Romania—Letter of Intent, Supplementary Memorandum on Economic and Financial Policies, and Technical Memorandum of Understanding

September 13, 2004

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

Use the free Adobe Acrobat Reader to view Table 1 of the SMEFP (12 Kb PDF file)

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

Dear Mr. de Rato:

The attached Supplementary Memorandum on Economic and Financial Policies (SMEFP) specifies understandings reached with staff in discussions during the first review of the Stand-By Arrangement (SBA) that was approved by the IMF Board on July 7, 2004.

In the first half of 2004, our main economic objectives were met. All performance criteria (PCs) were observed, except for the end-June quantitative PC on reducing private sector arrears to the general consolidated budget. On the basis of the corrective actions specified in the SMEFP (paragraph 14), we request a waiver for the nonobservance of this PC and a modification of the September and December PCs on the same indicator. In addition, continuing strong growth in domestic demand, only partly compensated by rapid output growth, necessitates some adjustments of program policies. In line with our decision to tighten fiscal policy, we request a modification of the PC on the general government deficit. The SMEFP also specifies the main elements of macroeconomic policies in 2005.

The Government believes that the policies set forth in the attached SMEFP are adequate to achieve the objectives of its program and ensure sustainable macroeconomic developments in 2004-06, but it will take any further measures that may become appropriate for this purpose. Romania will consult with the Fund on the adoption of these measures, and in advance of revisions to the policies contained in the SMEFP, in accordance with the Fund's policies on such consultation.

/s/ Adrian Nastase Prime Minister Government of Romania

/s/ Mugur Isarescu Governor National Bank of Romania

Supplementary Memorandum of Economic and Financial Policies for
2004-06

I. Introduction

1. This memorandum supplements the Memorandum on Economic and Financial Policies for 2004-06 (MEFP) finalized at the onset of the Stand-By Arrangement (SBA), which was approved by the IMF Board on July 7, 2004, and describes additional policy objectives and measures agreed in the context of the first review under the arrangement.

II. Background

2. Fiscal and monetary policies continue to be in line with the program, but domestic demand has remained stronger than expected. Fiscal tightening, reduction in losses in state-owned enterprises (SOEs), and prudent monetary policies contributed to a reduction in inflation from 14 percent at end-2003 to around 12 percent in July 2004. Moreover, disinflation was achieved without adverse effects on GDP growth, which accelerated to above 6 percent in the first half of 2004. Romania's external position strengthened further, with official reserves increasing to 4.6 months of prospective imports at end-June 2004 from about 3.9 months at end-2003. However, growth in domestic demand has not subsided as expected. As a result, the current account deficit, after declining in Q1, picked up again in Q2. This suggests a need for some additional measures in the remainder of the year to prevent overheating.

3. Fiscal policy has remained on track. The rectified budget approved on July 15 envisaged a general government deficit of 2.1 percent of GDP in 2004. Revenue performance is impressive, owing to our stepped-up efforts to improve collections and the strong economy. To contain accumulation of tax arrears, we have initiated bankruptcy procedures against 65 tax nonpayers among the 452 private companies with the largest arrears to the budget. Despite our efforts, however, we did not observe the corresponding end-June quantitative performance criterion under the program. Corrective measures are described in paragraph 14.

4. Monetary policy has been successful in reducing inflation and increasing foreign reserves. In response to the large surplus in the foreign exchange market of some €1.9 billion in January-June, the NBR lowered the policy interest rate by cumulative 250 basis points since May. However, inflows remain strong, and another €1 billion was purchased in July. Credit growth slowed in most of H1 of 2004, but recently foreign currency-denominated credit picked up again.

5. Further progress has been achieved in structural reforms, particularly in the energy sector. In July, sales-purchase agreements were signed for the privatization of Petrom and the two electricity distribution companies. Moreover, final bids for the two gas distribution companies have been received, and negotiations are near completion. Preparations for the sale of two additional electricity distribution companies and three energy generation complexes are proceeding. Owing partly to the restructuring of the Privatization Agency, only four large loss-making SOEs were sold or liquidated in Q2, instead of six envisaged by the structural benchmark under the program. In line with our determination to restructure state-owned sector, in H1 of 2004, employment in the 72 largest SOEs monitored under the program was reduced by 15,600 employees, or by 3.6 percent. The collections of heating bills have recently increased, but still require attention.

