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Romania

Author(s):
International Monetary Fund
Published Date:
January 2012
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I. Introduction and Summary

1. Romania’s recovery continues, but headwinds from the regional economic downturn and financial turbulence have severely weakened future prospects. Preliminary GDP data for Q3 show a strengthening of the recovery, driven by an exceptional agricultural harvest and continued strong industrial output growth. Domestic demand has begun to recover, with growth turning positive in construction and retail sales bottoming out. The labor market is also beginning to recover, as job growth has turned positive and real wages have started to rise. However, the euro area crisis is likely to sharply slow growth in the coming quarters. The net export contribution to growth has already slipped. International financial market uncertainty has produced a sharp rise in CDS spreads, which will feed through into domestic interest rates, slowing investment and consumption. Inflation has eased considerably, and is now expected to be within the authorities’ end-2011 target range (3 percent ± 1 ppt.). The current account deficit is expected to remain below 5 percent of GDP.

2. Romania has continued its strong performance under the new program. The authorities met all performance criteria and indicative targets for the third review. Performance under the structural benchmarks was more mixed. Benchmarks on bank restructuring legislation and governance legislation for SOEs were met. Those on SOE privatization and a review of the investment portfolio were partially met, but are expected to be completed by the time of the Board meeting.

3. The authorities are on track to achieve their 2011–12 deficit targets, but stepped-up efforts are needed on key structural reforms. The 2011 deficit target of 4.4 percent of GDP (in cash terms) will be met, and underspending should give the authorities resources to help pay down arrears in key sectors (health care and SOEs). The 2012 budget has been prepared with the objective of a cash deficit of 1.9 percent of GDP (2.1 percent of GDP including some off-budget expenditures), lower than strictly necessary to attain their 3 percent of GDP objective in ESA terms with the EU. While the tight expenditure control needed to reach this goal will be challenging, no new major policy changes will be required. A freeze in pensions and wages, together with additional EU support for the investment budget should deliver the needed adjustment. Progress on the ambitious structural reform agenda has been mixed. Governance legislation for SOEs has advanced, but deregulation efforts in the energy sector have lagged. SOE reforms have moved well in some firms, while remaining inadequate in others. The government shows continued commitment to the measures agreed, but political opposition is intensifying as the 2012 elections approach.

II. Macroeconomic Developments and Outlook

A. Recent Developments

4. Growth has resumed but the recovery remains fragile. After a tepid rise in Q2, the economy experienced a growth spurt in Q3 owing to a bumper harvest, a recovery in construction, and renewed industrial growth. The recovery in domestic demand, however, remains weak while export growth has stabilized after a slowdown during Q2. Labor market conditions continue to improve. Despite falling public employment, private employment and real wages have turned positive, perhaps reflecting in part the results of recent labor market reforms. In line with the turbulent external environment, consumer confidence has fallen recently, after continuous improvement since the beginning of the year.

Monthly Change in the Number of Employees

(in thousands)

Source: Haver; and IMF staff estimates.

5. Inflation has dropped sharply, reflecting food prices deflation and the removal of VAT base effect. Headline inflation fell to 3.6 percent in October from its peak of 8.4 percent in May. The strong decline in food prices on the back of the strong harvest more than offset the rise in transportation and other administered prices. Underlying inflationary pressures remain muted, with the core inflation1 falling to 2.7 percent in October (from 3.1 percent in July).

Private Consumption and Retail Trade

Source: Haver; and IMF staff estimates.

Inflation

(year-on-year, percent)

Source: European Commission; Haver; and staff estimates.

1/ Price trends over next 12 months.

6. Elevated financial market stress due to euro area turbulence has begun to affect Romania. Since July, the sovereign CDS spread has risen by some 200 basis points, and now exceeds the peak levels seen during the market disturbances last year. High risk aversion on the external markets has led the leu to depreciate by 4 percent since early July. Yields on domestic treasuries have been rising and issuances have sometimes been undersubscribed. The authorities have also postponed a planned dollar-denominated bond issue originally planned for November due to market uncertainties. However, international reserves remain comfortable at €36.3 billion, fully covering short-term debt at residual maturity.

National Currency per Euro

(July 1, 2008 = 100)

Source: Haver; Bloomberg; and IMF staff eatimates.

CDS, 5-years

7. Continued strong trade performance is mitigating the effects on the balance of payments of deteriorating financing conditions. Exports continue to hold up, due to increased market share and the good agricultural harvest, while subdued domestic demand continues to limit import growth. On the financing side, FDI inflows declined by 52 percent in the first nine months of the year compared to the same period last year while corporate sector inflows are now significantly skewed to short-term. On portfolio inflows, non-residents have reduced their exposure to domestic treasury bills from its peak in July.

Export (SA), Import (SA), Trade Balance 12m

(billon euros)

Source: Romanian authorities

B. Macroeconomic Outlook and Risks

8. The recovery is expected to be fragile due to increasing headwinds from regional economic downturn and financial turbulence, while inflationary pressures are expected to subside.

  • Growth is now expected to reach 2 percent in 2011 (up from the 1.5 percent previous forecast), owing to the temporary boost in agriculture production and the gradual recovery in domestic demand. In contrast, in 2012 growth is likely to be less robust than previously foreseen, reflecting the deteriorating external environment and spillover effect into domestic demand via the banking system. Staff now projects 2012 growth to be 1.8 percent, driven by a gradual rise in domestic private demand and increased EU funds absorption. Medium term growth in 2013–16 is expected to remain strong at 3.5–4 percent.

  • Headline CPI inflation is expected to recede to 3.6 percent by end-year, as deflationary pressures in food and energy offset the impact of an administered price hike in November. In 2012, barring significant supply shocks, inflation is likely to fall below 3 percent in the first half of the year due to base effects, and gradually increase toward the upper range of the central bank’s target band of 3 + 1 percent later in the year.

  • The current account deficit is projected to stabilize at around 4¼ percent of GDP in 2011–12. The recent strong growth in exports, particularly in the automotive and agricultural sectors, is expected to improve the trade balance in 2011. Net exports in 2012 are expected to remain broadly stable as import demand slows in line with lower export growth. On the financial account, multilateral financing is expected to be the main source of financing along with government’s medium term external bond placements. The private sector is projected to rollover short term debt with more medium term borrowing over the program period. FDI inflows are forecast to rebound with the help of privatization revenues. Under staff’s baseline scenario, no new financing gap is envisaged, consistent with the program’s precautionary nature.

Inflation Targets and Outcomes

(Percent)

Source: Haver; staff estimates.

Romania: Macroeconomic Outlook
20092010201120122013
Real GDP growth−7.1−1.32.01.83.5
CPI inflation, average5.66.15.93.03.0
CPI inflation, eop4.88.03.63.33.0
Current account balance (% of GDP)−4.2−4.1−4.0−4.4−4.9
Gross international reserves (bn euros)30.936.037.840.339.6

9. Risks to growth are tilted to the downside, while inflation risks are broadly balanced.

  • Growth. A further slowdown in Western European growth could depress exports and dampen consumer sentiment. Spillovers from increased turbulence in the euro area periphery could raise risk premia further and depress capital flows to Romania, adversely affecting investment and fiscal financing prospects. Bank deleveraging as a result of euro area sovereign debt crisis may lead to further credit contraction and drag down the recovery. A disorderly adjustment in the euro area periphery would generate even greater downward pressure on growth via its impact on the banking system. Domestic political tensions and looming elections could also lead to policy reversals, dampening confidence. On the upside, rapid implementation of structural reforms and faster absorption of EU-funded projects could catalyze faster economic growth.

  • Inflation risks appear balanced. On the upside, further exchange rate pressures due to the spill-over from euro area periphery and needed changes in administered prices may create inflationary pressure. Recent wage increase and possible rebound of food prices next year may also push inflation higher. On the down side, the still large negative output gap and slower than expected economic recovery may drive down core inflation further.

III. Policy Discussions

A. Fiscal Policy

10. The authorities remain on track to meet the 2011 cash deficit target. The end-September deficit and primary spending targets were both met by a comfortable margin (0.7 and 0.4 percent of GDP, respectively). While third quarter revenues fell short of expectations, with lower-than-projected excises and delays in SOE dividend payments, tight current expenditure control maintained the deficit well below target. Public employment continued to decline faster than expected, causing underspending on the wage bill. As a result of the third quarter revenue underperformance, the 2011 revenue forecast (excluding arrears reduction schemes and EU grants) has been revised down by 0.2 percent of GDP. The November budget rectification will assure that expenditures remain consistent with the deficit target, while allocating additional funds to the health sector to avoid the accumulation of new arrears, provided that health reforms are on track (MEFP ¶12). The budget supplement will also scale up SOE arrears cancellation schemes introduced at the time of the second review (from 0.3 to 0.5 percent of GDP). These plans are budget-neutral, as transfers to SOEs are offset by the recovery of tax arrears. Finally, the authorities will use any fiscal over-performance relative to the annual target to help SOEs cover their arrears to suppliers.

Fiscal Performance, Third Quarter 2011(billions, RON)
Proj. 1/Act. 2/Difference
Total revenue47.646.6−1.0
Tax revenue39.840.10.3
of which: Excises6.05.2−0.8
Nontax revenue5.84.2−1.6
Grants2.02.10.1
Other0.00.20.1
Total expenditure53.849.0−4.8
Current48.344.9−3.4
Personnel10.79.5−1.2
Goods and services7.17.70.6
Interest2.51.8−0.7
Subsidies1.81.3−0.5
Transfers25.624.0−1.6
Social assistance17.016.9−0.1
Other transfers5.53.4−2.2
EU funds, post-accession2.42.70.4
Other expenditure0.51.00.4
Projects financed from external credits0.50.60.1
Capital5.34.2−1.1
Deficit/Surplus−6.2−2.43.8
Memo item:
Total capital spending10.09.7−0.3
Source: Romanian authorities; and staff projections.

Arrears clearance schemes of 0.1b in VAT and 0.7b in non tax revenues.

Arrears clearance schemes of 0.2b in VAT and 0.6b in social security contributions.

Source: Romanian authorities; and staff projections.

Arrears clearance schemes of 0.1b in VAT and 0.7b in non tax revenues.

Arrears clearance schemes of 0.2b in VAT and 0.6b in social security contributions.

11. The authorities’ 2012 budget targets a cash deficit below 2 percent of GDP. To bring the EU accrual deficit well under 3 percent, the 2012 budget is based on a cash deficit of 1.9 percent of GDP.2 This target leaves scope to accommodate unforeseen shocks and, if economic conditions permit, moderately raise spending in the course of the year. The authorities felt that a prudent approach was warranted to withstand pre-election spending pressures and contain deficit financing costs in the context of an increasingly uncertain external environment. Achieving this ambitious 2012 target will require sustained expenditure restraint, including the following measures:

  • A freeze in public sector wages and pensions and continued reductions in public employment. This decision may be reconsidered during the year if more favorable financing and macroeconomic conditions create fiscal space.

  • Savings in capital expenditures by terminating non-performing projects identified during the prioritization exercise and by reducing the national co-financing of EU-funded projects. Romania should indeed benefit from a new EU regulation allowing program countries to temporarily reduce their co-financing rate from 15 to 5 percent.

  • Other savings will come from means-testing of social programs, cuts in subsidies, and implementation of health sector reforms and restructuring of public enterprises.

  • Some modest revenue measures will also be introduced (Table).

2012 Budget Reform Package(Relative to Unchanged Policy Scenario; In Percent of the 2012 GDP)
Increase in revenues0.3
Excises 1/0.1Excise rate hikes for cigarettes, and diesel
Nontax revenue 1/0.1Increase in royalties for construction material
Capital revenues 1/0.1Sales of buildings
Reduction in expenditures2.1
of which:
Personnel 2/0.5Wage freeze, and employment cuts
Subsidies 3/0.1Cut in district heating subsidy, termination of coal subsidy, and substitution of EU funding for agricultural subsidies
Cofinancing (pre and post-accession) 4/0.6Reduction in cofinancing of EU post-accession projects, and termination of pre-accession programs
Contingency funds 3/0.2Reduction in buffer
Pensions 5/0.5Pension freeze
Social assistance 3/0.1New social assistance code, better targeting of social programs, inspections, and reduction in some benefits
Improvement in the fiscal balance2.4
Source: Romanian authorities and IMF Staff.

Baseline: revenue-to-GDP ratio unchanged from 2011 (excluding arrears cancellation schemes).

Baseline: includes full recovery of 2010 wage cut.

Baseline: 2011 projected expenditure (excluding arrears cancellation schemes).

Baseline: post-accession cofinancing based on 15 percent rule applied to 2012 EU funds.

Baseline: implementation of the pension law for 2012.

Source: Romanian authorities and IMF Staff.

Baseline: revenue-to-GDP ratio unchanged from 2011 (excluding arrears cancellation schemes).

Baseline: includes full recovery of 2010 wage cut.

Baseline: 2011 projected expenditure (excluding arrears cancellation schemes).

Baseline: post-accession cofinancing based on 15 percent rule applied to 2012 EU funds.

Baseline: implementation of the pension law for 2012.

12. The 2012 deficit target measured under the IMF program will be 2.1 percent of GDP, including 0.2 percent of GDP in off-budget expenditures. The authorities have launched the National Program for Infrastructure and Development (PNDI) to invest in rural and small town infrastructure projects, such as water, sewage, roads, etc. They identified about RON 20 billion (4 percent of GDP) of infrastructure projects that will be undertaken over 2012–20. Payment to private contractors will only be made upon completion of the works, so that the cash deficits will not fully reflect spending commitments. In order to capture this off-budget spending, the 2012 fiscal deficit target will be adjusted upward by 0.2 percent of GDP. In any event, this spending will be counted as executed in the ESA deficit as measured by Eurostat, which will still be below the agreed 3 percent threshold in 2012.3 Given Romania’s relatively low debt-to-GDP ratio, staff suggested that a somewhat less ambitious cash deficit could be considered (still within the EU 3 percent accrual target) so as to make fiscal policy more supportive of economic growth. Staff and the authorities agreed, however, that tightening financing conditions might limit their ability to sustain a larger budget deficit.

13. Arrears are decreasing, but challenges remain in local governments and SOEs (MEFP ¶7).

  • Central government and social security arrears met the Q3 performance criterion. In the health sector, arrears in registered bills have now been completely eliminated, but one third of the bills uncovered during the stocktaking exercise have yet to be registered. The adoption of the claw-back tax (prior action) should provide incentives to drug suppliers to reduce overconsumption of compensated medications, while providing budget resources to help pay bills within legal deadlines.

  • In local governments, arrears have leveled off since the second quarter. The new amendments to the local government public finance law have been effective in preventing the accumulation of new arrears, but reducing the stock of existing arrears will require stricter enforcement of the law. Staff recommended that priority local capital projects should be adequately financed through multi-year contracts signed between line ministries and local governments, while low priority projects should be cancelled.

  • Arrears of SOEs declined in the third quarter, but additional measures are needed to continue this improvement (MEFP ¶22–25).4 While the government has implemented transfer schemes amounting to RON 2 billion, arrears declined by only RON 1.3 billion suggesting a rising underlying trend. Additional measures of additional RON 3 billion are under preparation to be implemented before the end of the year.5 The authorities will also continue the SOE restructuring and privatization process to preclude the accumulation of new arrears.

General Goverment Unpaid Bills and Arrears (over 90 Days Overdue)

(billons of RON)

Source: Romanian authorities; IMF staff estimates.

SOE Arrears

(billons of RON)

14. The authorities are conducting reforms to address persistent budgetary shortfalls in the healthcare system (MEFP ¶12).

  • Current reforms aim at containing public health expenditure and enhancing revenues. The reference price of some expensive drugs (C2 list) was revised in September. With the assistance of external consultants, the authorities will reduce the scope of the package of benefits insured by the government by the end of 2011. The claw-back tax mechanism (prior action) will ensure that drug producers bear the cost of drug overconsumption and that spending commitments remain within the allocated budget. Finally, the copayment law for medical services (prior action) is expected to be enacted in the fourth quarter.

  • In 2012–13, the authorities plan to phase in a fundamental restructuring of the health care system. The authorities are preparing a framework law by end-2011 (structural benchmark) to outline the key features of the new system. The reform is expected to scale up the involvement of the private sector in health care provision and financing with a view to enhancing efficiency and raising additional resources.

  • In the medium-term, the Romanian healthcare system should better align resources with needs. Public healthcare spending in Romania is among the lowest in the EU as a share of GDP, and population ageing will aggravate the funding shortfall. As a first step, the authorities ensured that the 2012 budget allocations to the health sector would be consistent with realistic spending programs.

15. The authorities continue to improve their financing strategy. The authorities launched the euro medium-term note program with a first issue in June and plan to continue regular external bond issuances both in euros and dollars. To protect government finances against external shocks, the authorities are building up foreign currency buffers, with a view to achieving four months of gross financing needs. The authorities have also made progress in building the domestic yield curve, but less favorable external market conditions have led them to temporarily reconsider extending further issuance maturities. Technical assistance missions provided by the IMF, European Commission (EC), and World Bank (WB) are also helping to strengthen the authorities’ debt management capacity and strategy.

16. Further efforts are needed to improve the absorption of EU structural funds and the quality of the public investment portfolio. Although the absorption of EU funds has improved continuously since 2010, absorption certified by the Commission remains weak, and difficulties have recently surfaced in some of the reimbursement claims, causing the government to temporarily pause applications. In order to boost absorption, the authorities have approved a list of 100 EU-funded priority projects, whose implementation will be strictly monitored. In addition, they will negotiate with the EC a reallocation of EU funds between operational programs in order to finance additional needs that occurred and were not envisaged for financing within the current 2007–13 programming period. They have also increased accountability of public procurement agencies in the tendering process and are developing standard bidding documents to reduce contested tenders. The authorities have also completed a comprehensive review of the existing investment portfolio and have prepared a database of all government projects. This database will be used to prioritize and evaluate projects to focus on those where funding can be fully secured within a medium-term horizon (e.g., 3–5 years), and to discontinue low priority and non-performing projects that cannot be fully financed within this horizon.

EU Structural and Cohesion Fund Absorption Rate

(In percent of total 2007-13 allocation)

Source: Europan Commission and Romanian authorities.

17. Tax administration reforms continue to aim at reducing collection costs and improving compliance. The authorities are making progress in the areas of risk assessment, taxpayer segmentation, office network reorganization, and indirect audit methods, but sustained improvements in revenue collection have not yet been achieved, as evidenced by the underperformance of the third quarter. One issue identified by past TA reports is the large number of small taxpayers registering for VAT, which diverts resources away from high-income taxpayer audit and service. To address this issue, the authorities have abandoned their plan to introduce a simplified tax regime -perceived as politically too costly- and will adopt administrative measures to tighten VAT registration eligibility criteria (structural benchmark), with a view to reducing the number of VAT registrants by 20 percent by end-September 2012.

B. Structural Reforms

State-Owned Enterprises

18. Reform measures beginning to bear fruit but significant additional effort is needed. The authorities have strengthened the database for monitoring local government SOEs by improving its coverage and data quality. The targets for both the operating balance and arrears for companies under monitoring were met. Additional restructuring measures are being implemented, and plans for arrears reduction and full- and partial- privatizations are advancing, albeit with some delay compared to original plans.

19. Improvements of SOE governance are being implemented. A corporate governance reform for SOEs has been approved which requires regular independent external audits, quarterly publication of financial data, reinforcement of OECD principles on corporate governance and the rights of minority shareholders. This law also ensures appropriate qualification of management and board members, and requires private management experience in the largest SOEs. In addition, the financial control of SOEs has been moved from line ministries to the MOPF.

20. Restructuring of SOEs is progressing, while arrears are being reduced. Restructuring plans are being implemented for about 150 central government SOEs (structural benchmark for July), and plans will be developed by year-end for additional companies newly integrated in the MOPF database. Arrears are expected to be reduced by nearly 1 percent of GDP, and efforts continue for additional arrears reductions, consistent with EU competition regulation on state aid (MEFP ¶7).

