility of collecting data from the various line ministries (RAs and national companies) and APAPS (commercial companies), and will report the wage bills and employment figures for each of the monitored enterprises (including aggregate figures for each ministry and for the overall total) to the IMF on a monthly basis. Employment reduction resulting from all forms of outsourcing will be reported in the "externalization" column of the respective tables, with a footnote, if necessary.

B. Wage Bill and Employment Adjustments in Selected Companies

As specified in paragraph 14 of the SMEFP-3, the government will eliminate Christmas bonuses and cut employment in five railway companies (CFR, CFR Marfa, CFR Calatori, SAAF, Metrorex) and their subsidiaries and two agricultural companies (A Padurilor and Imbunatatiri Functiare). In addition, overtime and night-shift mark-ups in the two agricultural companies will be reduced as needed to meet their budgeted wage bills. Layoffs are considered accomplished when personal and irrevocable notifications (after possible appeals are considered) are sent to the employees to be laid off.

The authorities will adjust the budgeted wage bill and the overall budgets of the following companies:

1.  Industrial companies:   
  SN Petrom – lei 250 billion;
  SN Carbune Ploesti – lei   30 billion;
  CN Minvest – lei   30 billion;
  SC Termoelectrica – lei   30 billion;
     
2.  Other companies:   
  RA Rami Dacia – lei   19 billion;
  CN Remin – lei     8 billion;
  SC Romaero – lei     7 billion;
  SC CUG – lei   50 billion;
  SC Faur – lei   66 billion;
  SC Rocar – lei   45 billion;
  SC Tractorul – lei   16 billion;
  Administratia Port Constanta – lei   27 billion;
  AND – lei   26 billion;
  SAAF – lei   11 billion;
  Metrorex – lei     8 billion.

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

The ceiling applies to the outstanding stock of arrears of the set of 76 monitored state-owned enterprises, whose arrears are to be monitored under Emergency Ordinance 79/2001 and Government Decision 866/2001. Under the ordinance, arrears are defined as accounts payable past the due date stipulated explicitly in the contracts, or if no such explicit date exist, 30 days after services/products are provided. The reporting on total arrears will have the following subcategories: to the state budget, to the social security budget; to the local budget; to special funds; and to other creditors. Arrears to the consolidated general government are defined as the sum of the first four categories. Amounts reflecting tax arrears exclusive of penalties will be reported separately. For arrears which have been rescheduled/canceled, the rescheduled/canceled amounts (including penalties) will not be counted as arrears reduction, and has to be reported. The report will include a breakdown of arrears to the ten largest creditors for each company. The report will also include data on overdue claims of each of the monitored companies, as reported under Emergency Ordinance 79/2001. For changes to the set of monitored companies, the targets will be adjusted downwards/upwards by the amount of arrears of the companies removed/added to the set. Data for monitoring purposes shall be supplied monthly to the IMF by the Ministry of Finance. The stock of arrears at end-December 2000 was lei 47.2 trillion.

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

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

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

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

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

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

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

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

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

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

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

Data for these companies will be collected by the Ministry of Industry and reported to the IMF on a monthly basis. Revenue resulting from obtaining shares through debt-equity swaps will be excluded from collections, unless the shares are sold for cash. The Ministry of Industry will include in this report data on billings and collections registered by Distrigaz Nord, Distrigaz Sud, Electrica and Termoelectrica, as well as information on possible dis- and reconnections for the following industrial (a) and heating (b) companies.

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

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

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

The ceilings apply to the cumulative stock from end-September 2001 of newly guaranteed or assumed domestic debt by the consolidated general government. For program purposes, the assumption of enterprise debt to banks by the consolidated general government and the issuing of a guarantee to assume enterprise debt to banks are treated as being equivalent. This limit includes any loan on which the government pays or guarantees interest, even if the principal is not guaranteed. The consolidated general government is defined in Section III of this attachment. The criterion also applies to the use of APAPS resources for recapitalizing enterprises or as collateral for bank loans. Foreign currency denominated loans will be converted at accounting exchange rates specified in consultation with Fund staff. These limits exclude:

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

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

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

  • domestic guarantees for loans for fuel imports for the 22 heat-producing units which were transferred from Termoelectrica to local authorities, to the extent that external off-budget guarantees issued for this purpose (see Section VIII) fall short of US$120 million (i.e., the sum of domestic and external guarantees issued for this purpose must not exceed US$120 million).