6. We have made decisive progress in improving our governance legislation. In May-June, parliament approved a package of laws strengthening the independence and powers of the judicial system. We have also strengthened the legislation on declaration of assets by government officials and parliamentarians and their close relatives.

III. Economic and Financial Policies in 2004 and 2005

A. Objectives and Strategy

7. Our main objective for the remainder of 2004 is to moderate growth in domestic demand to support disinflation and contain the current account deficit. For this purpose, we have decided to save part of the revenue overperformance and implement further measures to slow growth of foreign currency-denominated credit. Meanwhile, structural reform will continue according to schedule.

8. In 2005, the main elements of our macroeconomic policy package will be as follows: the S-I balance of the broad public sector will be improved by about ¾ percentage point of GDP. This will be achieved by a prudent budget policy, a modest nominal increase in the minimum wage, a prudent wage program for SOEs, and further reforms in the energy, railway and mining sectors. Monetary policy will monitor vigilantly developments in credit and implement further measures if necessary. As always, we stand ready implement additional measures if our current account or disinflation targets come under strain.

B. Fiscal Policy

9. In 2004, we will save part of the revenue overperformance relative to the projection in the first supplementary budget. To this end, we approved a second supplementary budget, which limited additional spending to lei 11,400 billion (prior action). Local governments, over which the central government has only limited control, are expected to increase spending by lei 4,300 billion, reflecting their higher revenue collections. To avoid incurring arrears following higher than expected spending in H1 of 2004, the central government budget allocation for public health will be increased by lei 2,272 billion, while we will take measures to improve spending controls. We will increase subsidies for the mining companies by lei 300 billion, which will facilitate severance payments for further reducing employment. Additional expenditures of lei 2,978 billion will be allocated to the pension fund to compensate for less-than-full CPI-indexation for pensioners that retired before April 1, 2001 and the change in the indexation scheme in 2005. Specifically, pensions will be increased by 5¼ percent for pensioners who retired under law 3/1997 and who receive a pension lower than three times the average gross economy-wide wage. The increase in pensions will be accompanied by shifting the indexation entirely to a CPI basis. Other expenditures will be increased by lei 1,550 billion. The revised deficit target appears in Table 1. We are committed to saving any additional revenue overperformance to further reduce the deficit of the general consolidated budget (excluding local authorities), as demonstrated by the deficit target adjustor (TMU, section III), and will not initiate or approve a third budget rectification of the 2004 budget. If the current account deficit worsens, we will implement additional measures, including expenditure cuts.

10. Fiscal policy in the broad public sector will be tightened in 2005. To keep the current account deficit target no greater than the 2004 one, at below 5½ percent of GDP, we will continue with measures to improve the financial performance of SOEs by adjusting energy prices and implementing tight wage policy in SOEs. The estimated improvement in SOEs' S-I balance will be equivalent to 0.6 percent of GDP. The general government deficit will be limited to 1.5 percent of GDP against the background of lower growth in output than in 2004. The submission of the draft 2005 budget to parliament in line with this fiscal stance is a structural performance criterion (PC) for October 15, 2004. We have also decided to postpone any further decisions on new motorway construction until after the World Bank has completed the study on prioritization of the motorway projects in September 2004.

11. Tax policy in 2005 will further reduce the high tax burden on labor, reduce profit tax and the personal income tax, and facilitate a further improvement in the business climate. We have decided to reduce the still-high social security contribution rates, which are one of the main causes of the widespread gray economy, by 1¼ percentage points. The profit tax will be cut rate from 25 percent to 19 percent, and the tax rate in the lowest bracket of the personal income tax from 18 to 14 percent. At the same time we will freeze the personal income tax exemption in nominal terms at lei 2,000,000. Moreover, we will increase the tax on dividends for resident physical persons from 5 percent to 10 percent and raise excise taxes in line with the schedule agreed with the EU. In 2005, profit tax revenue will benefit from the full-year effect of the elimination of the reduced profit tax rate for exporting activities in 2004. On this basis, we are expecting revenues in an amount of lei 780 trillion and are firmly committed to limit expenditures to lei 819 trillion. We have made the final decision on these tax reforms only after we reached understanding with staff on the details of the expenditure side of the 2005 budget. We will not grant any tax relief for reinvested profits as this would be unnecessary and inefficient, thereby threatening to undermine the success of the profit tax reform (continuous structural benchmark in the original MEFP). Furthermore, we will not broaden the scope of goods and services subject to the reduced VAT rate of 9 percent and refrain from introducing a second reduced VAT rate, including for books and newspapers (continuous structural PC). Should revenue performance deteriorate in the remainder of 2004 to the point of threatening the 2005 budget, the scheduled adjustments in excises taxes would be moved forward from July 1, 2005, to March 1.