Performance of Monitored SOEs

Source: Romanian auhtorities

21. The privatization process is progressing, albeit with some setbacks. The authorities have committed to appoint advisers in several SOEs (prior action).6 However, they have stepped back from its earlier commitment for majority privatization of the remaining public electricity distribution companies. While the deteriorating economic environment may impede timely privatizations, prospects in the energy sector seem still favorable given current price developments.

22. In the energy sector, restructuring measures and regulatory reforms aim at attracting private investment and removing pricing distortions. After unsuccessful efforts to form two national “champions,” the government is implementing an alternative strategy with smaller energy companies, a greater role for private capital, and winding up nonviable operations in coal and thermal energy companies. To avoid further arrears accumulation in district heating companies, local governments are now required to budget and pay for heating subsidies if they set a lower consumer price than recommended by the regulator. To address pricing and regulatory framework deficiencies, the government will approve and submit legislation to Parliament by mid-December 2011 ensuring a complete transposition of the EU 3rd Energy Package, including the independence of the energy regulator (ANRE), an appropriate unbundling regime, and the definition of vulnerable consumers. To better align the CUG formula price with actual costs, as of January 1, 2012, gas prices for non-households will be increased by another 5 percent (prior action). A roadmap for phasing out regulated prices in gas and electricity will be agreed with EC and IMF staff by end-January 2012, which would lay out the path to complete removal of regulated prices for non-households in electricity and gas before end-2013 and for households by end-2015. The authorities will take necessary steps to terminate existing below market bilateral contracts of state-owned gas and electricity generators and new contracts will be conducted with full transparency.

23. In the transport sector, the government is developing a medium-term strategy to enhance infrastructure and increase efficiency in service provision. Major infrastructure projects using EU structural funds are advancing and revenues are increasing through tariff adjustments and enhanced toll collection. Successful renegotiations of existing contracts and application of standard costs will substantially reduce costs in road, urban transport, and rail sectors. Closure for underutilized lines is expected to help achieve the viability of the rail system. Arrears of the passenger and infrastructure rail companies have been reduced via specific schemes and additional steps are under preparation. In addition to the planned privatizations in the national cargo rail company (Marfa) and the national air carrier (Tarom), private professional management will be appointed for all main rail companies and Tarom.

Other Reforms

24. The authorities continue efforts to improve the labor market and the provision of social benefits. Since the new Labor Code entered into force on April 30, more than 1 million new contracts have been signed, of which ⅓ were fixed-term (compared with less than 5 percent historically). The authorities will continue to monitor closely the implementation of the new Labor Code and its effects on labor market outcomes. The implementation of the Social Dialogue Code stalled due to delays in the consultation process with social partners. Staff supports the authorities in their commitment to reach an agreement and to ensure that the new legislation observes EU directives and core ILO conventions. The Social Assistance Law, which aims to streamline social benefits and improve the efficiency of social protection, has been approved by the Parliament and is expected to enter into force in 2012. This will be followed by significant changes in secondary legislation. The overall measures on social benefit reforms will result in fiscal savings of around 0.8 percent of GDP in 2010–13.

C. Financial Sector Policies

25. Tensions in euro area sovereign debt markets continue to weigh upon economic and financial market conditions in Romania. The banking sector as a whole recorded a loss over the year to date due to rising provisions. Non-performing loans (NPLs) rose to 14.2 percent in September and are expected to continue to rise into 2012, with the servicing of restructured and previously performing loans impacted by the slower than expected economic recovery. Provisioning remains prudent, covering some 97 percent of NPLs. This portfolio deterioration produced a decline in capital adequacy so far this year; however, the system remains well-capitalized, with an average ratio of 13.4 percent (down from 15.0 percent at end-2010) and a core tier one capital ratio of 12.9 percent at end-September. The authorities have continued their policy of requesting additional capital from bank owners well before they approach the statutory minimum of 8 percent. While an increase in corporate lending more than offset a slight decline in household lending, credit growth remains weak in real terms. The aggregate exposure to Romanian of the nine largest foreign banks participating in the European Bank Coordination Initiative stood at 99 percent of the March 2009 level.7 However, a loss of parent funding and resulting deleveraging remains a major risk due to the regional economic downturn and financial turbulence.

26. In light of the evolving situation in Europe, the authorities and staff agreed on immediate steps to strengthen the institutional framework and operational preparedness of their financial safety net. The NBR is re-running its liquidity and solvency stress tests to identify where further support would be required from shareholders, under various stress scenarios. The NBR stands ready to provide liquidity as necessary to mitigate segmentation in the interbank market and is placing its contingency plans onto an advanced stage of operational preparedness, ready to deploy as necessary to preserve depositor confidence. Additional amendments to bank resolution legislation will introduce bridge bank powers by end-November, which could be used in the event of a systemic threat. The Deposit Guarantee Fund (DGF) will become a full member of the National Committee for Financial Stability, and the NBR and the DGF will sign a memorandum of understanding to enhance information sharing, early identification of problem institutions, and to finalize resolution plans. A joint working group will also be established between the NBR and the DGF, with adequate expertise and resources to finalize operational arrangements. Legislative amendments will be made to allow quick access from the MOPF to any additional funding needed to fulfill the DGF’s obligations (including for bridge banks and purchase and assumption transactions).

27. The NBR will continue to intensively supervise the banking system and take proactive measures as necessary to ensure that banks have sufficient capital and liquidity. Given the worsening funding conditions and economic outlook, further capital will be required, particularly at some small and medium sized banks with high cost ratios, rising loan impairments, and lower than average provisions. The NBR will continue to actively request further capital injections from shareholders as and when required to maintain regulatory minima. The authorities will shortly finalize the regulatory framework including prudential filters and the neutral tax treatment of provisioning, to substantively preserve the current prudent approach once International Financial Reporting Standards are introduced for the banks at the beginning of 2012. The NBR has tightened the regulatory treatment of banks’ foreign currency lending to households, including via differential loan to value limits for lending in domestic and foreign currency on a hedged and unhedged basis. The authorities will closely monitor the impact of these measures and will recalibrate the limits as necessary to ensure that foreign currency lending remains prudently priced both to reflect the risks to households and to limit the further euroization of lending.

D. Monetary and Exchange Rate Policies

28. The central bank cut its policy rate by 25 basis points amid abating inflationary pressures. In its November board meeting, NBR cut policy rate from 6.25 percent to 6 percent, while maintaining the reserve requirement on local and FX currencies. This is the first policy rate cut since May 2010, as inflationary pressures have eased significantly after the global food and energy prices shocks receded and the first-round effects of the VAT hike played out. The NBR now expects inflation to remain within the target band in 2012 despite the rate cut. Recent tightening of banking liquidity has driven the money market rate closer to the policy rate, potentially strengthening the transmission of monetary policy rates into financial markets in the coming months. The central bank has been active in providing liquidity support to the banking sector by offering weekly repo operations. The exchange rate has also weakened somewhat in recent months, despite some central bank intervention, leading to a easing of the monetary stance. Staff had a somewhat higher inflation forecast for 2012 than the authorities and expressed reservations about the NBR’s rate cut, but noted that its small size would minimize inflationary effects. However, exchange rate pressures and renewed capital outflows will also constrain monetary policy in the future.

Monetary Conditions Index 1/

1/ Weight average of the annual change in the 3-month interbank offer rate and the nominal effective exchange rate (at a ratio of 1.5 to 1)

Source: Bloomberg; IFS and IMF staff estimates.

Interest Rates on RON Instruments

(percent)

Source: National Bank of Romania; and Haver.

29. Romania’s competitiveness remains adequate. Since 2008, the country’s Real Effective Exchange rate (REER) has depreciated by some 7 percent. The world market share of exports has also risen significantly. Assessment based on extended CGER analysis (Country Report No. 11/158, p.15) does not show a misalignment in the currency. Moreover, the depreciation of the leu in recent months has helped further improve competitiveness experienced since mid-2007, as measured by the Real Effective Exchange Rate.

REER 2011/2008 (% change)

Share of World Exports (%)

IV. Program Modalities and Other Issues

30. The attached Letter of Intent (LOI) and Memorandum of Economic and Financial Policies (MEFP) describe the authorities’ progress in implementing their economic program and sets out their commitments through end-March 2012. Some modifications to the program’s conditionality are proposed (Tables 12):

  • Three prior actions are proposed: (i) for appointment of legal advisor for Hidroelectrica, transaction advisor for Oltchim, and Transelectrica, and publication of tender for transaction advisor for Romgaz, Transgaz, and Tarom; (ii) to enact the copayment law and a revised clawback tax law on pharmaceuticals based on the growth in costs above pre-determined threshold; and (iii) for an increase of 5 percent in the CUG gas price for nonresidential consumers, which is essential to help normalize the gas market and ameliorate losses in SOEs.

  • A modification in the end-December NFA target is proposed. The end-year target is unchanged; however an adjustor on the size of the MOPF external bond placement is introduced for end-2011 and end-March 2012, reflecting the risks due to the deterioration of external environment.

  • A modification in the end-December adjustor to the general government balance is proposed. The end-2011 adjustors on non-grant government revenues and capital expenditures are removed; however, adjustors for end-March 2012 are introduced.

  • A modification to a structural benchmark is proposed: (Table 2) the increase in the VAT threshold as part of the simplified taxation system is replaced with an exclusion scheme to deregister small taxpayers from the VAT system. By end-December, this scheme will be designed which will ensure reduction of 20 percent in the number of taxpayers (mainly small ones) by end-September 2012 relative to end-September 2011. This will allow the authorities to stay within the existing VAT regime and avoid tax revenue losses.

  • New structural benchmark is being added: (Table 2) As part of the restructuring and privatization strategy, appointment of transaction advisors for Group 2 and legal advisors for group 3 are proposed. The appointment of advisors is essential for the SOE reform and privatization process, as the privatizations will bring significant additional investment into the transport and energy sectors to boost growth, while significantly improving transparency and operational efficiency.

31. Program modalities. Romania is not expected to face actual balance of payments financing needs in 2011 and 2012 under the baseline scenario, and the Stand-By Arrangement as well as financing commitments from the European Union will continue to be treated as precautionary.

32. Program risks. Romania’s capacity to repay the Fund is expected to remain strong. Fund credit outstanding would peak in 2011 at 38.5 percent of gross reserves. Peak payments would be in 2013–14 at a still manageable 12.7 and 12.1 percent of gross reserves and around 8.4 and 7.2 percent of exports of goods and services. While this exposure remains large, servicing risks are mitigated by the relatively low level of public debt. Public indebtedness (including guarantees) is expected to remain under 36 percent of GDP, with public external debt peaking at around 18 percent of GDP in 2012. Total external debt is projected to peak at under 78 percent of GDP in 2012 and decline in the medium run. In addition, an update of the 2009 safeguards assessment found a robust safeguards framework at the NBR, while recommending measures to sustain NFA reporting standards and effective audit oversight, and enhance accounting disclosures.

33. Fund staff has continued to cooperate closely with the staff of the EC and the WB. Fund, EC and the WB staff have consulted each other regularly regarding economic and policy developments in Romania, and EC and WB staff participated in Fund meetings with the authorities. The EU approved its new precautionary arrangement of €1.4 billion which parallels the new Fund SBA in May. The WB is also expected to approve a €1 billion Deferred Drawdown Option (DDO) for Romania in the second quarter of 2012.

V. Staff Appraisal

34. Risks to Romania’s economic recovery have risen substantially due to the worsening euro area financial crisis. Although growth accelerated in Q3 2011, prospects for 2012 have worsened significantly and further negative shocks cannot be ruled out. These shocks will affect economic prospects via increased stress in the financial sector, reduced export growth, and more difficult sovereign debt financing. The authorities have commendably taken a conservative approach to fiscal planning for 2012, but they will need to aggressively reduce other vulnerabilities to contain risks. The government must continue to build fiscal financing buffers—even at higher interest rates—to guard against possible future market disruptions. The central bank should place a premium on maintaining its current high reserves, while continuing its prudent policies regarding banking sector provisions and capital buffers. Further action to strengthen bank resolution mechanisms and prepare detailed contingency plans will also be important. The Fund precautionary program will continue to provide an important backstop to the authorities’ efforts.

35. Fiscal performance in 2011 has been good, and achievement of the year-end target is highly likely. The authorities’ commitment to tight expenditure control has been very effective, particularly as regards continued reductions in public employment. However, chronic problems in health care spending are a continuing source of fiscal stress. The government’s commitment to improve short-term revenues via copayment and clawback tax measures will help, but only more fundamental reforms will solve the problem. The authorities’ intention to produce a comprehensive reform package by year-end is welcome, but in order to succeed this legislation will have to address not only spending inefficiencies but also the chronic underfunding of the system. Unfortunately, revenue performance slipped significantly in the third quarter, reversing improvements earlier in the year. While steps to reform tax administration continue (supported by Fund technical assistance), these efforts have clearly not been sufficient to improve Romania’s dismal tax yields and more action is urgently required.

36. The authorities have produced a conservative 2012 budget, bringing attainment of their fiscal objectives within reach. The decision to target a deficit of 1.9 percent of GDP in cash terms makes the attainment of the government’s 3 percent EU deficit target in accrual terms highly probable, with the accrual deficit likely undershooting the minimum needed. While this likely overperformance may well boost Romania’s reputation for fiscal probity in these uncertain economic conditions, it comes at a price. Freezes in pensions and salaries for 2012 will make the budget more contractionary, with attendant negative effects in domestic demand and growth. A somewhat higher deficit (still below 3 percent in accrual terms) would still send a positive signal to markets while being less procyclical. For this reason, staff recommends the authorities consider modest increases for public employees and retirees (perhaps reflecting the cost of living) during the course of 2012 if budget conditions permit. Given the restrictive budget, increased absorption of EU funds becomes even more important. With the formation of a new ministry to supervise this absorption, prospects for increased EU-financed investment have improved. But serious obstacles remain, and in an environment of extreme euro area uncertainty, EU-funded investment will provide one of the few clear engines of growth for 2012. Finally, staff is concerned about off budget spending under the PNDI. While including it under the 2012 deficit target should limit its scope, it is a movement away from investment prioritization and transparent fiscal accounting that the authorities should reverse.

37. Implementation of planned structural reforms is essential if sustainable economic growth is to be maintained. Progress has been uneven in reforming public enterprises and in preparation for privatizations, and deregulation in the energy sector has lagged. The authorities need to press forward more firmly on enterprise restructuring, as fiscal space to accommodate large losses is nonexistent, and the external conditions may limit the success of early privatization offers (particularly of minority stakes, where concerns about governance may limit interest). Inefficient or loss-making operations are a waste of resources that Romania can no longer afford. Staff encourages the authorities to be more ambitious in their SOE reform policy, as even the completion of all reforms under the program will still leave a large state-owned sector only partially adapted to the needs of a modern EU state.

38. The authorities’ strongly proactive stance in banking supervision has helped forestall banking sector difficulties, but risks are rising. With more than 80 percent of the banking system controlled by foreign banks (including a number from euro area crisis countries), Romania is particularly vulnerable to the increasing banking sector uncertainties elsewhere in Europe. While capital and liquidity buffers exist in the system, the authorities should step-up efforts to ensure future stability. Enhanced monitoring of banking sector flows should be coupled with detailed contingency plans for any domestic banking problems, as well as for possible contagion from the euro area. The move to develop bridge banking powers is a welcome enhancement of banking resolutions capabilities, but the authorities need to work now to make this new mechanism operational. Efforts to further enhance cooperation with home countries (and other host countries) would also be advantageous, given the continent-wide nature of the challenge. Finally, the authorities also need to remain alert to any difficulties in small local banks.

39. The NBR is now well-placed to meet its inflation targets in both 2011 and 2012. With inflation risks still present, the recent 25 bp cut in the policy rate may have been premature. That said, the subsequent parallel easing by the ECB left the differential unchanged, minimizing negative effects. However, given current uncertainties staff would counsel against further monetary policy easing in the coming months in light of possible capital outflows or renewed downward pressures on the exchange rate. On the monetary operations side, the central bank needs to be prepared to be more active in providing liquidity to address any liquidity shortage in the banking system, particularly as market concerns segment the interbank market.

40. The authorities should develop contingency plans to address the possibility of a significant negative external shock. With fiscal and external imbalances much lower than at the outset of the crisis in 2008 and with support already in place from the IMF and EU, Romania is much better placed to respond to downside risks than previously. A renewed European recession might usefully be addressed by allowing limited use of fiscal automatic stabilizers as long as financing is available. If the crisis were to involve a sudden stop in external financing, Romania might be forced to draw on the precautionary arrangements with the Fund and the EU to provide fiscal financing, while flexibility in the exchange rate together with some drawdown of international reserves would help cover the shortfall in private sector financing flows. Major banking sector difficulties in Europe would require a firm response by the NBR to address the implications for the domestic banking system, with possible financial support from the authorities.

41. On the basis of Romania’s performance under the SBA, staff supports the authorities’ requests for completion of the third review under the arrangement. Staff also recommends approval of the modification of program conditionality, as proposed in the attached MEFP.

Box. The Stand-By Arrangement

Access: SDR 3,090.6 million, 300 percent of quota.

Length: 24 months.

Phasing: SDR 60 million was made available upon Board approval of the arrangement on March 25, 2011, which became effective on March 31, 2011. Two disbursements of SDR 430 million each became available on June 27 and September 29 with the completion of the first and second reviews. SDR 430 million will be made available subject to the completion of this review. Five subsequent disbursements, totally SDR 1340.6 million, are contingent upon completion of the fourth to the eighth review.

Conditionality

  • Quantitative Performance Criteria

    • ➢ A floor on the change in net foreign assets

    • ➢ A ceiling on central government and social security domestic arrears

    • ➢ A floor on the overall general government cash balance

    • ➢ A ceiling on general government guarantees

    • ➢ Non-accumulation of external debt arrears

  • Quantitative Indicative Targets

    • ➢ A ceiling on general government current primary spending

    • ➢ A ceiling on local government domestic arrears

    • ➢ A floor on the operating balance and a ceiling on arrears of the key loss-making SOEs

    • ➢ A ceiling on the execution of the PNDI program

  • A consultation band around the 12-month rate of inflation of consumer prices

  • Prior Action

    • ➢ Appoint legal advisor for Hidroelectrica, transaction advisor for Oltchim, Transelectrica and publish tender for transaction advisor for Romgaz, Tarom and Transgaz.

    • ➢ Enact the copayment law and the revised clawback tax law.

    • ➢ Increase gas price for non-resident consumers, in order to further align with CUG formula, by 5 percent.

  • Structural Benchmarks

    • ➢ Undertake SOE reforms, including (i) Appointment of legal advisors for privatization of CFR Marfa, TAROM, Transelectrica, Transgaz, and Romgaz; (ii) Preparation of action plans for the remaining SOEs of the central government; (iii) Design mechanisms to facilitate restructuring and securitizing SOE arrears. July 15, 2011.

    • ➢ Completion of a comprehensive review of the existing investment portfolio, which will prioritize and evaluate existing projects to focus on those where funding can be fully secured, examine the viability of old projects, with low priority and unviable ones discontinued, and production of a final report and an action plan. September 30, 2011.

    • ➢ Selection of advisors for SOE reform (i) Select transaction advisors for group 1 and (ii) legal advisors for group 2. October 31, 2011

    • ➢ Amend legislation to allow the use of the deposit guarantee fund resources to facilitate bank restructuring, including purchase and assumption transactions. September 30, 2011

    • ➢ Approve legislation to improve governance of SOEs. October 31, 2011

    • ➢ Prepare comprehensive amendments to the health care legislation to address the persistent budgetary shortfalls and to ensure high quality health care services. December 31, 2011.

    • ➢ Appoint transaction advisor for group 2 and legal advisor for group 3 as specified in MEFP. February 15, 2012 (proposed)

    • ➢ Design an exclusion scheme to remove from the VAT regime 20 percent of small taxpayers that are below the threshold level by end-September 2012 (compared to end-September 2011). December 31, 2011 (modified)

Figure 1.Romania: Real Sector, 2007-11

Source: Haver.

