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Romania: Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding

 

Romania: Letter of Intent

 

Bucharest, March 5, 2014

 

Mme. Christine Lagarde

 

Managing Director

 

International Monetary Fund

 

Washington, DC 20431

 

U.S.A.

 

Dear Mme. Lagarde:

 

The Romanian authorities reaffirm our commitment to our economic program supported by the

 

International Monetary Fund (IMF), the European Union (EU), and the World Bank (WB). We met four

 

out of five quantitative performance criteria and made good progress on structural reforms. In

 

particular, we launched initial public offerings (IPOs) of shares in two state-owned energy

 

companies, Romgaz and Nuclearelectrica, and the energy regulator implemented the next steps of

 

the energy price liberalization roadmaps as planned. We accelerated our absorption of EU funds,

 

which is particularly important since domestic demand has been weaker than expected. For 2014,

 

we remain committed to gradually reduce the fiscal deficit but slightly moderate the adjustment

 

path to facilitate greater absorption of EU funds with a view to enhancing the economy’s growth

 

potential.

 

1.

 

Our performance on the quantitative targets and the structural reform agenda for the first

 

and second reviews has been good (Tables 1 and 2).

 

 

Quantitative performance criteria and indicative targets. Four of the five end-December 2013

 

quantitative performance criteria and four out of five indicative targets were observed. The

 

performance criterion on the general government overall balance, set at the time of

 

program approval, was missed by a small margin, largely due to higher spending on EU co-

 

financing. We have adopted a budget for 2014 that provides for a continued gradual

 

consolidation. The indicative target on outstanding payments past due of all central-

 

government owned SOEs, however, was missed by a substantial margin. Corrective actions

 

are being taken to achieve the arrears objective of the program, as described in the attached

 

Memorandum of Economic and Financial Policies (MEFP). Inflation fell below the inner band

 

of the inflation consultation mechanism and discussions were held with IMF staff, as

 

required under the program.

 

 

Structural benchmarks. We have made good progress on achieving the program’s structural

 

benchmarks. We successfully launched an IPO of 15 percent of the government’s shares in

 

Romgaz. We started to publish monthly arrears reports by the central and local

 

governments, by administrative unit. We also prepared medium-term financial projections

 

that properly identify the fiscal implications of EU-funded projects, including co-financing

 

needs, financial corrections and non-eligible spending. We approved, by government

 

memorandum, a list of significant priority projects, based on the prioritization criteria, to

 

help prepare for the 2014 budget. The structural benchmark on appointing a professional

 

board in Hidroelectrica in accordance with the provisions of Ordinance 109/2011 was met.

 

We finalized the design and costing of our basic health care package, delineating the

 

options for private sector involvement. The new commitment control system was made

 

available to three pilot entities in January 2014; by end-April 2014, it is expected to cover all

 

expenditures in those entities and produce the required reports. We propose to reset the

 

structural benchmark accordingly. We have drafted a new covered bonds law and will submit

 

it to parliament, later than originally expected, for consideration through the emergency

 

procedure; we propose to reset the structural benchmark to end-March 2014. We have

 

amended the accounting rules applied to the sale of NPLs to domestic debt management

 

companies so that no tax liability is being created, in line with the outcome of the EC

 

infringement case.

 

 

2.

 

In the attached MEFP, we set out our plans to further advance towards meeting the

 

objectives of our macroeconomic program. In view of our performance under the program

 

supported by the IMF, the EU, and the World Bank and the corrective actions taken, the Government

 

of Romania and the National Bank of Romania (NBR) request a waiver of nonobservance on the

 

missed performance criterion and completion of the first and second reviews. We intend to continue

 

to treat the arrangement as precautionary.

 

3.

 

The program will continue to be monitored through quantitative performance criteria and

 

indicative targets, structural benchmarks and consultation clauses, during quarterly reviews in 2014

 

and semi-annual reviews afterwards. We propose the establishment of quantitative performance

 

criteria for March 31, 2014 and June 30, 2014 (MEFP, Table 1). We propose to modify the structural

 

benchmark on launching an IPO for Hidroelectrica (end-June 2014) by increasing the amount from

 

10 to 15 percent of the government’s shares, and dropping the reference to the planned capital

 

increase. Additionally, we propose to modify the structural benchmark on the commitment control

 

system for operation in all general government entities to facilitate monitoring. We also propose to

 

modify the structural benchmark on the covered bond legislation so as to specify submission to

parliament as the required action. As detailed in the MEFP and TMU, we propose five new structural

 

benchmarks, one prior action, and one new indicative target against which to measure progress

 

under the program (MEFP, Table 2). The Technical Memorandum of Understanding (TMU) explains

 

how program targets are measured. We request a rephasing of the availability dates for the

 

purchase associated with this review and the following reviews. The third review of the program will

 

take place on or after June 25, 2014, and the fourth review on or after September 28, 2014.

 

4.

 

We believe that the policies set forth in the letter of September 12, 2013 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 these objectives. We will consult with the IMF

 

and European Commission (EC) before modifying measures contained in this Letter and the

 

attached MEFP 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.

 

5.

 

We authorize the IMF and the EC to publish the Letter of Intent and its attachments, and the

 

related staff report. This letter is being copied to Mr. Olli Rehn.

 

Sincerely,

 

 

Victor Ponta Mugur Is?rescu

 

Prime Minister Governor of the

National Bank of Romania

 

 

(See more: http://www.imf.org/External/NP/LOI/2014/ROU/030514.pdf_

 

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