12. We will adjust the budget sector wage structure in 2005, which will result in differentiated wage increases, to improve incentives for the most skillful public servants. We have commissioned a study, in cooperation with the World Bank, on the salary structure in the budgetary sector. Based on the results of this study, and in consultation with the World Bank, we will decide on salary increases, including substantial increases for the most qualified 40,000 civil servants. The average nominal increase will be 12.0 percent, with nominal increases taking place on January 1 and October 1. All these reforms will result in maintaining constant spending on budgetary sector wages from the first supplementary 2004 budget in terms of GDP.

13. In 2005 we will implement several measures to ensure the sustainability of the pension system. Already in August 2004, we decided that, starting with 2005, pensions are adjusted only once per year in January, by the rate of projected average inflation in the year. In January 2005, the adjustment will be exceptionally limited to 3 percent, owing to the already implemented adjustments in 2004. (The corresponding decision is a prior action for completing the review.) By April 2005, we will approve amendments to the Pension Law that will accelerate the increase in the retirement age starting on July 1, 2005. Moreover, starting January 1, 2005, the pensions for farmers who were insured under the former farmer pension system will be paid from the state budget.

14. We have stepped up the fight against arrears. To address the nonobservance of the performance criterion, we have identified the 22 companies with an unjustified increase in arrears above lei 20 billion between December 2003 and June 2004 (section V of the TMU). We are determined to cover the shortfall by means of forced execution measures, by issuing a summons of forced execution to the debtor, against 6 companies, while initiating bankruptcy procedures against 3 other companies, where forced execution measures are unlikely to yield results (initiation of forced execution measures and submission of the request for initiation of bankruptcy procedures to court will be prior actions). In addition, AVAS will no longer institute or support any rescheduling or cancellation of budgetary obligations without the prior approval of the Ministry of Finance and consultation with IMF staff for already privatized companies. The Ministry of Finance and the state-owned creditors will insist on proceeding with bankruptcy procedures against the second largest refinery and oppose any kind of judicial reorganization, merger, acquisition, or other related scheme. Moreover, in the fight against tax evasion, by December 2004 we will adopt a comprehensive implementation plan to: (a) eliminate the illegal trade in petroleum products and cigarettes, areas where corruption is perceived to be pervasive; and (b) to fight corruption in customs administration. In addition, we will request technical assistance from the Fund to review the legislation on prevention, discovery, control, and sanction of tax fraud. Expenditure arrears of the budget will be reduced by paying health sector arrears incurred in 2003 by end-September, while private sector arrears are dealt with through bankruptcy procedures as specified in the MEFP (paragraph 17). Meanwhile, Ordinance 37/2004 has reduced arrears in the energy sector, as the Ministry of Public Finance has issued T-bills and bonds to pay the historical debts of the gas distribution companies and the privatized two electricity distributors.

15. In financing the 2005 budget deficit, we will give priority to domestic borrowing to limit supply pressures for private sector credit. Taking into account large expected privatization receipts from abroad, we will limit our Eurobond issuance to not more than €600 million in 2005. Domestic financing will aim at extending the maturity of lei-denominated securities.

16. We will contain the issuance of all external off-budget guarantees in 2005 to 1.6 percent of GDP, somewhat below the 2004 level. Within the ceiling, we will give priority to projects for modernizing the energy sector. We will limit the issuance of domestic guarantees to lei 2,000 billion.