Figure 2.Romania: External Sector, 2007-11.

Source: Haver.

1/ 2011Q1 is a projection for year 2011.

Figure 3.Romania: Labor Sector, 2007-11

Source: Haver.

Figure 4.Romania: Monetary Sector, 2005-11

(Percent)

Source: Haver; Romania National Bank; Consensus Forecast; IMF staff estimates.

1/ Price Trends over next 12 Months.

Figure 5.Romania: Fiscal Operations, 2005-12

(Percent of GDP)

Source: Romania National Authorities.

Figure 6.Romania: Financial Sector, 2007-11

Source: Dxtime; Romania National Bank.

Figure 7.Romania: Financial Developments

Source: Bloomberg; Haver.

Figure 8.Romania: Public Debt Sustainability: Bound Tests 1/

(Public debt in percent of GDP)

Sources: International Monetary Fund, country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ Permanent ¼ standard deviation shocks applied to real interest rate, growth rate, and primary balance.

3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2010, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

Figure 9.Romania: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ Permanent ¼ standard deviation shocks applied to real interest rate, growth rate, and current account balance.

3/ One-time real depreciation of 30 percent occurs in 2012.

Table 1.Romania: Quantitative Program Targets
201020112012
DecMarchJuneSeptDecMarchJuneSeptDec
ActualActualActualProg.Prelim.Prog.Prog.IndicativeIndicativeIndicative
I.Quantitative Performance Criteria
1.Floor on the change in net foreign assets (mln euros) 1/2/20,0261191896−150292.85000250250250
2.Floor on general government overall balance (mln lei) 3/−33,621−5,254−11260−17,500−13,685−23,953−3,100−6800−8500−12210
3.Ceiling on stock of central government and social security arrears (bn lei)0.190.130.110.150.100.100.080.070.060.05
4.Ceiling on general government guarantees issued since end-2008 (face value, bn lei)7.68.16.014.05.814.014.014.014.014.0
II.Continuous Performance Criterion
5.Nonaccumulation of external debt arrears0000000000
III.Inflation Consultation
6.12-month rate of inflation in consumer prices
Outer band (upper limit)6.25.74.14.45.95.2
Inner band (upper limit)5.24.73.13.44.94.2
Actual/Center point7.98.08.04.23.53.72.12.43.93.2
Inner band (lower limit)3.22.71.11.42.92.2
Outer band (lower limit)2.21.70.10.41.91.2
IV.Indicative Target
7.Ceiling on general government current primary spending (excl. EU funds and social assistance, mln lei)131,93830,67062,57896,35094,133130,70031,60063,40093,900128,300
8.Floor on operating balance (earnings before interest and tax, net of subsidies) of key SOEs. 4/ (as defined in TMU (bn. lei))−6.8−0.7−1.8−3.6−2.4−4.0−1.5−2.2−2.7−3.2
9.Ceiling on stock of arrears of key SOEs (as defined in TMU (bn. lei)) 4/17.919.219.719.218.515.917.015.010.05.0
10.Ceiling on stock of local government arrears (bn lei)0.910.820.810.850.820.800.700.600.500.40
11.Ceiling on the execution of the PNDI program (mln, lei) 5/2004007001000

The end-December 2010 figure is a stock.

Cumulative flows relative to previous year end stock. 2011 September target is adjusted down from 250 million to -150 million due to the delayed disbursement of 400 million from World Bank.

Cumulative figure during calendar year (e.g. March 2011 figure is cumulative from January 1, 2011).

Adjusted indicative targets for end-September and end-December.

Cumulative figure during calendar year (e.g. March 2012 figure is cumulative from January 1, 2012).

The end-December 2010 figure is a stock.

Cumulative flows relative to previous year end stock. 2011 September target is adjusted down from 250 million to -150 million due to the delayed disbursement of 400 million from World Bank.

Cumulative figure during calendar year (e.g. March 2011 figure is cumulative from January 1, 2011).

Adjusted indicative targets for end-September and end-December.

Cumulative figure during calendar year (e.g. March 2012 figure is cumulative from January 1, 2012).

Table 2.Romania: Performance for Third Review
MeasureTarget DateComment
Prior Action
1. Appoint legal advisor for Hidroelectrica, transaction advisor for Oltchim, Transelectrica, and publish tender for transaction advisor for Romgaz, Tarom and Transgaz.
2. Enact the copayment law and the revised clawback tax law.
3. Increase gas price for non-resident consumers, in order to further align with CUG formula, by 5 percent.
Quantitative performance criteria
1. Floor on net foreign assetsSept. 30, 2011Met
2. Floor on general government overall balanceSept. 30, 2011Met
3. Ceiling on central government and social security domestic arrearsSept. 30, 2011Met
4. Ceiling on general government guaranteesSept. 30, 2011Met
5. Non-accumulation of external debt arrearsSept. 30, 2011Met
Quantitative Indicative Target
1. Ceiling on general government current primary spendingSept. 30, 2011Met
2. Floor on operating balance of key SOEsSept. 30, 2011Met
3. Ceiling on stock of arrears of key SOEsSept. 30, 2011Met
4. Ceiling on stock of local government arrearsSept. 30, 2011Met
Inflation consultation band
Inner bandSept. 30, 2011Met
Outer bandSept. 30, 2011Met
Structural benchmarks
1. Undertake SOE reforms, including (i) Appointment of legal advisors for privatization of CFR Marfa, TAROM, Transelectrica, Transgaz, and Romgaz; (ii) Preparation of action plans for the remaining SOEs of the central government; (iii) Design mechanisms to facilitate restructuring and securitizing SOE arrears.July 15, 2011Partially met / partially reset as prior action
2. Completion of a comprehensive review of the existing investment portfolio, which will prioritize and evaluate existing projects to focus on those where funding can be fully secured, examine the viability of old projects, with low priority and unviable ones discontinued, and production of a final report and an action plan.Sept. 30, 2011Partially Met
3. Amend legislation to allow the use of the deposit guarantee fund resources to facilitate bank restructuring, including purchase and assumption transactions.Sept. 30, 2011Met
4. Selection of advisors for SOE reform: (i) select transaction advisors for group 1 and (ii) legal advisors for group 2Oct. 31, 2011Partially met/ partially reset as prior action
5. Approve legislation to improve governance of SOEs.Oct. 31, 2011Met
6. Impose a revised clawback tax on the pharmaceuticals based on the growth in their costs or above a pre-determined threshold.Nov. 30, 2011Reset as prior action
7. Introduction of a simplified taxation system for smaller taxpayers under the threshold with help from the IMF and EC, while requesting a shift in the VAT mandatory threshold from the EU Council of Ministers to €50,000.Dec. 31, 2011Modified
8. Prepare comprehensive amendments to the health care legislation to address the persistent budgetary shortfalls and to ensure high quality health care services.Dec. 31, 2011
New Structural Benchmarks
1. Design measures to reduce registration of small VAT payers by 20 percent by end-September 2012(compared to end-September 2011).Dec. 31, 2011
2. Appoint transaction advisor for group 2 and legal advisor for group 3 as specified in MEFP.Feb. 15, 2012
Table 3.Romania: Selected Economic and Social Indicators, 2007–12
200720082009201020112012
2nd Rev.Proj.Proj.
Output and prices(Annual percentage change)
Real GDP6.37.3−7.1−1.31.52.01.8
Contributions to GDP growth
Domestic demand15.98.3−14.6−1.00.31.91.6
Net exports−9.6−1.07.5−0.21.20.00.1
Consumer price index (CPI, average)4.87.85.66.16.45.93.0
Consumer price index (CPI, end of period)6.76.44.88.05.03.63.3
Producer price index (end of period)7.615.31.96.3
Unemployment rate (registered, average)4.34.06.37.65.05.35.2
Unemployment rate (LFS, average)6.45.86.97.3
Nominal wages22.723.78.52.45.75.35.8
Saving and Investment(In percent of GDP)
Gross domestic investment31.031.325.326.527.327.328.0
Gross national savings17.619.721.122.422.923.323.6
General government finances
Revenue32.332.231.432.833.533.033.6
Expenditure35.437.038.739.437.937.335.5
Fiscal balance−3.1−4.8−7.3−6.5−4.4−4.3−1.9
Privatization proceeds 1/0.20.10.10.10.10.10.1
External financing0.00.42.62.92.23.12.1
Domestic financing2.32.95.84.12.21.90.9
Fiscal balance (including PNDI)−3.1−4.8−7.3−6.5−4.4−4.3−2.1
Structural fiscal balance 2/−5.8−8.5−7.0−5.1−2.6−2.8−0.1
Gross public debt (direct debt only)10.411.821.828.731.531.633.1
Gross public debt (including guarantees)12.713.623.931.734.434.535.8
Money and credit(Annual percentage change)
Broad money (M3)33.717.59.06.98.38.38.9
Credit to private sector60.433.70.94.74.14.83.2
Interest rates, eop(In percent)
Euribor, six-months4.83.54.51.2
NBR policy rate7.510.38.06.3
NBR lending rate (Lombard)12.014.312.010.3
Interbank offer rate (1 week)7.112.710.73.6
Balance of payments(In percent of GDP)
Current account balance−13.4−11.6−4.2−4.1−4.5−4.0−4.4
Merchandise trade balance−14.3−13.7−5.8−4.9−4.0−3.5−3.4
Capital and financial account balance17.612.7−2.51.24.62.35.9
Foreign direct investment balance5.76.73.01.82.21.52.6
International investment position−43.5−49.4−62.7−63.9−75.7−75.5−74.5
Gross official reserves21.820.226.229.530.428.929.9
Gross external debt47.151.869.075.775.477.577.5
Exchange rates
Lei per euro (end of period)3.54.04.24.3
Lei per euro (average)3.33.74.24.2
Real effective exchange rate
CPI based (percentage change)8.5−5.0−7.62.0
GDP deflator based (percentage change)17.41.6−8.90.4
Memorandum Items:
Nominal GDP (in bn RON)416.0514.7498.0513.6543.0552.7580.7
Social and Other Indicators
GDP per capita (current US$, 2009): $7,500; GDP per capita, PPP (current international $, 2009): $14,198 Poverty rate: 5.7% (2008)
Sources: Romanian authorities; Fund staff estimates and projections; and World Development Indicators database.

Excludes receipts from planned privatizations under the program.

Actual fiscal balance adjusted for the automatic effects of the business cycle.

Sources: Romanian authorities; Fund staff estimates and projections; and World Development Indicators database.

Excludes receipts from planned privatizations under the program.

Actual fiscal balance adjusted for the automatic effects of the business cycle.

Table 4.Romania: Macroeconomic Framework, Current Policies, 2008–16
200820092010201120122013201420152016
2nd Rev.Proj.Proj.Proj.Proj.Proj.Proj.
GDP and prices (annual percent change)
Real GDP7.3−7.1−1.31.52.01.83.54.04.04.0
Real domestic demand7.3−12.9−1.00.31.91.63.64.14.24.2
Consumption8.7−7.8−2.1−1.00.60.72.84.34.44.4
Investment3.7−26.22.74.16.04.25.83.53.73.7
Exports8.3−5.313.116.012.85.67.28.08.28.2
Imports7.9−20.911.611.011.24.97.27.78.38.3
Consumer price index (CPI, average)7.85.66.16.45.93.03.03.03.03.0
Consumer price index (CPI, end of period)6.44.88.05.03.63.33.03.03.03.0
Saving and investment (in percent of GDP)
Gross national saving19.721.122.422.923.323.624.324.625.125.3
Government1.5−2.00.82.82.95.35.75.96.36.8
Private18.223.221.520.120.418.318.618.718.818.5
Gross domestic investment31.325.326.527.327.328.029.229.630.030.3
Government6.35.37.47.27.37.27.17.27.27.1
Private25.020.019.120.220.020.722.122.422.923.2
General government (in percent of GDP)
Revenue32.231.432.833.533.033.634.134.334.434.6
Tax revenue27.927.427.028.227.927.827.827.928.028.1
Non-Tax revenue3.12.93.93.63.33.33.23.23.33.3
Grants0.91.01.81.61.72.32.82.92.92.9
Expenditure37.038.739.437.937.335.535.535.635.334.9
Fiscal balance−4.8−7.3−6.5−4.4−4.3−1.9−1.4−1.3−0.9−0.3
Structural fiscal balance 1/−8.5−7.0−5.1−2.6−2.8−0.10.20.00.10.6
Gross public debt (direct debt only)11.821.828.731.531.633.132.030.428.726.5
Gross public debt (including guarantees)13.623.931.734.434.535.834.532.830.928.5
Monetary aggregates (annual percent change)
Broad money17.59.06.98.38.38.99.610.411.312.9
Domestic credit33.70.94.74.14.83.25.78.710.211.6
Balance of payments (in percent of GDP)
Current account−11.6−4.2−4.1−4.5−4.0−4.4−4.9−5.0−5.0−5.0
Trade balance−13.7−5.8−4.9−4.0−3.5−3.4−3.4−3.3−3.4−3.3
Services balance0.5−0.2−0.5−0.4−0.7−0.7−0.7−0.7−0.7−0.7
Income balance−2.7−1.6−1.5−2.5−2.4−2.4−2.5−2.6−2.7−2.7
Transfers balance4.33.52.82.42.62.11.71.61.81.6
Capital and financial account balance12.8−1.91.24.62.35.97.67.24.24.6
Foreign direct investment, balance6.73.01.82.21.52.62.12.12.12.1
Memorandum items:
Gross international reserves (in billions of euros)28.330.936.039.837.840.339.638.535.734.9
Gross international reserves (in months of next year’s imports)7.87.47.67.77.57.46.75.95.05.0
International investment position (in percent of GDP)−49.4−62.7−63.9−75.7−75.5−74.5−76.7−76.9−81.8−76.5
Real effective exchange rate, CPI based−5.0−7.62.04.22.6−3.42.53.42.62.2
External debt (in percent of GDP)51.869.075.775.477.577.573.969.464.561.8
Short-term external debt (in percent of GDP)14.713.116.015.316.116.115.715.114.514.0
Terms of trade (merchandise, percent change)3.10.22.5−3.01.5−0.3−0.7−1.0−0.2−0.2
Nominal GDP (in millions of lei)514,700498,008513,641543,040552,703580,661622,606673,407728,673789,663
Nominal GDP (in millions of Euros)139,666117,558122,062131,001130,918134,524145,766160,277176,092193,461
Output Gap10.0−0.8−3.7−4.7−4.2−5.0−4.5−3.7−3.0−2.5
Sources: Romanian authorities; and Fund staff estimates and projections.

Actual fiscal balance adjusted for the automatic effects of the business cycle

Sources: Romanian authorities; and Fund staff estimates and projections.

Actual fiscal balance adjusted for the automatic effects of the business cycle

Table 5.Romania: Balance of Payments, 2008–16(In billions of euros, unless otherwise indicated)
200820092010201120122013201420152016
ActActActProgProj.Proj.Proj.Proj.Proj.Proj.
Current account balance−16.2−4.9−5.0−5.9−5.2−5.9−7.2−8.0−8.8−9.7
Merchandise trade balance−19.1−6.9−6.0−5.2−4.6−4.6−4.9−5.4−6.0−6.4
Exports (f.o.b.)33.729.137.343.644.047.351.456.061.367.1
Imports (f.o.b.)52.836.043.248.848.651.956.361.367.373.5
Services balance0.7−0.3−0.6−0.6−0.9−1.0−1.0−1.1−1.3−1.3
Exports of non-factor services8.87.16.57.47.07.68.29.09.810.7
Imports of non-factor services8.17.47.18.08.08.59.310.111.112.1
Income balance−3.7−1.9−1.8−3.3−3.1−3.2−3.7−4.2−4.8−5.2
Receipts2.31.21.11.11.11.11.21.21.31.3
Payments6.03.12.94.44.24.34.95.46.06.5
Current transfer balance6.04.13.43.23.42.82.52.63.23.2
Capital and financial account balance17.8−2.91.56.03.07.911.111.67.58.9
Capital account balance0.60.60.20.60.60.60.60.60.60.6
Foreign direct investment balance9.33.62.22.92.03.53.13.43.74.1
Portfolio investment balance−0.90.50.74.83.31.62.72.6−1.0−1.0
Other investment balance8.7−7.6−1.7−2.3−3.02.24.85.04.26.2
General government0.2−0.50.3−1.2−1.8−0.40.0−0.2−1.50.0
Domestic banks3.0−5.50.60.1−0.90.60.60.70.80.8
Other private sector5.5−1.6−2.6−1.1−0.32.14.14.54.95.4
Errors and omissions−1.7−1.0−0.90.00.00.00.00.00.00.0
Multilateral financing2.13.72.83.2
European Commission1.52.21.41.4
World Bank0.30.00.30.3
EIB/EBRD/IFC0.31.51.21.5
Overall balance0.0−6.7−0.72.90.94.03.93.5−1.4−0.8
Financing0.06.70.7−2.9−0.9−4.0−3.9−3.51.40.8
Gross international reserves (increase: -)0.0−1.1−3.6−3.8−1.8−2.50.71.22.80.8
Use of Fund credit, net0.06.84.30.90.9−1.5−4.6−4.7−1.40.0
Purchases 1/0.06.84.30.90.90.00.00.00.00.0
Repurchases0.00.00.00.00.0−1.5−4.6−4.7−1.40.0
Other liabilities, net0.01.00.00.00.00.00.00.00.00.0
Memorandum items:(In percent of GDP)
Current account balance−11.6−4.2−4.1−4.5−4.0−4.4−4.9−5.0−5.0−5.0
Foreign direct investment balance6.73.01.82.21.52.62.12.12.12.1
Merchandise trade balance−13.7−5.8−4.9−4.0−3.5−3.4−3.4−3.3−3.4−3.3
Exports24.124.730.633.333.635.235.334.934.834.7
Imports37.830.635.437.237.138.638.738.338.238.0
Gross external financing requirement33.129.725.927.127.330.232.030.026.625.4
(Annual percentage change)
Terms of trade (merchandise)3.10.22.5−3.01.5−0.3−0.7−1.0−0.2−0.2
Export volume8.3−5.313.116.012.85.67.28.08.28.2
Import volume7.9−20.911.611.111.24.97.27.78.38.3
Export prices18.73.36.00.65.01.61.20.61.01.0
Import prices15.43.73.23.61.71.91.31.21.40.9
(In billions of euros)
Gross international reserves 2/28.330.936.039.837.840.339.638.535.734.9
GDP139.7117.6122.1131.0130.9134.5145.8160.3176.1193.5
Sources: Romanian authorities; and Fund staff estimates and projections.

Includes IMF disbursement to the Treasury of €0.9 billion in 2009 and €1.2 billion in 2010.

Operational defition. Reflects the allocation of SDR 908.8 million that was made avaialable in two tranches in August and September 2009.

Sources: Romanian authorities; and Fund staff estimates and projections.

Includes IMF disbursement to the Treasury of €0.9 billion in 2009 and €1.2 billion in 2010.

Operational defition. Reflects the allocation of SDR 908.8 million that was made avaialable in two tranches in August and September 2009.

