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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




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






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.





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.




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.




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.




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.





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_