C. Wage Policy

17. To protect the competitiveness of our economy, the minimum wage will be increased only modestly in 2005. We will approve a government decision, stipulating an increase of 10.7 percent in the statutory minimum wage on January 1, 2005, to lei 3,100,000. We will refrain from raising the minimum wage above this level throughout 2005 (continuous structural PC). In negotiations on the national collective contract, government officials will seek to ensure that the minimum wage in this contract does not deviate from the statutory minimum wage. The system of national collective contract will be reviewed in the context of the revisions of the Labor Code as stipulated in paragraph 44 of the MEFP.

18. Our SOE wage policy in 2005 aims at improving the financial performance of 72 large monitored companies by about ¼ percent of GDP. The budgets of the monitored companies, limiting the annual wage bill growth to 4 percent and specifying quarterly targets, will be approved by end-December (structural PC). The target for March 2005 will be a quantitative PC. With the scheduled reduction of employment by an average 9,700 positions, this implies an average gross wage growth of about 7 percent in nominal terms. To strengthen the credibility of our wage bill target, the ministries will block payments equivalent to 4 percent of the quarterly wage bill in monitored SOEs until the last month of the quarter and will release it only after it has become clear that the respective target will be reached.

D. Energy Sector Reforms

19. We remain committed to the energy price increases agreed in the MEFP, including the gas price adjustment scheduled for January 2005 (structural PC in the orginal MEFP). Moreover, we will follow the recommendations from the review of electricity prices that was performed in cooperation with the World Bank by deciding by December 31, 2004, on increasing end-user electricity prices, effective January 1, 2005 (structural PC in the original MEFP), which will facilitate an increase of the hydro-power producer price of at least 90 percent (structural PC), while at the same time deciding to abolishing the national development tax, also effective January 1, 2005 (structural PC).

20. We will immediately initiate liquidation procedures against SOEs which do not follow ORD 37/2004 on the payment of current utility bills and the repayment of arrears. In this regard, we will amend Government Ordinance 115/2003 in accordance with Government Ordinance 37/2004, which will result in the general consolidated budget paying the difference between the real value of shares received by Distrigaz to settle the bill and the unpaid gas bills of Roman accumulated during the period October 2003-February 2004, when most of the company was state-owned.

21. We have approved a reform strategy for the district heating system as an annex to Government Decision 882/2004. We will consult with the World Bank on the implementation of all aspects of the strategy. In addition, by October 15, 2004, we will prepare reports on: (a) the schedule for reducing heat producer subsidies and increasing the National Reference Price in the period 2005-07; (b) the plans for introduction of metering by local administrations as submitted to the ministry of administration and interior (MAI); (c) the master plans on district heating reform submitted to the MAI by local administrations; (d) the restructuring of Termoelectrica's high-cost units ("stranded assets"); and (e) the action plan for implementing the heating strategy with necessary legislation to be implemented, including a thermal energy law and the two-part (binomial) tariff. On January 1, 2005, the producer heating price will be raised in line with increasing costs (structural PC in the original MEFP), while the National Reference Price (the ceiling for producer prices) will be raised in July with a view to eliminating it by end-2007. The government's plan for abolishing the National Reference price will be subject to particular attention in the context of discussions on the forthcoming review.

E. Privatization, Liquidation, and Restructuring

22. We aim to achieve substantial further progress in the privatization of utilities, building on recommendations from the World Bank. As the Petrom sale has to be reviewed by the Competition Council, we remain committed to resolve any issues that might arise from that review as necessary for the successful completion of the deal. The privatization of the two gas distributors is expected to result in the signing the contract by end-October 2004 (structural benchmark), while a privatization strategy for Electrica-Muntenia Sud aiming at receiving final bids by end-July 2005 will be ready by end-December (structural benchmark) and privatization strategies for energy complexes Rovinari, Turceni, and Craiova will be finalized by end-March 2005. Moreover, we will limit the floatation of minority stakes in SOEs, among which Romgaz, on the Bucharest stock exchange to 5 percent of the companies' share capital.