Table 6.Romania: Gross Financing Requirements, 2010-12(In billions of euros, unless otherwise indicated)
201020112012Total
YearQ1Q2Q3Q4YearQ1Q2Q3Q4Year2011-12
ActActActProjProjProj.ProjProjProjProjProj.Proj.
I. Total financing requirements37.58.88.710.312.340.09.09.79.510.839.078.9
I.A. Current account deficit4.90.72.11.01.45.21.51.51.51.55.911.1
I.B. Short-term debt21.15.84.35.65.821.46.16.06.26.024.345.7
Public sector4.61.90.81.21.15.01.21.20.80.53.88.8
Banks11.22.92.63.33.312.13.53.33.93.414.126.3
Corporates5.21.00.81.01.44.31.41.41.52.06.410.7
I.C. Maturing medium- and long-term debt11.31.92.33.93.511.51.92.52.03.29.721.1
Public sector1.70.20.30.70.21.50.20.90.20.41.83.4
Banks3.20.20.82.00.73.70.80.60.60.52.66.3
Corporates6.41.41.11.12.66.20.91.01.12.25.311.5
I.D. Other net capital outflows 1/0.30.40.1−0.21.61.9−0.5−0.3−0.20.1−0.91.0
II. Total financing sources33.98.410.27.611.938.19.910.49.311.441.079.1
II.A. Foreign direct investment, net2.20.50.7−0.10.82.00.90.90.90.93.55.5
II.B. Capital account inflows0.20.10.10.00.20.40.10.10.10.10.50.9
II.C. Short-term debt23.26.66.45.86.425.27.26.66.46.126.451.5
Public sector5.42.51.70.71.06.01.41.40.80.54.110.2
Banks12.52.63.33.53.312.73.93.43.93.414.627.4
Corporates5.31.41.41.52.06.41.91.81.72.17.614.0
II.D. Medium- and long-term debt8.21.13.01.94.510.51.62.81.94.310.621.1
Public sector2.30.31.70.21.53.60.11.30.11.22.66.2
Banks2.30.60.51.10.62.80.70.60.60.62.55.3
Corporates3.70.30.80.62.44.10.80.91.22.55.59.6
Errors and Omissions−0.9−0.9−0.40.90.0−0.40.00.00.00.00.0−1.2
III. Increase in gross reserves3.51.11.9−1.40.21.81.61.1−0.40.12.54.3
IV. Financing Gap8.02.40.70.40.54.00.80.4-0.2-0.50.44.5
V. Program financing8.02.40.70.40.54.00.80.4-0.2-0.50.44.5
IMF 2/4.30.90.00.00.00.90.00.0−0.6−0.9−1.5−0.6
Purchases4.30.90.00.00.00.90.00.00.00.00.00.9
Repurchases0.00.00.00.00.00.00.00.0−0.6−0.9−1.5−1.5
Others3.71.50.70.40.53.20.80.40.40.41.95.1
European Commission2.21.20.20.00.01.40.00.00.00.00.01.4
World Bank0.00.00.30.00.00.30.40.00.00.00.40.7
EIB/EBRD/IFC1.50.30.30.40.51.50.40.40.40.41.53.0
Memorandum items:
Rollover rates for amortizing debt ST (in percent)
Public sector1181332107293120120110100100110115
Banks11291125104100105110105100100104104
Corporates101142174100147151135125115105119131
Rollover rates for amortizing debt MLT (in percent)
Public sector135131526256502385013730260144186
Banks712746055887590951001059784
Corporates581972599466909510511510584
Gross international reserves 3/36.037.840.3
Coverage of gross international reserves
− Months of imports of GFNS (next year)7.67.57.4
− Short-term external debt (in percent)117.9108.6102.1
Source: Romanian authorities and IMF staff estimates.

Includes includes portfolio equity, financial derivatives and other investments, assets position.

Last disbursement of the previous program is treated as precautionary

Operation Definition

Source: Romanian authorities and IMF staff estimates.

Includes includes portfolio equity, financial derivatives and other investments, assets position.

Last disbursement of the previous program is treated as precautionary

Operation Definition

Table 7.Romania: General Government Operations, 2010–12(In percent of GDP)
20102011201120122012
2nd Rev. 6/Proj 7/2nd Rev.Proj. 8/
Revenue32.833.533.033.933.6
Taxes27.028.227.928.127.8
Corporate income tax2.12.02.02.02.0
Personal income tax3.53.53.43.53.4
VAT7.68.68.68.58.6
Excises3.43.73.63.73.6
Customs duties0.10.10.10.10.1
Social security contributions8.99.09.09.08.8
Other taxes1.31.31.21.31.2
Nontax revenue3.93.63.33.33.3
Capital revenue0.10.10.10.10.3
Grants, including EU disbursements1.81.61.72.42.3
Expenditure39.437.937.336.735.5
Current expenditure35.734.233.632.831.7
Compensation of employees8.37.57.37.26.9
Goods and services5.85.45.55.35.4
Interest1.41.81.71.71.8
Subsidies1.31.21.20.90.9
Transfers18.517.917.517.416.3
Pensions8.28.88.68.78.2
Other social transfers5.23.83.73.53.4
Other transfers 1/4.64.94.74.84.3
Other spending0.60.50.50.50.4
Proj. with ext. credits0.30.40.40.20.4
Capital expenditure 2/3.83.73.73.83.8
Reserve fund0.00.00.00.00.0
Net lending and expense refunds−0.10.00.00.00.0
Fiscal balance−6.5−4.4−4.3−2.8−1.9
Primary balance−5.1−2.6−2.6−1.1−0.2
Fiscal balance including PNDI−6.5−4.4−4.3NA−2.1
Financing6.54.44.32.81.9
Privatization proceeds0.10.10.10.10.1
External2.92.23.11.32.1
Domestic4.12.21.91.30.9
Use of deposits−0.4NA−0.70.2−1.1
Financial liabilities
Gross public debt 3/31.734.434.534.735.8
Gross public debt excl. guarantees28.731.531.632.133.1
External13.214.615.315.616.6
Domestic15.516.816.316.416.4
Memorandum items:
Total capital spending (excluding PNDI)7.47.27.37.37.2
Fiscal balance (ESA95 basis)
Output gap 4/−3.7−4.7−4.2−3.8−5.0
Conventional structural fiscal balance−5.1−2.6−2.8−1.4−0.1
Gross public debt (authorities definition) 5/37.9
Nominal GDP (in billions of RON)513.6543.0552.7588.9580.7
Revenue168,635182,126182,360199,450195,197
Taxes138,667153,232154,259165,428161,384
Corporate income tax10,96910,68611,07711,87611,729
Personal income tax17,95718,82718,86020,41819,809
VAT39,24646,88247,68950,24749,868
Excises17,31220,05619,67221,75121,183
Customs duties574657637716686
Social security contributions45,70449,14349,53252,84750,975
Other taxes6,9056,9826,7907,5727,134
Nontax revenue19,79619,42718,26019,22118,988
Capital revenue6857017017601,486
Grants9,4948,7669,14114,04113,338
o/w EU pre-accession funds4,0549601,331446818
Financial operations and other−60000
Expenditure202,256206,080206,314215,979206,407
Current expenditure183,243185,526185,668193,211183,833
Compensation of employees42,83940,57040,31742,50039,800
Goods and services29,54129,21730,34631,35631,486
Interest7,2759,5979,39110,12910,228
Subsidies6,7356,7536,6605,3675,463
Transfers95,06097,28196,702102,55094,807
Pensions42,10747,76947,76951,01447,873
Other social transfers26,50520,69120,42220,67619,603
Other transfers 1/23,51426,34425,90528,02925,236
Other spending2,9332,4772,6062,8312,096
Proj. with ext. credits1,7942,1062,2521,3102,050
Capital expenditure 2/19,44120,30420,54322,59622,342
Reserve fund024351172232
Net lending and expense refunds−42875200
Fiscal balance−33,621−23,953−23,953−16,529−11,210
Primary balance−26,346−14,356−14,562−6,401−982
Fiscal balance including PNDI−33,621−23,953−23,953NA−12,210
Financing33,62123,95323,95316,52911,210
Privatization proceeds289400400400400
External14,80711,78616,8957,50511,931
Domestic20,84111,76710,6167,5795,240
Use of deposits−2,161NA−3,9581,045−6,360
Financial liabilities
Gross public debt 3/163,023186,576190,533204,433207,704
Gross public debt excl. guarantees147,347170,900174,858188,758192,028
External67,68579,47184,58092,10596,511
Domestic79,66391,43090,27896,65395,518
Memorandum item:
Gross public debt (authorities definition) 4/194,459
Sources: Ministry of Finance; Eurostat; and Fund staff projections.

Includes EU-financed capital projects.

Does not include all capital spending.

Total consolidated public debt, including government debt, local government debt, and guarantees.

Percentage deviation of actual from potential GDP.

Includes guarantees and intra-governmental debt.

Includes arrears reduction plans in VAT (551m), nontax revenues (876m), subsidies (736m), other transfers (454m) and other social transfers (237m).

Includes arrears reduction plans in VAT (1709m), SSC (726m), CIT (8m), excises (72m), subsidies (823m), goods and services (129m), other transfers (1087m), capex (238m), and other social transfers (237m).

Includes arrears reduction plans in VAT (1562m), and other transfers (1562m).

Sources: Ministry of Finance; Eurostat; and Fund staff projections.

Includes EU-financed capital projects.

Does not include all capital spending.

Total consolidated public debt, including government debt, local government debt, and guarantees.

Percentage deviation of actual from potential GDP.

Includes guarantees and intra-governmental debt.

Includes arrears reduction plans in VAT (551m), nontax revenues (876m), subsidies (736m), other transfers (454m) and other social transfers (237m).

Includes arrears reduction plans in VAT (1709m), SSC (726m), CIT (8m), excises (72m), subsidies (823m), goods and services (129m), other transfers (1087m), capex (238m), and other social transfers (237m).

Includes arrears reduction plans in VAT (1562m), and other transfers (1562m).

Table 8.Romania: Monetary Survey, 2009–12(In millions of lei (RON), unless otherwise indicated; end of period)
Dec-09Dec-102011Dec-12
Q1Q2Q3Q4 Proj.Proj.
I. Banking System
Net foreign assets17,68418,77612,34823,78925,79222,71033,555
In million euros4,1824,3823,0015,6196,0755,2537,783
o/w commercial banks−19,708−21,158−21,375−21,961−22,151−22,035−22,035
Net domestic assets171,946183,987183,982176,123183,343196,810205,528
Public sector credit26,74843,39339,81334,08342,28653,32469,129
Private sector credit199,887209,298203,956213,651221,431219,356226,319
Other−54,688−68,704−59,787−71,611−80,374−75,870−89,920
Broad Money (M3)189,630202,763196,331199,912209,135219,520239,084
Money market instruments1,6173,1773,4303,8224,3634,7657,148
Intermediate money (M2)188,013199,586192,901196,090204,772214,755231,935
Narrow money (M1)79,36181,60577,75980,04583,96690,51795,908
Currency in circulation23,96826,79326,23826,95329,40632,12234,035
Overnight deposits55,39454,81251,52153,09254,56058,39561,873
II. National Bank of Romania
Net foreign assets101,015109,433100,288116,774119,831117,974128,561
In million euros23,89125,54024,37727,58028,22627,28829,817
Net domestic assets-49,354-54,330-50,408-64,476-64,206-58,813-65,876
Public sector credit, net−13,626−12,795−16,386−27,757−17,764−16,795−16,795
Credit to banks, net−23,848−26,148−27,330−22,610−24,339−25,339−33,339
Other−11,880−15,387−6,692−14,109−22,103−16,678−15,741
Reserve money51,66255,10349,88152,29855,62559,16162,685
(Annual percentage change)
Broad money (M3)9.06.93.32.56.88.38.9
NFA contribution2.60.6−7.2−1.60.81.94.9
NDA contribution6.46.310.64.16.16.34.0
Reserve money2.46.79.06.512.57.46.0
NFA contribution−18.416.3−17.1−2.418.315.517.9
NDA contribution20.8−9.626.18.8−5.9−8.1−11.9
Domestic credit, real5.53.22.1−5.36.64.14.9
Private sector, real−3.7−3.0−5.3−6.22.91.2−0.1
Public sector, real159.521.912.218.216.412.118.2
Broad money (M3), in real terms3.9−1.0−4.3−5.13.24.55.4
Private deposits, at constant e/r8.15.01.83.26.27.07.7
Private credit, nominal0.94.72.31.36.54.83.2
Memorandum items
CPI inflation, eop4.78.08.08.03.53.63.3
Inflation target2.5 - 4.52.5 - 4.52.0 - 4.02.0 - 4.02.0 - 4.02.0 - 4.02.0 - 4.0
Interest rates (percent):
Policy interest rate8.006.256.256.256.25
Interbank offer rate, 1 week10.73.65.14.35.5
Corporate loans 1/15.49.49.89.39.8
Household time deposits 1/9.97.67.16.76.5
Share of foreign currency private deposits38.836.135.834.734.0
Share of foreign currency private loans60.163.062.262.963.6
M2 velocity2.652.572.562.592.832.572.50
Money multiplier (M3/reserve money)3.673.683.943.823.763.713.81
Sources: National Bank of Romania; and Fund staff estimates.

Rates for new local currency denominated transactions.

Sources: National Bank of Romania; and Fund staff estimates.

Rates for new local currency denominated transactions.

Table 9.Romania: Financial Soundness Indicators, 2008–11(In percent)
2008 Dec.2009 Dec.2010 Mar.2010 Jun.2010 Sep.2010 Dec.2011 Mar.2011 June2011 Sep.
Core indicators
Capital adequacy
Capital to risk-weighted assets13.814.715.014.314.615.014.914.213.4
Tier 1 capital to risk-weighted assets11.813.414.213.413.814.214.513.612.9
Asset quality
Nonperforming loans (1/) to total gross loans2.87.99.110.211.711.912.713.414.2
Nonperforming loans (1/) net of provisions to capital10.711.312.614.516.315.715.716.517.8
Earnings and profitability
Return on assets1.60.20.5−0.1−0.2−0.20.50.1−0.3
Return on equity(2/)17.02.96.0−1.6−2.1−1.75.00.6−3.4
Net interest income to operating income44.844.155.758.258.760.659.863.762.3
Noninterest expense to operating income (cost to income)55.763.956.559.258.664.965.667.566.1
Personnel expense to operating income23.420.320.721.621.221.022.823.322.4
Liquidity
Liquid assets (3/)to total assets47.157.458.659.159.360.058.858.760.7
Liquid assets (3/) to short-term liabilities (4/)230.5132.0150.0146.7148.7142.2151.8143.5143.6
Liquid assets (3/) to total attracted and borrowed sources116.279.481.279.882.180.980.580.481.6
Foreign exchange risk
Net open position in foreign exchange, in percent of capital1.62.31.6−3.21.4−1.4−2.9−3.4−4.2
Lending in foreign exchange, in percent of non-gov. credit57.860.160.462.862.563.062.262.963.6
Foreign currency liabilities, in percent of total attracted and borrowed sources43.742.843.644.744.143.543.843.243.6
Deposits in foreign exchange, in percent of non-gov. dom. deposits34.838.8373837.436.035.634.634.0
Encouraged indicators
Deposit-taking institutions
Leverage ratio (5/)8.17.68.17.97.98.18.07.87.5
Personnel expenses to noninterest expenses41.931.836.636.436.132.334.734.533.9
Customer deposits to total (non-interbank) loans81.988.788.385.186.084.884.081.681.7
Source: Romanian National Bank.

The NPLs represent un-adjusted exposures of loans and related interests overdue for more than 90 days and/or for which legal proceedings were initiated.

Return on equity is calculated as Net profit/loss to average own capital.

Liquid assets = balance sheet assets and off balance sheets items with residual maturity of up to 3 months.

Short term liabilities =balance sheet liabilities and off balance sheet items with residual maturity of up to 3 months.

Tier 1 Capital to average assets.

Source: Romanian National Bank.

The NPLs represent un-adjusted exposures of loans and related interests overdue for more than 90 days and/or for which legal proceedings were initiated.

Return on equity is calculated as Net profit/loss to average own capital.

Liquid assets = balance sheet assets and off balance sheets items with residual maturity of up to 3 months.

Short term liabilities =balance sheet liabilities and off balance sheet items with residual maturity of up to 3 months.

Tier 1 Capital to average assets.

Table 10.Romania: Schedule of Reviews and Purchases
Amount of Purchase
DateMillions of SDRsPercent of QuotaConditions
March 25, 201160.05.82Approval of arrangement
June 27, 2011430.041.74First review and end-March 2011 performance criteria
September 29, 2011430.041.74Second review and end-June 2011 performance criteria
December 19, 2011430.041.74Third review and end-September 2011 performance criteria
March 15, 2012430.041.74Fourth review and end-December 2011 performance criteria
June 15, 2012430.041.74Fifth review and end-March 2012 performance criteria
September 15, 2012430.041.74Sixth review and end-June 2012 performance criteria
December 15, 2012430.041.74Seventh review and end-September 2012 performance criteria
March 15, 201320.62.00Eighth review and end-December 2012 performance criteria
Total3090.6300
Source: IMF staff estimates.
Source: IMF staff estimates.
Table 11.Romania: Indicators of Fund Credit, 2011–16 1/(In millions of SDR)
201120122013201420152016
Existing Fund Credit
Stock 2/10,5699,2625,2101,329960
Obligations 3/371,4464,1593,9311,24498
Repurchase0130740523881123396
Charges3713810850112
Prospective Fund Credit under Stand-By Arrangement
Disbursement1,3501,72021000
Stock 2/1,3503,0703,0913,0912,093550
Obligations 3/72836371,0321,563
Repurchase00009981,543
Charges72836373421
Stock of existing and prospective Fund credit
In millions of SDR11,91912,3328,3014,4192,189550
In percent of quota1,1571,19780642921353
In percent of GDP10.210.36.53.11.40.3
In percent of exports of goods and services26.225.315.87.83.50.8
In percent of gross reserves35.534.623.813.17.01.8
Obligations to the Fund from existing and prospective Fund arrangements
In millions of SDR811,6784,4364,0772,2941,661
In percent of quota7.9162.9430.6395.8222.7161.3
In percent of GDP0.11.43.52.91.51.0
In percent of exports of goods and services0.23.48.47.23.72.5
In percent of gross reserves0.24.712.712.17.45.5
Source: IMF staff estimates.

Using IMF actual disbursements, SDR interest rate as well as exchange rate of SDR/US$ and US$/€ of October 6, 2011.

End of period.

Repayment schedule based on repurchase obligations.

Source: IMF staff estimates.

Using IMF actual disbursements, SDR interest rate as well as exchange rate of SDR/US$ and US$/€ of October 6, 2011.

End of period.

Repayment schedule based on repurchase obligations.

Table 12.Romania: Public Sector Debt Sustainability Framework, 2006-16(In percent of GDP, unless otherwise indicated)
ActualProjections
20062007200820092010201120122013201420152016Debt-stabilizing primary balance 9/
Baseline: Public sector debt 1/12.612.713.623.931.734.535.834.532.830.928.5-0.9
o/w foreign-currency denominated10.99.38.615.420.421.221.620.018.717.716.7
Change in public sector debt−5.00.10.910.37.82.71.3−1.3−1.7−1.9−2.4
Identified debt-creating flows (4+7+12)−4.20.23.97.77.62.00.2−1.1−1.3−1.6−2.1
Primary deficit0.62.44.16.15.12.60.2−0.3−0.5−0.8−1.2
Revenue and grants32.332.332.231.432.833.033.634.134.334.434.6
Primary (noninterest) expenditure32.934.636.337.538.035.633.833.833.833.633.4
Automatic debt dynamics 2/−4.3−2.0−0.11.62.6−0.50.1−0.7−0.8−0.8−0.9
Contribution from interest rate/growth differential 3/−2.1−1.4−1.71.70.7−0.50.1−0.7−0.8−0.8−0.9
Of which contribution from real interest rate−0.9−0.8−0.90.70.40.10.70.50.50.50.2
Of which contribution from real GDP growth−1.2−0.7−0.81.00.3−0.6−0.6−1.2−1.3−1.2−1.1
Contribution from exchange rate depreciation 4/−2.2−0.61.60.01.9
Other identified debt-creating flows−0.4−0.2−0.1−0.1−0.1−0.1−0.1−0.1−0.10.00.0
Privatization receipts (negative)−0.4−0.2−0.1−0.1−0.1−0.1−0.1−0.1−0.10.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes (2-3) 5/−0.8−0.1−3.02.60.20.71.1−0.2−0.4−0.3−0.3
Public sector debt-to-revenue ratio 1/39.139.442.476.296.7104.5106.4101.195.589.682.4
Gross financing need 6/4.34.46.718.514.113.212.311.49.97.65.6
in billions of U.S. dollars5.27.513.630.222.824.423.323.322.218.415.0
Scenario with key variables at their historical averages 7/34.533.731.830.028.527.1-2.9
Scenario with no policy change (constant primary balance) in 2011-201634.538.239.841.142.443.4-1.4
Key Macroeconomic and Fiscal Assumptions Underlying Baseline
Real GDP growth (in percent)7.96.37.3−7.1−1.32.01.83.54.04.04.0
Average nominal interest rate on public debt (in percent) 8/5.47.17.18.66.15.85.45.35.65.75.2
Average real interest rate (nominal rate minus change in GDP deflator, in percent)−5.2−6.4−8.14.51.70.32.11.71.61.71.0
Nominal appreciation (increase in US dollar value of local currency, in percent)19.46.5−16.50.3−10.7
Inflation rate (GDP deflator, in percent)10.613.515.24.14.45.53.23.64.04.04.2
Growth of real primary spending (deflated by GDP deflator, in percent)14.812.012.4−3.90.0−4.2−3.53.44.33.43.3
Primary deficit0.62.44.16.15.12.60.2−0.3−0.5−0.8−1.2

Coverage: General government gross debt, including guarantees.