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

VIII. Ceilings on Contracting or Guaranteeing of External Debt

The ceilings apply to the cumulative stock for each year of newly contracted or guaranteed external debt by the consolidated general government. The consolidated general government is defined in Section III of this attachment. This performance criterion applies not only to debt as defined in point No. 9 of the IMF Guidelines on Performance Criteria with Respect to Foreign debt adopted on August 24, 2000 (Executive Board Decision No. 12274-(00/85)) but also to commitments contracted or guaranteed for which value has not been received. The ceilings also apply to any assumption of loans for debt outstanding which were not previously contracted or guaranteed by the consolidated general government. Excluded from the ceilings are liabilities to the IMF and bridge loans from the BIS, foreign banks, foreign governments, or any other financial institution. Debt falling within the ceilings shall be valued in U.S. dollars at the exchange rate prevailing at the time the contract or guarantee becomes effective. Loans considered concessional are also excluded from the ceilings. Off-budget debt includes all debt to non-budget entities from private sector creditors guaranteed by the Ministry of Finance. Loans for fuel imports for Distrigaz, Romgaz, Termoelectrica, and the 22 heat-producing units which were transferred from Termoelectrica to local authorities are included in the overall ceilings, while being excluded from the off-budget guaranteed debt ceilings. With respect to new loans contracted to ensure fuel imports for the heating period 2002/2003, they are excluded from the off-budget guaranteed debt ceilings up to an amount of US$200 million for Termoelectrica and Electrocentrale and US$120 million for the transferred heating units. Fuel import loans contracted by Termoelectrica and the transferred heating units are excluded from the ceilings on debt with maturities between one and three years.

Concessional loans are defined as those with a grant element of at least 35 percent of the value of the loan, using currency-specific discount rates based on the commercial interest reference rates reported by the OECD (CIRRS) in effect at the time of contracting or guaranteeing the loan.

The ceilings shall be monitored from data supplied monthly to the IMF by the Ministry of Finance. The stock of debt at end-June 2001 was $1,194 million for maturities over one year ($83 million of which was off-budget), $196 million for the subceiling of debt with maturity of one to three years (none of which was off-budget), zero for debt with less than one year maturity.

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

IX. Indicative Targets for Ceilings on Average Reserve Money

Average reserve money is defined as the sum of average currency in circulation outside the NBR and average deposits (required plus excess reserves) of the commercial banks at the NBR for the indicated month. Commercial bank deposits exclude required and excess reserves in foreign exchange for foreign exchange deposits. Data on reserve money will be monitored from the daily indicators data of the NBR, which shall be supplied to the IMF weekly by the NBR. The stock of average reserve money as of September 2001 was lei 60,442 billion.

The ceilings on average reserve money will be adjusted in the following circumstances:

(1) Should reserve requirements be increased/decreased from 25 percent on all required reserves held in lei, the reserve money targets would be increased/decreased by the product of the change in the reserve requirements and the programmed deposits for which required reserves are held in lei. The level of the programmed deposits is lei 189,866 billion for March 2003, lei 204,549 billion for June 2003, lei 194,983 billion for September 2003 and lei 238,815 for December 2003.

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

X. Indicative Targets for Ceilings on Broad Money

Broad money is defined as the liabilities of the banking system with the non-bank public. Broad money includes foreign currency deposits of residents, but excludes government deposits and deposits of foreign monetary institutions and other non-residents. For the purposes of the program, deposits which are denominated in foreign currency will be converted into lei at the accounting exchange rates specified in consultation with Fund staff.

Data on broad money will be monitored from the monthly data on the accounts of the banks and the banking system, which shall be supplied to the IMF monthly by the NBR. The stock of broad money at program exchange rates as of September 30, 2001 was lei 235,363 billion.

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

Total exposure covers all loans, advances, holdings of debt and off-balance sheet exposure of resident banks to state-owned enterprises. Data on loans will also be reported separately from total exposure. State-owned enterprises are all regis autonomes and commercial companies with majority ownership by the government or APAPS. For the purposes of monitoring, foreign currency denominated debt will be converted in lei at end-month lei/dollar exchange rates specified in consultation with Fund staff. Foreign currency denominated credit in convertible currencies, other than the U.S. dollar, shall be converted at their respective exchange rates against the U.S. dollar as specified in Section II of this attachment. Data on banking sector lending to state-owned enterprises will be monitored from monthly data provided by the NBR.

The amount of total exposure, as reported by the NBR, will include (on a cumulative basis from end-March 2002):

(i) exposure to companies where the majority ownership shifted to the private sector. For this purpose, APAPS and the relevant ministries will provide a monthly update of their portfolio to the NBR;

(ii) any amount of debt or off-balance sheet write-offs;

(iii) any assumption of debt or off-balance sheet items by the government or other public bodies.

Additionally, the NBR will report monthly on total exposure of the banking system to state-owned enterprises with outstanding exposure over lei 100 billion, on a company-by-company basis. The stock of banking sector exposure to state-owned enterprises at program exchange rates as of September 30, 2001 was lei 27,052 billion of which lei 13,541 billion was to BCR.


1Foreign financing is defined as disbursements of balance of payments support loans to the government with a maturity of more than a year from multilateral and bilateral creditors and resources with a maturity of more than one year raised in the international capital markets by the government. This excludes use of IMF resources.
2These include the State Social Security Fund, the Insurance Fund for Work-Related Accidents, the Unemployment Fund, and the Health Social Insurance Fund.