23. We will make speedy progress in divesting the companies under AVAS. In addition to the structural benchmark of privatizing or liquidating six large companies by end-September, we will divest the remaining three by end-2004. We will either privatize or liquidate 15 smaller companies in which AVAS holds a majority share package in Q3, another 20 in Q4 and at least 20 in Q1 of 2005 (the last two targets are structural benchmarks).

24. We remain committed to instilling financial discipline in the railways. By September 15, we will offer again for concession the remaining segments of the 3,000 kilometer railway track that was supposed to be divested by end-June. To prevent accumulation of arrears, the 2005 wage bill in the three railway companies will increase by no more than 8 percent. In addition, there will be no wage increases in the railway sector in the remainder of 2004.

25. In 2005, we remain committed to accelerating the restructuring of the hard coal sector, and the reduction of subsidies and transfers to the mining sector in line with the approved mining sector strategy. In addition to the 5,700 miners laid off by end-July 2004, an additional 2,300 layoffs have been initiated bringing the total reduction in mining sector employment in 2004 to 8,000 by end-September. Utility payments are being monitored closely, and all but one heavy loss-making mine, Baia de Aries, are current on their payments. We have accelerated the closure of this mine with 400 of the 650 miners given redundancy notice on August  15, 2004.

F. Monetary Policy and Banking Issues

26. The NBR will continue to focus on lowering inflation to single digits while managing monetary policy's transition to a new framework. Preparations for the introduction of the new inflation targeting regime will be speeded up, and the confirmation of full-scale implementation of the new framework will follow the accomplishment of two 'dry runs' of the quarterly forecasting cycle.

27. Overperformance on inflation, together with large foreign currency inflows in the first half of the year, indicate room for the NBR to gradually lower the policy interest rate. Lower domestic real interest rates, on the background of continued monetary policy prudence, will improve the composition of bank lending in favor of local currency loans, thus lowering the related risks. Furthermore, a lower policy interest rate would diminish the yield differential between domestic and world markets and hence incentives for large and potentially destabilizing volatile inflows.

28. Meanwhile, credit growth remains of concern. To curb the recent renewed surge in foreign currency-denominated credit, we have decided to increase the reserve requirement for foreign liabilities from 25 percent to 30 percent as of September 1. As of September 1, 2004, we will expand the database of the NBR's Credit Information Bureau to include delinquent loans below lei 200 million. In addition, we will include information on (a) all debit and credit card frauds by cardholders, (b) the exposure of non-resident legal entities, and (c) the total exposure on groups of debtors.

G. Labor Market and Governance

29. Our efforts to strengthen public administration, eliminate corruption and improve the business climate will continue in close cooperation with the EU and the World Bank. In cooperation with the World Bank, we are evaluating the impact of the new Labor Code on the labor market and employment with a view to increasing labor market flexibility. The comprehensive overhaul of the Labor Code in early 2005 will address concerns of the stakeholders, among which are concerns about the Wage Guarantee Fund, the binding nature of collective labor contracts for non-participating employers, the procedures to determine the work load, regulations on hiring and firing, the flexibility of fixed-term contracts, and red tape. The overhaul of the code will be agreed upon with the World Bank within the framework of the EU acquis, and be submitted to parliament by end-March 2005, with a view to implementing the new code on July 1, 2005. We will follow up on the issues raised in the PricewaterhouseCoopers report on SNTR, particularly with regard to the role of the minority shareholder, and publish the results on the web site of AVAS by March 2005.

30. We will approve by end-March 2005 legislation amending Article 24, paragraph 2 of the Law on Ministerial Responsibility (Law 115/1999), to remove immunity for former members of the government.

IV. Program Monitoring

Owing to the forthcoming elections in November 2004, we will seek combined conclusion of the second and the third review in early 2005.

Technical Memorandum of Understanding for Stand-By Arrangement

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

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

Average reserve money is defined as the sum of average currency in circulation outside the NBR and average deposits (required plus excess reserves) of the commercial banks at the NBR for the indicated month. Commercial bank deposits exclude required and excess reserves in foreign exchange for foreign exchange deposits. Data on reserve money will be monitored from the daily indicators data of the NBR, which shall be supplied to the IMF weekly by the NBR. The stock of average reserve money as of March 2004 was lei 111,778 billion.