Derived as [(r - π(1+g) - g + αε(1 +r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1 +g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Coverage: General government gross debt, including guarantees.

Derived as [(r - π(1+g) - g + αε(1 +r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1 +g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Table 13.Romania: External Debt Sustainability Framework, 2006-16(In percent of GDP, unless otherwise indicated)
ActualProjections
20062007200820092010201120122013201420152016Debt-stabilizing non-interest current account 6/
Baseline: External debt42.147.151.869.075.777.577.573.969.464.561.8-5.8
Change in external debt3.34.94.817.26.71.70.0−3.6−4.5−4.9−2.7
Identified external debt-creating flows (4+8+9)−5.4−1.40.410.5−0.8−1.5−0.7−1.6−1.40.91.1
Current account deficit, excluding interest payments9.212.210.12.42.51.92.43.03.33.53.7
Deficit in balance of goods and services12.014.013.26.15.44.24.14.14.14.14.0
Exports32.129.230.430.735.939.040.840.940.540.440.2
Imports44.243.243.636.841.343.244.945.044.644.544.2
Net non-debt creating capital inflows (negative)−8.6−5.8−6.1−3.4−2.4−4.1−3.8−4.0−3.7−1.5−1.6
Automatic debt dynamics 1/−6.0−7.8−3.611.5−1.00.60.7−0.6−1.0−1.1−1.0
Contribution from nominal interest rate1.21.21.51.81.62.12.01.91.71.51.4
Contribution from real GDP growth−2.5−2.1−3.14.40.8−1.4−1.3−2.5−2.7−2.5−2.4
Contribution from price and exchange rate changes 2/−4.7−7.0−2.05.4−3.4
Residual, incl. change in gross foreign assets (2-3) 3/8.86.44.36.77.53.20.8−2.1−3.1−5.8−3.8
External debt-to-exports ratio (in percent)131.0160.9170.3224.5211.2198.4189.9180.5171.3159.8153.6
Gross external financing need (in billions of Euros) 4/21.735.946.234.931.635.740.746.648.146.949.1
in percent of GDP22.228.833.129.725.927.330.232.030.026.625.4
Scenario with key variables at their historical averages 5/77.574.070.667.061.057.1-9.4
Key Macroeconomic Assumptions Underlying Baseline
Real GDP growth (in percent)7.96.37.3−7.1−1.32.01.83.54.04.04.0
GDP deflator in Euros (change in percent)13.819.84.4−9.45.15.11.04.75.75.65.6
Nominal external interest rate (in percent)3.83.73.62.92.42.92.72.62.52.42.3
Growth of exports (Euro terms, in percent)19.315.916.6−14.921.116.77.58.68.89.59.5
Growth of imports (Euro terms, in percent)25.224.713.2−28.916.312.46.88.58.99.79.2
Current account balance, excluding interest payments−9.2−12.2−10.1−2.4−2.5−1.9−2.4−3.0−3.3−3.5−3.7
Net non-debt creating capital inflows8.65.86.13.42.44.13.84.03.71.51.6
e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

Derived as [r - g - ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ñ = change in domestic GDP deflator in uro terms, g = real GDP growth rate,

ε = nominal appreciation (increase in dollar value of domestic currency), and α = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-ρ(1+g) + εα(1 +r)]/(1 +g+ρ+gρ) times previous period debt stock. ñ increases with an appreciating domestic currency (ε > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

Derived as [r - g - ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ñ = change in domestic GDP deflator in uro terms, g = real GDP growth rate,

ε = nominal appreciation (increase in dollar value of domestic currency), and α = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-ρ(1+g) + εα(1 +r)]/(1 +g+ρ+gρ) times previous period debt stock. ñ increases with an appreciating domestic currency (ε > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Romania: Letter Of Intent

Bucharest, December 2, 2011

Mme. Christine Lagarde

The Managing Director

International Monetary Fund

Washington, DC, 20431

U.S.A.

Dear Mme. Lagarde:

1. The Romanian authorities reaffirm our commitment to its economic program supported by the International Monetary Fund (IMF), the European Union (EU), and the World Bank (WB). The track record to date is strong. We have met all quantitative targets for the third program review and continue our efforts on a large structural agenda, though further progress is needed in some areas, as described in the attached Memorandum of Economic and Financial Policies (MEFP). Our achievements in economic stabilization and reforms are beginning to bear fruit, as economic growth has turned positive this year after two years of decline. Continued firm policy implementation and maintaining fiscal, monetary and financial buffers are required to safeguard against risks, as the recovery remains vulnerable to adverse developments in international financial markets and pronounced downside risks to euro area recovery.

2. Our performance on the quantitative targets and the structural reform agenda for the third review has been strong (MEFP Tables 1 and 2).

  • Quantitative performance criteria and indicative targets. All end-September 2011 quantitative performance criteria and indicative targets were observed. The floor on general government balance was met with a significant margin of 0.7 percent of GDP. Inflation returned to within the inner band of the inflation consultation mechanism.

  • Structural benchmarks. We have completed the review of the investment portfolio, and expect to complete work on the prioritization of investments by the board meeting. We also will approve corporate governance reform legislation of state-owned enterprises. (SOEs). However, in the remaining areas of SOE reforms and the selection of transaction and legal advisors progress has been inadequate. We aim to fulfill the remaining components of the structural benchmarks by the time of the Board meeting. Finally, we are advancing on the revisions on the clawback tax and intend to fulfil the benchmark before the Board meeting.

3. In the attached MEFP, we set out our plans to further advance towards meeting the objectives laid out in our macroeconomic program. In view of our strong performance under the program supported by the IMF and the EU, the Government of Romania and the National Bank of Romania (NBR) request completion of the third review. We intend to continue to treat the arrangement as precautionary.

4. The program will continue to be monitored through quarterly reviews, prior actions, quantitative performance criteria and indicative targets, and structural benchmarks. We propose for a modification of the December 31, 2011 quantitative performance criteria and the establishment of such criteria for March 31, 2012 as set out in the attached MEFP, where an adjustor to performance criterion on Net Foreign Assets is introduced, and changes to the adjustor on general government balance have also been made (and described in the Technical Memorandum of Understanding (TMU)). As detailed in the MEFP, we also propose new structural benchmarks against which to measure progress under the program (MEFP Table 2). The TMU explains how program targets are measured.

5. We believe that the policies set forth in the letters of March 10, 2011, June 9, 2011, September 14, 2011 and in this Letter are adequate to achieve the objectives of our economic program. We stand ready to take additional measures as appropriate to ensure achievement of its objectives. We will consult with the IMF and European Commission (EC) before modifying measures contained in this Letter and the attached Memorandum or adopting new measures that would deviate from the goals of the program, and will provide the IMF and the EC with the necessary information for program monitoring.

6. We authorize the IMF and the EC to publish the Letter of Intent and its attachments, and the related staff reports. This letter is being copied to Mr. Olli Rehn.

Sincerely,

/s//s/
Gheorghe IalomiţianuMugur Isarescu
Minister of Public FinanceGovernor of the National Bank of Romania
Romania: Memorandum of Economic and Financial Policies

Recent Economic Developments and Outlook

1. Romania’s growth is now resuming, but severe headwinds from the regional economic slowdown and financial turbulence are making the recovery fragile. We continue to forecast growth of around 1½–2 percent in 2011, rising modestly to about 1¾–2¼ percent in 2012. The favorable agricultural harvest will likely boost farm incomes and offset slowing external demand in the short run. This has also reduced significantly the inflationary pressures that were evident earlier in the year due to high global food and energy prices. We now expect inflation to remain within the inflation target range despite some increases in administered prices. Amidst signs of a gradually improving labor market and the anticipated absorption of EU funds, growth is expected to be mainly driven by domestic demand in 2012. The current account deficit is projected to remain below 5 percent of GDP in 2011–12 on the back of improved trade performance. Continued firm policy implementation is required to safeguard against downside risks, as there remain significant vulnerabilities to adverse developments in international financial markets and the euro area recovery.

Fiscal Policy

2. For 2011, we remain committed to the previously agreed cash deficit target of 4.4 percent of GDP or below 5 percent in ESA terms. In the third quarter, revenues were below expectations, but tight control on current spending allowed us to meet the fiscal balance target with a comfortable margin. We have continued to reduce public employment by another 20,000 positions in the third quarter, in line with our commitment to keeping the wage bill below 7.5 percent of GDP in 2011. In August, we eliminated central government heating subsidies and improved the legislation to provide heating allowances for the most vulnerable population. Local governments are also required to fully budget and fund their heating subsidies. To safeguard the deficit target, we will continue our prudent management of expenditures to ensure that there will be room to counteract any continued revenue underperformance. The November budget rectification will allocate the necessary funds to avoid the accumulation of new arrears in the health sector.

3. In order to bring closer the cash and ESA measures of the fiscal balance, we will start monitoring selected state-owned enterprises (SOEs) as defined in the attached TMU on a monthly basis beginning in November; once this system is fully functional, we will request that the performance criterion on the general government cash overall balance be amended to include the operating balance of these entities. This system will—as far as possible—include the SOEs that are to be added to the ESA definition of the general government, and with the technical assistance of Eurostat, enhance our ability to measure the fiscal deficit on an accrual basis.

4. For 2012, we remain committed to bringing the fiscal deficit in ESA terms below 3 percent of GDP. To achieve this with ample margin for unforeseen shocks, we will approve a budgetary cash deficit of 1.9 percent of GDP, although our deficit target as measured under the IMF program will be 2.1 percent of GDP due to off-budget spending under the National Development and Infrastructure Program (PNDI). Achieving this ambitious fiscal deficit will require sustained expenditure restraint. We will initially freeze wages in the public sector as well as pensions (by postponing this element of the implementation of the pension law until 2013). However, if economic conditions permit we will consider prudent wage and pension increases later in the year. We will make savings in the capital budget by eliminating the non-performing projects identified during the prioritization exercise and by reducing the national co-financing of EU-funded projects. A new EU regulation will allow us to temporarily reduce the co-financing rate by 10 percentage points (as long as Romania is covered by this current IMF/EU program) and a national regulatory framework renders non-recoverable VAT from projects financed by EU structural funds eligible for reimbursement. We will also replace budget subsidies given to the agricultural sector with funds received from the EU. Implementation of health sector reforms and restructuring of public enterprises included in the general government will also be crucial to achieve the 2012 target. Means-testing of social benefits programs is also expected to generate savings.

5. We intend to bring the wage bill below 7.2 percent of GDP in 2012. Public employment reductions will continue with the policy of replacing only 1 out of 7 employees; however, we will implement it with more flexibility, by applying the rule at a sectoral or higher level rather than for each institutional unit. This flexible approach will allow elimination of some bottlenecks in sectors where problems with staff shortages are becoming acute, as identified by the recently conducted functional reviews.

6. In the medium-term, we remain committed to continued responsible fiscal policy, consistent with our fiscal strategy and Fiscal Responsibility Law (FRL). We will continue to support the independent Fiscal Council, by providing it with adequate information and funding. We will ask the Fiscal Council to recommend improvements to the FRL to increase flexibility while strengthen the commitment to transparency and responsible fiscal policy. We will strictly limit further ad hoc changes to the tax system to ensure predictability and stability. We will close tax loopholes and improve the efficiency of the tax system, while ensuring its revenue neutrality, taking stock of the recommendations of the technical assistance of the IMF. The government will appoint an interministerial group to implement the functional review action plans. We will begin implementation of the action plans by focusing on “quick-win” measures requiring no additional financing. By mid-January 2012, we will ensure that a central coordinating entity is operational and will submit to the EU, WB, and IMF the first quarterly implementation reports.

7. Arrears and unpaid bills of the general government (excluding SOEs) have been declining since the beginning of the year. Arrears now stand below 0.2 percent of GDP (almost entirely in local governments). In SOEs monitored under the program, arrears have fallen in the third quarter of 2011 by some 0.2 percent of GDP to 3.4 percent of GDP. Overall, central government SOE arrears fell some 0.3 percent of GDP to 3.8 percent of GDP. With the assistance of Fund and EC staff, we are implementing our action plan to deal with arrears as follows:

  • In the health sector, arrears in registered bills have now been completely eliminated and we will pay the unregistered bills revealed during the stocktaking exercise by end-2011. We have registered about two thirds of the RON 500 million unpaid bills uncovered in the stocktaking exercise. We will register the remaining bills by the end of the year, and will specify in the 2012 budget that all new bills must be registered within 60 days of delivery of the relevant good or service. Additional budget allocations to the health sector were made in July and RON 750 million will be included in the November supplementary budget to avoid new arrears, but new allocations will be conditioned on progress on systemic reforms.

  • At the local government level, arrears have leveled off since the second quarter. The new amendments to the local government public finance law (LGPFL) are effective in preventing the accumulation of new arrears, but we need to better enforce its provisions and explore possibilities to further reduce the stock of existing arrears. In particular, we will ensure adequate financing, within line ministries’ budget ceilings, of local government projects co-financed by the state budget. Medium-term financing of these projects will be guaranteed through multi-year contracts signed between line ministries and local governments, according to the provisions of the LGPFL. These projects shall be included in the capital investment database to ensure that line ministries can prioritize and adequately fund these projects.

  • For SOEs, we are making progress in the process of reducing arrears in monitored companies through swap operations, payments, and other financial operations. Together, we anticipate that these measures will permit arrears of companies under monitoring to be reduced by RON 5 to 6 billion (1 percent of GDP) by early 2012. As part of this process, any overperformance against the 2011 cash fiscal deficit target (after central government and social security) will be used to help fund arrears clearance in CFR Infrastructure, conditional upon the subsequent viability of the firm and on negotiation of elimination of payment penalties with suppliers.

  • The next phase in the integration of the accounting reporting system with the Treasury payment system is underway, including the commitment control and reporting module for all levels of government. The design of the system has been finalized and the contract with the software provider will be signed by end-March 2012. This system will help control spending commitments to avoid accumulating future arrears.

  • Over the next two years the period for paying bills submitted to the central government and social security system will be gradually reduced. The EU directive 7 in this area will be transposed into Romanian law on a timely basis. Towards this end, we will seek to use revenues from the clawback tax to begin shortening the period for paying bills submitted for pharmaceuticals.

  • To prevent possible future arrears due to unfunded contracts, we will ensure that any commitments made at the central government level for multiannual capital projects are appropriately reflected in the fiscal accounts and new guarantees issued for bank financing of these projects are transparently recorded within the program guarantee ceiling of RON 14 billion.

8. We have improved our financing strategy and will continue to focus on building the yield curve and consolidating the financial buffers. We launched our euro medium-term notes program with a June issue for €1.5 billion. We will continue regular external bond issuance 1–2 times per year at a range of maturities. We remain committed to consolidating our financial buffer (including WB DPL-DDO financing) to around four months of financing needs to protect government finances against unforeseen external shocks. Less favorable external market conditions have led us to temporarily reconsider further extension of the maturity of our domestic debt issuances, but we will continue to issue a range of maturities at market interest rates. We are conducting a formal review of our debt management strategy with the assistance of IMF, EC, and WB experts by Q1 2012; in August and October 2011, we received training on a debt management system in order to strengthen our capacity to optimize debt portfolios. We will also further improve treasury information technology (IT) systems and increase senior staffing.

9. Improving the absorption of EU funds remains a difficult challenge, and further efforts are needed. We have moved the EU structural funds coordination unit to a newly created Ministry of European Affairs. In order to significantly boost absorption next year, we have undertaken measures for identification of high priority projects, strengthen capacity of management authorities, and reduce procedural bottlenecks. We have approved a list of 100 priority projects and will strictly monitor their implementation. In addition, we will negotiate with the EC a reallocation of EU funding between operational programs and funds in order to finance additional needs that occurred and were not envisaged for financing within the current programming period 2007–13. We have increased accountability of public procurement agencies in the tendering process and have made progress in developing standard bidding documents in four key subsectors and standardized procurement procedures, where possible, which we expect to complete by end-2011. We are also seeking to simplify procedures, increase staffing and technical expertise of managing authorities, and improve transparency regarding project implementation and payment claim status.

10. We are focusing on prioritizing investment to assure sufficient financing for key projects. We have completed a comprehensive review of the existing investment portfolio and have prepared a database of all government projects. This database will be used to prioritize and evaluate projects to focus on those where funding can be fully secured within a medium-term horizon (e.g., 3–5 years), and to discontinue low priority and non-performing projects that cannot be fully financed within this horizon. In particular, we will strictly prioritize EU funded projects in 2012. The prioritization of investment projects should be based on feasibility studies, and take account of criteria such as cost benefit analysis, estimated share of completion, how well the project implementation has been managed to date by the ministry, their matching to the strategic priorities of the government, as well as on the analysis produced by the capital monitoring unit of the Ministry of Public Finance (MOPF). The Ministry of Regional Development and Tourism (MRDT) and the Ministry of Environment and Forest (MEF) will ensure that this spending does not exceed RON 1.0 billion in 2012 (RON 820 million for MRDT and RON 180 million for MEF). In addition, the authorities overseeing public private partnerships (PPPs) commit to joint reporting by mid-April 2012 on the functioning of their working arrangements.

11. To address the persistent budgetary shortfalls in the healthcare system and enhance service quality, we are preparing a comprehensive reform of the system. Over the medium-term, given that public healthcare spending in Romania is among the lowest in the EU as a share of GDP, we will ensure adequate financing in line with the recommendation of the 2008 Presidential Commission on health care policy while factoring in the challenge of population aging into spending needs. The reform will also ensure that spending commitments remain within the allocated budget. To contain the growth of spending, we will seek to reduce the scope of the public benefits package through greater reliance on cost-sharing and private supplementary insurance. We are also exploring options for greater private sector involvement in health care provision and financing to enhance efficiency and quality of services, and to raise additional resources. We are preparing a framework law based on these principles, which will be finalized by end-2011 (structural benchmark), and approved by end-March 2012.

12. In 2012, budget allocations to the health sector will be consistent with a realistic spending program, while incorporating savings from reforms already underway, including:

  • Basic benefits package. With the technical assistance of the National Institute for Health and Clinical Excellence under the WB financed project, we are assessing and revising the package of benefits insured by the government to exclude coverage of costly nonessential health services and drugs. A negative list of services and revised list of reimbursed drugs will be prepared by the end of the year.

  • Pharmaceutical expenditures. In September, we included generics in the C2 list, and changed references prices accordingly. In the context of the revision of the basic benefits package, we will also revise settlement prices and the list of compensated and free drugs.

  • Expenditure controls. We will continue to monitor aggregate hospital budgets to ensure that they are consistent with the expenditure programmed in the general government budget, and will take all necessary actions to avoid new arrears, including at the level of hospitals under the responsibility of local governments.

  • Revenue enhancements. The copayment law for medical services has already received a positive recommendation from the expert commission of the Chamber of Deputies and is expected to be implemented during the first half of 2012. The current version of the claw-back tax for pharmaceuticals, introduced in October, presents some shortcomings that we will address by the end of the year. A revised law, agreed with IMF, EU, and WB staff, will be approved by end-2011. Enactment of the copayment and of the revised clawback legislation will be prior actions for conclusion of the third review.

  • Progress continues on implementing new healthcare IT systems. The auditing of patient registries is underway and will be completed by end-2011. In 2012, we will begin rolling out new health cards for all participants, which will help control fraud and abuse in the system and better monitor spending commitments. We will also introduce a new electronic prescription module for the National Health Information System in the second half of 2012. We will internalize the National Health Accounts System and will initiate the development of the Health Technology Assessment System by end-2011. These mechanisms will help ensure that future spending remains within allocations.

13. Improving tax administration and fighting tax evasion are crucial elements of our strategy to increase revenue. We are making progress on a comprehensive reform of ANAF. However, sustained improvements in tax collections have not yet been achieved and we hope that our continued efforts will bring such results in the future. Among the key developments are the following:

  • We have reconsidered our previous plans to introduce simplified taxation for smaller taxpayers. We now plan to use administrative means to cancel the registration for VAT purposes of the low contributors, who constitute 60 percent of firms registered but contribute only 1 percent to the fiscal revenues of the budget. In consultation with EU and IMF experts, we will agree on measures to reduce VAT registrants by 20 percent by end-September 2012 (compared to end-September 2011) (modified structural benchmark, end-December 2011). This system will help reduce fraud, and allow us to redirect tax administration resources towards large taxpayer compliance control.

  • We have started implementing the indirect audit method strategy, with a view to starting audits of individuals in 2012. To access third party information, we concluded agreements with most of the institutions providing such data, including the Land Registry.

  • We passed the government decision on ANAF restructuring and have closed 141 regional offices to reduce collection costs. ANAF staff has been reduced by 8 percent since end-2010. We have also initiated a regionalization reform, with long-term benefits for efficient administration, commencing with the large taxpayer directorate.

  • We will decrease the number of large taxpayers under the supervision of the large taxpayer directorate, to around 2000 starting with 2012.

  • We have adopted a compliance risk strategy in accordance with best practices in September. As a first step, we have already established a department in charge of risk assessment and work is under way to collect information for risk analysis purposes. A risk analysis procedure has been adopted in September, and selection of individual taxpayers for auditing will be based on this procedure.

  • We are planning expansion of e-filing and further simplification of tax forms and the number of payments required with a view to providing a one-stop shop for tax declaration and payments. Between January and September 2011, 40 percent of all tax returns filed to ANAF were using e-filing facilities.

  • We will also review VAT refund processes to streamline the timeframe for issuance and address difficulties from the expiration of the temporary reverse VAT scheme. Recently, the large taxpayers directorate abandoned its practice of requesting supplementary documents to examine VAT refund requests.

  • To reduce tax arrears, which have increased sharply with the economic crisis, a new scheme for agreed installment arrangements was approved in March. In October, we introduced another scheme allowing penalties to be partially or fully cleared for arrears prior to August 2011. We will consider other options if the situation does not improve materially in the next months.

Financial Sector

14. The tensions in euro area sovereign debt markets weighed upon the economic and financial market conditions in Romania during the third quarter. The Romanian banking sector as a whole recorded a loss in the quarter, due to rising provisions. Non-performing loans ratio (loans that are past due over 90 days and/or for which legal proceedings have been initiated) rose to 14.2 percent in September. Lending aggregates are picking up, with an increase in corporate lending more than offsetting a slight decline in household lending, but credit growth remains weak in real terms. The banking system remains well-capitalized, with an average capital adequacy ratio of 13.4 percent and a tier one capital ratio of 12.9 percent at end-September.

15. The final amendments to bank resolution legislation to introduce bridge bank powers are due to be completed by end-November. In light of the adverse developments in the external environment, we will take further steps to buttress the operational preparedness and strengthen the institutional underpinnings of the financial safety net by the end of the year. Specifically: (i) the Deposit Guarantee Fund (DGF) will join the National Committee for Financial Stability as a full member; (ii) the NBR and the DGF will sign a memorandum of understanding, which includes the appropriate procedures to enhance information sharing, warrant the early identification of problematic credit institutions and prepare contingency plans to deal with such institutions; (iii) under the guidance of the supervision department, the NBR will set up a joint working group of the NBR and DGF aiming at, inter alia, preparing contingency plans, finalizing intra- and inter-institutional operational procedures and undertaking practice runs and simulations. This working group will be given adequate expertise and resources to meet these objectives on a priority basis. The additional funding needed to fulfill the DGF’s obligations (including for bridge banks and purchase and assumption transactions) will be available within five working days from the MOPF on the (“cost recovery”) terms and conditions agreed by the MOPF and will no longer be capped by the balance in the privatization account, and legislative amendments will allow for it to be financed via the MOPF’s treasury operations.

16. In meeting our commitment to introduce International Financial Reporting Standards (IFRS) for the banking sector at the beginning of 2012, the NBR will ensure that, if prudential provisions exceed IFRS provisions, the calibration of prudential filters for provisions and solvency will substantively preserve the current approach, and not result in a reduction in banks’ solvency ratios compared to the present provisioning regime. The NBR will urgently complete consultations with the banking community to reach a common agreement on the calibration issues by end-November 2011. Net amounts arising at the start of 2012 from the release of provisions due to the new accounting treatment and which are treated as retained earnings from specific provisions to support regulatory capital will not be taxed as long as they remain in the corresponding retained earnings account. On an ongoing basis, the authorities will ensure that the IFRS provisions, and any additional prudential filters applied by the NBR, are tax deductible when they are made and taxable when they are released. To maintain its current capacity to effectively supervise the banking sector, the NBR will strengthen its expertise on IFRS, including via consultations with international experts.

17. The NBR will closely monitor the impact of the recent regulations on foreign currency lending to households and recalibrate the limits as necessary going forward to ensure that foreign currency lending to households, including for mortgages, remains prudently priced to reflect the risks to households. As preserving credit discipline and avoiding moral hazard among debtors contributes significantly towards enhancing financial stability, we will continue to refrain from adopting legislative initiatives (such as the personal insolvency law or proposals on the debt collecting law), which would undermine credit discipline. The NBR will ensure that any future consolidation process in the banking sector would lead to the emergence of well-capitalized credit institutions backed by a strong private shareholder base. We will amend the legislation on the bankruptcy of insurance undertakings, which will be enacted by end-April 2012.

Monetary Policy

18. Headline inflation has dropped more than previously forecasted since July, on the back of food price deflation and the disappearance of the first-round effect of VAT hike. The NBR is now seen to meet its 2011 inflation target, as we now expect inflation to continue declining to around 3.3 percent by the end of the year. Barring significant supply shocks and exchange rate depreciation, 2012 inflation is also likely to be within the central bank’s target band. However, risks to inflation remain, particularly from additional needed adjustments in administered prices and a rebound in wage cost dynamics. These pressures, together with the ongoing instability in international financial markets and the attendant risk of exchange rate pressures and volatile capital flows, mean that a continued prudent monetary policy stance is required. We will maintain banks’ reserve requirements ratios unchanged in the coming months and will act judiciously on the monetary policy rate.

Structural Reforms

Regulatory and Strategic Reforms in Transport and Energy

19. We remain convinced that comprehensive reforms in the energy and transport sectors are crucial for improving public sector efficiency, enhancing medium-term growth prospects, and increasing the absorption of EU structural funds. In the transport sector, in the coming months we will develop a new general transport strategy and master plan for Romania, balancing the increasing demand, ensuring the complementarities between the different transport modes in an efficient way, and the available fiscal means while defining priorities for medium- and long-term investment. We continue to implement measures to cut expenditures and raise revenues, in line with those specified in our letters of June 9 and September 14, 2011. Renegotiations of existing contracts and applying standard costs will substantially reduce costs in the road, urban transport, and rail industries. We have been able to reduce arrears of the passenger and infrastructure rail companies via specific schemes and are considering additional steps, conditional on the post-reform financial viability of these firms and EU regulations on state aid. In order to bring the rail sector closer to economic viability, we will continue the process of closing 1000 underutilized line kilometers. In addition, we will tender out the remaining 1600 line kilometers agreed and, in case the tendering fails, close them. Finally, we will develop by end-March 2012 ways to improve revenue generation and management of the real estate of the various transport sector SOEs, possibly through the establishment of a special real estate company.

20. For the energy sector we envisage major reforms. We have changed our national energy strategy with a view to attract more private capital and allowing for more transparent, flexible, and competitive energy production and supply. To enhance the pricing and regulatory framework we will undertake the following steps8:

  • The government will approve and submit legislation to Parliament by mid-December ensuring a complete transposition of the 3rd Energy Package as agreed with the EC, including the functional and financial independence of the energy regulator (ANRE), an appropriate unbundling regime, and the definition of vulnerable consumers.

  • We will approve by end-January 2012, a government memorandum (after agreement with the IMF and EC), a roadmap for phasing out regulated prices in gas and electricity specifying the timetable and intermediary steps, as defined in the EU Supplemental Memorandum of Understanding. We will also submit to Parliament the corresponding legislation by the same date. In order to ensure the good functioning of the price deregulation process, we will remove all legal, regulatory and physical barriers to cross-border trade of electricity and gas. We will also ensure that competition on energy markets is maintained, in particular in the gas market.

  • We have already undertaken action to ensure that existing bilateral energy contracts of SOEs are not extended and that their prices are adjusted to prevailing market prices as quickly as legally permissible and that new bilateral contracts are made transparently and non-discriminately through OPCOM (electricity) and other competitive procedures, including the possibility to develop a platform of exchange (gas) and are published.

  • To better align the CUG with actual costs, we will issue a decision to increase the CUG for non-households by another 5 percent as of January 1, 2012 (prior action).

State-Owned Enterprises

21. We maintain our ambitions reform agenda for SOEs, though additional action is needed to realize it. Our efforts contributed to achieving the third quarter indicative targets on the operating balance and arrears in key companies. We have also enhanced our monitoring of central government SOEs and made progress with a similar database for local SOEs. Restructuring of central government SOEs is advancing. Restructuring plans of all 154 companies specified in the LOI of June have been finalized. The process of implementing and sharpening these plans has started. For remaining central government SOEs in our database, we will develop plans by end-December 2011 in line with guidance given by staff concerning aim and content of these plans.

22. Our privatization efforts have not progressed as quickly as we had anticipated, but we remain committed to offering minority and majority stakes in a series of companies over the coming months. The structural benchmark on the appointment of privatization advisors was not met, but we intend to rectify this by the time of the IMF Board meeting (prior action). Privatization of these companies will be done in a market-friendly process and we will consult closely with IMF and EC staff. The transaction consultants will have the task of drafting evaluation reports, and recommending and justifying the offer price of the shares in view of a successful closing transaction. Our planned privatization actions are as follows:

  • The first group of companies to be offered by end-April 2012 includes: i) Oltchim (sale of remaining public shares to strategic investor), ii) Tarom (IPO of 20 percent), iii) Transelectrica (SPO of a 15 percent stake plus a later capital increase of about 12 percent), iv) Transgaz (SPO of a 15 percent stake); and v) Posta Romana (minority stake). In addition, the copper mining company, Cuprumin, will be privatized by mid-February and the IPO of a 15 percent stake in Romgaz will be undertaken by end-June.

  • The second group of companies includes i) Hidroelectrica (IPO of 10 percent to increase capital) and ii) Petrom (SPO of 9.84 percent stake will be re-launched), iii) CFR Marfă (majority privatization, possibly with the support of the EBRD and IFC). Appointment of transaction advisors for this group will be completed by mid-February 2012 (structural benchmark).

  • The third group comprises i) Electrica Serv (majority privatization of all regional companies currently under creation); ii) Nuclearelectrica (at least 10 percent via capital increase); iii) S.C. Electrica Furnizare S.A. (including the supply activity transferred from SC Electrica SA, majority privatization); iv) the three remaining Electrica distribution subsidiaries (minority privatization). Appointment of legal advisors for this group will be concluded by mid-February (structural benchmark).

  • Appointment of legal advisors will be concluded by end-June for (i) the new energy producer Hunedoara to be created by merging the power plants in Paroşeni and Mintia and purchasing the four viable mines of CNH (majority privatization); and (ii) the new energy producer to be created by merging SNLO and the three energy complexes in Craiova, Rovinari and Turceni; and (iii) ElCen Bucuresti (majority privatization).

23. In addition to the privatizations, we continue preparations to resolve the financial situation of Termoelectrica. By end-2011, valuable assets will either be extracted via forced execution by ANAF or be sold. The remaining part of the company will be placed into voluntary liquidation proceeding also by end-2011.

24. A general corporate governance reform has been prepared, which requires regular independent external audits, quarterly publication of financial data, reinforcement of OECD principles on corporate governance and strengthening the rights of minority shareholders. We have approved the legislation in November 2011, somewhat later than originally envisaged in the structural benchmark in order to allow for full public comment. For SOEs, a clearer distinction between the role of line ministries and management is included in this law, along with requirements on the appropriate qualification of management and board members. A government ordinance has been approved to move the financial control of SOEs from line ministries to the MOPF, including enhanced reporting mechanisms. Private management experience will be brought into the largest SOEs that remain under majority government ownership, in line with the criteria described in the letter of intent of September 2011. This management search will begin in November and private management teams will be selected by end-January 2012 to take office as soon as legally possible thereafter. In cases where significant minority stakes are to be sold, this timetable may be adjusted to allow for participation of the new minority shareholders. Based on the experience of this exercise, we are firmly committed to increasing the number of SOEs with private management in the course of 2012.

Other Structural Reforms

25. We are continuing with labor market reforms and the newly implemented legislation has shown positive impact. After the new Labor Code entered into force on April 30, along with economy recovery, more than one million new contracts have been signed, with 33 percent being fixed-term contracts. We will continue to monitor closely implementation of the new Labor Code and its effects on labor market outcomes. The implementation of the Social Dialogue Code stalled due to prolongation of the consultation process with social partners on sector definition in a collective bargaining. We will facilitate the tripartite consultation to reach an agreement and also ensure the new legislation observes EU directives and core ILO conventions. The Social Assistance Law, which aims to streamline social benefits and improve the efficiency of social protection, was approved by the Parliament. This will be followed by significant changes in secondary legislation. The overall measures on social assistance reforms will result in fiscal savings of around 0.8 percent of GDP in 2010–13.

26. We are committed to improving entry into retail markets to maintain a competitive environment, encourage innovation, and increase efficiency. In this regard we will eliminate by end-January 2012 undue barriers for opening large surface retail stores. We will undertake a Report on Observance of Standards and Codes (ROSC) on corporate insolvency systems and creditor rights in early 2012.

27. Measures to reform the judiciary are underway, with a view to make it more effective, unifying the jurisprudence, and fighting against corruption, which will provide for a transparent business environment and boost the economic performance. One of the top ranking objectives of the Government related to the reform of the judiciary is the successful implementation of the new fundamental legal codes for Romania: the civil code, the criminal code, the civil procedure code and the criminal procedure code. The civil code went into effect on October 1, 2011, and the government put in place measures to support its smooth implementation. In addition, the Ministry of Justice is supporting the transition to the new legal framework. Measures to implement the other three new codes, and any additional measures needed for the new civil code, will be identified by the impact studies currently underway. We will also undertake reforms in the agricultural sector—including by speeding up the surveying and registration of agricultural land—to improve food security and increase export prospects.

Table 1.Romania: Quantitative Program Targets
201020112012
DecMarchJuneSeptDecMarchJuneSeptDec
ActualActualActualProg.Prelim.Prog.Prog.IndicativeIndicativeIndicative
I.Quantitative Performance Criteria
1.Floor on the change in net foreign assets (mln euros) 1/2/20,0261191896−150292.85000250250250
2.Floor on general government overall balance (mln lei) 3/−33,621−5,254−11260−17,500−13,685−23,953−3,100−6800−8500−12210
3.Ceiling on stock of central government and social security arrears (bn lei)0.190.130.110.150.100.100.080.070.060.05
4.Ceiling on general government guarantees issued since end-2008 (face value, bn lei)7.68.16.014.05.814.014.014.014.014.0
II.Continuous Performance Criterion
5.Nonaccumulation of external debt arrears0000000000
III.Inflation Consultation
6.12-month rate of inflation in consumer prices
Outer band (upper limit)6.25.74.14.45.95.2
Inner band (upper limit)5.24.73.13.44.94.2
Actual/Center point7.98.08.04.23.53.72.12.43.93.2
Inner band (lower limit)3.22.71.11.42.92.2
Outer band (lower limit)2.21.70.10.41.91.2
IV.Indicative Target
7.Ceiling on general government current primary spending (excl. EU funds and social assistance, mln lei)131,93830,67062,57896,35094,133130,70031,60063,40093,900128,300
8.Floor on operating balance (earnings before interest and tax, net of subsidies) of key SOEs. 4/ (as defined in TMU (bn. lei))−6.8−0.7−1.8−3.6−2.4−4.0−1.5−2.2−2.7−3.2
9.Ceiling on stock of arrears of key SOEs (as defined in TMU (bn. lei)) 4/17.919.219.719.218.515.917.015.010.05.0
10.Ceiling on stock of local government arrears (bn lei)0.910.820.810.850.820.800.700.600.500.40
11.Ceiling on the execution of the PNDI program (mln, lei) 5/2004007001000

The end-December 2010 figure is a stock.

Cumulative flows relative to previous year end stock. 2011 September target is adjusted down from 250 million to -150 million due to the delayed disbursement of 400 million from World Bank.

Cumulative figure during calendar year (e.g. March 2011 figure is cumulative from January 1, 2011).

Adjusted indicative targets for end-September and end-December.

Cumulative figure during calendar year (e.g. March 2012 figure is cumulative from January 1, 2012).

The end-December 2010 figure is a stock.

Cumulative flows relative to previous year end stock. 2011 September target is adjusted down from 250 million to -150 million due to the delayed disbursement of 400 million from World Bank.

Cumulative figure during calendar year (e.g. March 2011 figure is cumulative from January 1, 2011).

Adjusted indicative targets for end-September and end-December.

Cumulative figure during calendar year (e.g. March 2012 figure is cumulative from January 1, 2012).

Table 2.Romania: Performance for Third Review
MeasureTarget DateComment
Prior Action
1. Appoint legal advisor for Hidroelectrica, transaction advisor for Oltchim, Transelectrica, and publish tender for transaction advisor for Romgaz, Tarom and Transgaz.
2. Enact the copayment law and the revised clawback tax law.
3. Increase gas price for non-resident consumers, in order to further align with CUG formula, by 5 percent.
Quantitative performance criteria
1. Floor on net foreign assetsSept. 30, 2011Met
2. Floor on general government overall balanceSept. 30, 2011Met
3. Ceiling on central government and social security domestic arrearsSept. 30, 2011Met
4. Ceiling on general government guaranteesSept. 30, 2011Met
5. Non-accumulation of external debt arrearsSept. 30, 2011Met
Quantitative Indicative Target
1. Ceiling on general government current primary spendingSept. 30, 2011Met
2. Floor on operating balance of key SOEsSept. 30, 2011Met
3. Ceiling on stock of arrears of key SOEsSept. 30, 2011Met
4. Ceiling on stock of local government arrearsSept. 30, 2011Met
Inflation consultation band
Inner bandSept. 30, 2011Met
Outer bandSept. 30, 2011Met
Structural benchmarks
1. Undertake SOE reforms, including (i) Appointment of legal advisors for privatization of CFR Marfa, TAROM, Transelectrica, Transgaz, and Romgaz; (ii) Preparation of action plans for the remaining SOEs of the central government; (iii) Design mechanisms to facilitate restructuring and securitizing SOE arrears.July 15, 2011Partially met / partially reset as prior action
2. Completion of a comprehensive review of the existing investment portfolio, which will prioritize and evaluate existing projects to focus on those where funding can be fully secured, examine the viability of old projects, with low priority and unviable ones discontinued, and production of a final report and an action plan.Sept. 30, 2011Partially Met
3. Amend legislation to allow the use of the deposit guarantee fund resources to facilitate bank restructuring, including purchase and assumption transactions.Sept. 30, 2011Met
4. Selection of advisors for SOE reform: (i) select transaction advisors for group 1 and (ii) legal advisors for group 2Oct. 31, 2011Partially met/ partially reset as prior action
5. Approve legislation to improve governance of SOEs.Oct. 31, 2011Met
6. Impose a revised clawback tax on the pharmaceuticals based on the growth in their costs or above a pre-determined threshold.Nov. 30, 2011Reset as prior action
7. Introduction of a simplified taxation system for smaller taxpayers under the threshold with help from the IMF and EC, while requesting a shift in the VAT mandatory threshold from the EU Council of Ministers to €50,000.Dec. 31, 2011Modified
8. Prepare comprehensive amendments to the health care legislation to address the persistent budgetary shortfalls and to ensure high quality health care services.Dec. 31, 2011
New Structural Benchmarks
1. Design measures to reduce registration of small VAT payers by 20 percent by end-September 2012(compared to end-September 2011).Dec. 31, 2011
2. Appoint transaction advisor for group 2 and legal advisor for group 3 as specified in MEFP.Feb. 15, 2012
Romania: Technical Memorandum of Understanding (TMU)

December 2, 2011

1. This Technical Memorandum of Understanding (TMU) defines the variables included in the quantitative performance criteria and indicative targets set out in the Memorandum of Economic and Financial Policies (MEFP), the key assumptions, the methods to be applied in assessing program performance, and the reporting requirements to ensure adequate monitoring of economic and financial developments. The quantitative performance criteria and indicative targets, and structural benchmarks for 2011 and 2012 are listed in Tables 1 and 2 of the MEFP, respectively.