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

(1) Should reserve requirements be increased/decreased from 18 percent on all required reserves held in lei, the reported reserve money figures would be increased/decreased by the product of the change in the reserve requirements and the programmed deposits for which required reserves are held in lei. The level of the programmed deposits is lei 242,609 billion for June 2004, lei 282,934 billion for September 2004, lei 323,242 for December 2004 and lei 326,329 for March 2005.

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

Average net foreign asset stocks will be converted into lei for the purposes of calculating average net domestic assets at the average monthly lei/U.S. dollar rates specified in consultation with Fund staff. The average stock of NFA is defined as the average of the daily NFA as defined in Section II. The limits will be monitored from daily data on the accounts of the NBR supplied weekly to the IMF by the NBR. The average NDA as of March 2004 was lei -122,235 billion.

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

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

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

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

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

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

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

Net foreign assets of the NBR consist of reserve assets minus foreign liabilities. For the purposes of the program, reserve assets shall be defined as monetary gold, holdings of SDRs, any reserve position in the IMF, and holdings of foreign exchange in convertible currencies by the NBR. Excluded from gross reserves are long-term assets, NBR redeposits at the commercial banks, any assets in nonconvertible currencies, encumbered reserve assets, reserve assets pledged as collateral for foreign loans, reserve assets pledged through forward contracts, and precious metals other than gold. Monetary gold shall be valued at an accounting price of US$407 per ounce and SDRs at US$1.48597 per SDR. NFA stocks are measured at the last working day of the respective month.

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

All assets and liabilities denominated in convertible currencies, other than the U.S. dollar, shall be converted at their respective exchange rates against the U.S. dollar on December 31, 2003. Specifically, €1 = US$1.26145, £1 = US$1.7847, AUD1 = US$0.750, JPY1 = US$0.00934. All changes of definition or valuation of assets or liabilities as well as details of operations concerning sales, purchases, or swap operations of gold shall also be communicated to the IMF staff.

The NFA of the NBR will be adjusted:

(i) upwards/downwards by 100 percent of the excess/shortfall of gross foreign financing¹ from the programmed levels on a cumulative basis from end-March 2004 as follows:

(ii) by the change in the stock of foreign currency denominated Ministry of Finance Treasury Bills including those issued for bank restructuring (on a cumulative basis from end-March 2004. The outstanding stock on March 31, 2004 was US$450.891 million evaluated at the program exchange rates.

(iii) upwards by the amount of foreign currency receipts from large privatizations (sale price above $10 million) (cumulative from end-March 2004), excluding proceeds from the sale of BCR, which are already included in the target.

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

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

The consolidated general government includes the state budget; the budgets of the local authorities; the social protection funds;² the "Special Fund for the Development of the Energetic System", the "Authority for the Sale of State Assets" (AVAS)³, the "National Administration of Roads (AND)"; other extra-budgetary operations of ministries financed by foreign loans; and the counterpart funds created from the proceeds of foreign loans. Any new funds created during the program period to undertake operations of a fiscal nature as defined in the IMF's Manual on Government Finance Statistics will be incorporated within the definition of consolidated general government.

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

For program purposes, net credit of the banking system to the consolidated general government is defined as all claims of the banking system on the consolidated general government less all deposits of the consolidated general government with the banking system. Foreign-currency denominated credit to government outstanding at December 31, 2003 will be converted in U.S. dollars at the end-December 2003 exchange rate and from dollars into lei using the rates specified in consultation with Fund staff. Foreign-currency denominated credit newly issued in 2004 will be valued at the exchange rates specified in consultation with Fund staff. Government loans to banks at an interest rate less than the reference rate of the NBR to finance on lending to economic agents are excluded from government deposits; an agreed listing of the accounts to be treated as government deposits for program purposes is contained in the FAD aide memoir "Romania: Measuring the Fiscal Deficit", Part II, Appendix 11, February 1994.

The deficit target for 2004 will be adjusted downwards by the amount of any excess revenue in the general government budget (excluding local authorities) over the amount of lei 548,246 billion, which represents the revenue estimate in the second supplementary state budget for that year.