2. For the purposes of the program, the exchange rates of the Romanian Leu (RON) to the euro is set at RON 4.2848 = €1, to the U.S. dollar at RON 3.2045 = $1, to the Japanese yen at RON 3.9400 = ¥100, and to the pound sterling at RON 4.9673 = £1, the rates as shown on the National Bank of Romania’s (NBR’s) website as of December 31, 2010. The exchange rates to other currencies, where applicable, will also be the ones shown on the NBR’s website as of December 31, 2010.

3. For the purposes of the program, the general government includes the entities as defined in the 2011 and 2012 budgets. These are: the central government (state budget, treasury, self-financed state entities included in the budget, etc.), local governments, social security funds (pension, health, and unemployment), road fund company, and administration of the property fund. This definition of general government also includes any new funds, or other special budgetary and extra budgetary programs that may be created during the program period to carry out operations of a fiscal nature as defined in the IMF’s Manual on Government Finance Statistics 2001. The authorities will inform IMF staff of the creation of any such new funds or programs immediately. As mentioned in the MEFP (¶3) and ¶11 below, this definition will be expanded to cover state-owned enterprises incorporated into the general government accounts under ESA95, upon completion of the review being undertaken by Eurostat.

Quantitative Performance Criteria, Indicative Targets, Inflation Consultation Band, and Continuous Performance Criteria

A. Floor on the Change in Net Foreign Assets

4. For program purposes, Net Foreign Assets (NFA) are defined as the NFA of the NBR minus Treasury liabilities to the International Monetary Fund.

5. NFA of the NBR are defined as the euro value of gross foreign assets of the NBR (including reserve requirements of the commercial banking system held at the NBR) minus gross foreign liabilities of the NBR; and will be measured on the basis of the NBR’s operational rather than accounting definitions. Non-euro denominated foreign assets and liabilities will be converted into euro at the program exchange rates.

6. Gross foreign assets of the NBR are defined to include the NBR’s holdings of SDRs, the country’s reserve position at the IMF, holdings of cash, securities and deposits abroad in convertible foreign currencies. Excluded from reserve assets are: (i) gold and other precious metals; (ii) assets in nonconvertible currencies; (iii) illiquid assets; (iv) any assets that are pledged, collateralized, or otherwise encumbered, unless there is also a gross foreign liability associated with it; (v) claims on residents; and (vi) claims in foreign exchange arising from derivatives in foreign currencies vis-à-vis domestic currency (such as futures, forwards, swaps, and options).

7. Gross foreign liabilities of the NBR are defined as all foreign exchange liabilities to residents and nonresidents, including commitments to sell foreign exchange arising from derivatives (such as futures, forwards, swaps, and options), and all credit outstanding from the IMF, but excluding (i) banks’ foreign currency deposits against reserve requirements; and (ii) government foreign currency deposits at the NBR. This definition is meant to bring the concept of foreign liabilities closer to the balance of payment definition, on which the targets are based.

Floor on cumulative change in NFA from the beginning of 2011 and 2012 (in mln. euros)1
201020112012
Dec.Mar.Jun.Sep.Dec.Mar.Jun.Sep.Dec.
stockactualactualactualPCPCindicat.indicat.indicat.
Cumulative change in NFA20,02611921,8962935000250250250
Memorandum Item:

Gross Foreign Assets
32,4329962,793120610000250−350−1250

PC = performance criterion; data for end-month. Flows are cumulative from the beginning of the same calendar year (e.g., March 2012 figure is cumulative from January 1, 2012). Current year stocks are obtained by adding the flows to the previous end-year stock.

PC met with an adjustment for the WB disbursement of €300 million.

PC = performance criterion; data for end-month. Flows are cumulative from the beginning of the same calendar year (e.g., March 2012 figure is cumulative from January 1, 2012). Current year stocks are obtained by adding the flows to the previous end-year stock.

PC met with an adjustment for the WB disbursement of €300 million.

8. The NFA target for December 31, 2011 and March 31, 2012, will be adjusted upward (downward) by the full amount of the surplus (shortfall) relative to the baseline of external bond placement by the Ministry of Public Finance (MOPF). NFA targets will also be adjusted (i) upward (downward) by the surplus (shortfall) in program disbursements relative to the baseline projection (Program disbursements are defined as external disbursements from official creditors (WB and the EC) that are usable for the financing of the overall central government budget) and (ii) upward by the increase in commercial bank reserve requirements held with the NBR relative to end-December 2010 (€6,797 million), measured at program exchange rates.

External program and MOPF disbursements–Baseline projections (in mln. euros)
20112012
Mar.Jun.Sep.Dec.Mar.Jun.Sep.Dec.
Cumulative flows from end of 2010 under external program1,2001,6502,0502,0502,0502,0502,0502,050
Flows of external MOPF bond placement1,0000

B. Consultation Mechanism on the 12-month Rate of Inflation

9. The quarterly consultation bands for the 12-month rate of inflation in consumer prices (as measured by the headline consumer price index (CPI) published by the Romanian Statistical Institute), are specified below. Should the observed year-on-year rate of CPI inflation fall outside the outer bands specified below, the authorities will complete a consultation with the IMF on their proposed policy response before requesting further purchases under the program. In addition, the NBR will conduct discussions with IMF staff should the observed year-on-year rate of CPI inflation fall outside the inner bands specified for the end of each quarter in the table below.

Inflation consultation band
201020112012
Dec.

actual
Mar.

actual
Jun.

Actual
Sep.

actual
Dec.

target
Mar.

target
Jun.

indicat.
Sep.

indicat.
Dec.

indicat.
Outer band (upper limit)5.74.14.45.95.2
Inner band (upper limit)4.73.13.44.94.2
Actual / Center point7.98.08.03.53.72.12.43.93.2
Inner band (lower limit)2.71.11.42.92.2
Outer band (lower limit)1.70.10.41.91.2

C. Performance Criterion on General Government Balance

10. The budget deficit will be monitored quarterly through the cash balance of the general government in GFS 1986 classification. The authorities will consult with IMF staff on corrective measures in the event of shortfalls in government revenue and financing.

Cumulative floor on general government balance1
(In millions of lei)
End-December 2010 (actual)−33,621
End-March 2011 (actual)−5,254
End-June 2011 (actual)−11,260
End-September 2011 (actual)−13,685
End-December 2011 (performance criterion)−23,953
End-March 2012 (performance criterion)−3,100
End-June 2012 (indicative)−6,800
End-September 2012 (indicative)−8,500
End-December 2012 (indicative)−12,210

Cumulative figure during calendar year (e.g., March 2012 figure is cumulative from January 1, 2012).

Cumulative figure during calendar year (e.g., March 2012 figure is cumulative from January 1, 2012).

11. Starting from end-March 2012 performance criterion, the budget deficit will be measured from above the line using the budget execution data. Expenditure will include the value of the works executed under the contracts from the National Program for Infrastructure Development (PNDI).

12. Once the reporting system for state-owned enterprises (SOEs) is fully functional, the budget deficit target will be modified to be in line with the expanded definition of the general government, which will include the following SOEs: C.N. de Autostrãzi si Drumuri Nationale din România SA, Fondul Proprietatea SA, Metrorex SA, Administratia Fluviala Dunarea de Jos, CFR Calatori, CN Huila Petrosani SA, SN a Carbunelui SA, CN Radiocomunicatii Constanta, SC Interventii Feroviare, CFR Infrastructura, Termoelectrica, Societatea Nationala “Aeroportul International Mihail Kogalniceanu”, SC Electrificarea SA, CN Administratia Canalelor Navigabile Constanţa SA, SC CN Romarm SA Buc Filiala SC Uzina Mecanica Cugir SA, SC Santierul Naval Mangalia SA, Societatea Feroviara de Turism SFT CFR, SC Uzina Mecanica Orastie, Societatea de Transport Maritim si de Coasta CFR Ferryboat SA, SC Avioane Craiova SA, SC Petromin SA, SC Constructii Aeronautice SA, SC Sanevit 2003 SA, SC Uzina AutoMecanica SA Moreni, SC Terom SA, SN Plafar SA, and SC Nicolina SA.

13. The Ministry of Public Finance (MOPF) will also provide monthly data to measure the deficit from below the line. The balance of the general government measured from below the line will include:

  • + (i) net external financing, excluding valuation gains and losses;

  • + (ii) change in net domestic credit from the financial system, excluding valuation gains and losses from deposits denominated in foreign currency and including adjustments for;

    • + (a) received EU funds not yet spent (advance payments);

    • + (b) claims of the government on EU funds;

    • + (c) property fund obligations not yet paid;

  • + (iii) change in the stock of issued government securities, net of valuation changes;

  • + (iv) net changes in other financing.

14. If the difference between the general government deficit measured from above the line and from below the line is larger than lei 200 million each quarter during 2011 and 2012, the MOPF will consult with IMF staff.

15. The performance criterion for the general government balance for end-March 2012 (measured on a cumulative basis from the beginning of the year) will be adjusted downward by the amount that capital spending (including spending related to EU funds and arrears reduction plans, but excluding the works executed under the contracts from the PNDI) exceeds lei 6,970 million up to a limit of lei 1,400 million.

D. Performance Criterion Limiting the Issuance of Government Guarantees to the Non-Financial Private Sector and Public Enterprises

16. The issuance of general government guarantees to the non-financial private sector and public enterprises will be limited during the program period. This ceiling is set at RON 14 billion but may be adjusted upward by up to RON 9.6 billion for guarantees for financing the Nabucco project. Revision to targets will be renegotiated during future missions to allow for reasonable public guarantees in the context of privatization of majority stakes in state-owned enterprises and securitization of domestic payment arrears.

Ceiling on new general government guarantees issued from end-2008 until:(In billions of lei)
End-December 2010 (actual)7.6
End-March 2011 (actual)8.1
End-June 2011 (actual)6.0
End-September 2011 (actual)5.8
End-December 2011 (performance criterion)14.0
End-March 2012 (performance criterion)14.0
End-June 2012 (indicative)14.0
End-September 2012 (indicative)14.0
End-December 2012 (indicative)14.0

E. Performance Criterion on the Stock of Domestic Arrears by the Central Government and Social Security System

17. The performance criterion established on the stock in domestic payments arrears of the central government and social security sector (as defined in ¶3 above) contemplates their elimination during the program period. The stock will be measured net of intergovernmental arrears, but both gross and net arrears will be reported by the government. In case of need, the government will take corrective measures to prevent the accumulation of new spending arrears. For the purpose of the program, arrears mean accounts payable past due date by 90 days (in line with ESA95 definitions for expenditures).

Stock of central government and social security arrears(In billions of lei)
End-December 2010 (actual)0.19
End-March 2011 (actual)0.15
End-June 2011 (actual)0.11
End-September 2011 (actual)0.10
End-December 2011 (performance criterion)0.10
End-March 2012 (performance criterion)0.08
End-June 2012 (indicative)0.07
End-September 2012 (indicative)0.06
End-December 2012 (indicative)0.05

F. Continuous Performance Criteria on Non-Accumulation of External Payments Arrears by the General Government

18. The general government will not accumulate external payment arrears during the program period. For the purposes of this performance criterion, an external payment arrear will be defined as a payment by the general government that has not been made within seven days of falling due. The performance criterion will apply on a continuous basis.

G. Indicative Target on General Government Current Primary Spending

19. The indicative target on current primary expenditure of the general government is defined as spending on personnel, goods and services excluding EU funds (specified under external grant category), subsidies, transfers to public entities, pensions (social security budget in social assistance category), state aid and other spending in other transfers category, Reserve Fund, and other expenditure as classified in the monthly reporting tables. Actual data (to which the target will be compared) should include payments related to arrears reduction plans.

Cumulative change in general government current primary expenditures1(In millions of lei)
End-December 2010 (actual)131,938
End-March 2011 (actual)30,670
End-June 2011 (actual)62,578
End-September 2011 (actual)94,133
End-December 2011 (indicative)130,700
End-March 2012 (indicative)31,600
End-June 2012 (indicative)63,400
End-September 2012 (indicative)93,900
End-December 2012 (indicative)128,300

Cumulative figure during calendar year (e.g., March 2012 figure is cumulative from January 1, 2012).

Cumulative figure during calendar year (e.g., March 2012 figure is cumulative from January 1, 2012).

H. Indicative Target on the Execution of the PNDI Program

20. An indicative target on the ceiling is set for the execution of the PNDI program.

Ceiling for the execution of the PNDI Program(In million of lei)
End-March 2012 (indicative)200
End-June 2012 (indicative)400
End-September 2012 (indicative)700
End-December 2012 (indicative)1,000

Cumulative figure during calendar year (e.g., March 2012 figure is cumulative from January 1, 2012).

Cumulative figure during calendar year (e.g., March 2012 figure is cumulative from January 1, 2012).

I. Indicative Target on Local Government Arrears

21. The indicative target on the stock of domestic payments arrears of local governments contemplates no accumulation of new arrears and their reduction during the program period. In case of need, the government will take corrective measures to prevent the accumulation of new spending arrears. For the purpose of the program, arrears mean accounts payable past the due date by 90 days (in line with ESA95 definitions for expenditures).

Stock in local government arrears(In billions of lei)
End-December 2010 (actual)0.91
End-March 2011 (actual)0.82
End-June 2011 (actual)0.81
End-September 2011 (actual)0.82
End-December 2011 (indicative)0.80
End-March 2012 (indicative)0.70
End-June 2012 (indicative)0.60
End-September 2012 (indicative)0.50
End-December 2012 (indicative)0.40

J. Monitoring of Public Enterprises

22. Public enterprises are defined as all companies, research institutes and regii autonome with a cumulative public capital share of 50 percent or more, held directly or indirectly by local governments and the central government.

23. A quarterly indicative target for 2011 is set on the aggregate operating balance (earnings before interest and tax) net of subsidies, accumulated per calendar year, of the following public enterprises: C.N. Căi Ferate CFR S.A., C.N. de Autostrãzi si Drumuri Nationale din România S.A., C.N. a Huilei S.A., C.N. Poşta Românã S.A., S.C. Complexul Energetic Turceni S.A., S.C. Filiala de Intretinere si Servicii Energetice “Electrica Serv” - S.A., S.C. Metrorex S.A., S.N. de Transport Feroviar de Marfă “CFR Marfă” S.A., S.N. Transport Feroviar de Călători “CFR Călători” S.A., C.N. Tarom S.A., S.C. Electrocentrale Bucuresti S.A., S.C. Electrica Furnizare Transilvania Nord S.A., S.C. Oltchim S.A., S.C. Termoelectrica S.A., SNa Lignitului Oltenia S.A., S.C. Electrificare CFR S.A., S. C. Interventii Feroviare S.A., S. C. Telecomunicatii C.F.R. S.A. The data shall be reported with operating results by firm. The targets will be as follows:

Floor on cumulative operating balance12(In billions of lei)
End-December 2010 (actual)−6.8
End-March 2011 (actual)−0.7
End-June 2011 (actual)−1.8
End-September 2011 (preliminary)−2.4
End-December 2011 (adjusted, indicative)−4.0

Cumulative figure during calendar year (e.g., March 2011 figure is cumulative from January 1, 2011).

End September actual data and end-December target exclude operating balance of S.C. Electrica Furnizare Transilvania Nord S.A.

Cumulative figure during calendar year (e.g., March 2011 figure is cumulative from January 1, 2011).

End September actual data and end-December target exclude operating balance of S.C. Electrica Furnizare Transilvania Nord S.A.

24. A quarterly indicative target for 2012 is set on the aggregate operating balance (earnings before interest and tax) net of subsidies, accumulated per calendar year, of the following public enterprises: C.N. de Autostrãzi si Drumuri Nationale din România S.A., S.C. Metrorex S.A., C.N. Căi Ferate CFR S.A. (including S. C. Interventii Feroviare S.A.), S.C. Electrificare CFR S.A., S. C. Telecomunicatii C.F.R. S.A., S.N. Transport Feroviar de Călători “CFR Călători” S.A., S.N. de Transport Feroviar de Marfă “CFR Marfă” S.A., C.N. Tarom S.A., S.C. Oltchim S.A., C.N. a Huilei S.A., S.C. Termoelectrica S.A., S.C. Electrocentrale Deva S.A., S.C. Electrocentrale Paroseni S.A., S.C. Electrocentrale Galati S.A., S.C. Electrocentrale Bucuresti S.A., SNa Lignitului Oltenia S.A., S.C. Complexul Energetic Craiova S.A., S.C. Complexul Energetic Rovinari S.A., S.C. Complexul Energetic Turceni S.A., S.C. Hidroelectrica, S.C. Electrica S.A., C.N. Poşta Românã S.A. The data shall be reported with operating results by firm. The targets will be as follows:

Floor on cumulative operating balance1(In billions of lei)
End-March 2012 (indicative)−1.5
End-June 2012 (indicative)−2.2
End-September 2012 (indicative)−2.7
End-December 2012 (indicative)−3.2

Cumulative figure during calendar year (e.g., March 2012 figure is cumulative from January 1, 2012).

Cumulative figure during calendar year (e.g., March 2012 figure is cumulative from January 1, 2012).

25. In case one of these firms is liquidated, or its majority share is privatized or merged with a company not listed above, the aggregate target listed above will be adjusted by the

original operating balance target for this firm. If any of the companies listed above is split into a new company, both companies will remain under monitoring. If some of the above companies are merged, the newly created companies will remain under monitoring.

26. A quarterly indicative target for 2011 is set on the stock of arrears of the public enterprises listed in ¶23. The data shall be reported at the firm level. The targets will be as follows:

Ceiling on stock of arrears 1(In billions of lei)
End-December 2010 (actual)17.9
End-March 2011 (actual)19.2
End-June 2011 (actual)19.7
End-September 2011 (adjusted, preliminary)18.5
End-December 2011 (adjusted, indicative)15.9

End September actual data and end-December target exclude arrears of S.C. Electrica Furnizare Transilvania Nord S.A.

End September actual data and end-December target exclude arrears of S.C. Electrica Furnizare Transilvania Nord S.A.

27. A quarterly indicative target for 2012 is set on the stock of arrears of the public enterprises listed in ¶24. The data shall be reported at the firm level. The targets will be as follows:

Ceiling on stock of arrears(In billions of lei)
End-March 2012 (indicative)17.0
End-June 2012 (indicative)15.0
End-September 2012 (indicative)10.0
End-December 2012 (indicative)5.0

In case one of these firms is liquidated, its majority share is privatized or is merged with a company not listed above, the aggregate target listed above will be adjusted by the original arrears target for this firm. If any of the companies listed above is split into a new company, both companies will remain under monitoring. If some of the above companies are merged, the newly created companies will remain under monitoring.