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

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

The wage bill targets will be adjusted as follows:

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

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

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

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

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

The following companies have increased their arrears by more than lei 20 billion between December 2003 and June 2004: CSR SA, ROMPETROL SA, TRACTORUL UTB SA, DISTRIBUTION OIL SRL ( RAFO IMPERIAL OIL), ATLAS GIP, ROMAN SA, ARO SA, DIONISOS SA, TRANSPORT PRESTARI SERVICII CU UTILAJE TERASIERE ROVINARI SA, FEPA SA, UZTEL SA, INTERAMERICAN TRADING SRL FILIALA ARAD, RIENI DRINKS SA, CONSTRUCTII FEROVIARE MOLDOVA SA, NOVATEX, HIDROMECANICA SA, REMAR SA, NITRAMONIA SA, ASTESE PRODUCTION SRL, TEROM SA, MAREX SA, HIDROCONSTRUCTIA SA.

From that list, forced execution measures will be applied to the following companies: ROMAN SA, ROMPETROL SA, RIENI DRINKS SA, CONSTRUCTII FEROVIARE MOLDOVA SA, TEROM SA, NITRAMONIA SA

Bankruptcy procedures will be initiated against the following companies: ATLAS GIP SA, DIONISOS SRL, NOVATEX SA

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

The ceiling applies to the outstanding stock of arrears of the set of 72 monitored state-owned enterprises, whose arrears are to be monitored under Emergency Ordinance 79/2001 and Government Decision 393/2004. Under the ordinance, arrears are defined as accounts payable past the due date stipulated explicitly in the contracts, or if no such explicit date exist, 30 days after services/products are provided. The reporting on total arrears will have the following subcategories: to the state budget, to the social security budget; to the local budget; to special funds; and to other creditors. Arrears to the consolidated general government are defined as the sum of the first four categories. Amounts reflecting tax arrears exclusive of penalties will be reported separately. For arrears which have been rescheduled/canceled or reduced by any means rather than a cash payment to the general government, the rescheduled/canceled/reduced amounts (including penalties) will not be counted as arrears reduction, and have to be reported to Fund staff on a monthly basis, as part of the regular monitoring. The report will include a breakdown of arrears to the ten largest creditors for each company. The report will also include data on overdue claims of each of the monitored companies, as reported under Emergency Ordinance 79/2001 and Government Decision 393/2004. For changes to the set of monitored companies owing to privatization or the initiation of bankruptcy procedures, the targets will be adjusted downwards/upwards by the amount of arrears of the companies removed/added to the set. Data for monitoring purposes shall be supplied monthly to Fund staff by the Ministry of Public Finance by at most 35 calendar days after the end of the respective month. The stock of arrears at end-March 2004 was lei 42,262 billion.

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

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

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

The floors on collection rates are defined as follows:

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

(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:

Using these definitions, the collection rate of Termoelectrica including the externalized units at end-December 2003 was 87.9, of Electrica 98.1, and of the two gas companies 98.8. Data for these companies will be collected by the Ministry of Economy and Commerce and reported to the IMF on a monthly basis. Revenue resulting from obtaining shares through debt-equity swaps will be excluded from collections, unless the shares are sold for cash. The Ministry of Economy and Commerce will include in this report data on billings and collections registered by Distrigaz Nord, Distrigaz Sud, Electrica and Termoelectrica, as well as information on possible dis- and reconnections for the following industrial (a) and heating (b) companies.

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

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

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

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

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

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

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

VIII. 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 ceiling applies to the cumulative stock from end-March 2004 of newly guaranteed or assumed domestic debt by the consolidated general government. For program purposes, the assumption of enterprise debt to banks by the consolidated general government and the issuing of a guarantee to assume enterprise debt to banks are treated as being equivalent. This limit includes any loan on which the government pays or guarantees interest, even if the principal is not guaranteed. The consolidated general government is defined in Section III of this attachment. The criterion also applies to the use of AVAS resources for recapitalizing enterprises or as collateral for bank loans. Foreign currency denominated loans will be converted at accounting exchange rates specified in consultation with Fund staff.

This ceiling excludes:

• the contracting or guaranteeing of external debt, for which separate limits are set out in Section IX of this attachment;
  
  
• debt transferred in the process of bank restructuring, privatization or liquidation of state-owned enterprises; and
  
  
• the assumption of debt as a result of an activation of a guarantee or collateral.

Data for monitoring purposes shall be supplied monthly to the IMF by the Ministry of Finance. The stock of guarantees and debt assumed as described in this section was lei 746 billion as of end-March 2004.

IX. Ceilings on Contracting or Guaranteeing of External Debt

The ceilings apply to the cumulative flow since the beginning of each year of newly contracted or guaranteed external debt by the consolidated general government. The consolidated general government is defined in Section III of this attachment. This performance criterion applies not only to debt as defined in point No. 9 of the IMF Guidelines on Performance Criteria with Respect to Foreign debt adopted on August 24, 2000 (Executive Board Decision No. 12274-(00/85)) but also to commitments contracted or guaranteed for which value has not been received. The ceilings also apply to any assumption of loans for debt outstanding which were not previously contracted or guaranteed by the consolidated general government. Excluded from the ceilings are liabilities to the IMF and bridge loans from the BIS, foreign banks, foreign governments, or any other financial institution. Debt falling within the ceilings shall be valued in U.S. dollars at the exchange rate prevailing at the time the contract or guarantee becomes effective. Loans considered concessional are also excluded from the ceilings. Off-budget debt includes all debt to non-budget entities from private sector creditors guaranteed by the Ministry of Finance. Loans for fuel imports for Distrigaz, Romgaz, Termoelectrica, and the 23 heat-producing units which were transferred from Termoelectrica to local authorities, and any further units externalized during the program, are included in the overall ceilings, and the appropriate off-budget guaranteed debt ceilings.

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

The ceiling for 2005 on contracting and guaranteeing external debt with maturity over one year includes an Eurobond in the amount of €600 million In case an Eurobond is not issued or is issued for a smaller amount, the ceiling will be adjusted downwards by 100 percent of the shortfall on a cumulative basis beginning end-March 2005 as follows:

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

The 2005 ceiling will also be adjusted upwards in the amount of those agreements included in the 2004 ceiling but not guaranteed during that year. Those guarantees, and the associated maximum adjustments (to be converted into US dollars at prevailing rates at the time of the transaction) , would be limited to SNR broadcasting for modernization of TVR1 and TVR2 (US$ 70 million), TAROM purchase of 4 aircraft (US$38.5 million), Electrocentrale CET Bucuresti Vest (€122 million), Unit 2 Cernavoda (€223.5 million), CFR (US$30 million), CET PALAS (US$40 million), Transelectrica Brazi Vest (JPY 3000 million), Hidroelectrica modernization of Group VI (CHF 30 million), EBRD Portile de Fer (€ 30 million), Transelectrica Gutinas (€25 millioni), and CET Deva (€33.4 million).

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

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

X. Indicative Targets for Ceilings on Broad Money

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

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

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

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

The amount of total exposure, as reported by the NBR, will include (on a cumulative basis from end-March 2004):

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

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

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

The amount of total exposure will exclude BCR's performance guarantees to the company Romtechnica, incurred before 1989, which are assumed by the state but still kept in BCR accounts as an off-balance sheet item.

Additionally, the NBR will report monthly on total exposure of the banking system to state-owned enterprises with outstanding exposure over lei 100 billion, on a company-by-company basis. The stock of banking sector exposure to state-owned enterprises at program exchange rates as of March 31, 2004 was lei 49,260 billion of which BCR's exposure was lei 17,377 billion.

XII. Indicative Targets on the Total Public Sector Deficit Financing

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

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

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

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

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

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

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

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

The principal providers of data are:

(i) the Ministry of Finance on:

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

(ii) the NBR on:

- leasing operations of ministries and local governments;
- T-bills, issued domestically, held by non-residents;
- T-bills and bonds held by the non-bank public;
- T-bills and bonds in lei and foreign currencies held by banks;

- bank loans in lei and foreign currencies, including to the "National Road Administration" (AND);
- decrease in government deposits in lei and foreign currencies, including deposits of the "National Road Administration"( AND) ;
- externally issued bills and bonds by SOEs without state guarantee,
- external loans to SOEs without state guarantee;
- domestic bank loans to SOEs; and
- decrease in SOEs deposits with domestic banks.

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