K. Private Management for Key SOEs

28. Private management will be selected, in line with MEFP ¶24, at least for the following state-owned enterprises: i) C.N. Poşta Românã S.A., ii) C.N. Tarom S.A., iii) S.C. Electrificare CFR S.A., iv) SNa Lignitului Oltenia S.A., v) S.C. Electrica Furnizare S.A., vi) S.C. Hidroelectrica, vii) C.N. Romarm aparat central, and viii) S.C. Oltchim S.A..

29. In addition, private management is envisaged in the course of 2012 for the following additional companies: i) C.N. Căi Ferate CFR S.A., ii) S.N. Transport Feroviar de Călători

“CFR Călători” S.A., iii) SN Nuclearelectrica, iv) S.N. Transgaz, v) CN Transelectrica, vi) S.N. Romgaz and vi) C.N. Adm. Port. Maritim Constanta S.A.

L. Reporting Requirements

30. Performance under the program will be monitored from data supplied to the IMF and EC by the NBR and the MOPF as outlined in the table below. The authorities will transmit promptly to IMF and EC staff any data revisions as well as other information necessary to monitor the arrangement with the IMF and EC.

Romania: Data Provision to the IMF and EC
ItemPeriodicity
To be provided by the Ministry of Finance
Preliminary monthly data on general government accounts, including public enterprises as defined by ESA95Monthly, on the 25th day of the following month
Quarterly final data on project execution under the Program for National Infrastructure DevelopmentQuarterly, on the 25th day past the test date
Quarterly final data on general government accounts, including public enterprises as defined by ESA95Quarterly cash data, on the 35th day past the test date; Quarterly accrual data, on the 55th day past test date
The budget deficit of the general government using ESA95 definitionQuarterly, with a lag of three months
Preliminary data on below-the-line financing for the general governmentMonthly, with a lag of no more than 35 days past the test date
Final quarterly data on below-the-line financing for the general governmentQuarterly, no later than 45 days past the test date
Total accounts payable and arrears of the general government, including local governmentsPreliminary monthly, within the next month. Quarterly, within 55 days
Stock of the central government external arrearsDaily, with a lag of not more than seven days
Public debt and new guarantees issued by the general governmentMonthly, within one month
Preliminary monthly data on general government primary spending, net of EU disbursementsPreliminary monthly data within 25 days
Final quarterly data on general government primary spending, net of EU disbursementsQuarterly, within 35 days from the test date
Preliminary data on the operating balance, profits, stock of arrears, and personnel expenditures for each key public enterprise as defined in ¶22Quarterly, within 30 days
Final data on the operating balance, profits, stock of arrears, and personnel expenditures for each key public enterprise as defined in ¶22Quarterly, end May for the previous year and end-August for first half of the current year
Data on EU project grants (reimbursements and advances), capital expenditures and subsidies covered by EU advances or eligible for EU reimbursement on EU supported projects specifically agreed with the EUMonthly, within three weeks of the end of each month
The balance of the TSA in RONMonthly, within two weeks of the end of each month
The balance of the two foreign currency accounts used for budget financing and public debt redemption purposes (average, and end-of-period)Monthly, within two weeks of the end of each month
The balance of the privatization receipts registered in the account of the State Treasury, details on any claims on these receipts and projected net outflows.Monthly, within two weeks of the end of each month
Reporting of progress in the implementation of the Romanian public administration’s functional reviewQuarterly, to be sent two weeks before each mission for each of the 12 ministries
To be provided by the National Bank of Romania
NFA data, by components, in both program and actual exchange ratesWeekly, each Monday succeeding the reporting week and with a 3 working day lag in the case of end-quarter data
Monetary survey data in the format agreed with IMF and EC staffMonthly, within 30 days of the end of the month
The schedule of contractual external payments of the banking sector falling due in the next four quarters, interest and amortization (for medium and long-term loans)Monthly, 45 days after the end of each month
The schedule of contractual external payments of the corporate sector falling due in the next four quarters interest and amortization (for medium and long-term loans)Monthly, 45 days after the end of each month
The stock of short-term external debt of banks and corporateMonthly, 45 days after the end of each month
Data on solvency should be provided on quarterly basis.
Balance of payments in the IMF format currently used to reportMonthly, 45 days after the end of each month
Exposure (deposits, loans, subordinated loans) of (i) foreign parent banks to their subsidiaries in Romania; (ii) IFI and (iii) other creditors to banks in Romania (by national and foreign currency).Monthly, 20 days after the end of each month
Financial soundness indicators1Monthly, 15 days after the end of each month
Foreign currency reserves including information on FX market interventions and swaps by the NBRBi-weekly
The IMF and the EC shall be immediately informed in case of sudden loss of reserves exceeding EUR 600 million, or if the stock of foreign exchange reserves falls below the floor of EUR 23 billionImmediately, upon occurrence
Annex

Measures to Improve Performance of SOEs under Monitoring

C.N. de Autostrãzi si Drumuri Nationale din România S.A.

  • Ensure sufficient public support (via EU structural funds and national budget) for investments in road infrastructure needed in budget for 2012, by end-2011.

  • Increase revenues by extending information system for the toll system; contract for installation of 63 new fixed control points will be signed by end-2011.

  • Finalize customization of internal management control standards by end-March 2012.

  • Reduce costs by applying standard costs both for existing contracts, through a renegotiation process, and for new contracts.

S.N. de Transport Feroviar de Marfă “CFR Marfă” S.A.

  • Amend the company’s budget by end-November 2011, as the originally included capital increase is not included in the government’s budget revision.

  • Negotiate with the Ministry of Public Finance, Ministry of Internal Affairs and Ministry of Economy possibilities of arrears cancellation schemes by end-2011.

  • Appoint the investment bank / SSIF (Financial Investments Services Company) which will also provide the legal advice for privatization for majority privatization to strategic investor by end-January 2012.

  • Merger of the maintenance companies of Marfa and Calatori (Societatea Comercială Întreţinere şi Reparaţii Locomotive şi Utilaje “C.F.R. IRLU”-S.A and Societatea comerciala de reparaţii locomotive C.F.R. SCRL Braşov S.A.), to be directly owned by Ministry of Transport and Infrastructure, by end-June 2012.

  • Publish prospectus by mid-June 2012.

  • Conclude privatization by end-October 2012.

  • Continuous reinforcement of efforts to collect outstanding invoices, including by giving notice on contracts and taking legal measures against companies with substantial arrears.

  • Reduce costs by applying standard costs both for existing contracts, through a renegotiation process, and for new contracts.

S.N. Transport Feroviar de Călători “CFR Călători” S.A.

  • Approve remaining standard costs for maintaining rolling stock by end-November 2011, to be required on all new contracts.

  • Allocate in investment budget for 2012 amount needed to start replacing the old rolling stock with diesel railcars and electric multiple units, by end-2011.

  • Develop assessment of viability of lines and develop plan for suspension of services by end-January 2012.

  • Scrap 240 depreciated cars by end-June 2012.

  • Merger of the maintenance companies of Marfa and Calatori (Societatea Comercială Întreţinere şi Reparaţii Locomotive şi Utilaje “C.F.R. IRLU”-S.A and Societatea comerciala de reparaţii locomotive C.F.R. SCRL Braşov S.A.), to be directly owned by Ministry of Transport and Infrastructure, by end-June 2012.

  • Appoint private management and board members in the course of 2012, if experience with private management in SOEs is positive.

C.N. Căi Ferate CFR S.A.

  • Sign consultancy contract by end-November 2011 for analysis of rail system and develop strategy for sustainability by end-January 2012.

  • Revise PSO contract in February 2012 in line with findings of study, aiming at a substantial reduction of lines under management of CFR towards 10,000 over the coming years, while preserving and enhancing the actual and future TEN-T network, and including a corresponding personnel reduction while preserving the necessary personnel in charge with the implementation of structural funds.

  • Assuming a corresponding agreement concerning the payment of electricity related receivables from CFR Infrastructure, issue a corresponding legal act to wave penalties for receivables of S.C. Electrica S.A. by end-2011.

  • Ensure sufficient public support (via EU structural funds and national budget) for investments in rail infrastructure needed in budget for 2012, by end-2011.

  • Develop plan how to increase revenues from renting out and better administrating commercial space, including potential public-public partnerships, by mid-January 2012.

  • Use expected government capital increase to repay arrears to the central budget and social security contributions, including those to be taken over from CFR Electrificare, by end-2011.

  • Use excess budgetary means in 2011 and / or a credit guaranteed by the state to reduce arrears to electricity suppliers by end-March 2012, strictly conditioned on reform measures.

  • Develop by end-March 2012 ways to improve management of the real estate of the various transport sector SOEs, possibly through the establishment of a special real estate company.

  • Continue tendering process for public service obligations and infrastructure maintenance for 1600 line kilometers of extended railway, bringing the total number of line kilometers under private management to 4000 kilometers. Close all lines for which tenders failed by end-April 2012, bringing network under management of CFR down to 15.500 line kilometers.

  • In light of the reduction of lines to be maintained and technology modernization, reduce personnel by 2000 (compared with end-September 2011) while not reducing personnel managing structural funds, by end-April 2012.

  • Continue insolvency procedure for the Tipografia subsidiary; if liquidation can be avoided, the process to full privatization of the company will be started immediately.

  • Appoint private management and board members in the course of 2012, if experience with private management in SOEs is positive.

  • Present a short report on which measures have been implemented during last month,

key findings of the various studies and which new measures are envisaged, during first week of every month.

S.C. Interventii Feroviare S.A.

  • Complete integration into mother company by end-2011.

  • Reduce personnel by 28 positions until end-2011.

  • Enforce 4 days leave without pay for remaining personnel by end-2012.

S.C. Electrificare CFR S.A.

  • Arrears to the state budget will be taken over by the mother company C.N. Căi Ferate CFR S.A. together with ANAF by end-2011.

  • Appoint private management and board members by early-2012.

  • Continue the restructuring and modernization program, including a further reduction of 85 positions by end-2012 (compared with September 1, 2011).

  • Ensure the acquisition of electricity via OPCOM when taking over supply and distribution activity for traction energy for the whole railway system.

S.C. Telecomunicatii C.F.R. S.A.

  • Complete administrative formalities for subordinating SC Telecomunicatii S.A. under the authority of the Ministry of Transports and Infrastructure.

  • Continue to elaborate legislation establishing the new framework for supplying telecommunication services within an integrated system.

S.C. Metrorex S.A.

  • Develop plan how to increase revenues from commercial activities like renting advertising and commercial spaces by mid-January 2012.

  • Increase revenues by introducing 16 new metro trains into circulation in 2012.

  • Include S.C. Metrorex S.A. in the list of potential beneficiaries of SOP–Transport 2014–2020 in order to use European Structural Funds.

C.N. Tarom S.A.

  • Publish tender for investment bank / SSIF (Financial Investments Services Company) which will also provide the legal advice for privatization of at least a 20 percent stake via IPO, prior action.

  • Elaborate the TAROM 2012–16 Development Plan, signing the consulting services contract until end-November 2011.

  • Publish prospectus by end-January 2012.

  • Conclude privatization offer by end-April 2012.

  • Appoint private management and board members shortly after conclusion of privatization.

  • Reduce costs (e.g. by renegotiation of contracts, voluntary personnel reductions, discontinuation of selected lines and flights, by renegotiation of lease-in contract for flying staff, extending the saving oil consumption program).

  • Increase revenues (e.g. by alternative sales strategies and optimizing pricing policies, developing strategy for additional lines to Eastern Europe in cooperation with Skyteam partners, resuming on-board sales and sale of TAROM branded products).

C.N. Poşta Românã S.A.

  • Reduce postal subunits from 7100 at end-2010 to around 5800 by end-December 2011.

  • Ensure respecting 2011 budget allocation for wage bill by end-2011.

  • Repayment of all arrears (depending on court decision, where applicable) by end-2011.

  • Hire legal and transaction advisor for capital increase by at least 20 percent by end-January 2012.

  • Start process of collective layoffs in line with restructuring plan by end-2011.

  • Publish prospectus for capital increase of strategic investor by end-February 2012.

  • Finalize capital increase by end-April 2012.

  • Appoint private management and board members shortly after capital increase has been implemented in close cooperation with new shareholder.

S.C. Oltchim S.A.

  • Appoint investment bank for full privatization (prior action), publish prospectus for SPO by mid-February 2012, conclude privatization offer by end-April 2012.

  • Appoint team of private management and board members to prepare the company for privatization by end-December 2011.

  • Neither Oltchim nor the government will acquire the refinery in Arpechim prior to privatization.

S.C. Termoelectrica S.A., including subsidiaries S.C. Electrocentrale Paroseni S.A. and S.C. Electrocentrale Deva S.A.

  • Dismantle production capacity in groups 1, 2 and 3 of Electrocentrale Paroseni of at least 150 MW (compared with end-2010) by end-December 2011.

  • Put group 1 of Electrocentrale Deva of 210 MW into conservation by end-April 2012.

  • Use forced execution by ANAF for the subsidiaries Paroseni and Deva by end-December and start forming the new energy company Hunedoara by merging these two companies.

  • Use forced execution by ANAF for Electrocentrale Bucuresti by end-December 2011 and put it under direct ownership of the Ministry of Economy.

  • Approve voluntary liquidation of Termoelectrica and appoint special single administrator by end-2011 in order to appoint liquidator by end-February 2012.

  • Appoint legal advisor for majority privatization of new energy company Hunedoara by end-June 2012.

  • Appoint transaction advisor for majority privatization of new energy company Hunedoara by end-August 2012.

  • Complete majority privatization offer of new energy company Hunedoara by end-2012.

S.C. Electrocentrale Bucuresti S.A.

  • Accelerate discussions between ElCen Bucuresti, Radet Bucuresti, and Radet Constanta, the Ministry of Economy, and the municipality of Bucharest to find a solution for outstanding payments.

  • Use payments from government under district heating related arrears reduction schemes (about 0.1 bn. lei) for arrears reduction by end-November 2011.

  • Elimination of all arrears to Romgaz by end-December 2011.

  • Use forced execution by ANAF against Termoelectrica by end-December 2011 and put it under direct ownership of the Ministry of Economy.

  • Appoint legal advisor for the majority privatization by end-June 2012.

  • Appoint transaction advisor by end-August 2012.

  • Publish prospectus by end-October 2012.

  • Finalize privatization offer by end-2012.

  • Continue process of creating joint ventures with strategic investors to built new power units in Bucharest, Constanta and Fantanele with private majority share.

S.C. Filiala de Intretinere si Servicii Energetice "Electrica Serv" S.A.

  • Appoint legal advisor for majority privatization of regional companies via IPO or to strategic investor by mid-February.

  • Appoint transaction advisor for privatization by end-March 2012.

  • Conclude privatization for the new company active in the area of Transilvania Sud, Transilvania Nord and Muntenia Nord by end-June 2012, finalize the process for the other 5 companies by autumn 2012 and file for liquidation for all subsidiaries for which privatization failed immediately thereafter.

S.C. Complexul Energetic Turceni S.A., including energy complexes in S.C. Complexul Energetic Craiova S.A. and S.C. Complexul Energetic Rovinari S.A.

  • Turceni: Reduce personnel by 200 (compared with end-2010) by end-December 2011.

  • Create new energy producer by merging SNLO and the three energy complexes in Craiova, Rovinari and Turceni by end-March 2012.

  • Appoint legal advisor for majority privatization of newly created company via IPO or to strategic investor by end-June 2012.

  • Appoint transaction advisor by end-August 2012.

  • Publish prospectus for privatizations by end-October 2012.

  • Conclude privatization offer by end-2012.

C.N. a Huilei S.A

  • Start forced execution by ANAF to take over non-viable parts of CNH for tax liabilities as soon as legal acts have been approved. Thereafter, create by end-2011 separate, independent company for non-viable mines for closing them down in line with EU regulations.

  • Sell viable mines in open and transparent tendering process in spring 2012.

  • Start liquidation process thereafter.

SNa Lignitului Oltenia S.A.

  • Use government payments under district heating and heavy water related arrears reduction schemes (about 0.3 bn. lei) for arrears reduction by end-November 2011.

  • Decrease personnel by 200 compared with end-September 2011 by end Mach 2012.

  • Create new energy producer by merging SNLO and the three energy complexes in Craiova, Rovinari and Turceni by end-March 2012 (see above under S.C. Complexul Energetic Turceni S.A.).

  • Appoint private management and board members as from the formation of the new Complexul Energetic Oltenia.

  • Continuous reduction of underground operation with aim to terminate it by end-March 2013.

S.C. Hidroelectrica S.A.

  • Appoint legal advisor for 10% capital increase via IPO, prior action.

  • Giving cancellation notice to all bilateral contracts not having been traded on Opcom by end-December 2011.

  • Appoint private management and board members by end-December 2011.

  • Appoint investment bank by mid-February 2012.

  • Publish prospectus by end-July 2012.

  • Conclude IPO by end-October 2012.

S.C. Electrica S.A. and S.C. Electrica Furnizare SA

  • Keep remaining 3 distribution subsidiaries in separate companies as merging them could lead to competition restrictions.

  • Assuming a corresponding agreement concerning the payment of electricity related receivables from CFR Infrastructure, issue a corresponding legal act to wave penalties for receivables of S.C. Electrica S.A. by end-2011.

  • Transfer the own supply activity of SC Electrica SA to SC Electrica Furnizare SA by the end January 2012.

  • Appoint legal advisor for majority privatization of Electrica Furnizare SA, including the own supply activity of SC Electrica SA, and minority privatization of all 3 distribution subsidiaries by mid-February 2012.

  • Appoint investment bank for privatizations by mid-June 2012.

  • Publish prospectus for privatizations by mid-August 2012.

  • Conclude privatization offering by end-October 2012.

  • Reduce personnel in parallel to privatization of subsidiaries and own supply activity.

As measured by the Core 3 indicator, which excludes energy, administered prices, unprocessed foods, alcohol, and tobacco.

The gap between ESA and cash deficits is traditionally on the order of 0.5 percent of GDP. The inclusion of additional SOEs in 2012 may add to the gap, but arrears repayment narrows it. The exact SOEs to be included have not yet been finalized by Eurostat, but the cash–accruals difference is expected to be on the order of ¾ percent of GDP.

The authorities anticipate contracting 1½ percent of GDP in projects in 2011 and 2012, and 1 percent of GDP in 2013. The projects would be executed and paid for in the period 2012–20, with the bulk of project execution in 2013–15, but payments concentrated in 2015–20.

SOE arrears of monitored companies amounted to RON 18.5 billion (3.4 percent of GDP) at the end of the third quarter. Non monitored central government SOEs arrears amounted to RON 2.5 bn. Finally, a newly developed database for local government SOEs revealed additional arrears of RON 3.6 bn.

Strategies to reduce SOE arrears include bankruptcy procedures, installment agreements, netting–out schemes among public institutions, provision of public resources via credits or debt–equity swaps (with the clearance by EU competition authorities), restructuring, and securitization.

The agenda includes, by early 2012, selling of the remainder stakes in the chemical company Oltchim, a majority stake in Cuprumin, and minority stakes in the airline Tarom, Posta Romana, and energy companies Romgaz, Transelectrica, and Transgaz. In addition, minority stakes will be sold in Hidroelectrica and the second attempt to sell the 10 percent stake in Petrom will take place in early 2012. Later in 2012, privatization is envisaged for a third group of companies that include sale of minority stakes in Nuclearelectrica and majority privatizations of the cargo rail company, all energy supply companies and major energy producers.

While they have not agreed on a specific target exposure level, going forward these banks have affirmed their long-term commitment to the country and continue to report exposures.

If EU infringement procedures require faster action, we will comply with their requirements.

Data on solvency should be provided on quarterly basis.

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