Advanced Search

Law No. 64 Of 8 July 1992 Approving The Abeyance Of Standby Loan Granted To Romania By The International Monetary Fund

Original Language Title:  LEGE nr. 64 din 8 iulie 1992 privind aprobarea aranjamentului de credit stand-by acordat României de către Fondul Monetar Internaţional

Subscribe to a Global-Regulation Premium Membership Today!

Key Benefits:

Subscribe Now for only USD$40 per month.
LEGE No 64 of 8 July 1992 on the approval of the stand-by credit arrangement granted to Romania by the International Monetary Fund
ISSUER PARLIAMENT
Published in OFFICIAL MONITOR NO. 161 of 14 July 1992



The Romanian Parliament adopts this law + Article 1 The stand-by credit arrangement amounting to DST 314.04 million, granted to Romania by the International Monetary Fund, is approved for a period of 10 months, starting from May 29, 1992. + Article 2 The equivalent in lei of 314.04 million DST, respectively 85.172 million lei, which is transferred to account no. 1 of the International Monetary Fund at the National Bank of Romania, as received by credit tranches, shall be covered by the reserves of the National Bank of Romania. + Article 3 The equivalent in lei of interest rates and the stand-by commission in foreign currency, related to this credit, shall be borne by the state budget. + Article 4 The National Bank of Romania and the Ministry of Economy and Finance are tasked with bringing to fruition the provisions of this law This law was adopted by the Senate at the meeting of June 23, 1992, in compliance with the provisions of art 74 74 para. (2) of the Romanian Constitution. SENATE PRESIDENT academician ALEXANDRU BIRLADEANU This law was adopted by the Chamber of Deputies at the meeting of June 29, 1992, in compliance with the provisions of 74 74 para. (2) of the Romanian Constitution. CHAMBER OF DEPUTIES PRESIDENT MARTIAN DAN + Annex ROMANIA: STAND-BY ARRANGEMENT This document has as annexes a letter and an accompanying memorandum bearing the date of May 4, 1992, from the Minister of Economy and Finance of Romania and the Governor of the National Bank of Romania, requesting a stand-by arrangement and Determine: (i) the objectives and policies that the Romanian authorities intend to follow for the period of this stand-by arrangement; and (ii) Romania's agreements with the Fund regarding the conduct of an examination of the progress made in achieving the objectives of the program and the policies and measures that the Romanian authorities will follow for the period Stand-by arrangement. To support these objectives and policies, the International Monetary Fund grants this stand-by arrangement in accordance with the following provisions: 1. In the 10-month period starting on May 29, 1992, Romania will have the right to make purchases from the Fund in an amount equivalent to DST 314.04 million, subject to paragraphs 2, 3, 4, 5 and 6 below, without a new examination from the Fund. 2.a) The purchases under this arrangement will not be able to exceed, without the Fund's agreement, the equivalent of DST 157.02 million by August 15, 1992, equivalent to DST 209.36 million by November 15, 1992 and the equivalent of 261.7 million SDR up to 15 February 1993. b) None of the limits provided in lett. a) above will not be able to apply to any purchase based on this stand-by arrangement that will not increase the availability of the Fund in the currency of Romania, in credit tranches, over 25% of the quota or will not increase the availability of the Fund in the currency that, as a result of purchases from borrowed sources, more than 12.5% of the share. 3. The purchases under this stand-by arrangement will be made from ordinary sources and sources borrowed 1: 2 until the purchases under this arrangement will reach a total of 205,300,000 DST and after that from borrowed sources, subject to any change made by the Fund in respect of the proportions of ordinary and borrowed resources will apply to the amounts that can be bought after the date of the change. 4. Romania will not make purchases under this arrangement that will increase the Fund's availabilities in its currency, within the credit tranches, over 25% of its share that will increase the Fund's availabilities in that currency-as a result of purchases from borrowed resources-more than 12,5% of the share: a) during any period during which the dates at the end of the preceding period show that ((1) the limit on the cumulative change of the net credit granted by the banking system to the consolidated general administration referred to in paragraph 20 and Annex no. 1 of the attached memorandum; or ((2) the limit on the cumulative change of the net domestic assets of the banking system referred to in paragraph 23 and Annex no. 2 2 of the memorandum; or ((3) the limit on the cumulative change of net international reserves referred to in paragraph 37 and Annex no. 3 3 of the memorandum; or ((4) the limit on contracting or guaranteeing a new external debt with maturities between 1-12 years or below the limit on contracting or guaranteeing a new external debt with maturities between 1-5 years referred to in paragraph 39 and Annex no. 4 4 of the memorandum, have not been complied with; or b) after 14 November 1992 until the examination referred to in paragraph 40 of the Memorandum is not carried out; or c) during any period of the stand-by arrangement, if Romania: 1 1) impose or intensify restrictions on payments and transfers for current international transactions; or 2 2) introduce or modify multiple currency practices; or 3) conclude bilateral payment agreements that are incompatible with the provisions of art. 8 8; or 4 4) impose or intensify import restrictions for reasons of balance of payments. If Romania is prevented from making purchases on the basis of this arrangement due to the provisions of this paragraph 4, the purchases will be resumed only after a consultation has taken place between the Fund and Romania and agreements have been reached in what concerns the circumstances in which those purchases may be resumed. 5. Romania will not make purchases on the basis of this stand-by arrangement during any period of the arrangement in which it has an outstanding financial obligation to the Fund or fails to make a repurchase expected according to the lines the Guidelines, relating to the correction action for failure to make a purchase or in accordance with Decision no. 9331-(89/167) as amended. 6. Romania's right to engage in transactions covered by this arrangement may be suspended only with regard to the requests received by the Fund after: a) a formal ineligibility; or b) a decision of the Executive Council to suspend transactions, either in general or to examine a proposal made by an Executive Director or the Director-General to formally suppress or limit Romania's eligibility. When a notice of a decision to examine a proposal is made in accordance with this paragraph 6, the purchases under this arrangement will be resumed no longer after a consultation has taken place between the Fund and Romania and reached a understanding as to the circumstances in which those purchases can be resumed. 7. The purchases under this arrangement will be made in the currencies of other members, selected in accordance with the Fund's policy and procedures and may also be made in the SDR if, at the request of Romania, the Fund agrees to provide them on the date Buying. 8. The currency date for purchases under this arrangement involving borrowed resources will be determined in accordance with Rule G-4 (b) of the Fund Rules and Regulations. Romania will consult with the Fund on the date of purchases involving resources borrowed in accordance with the G-4 rule. 9. Romania will pay interest for this arrangement in accordance with the Fund's decisions. 10.a) Romania will redeem the amount in its currency resulting from a purchase made on the basis of this arrangement, in accordance with the provisions of the Statute and the decisions of the Fund, including those relating to redemption when the situation of the balance of Payments and reserves are improving. b) Any reduction in the currency of Romania, owned by the Fund, will reduce the amount subject to the redemption provided for in letter a) above, in accordance with the principles applied by the Fund for this purpose on the date of the reduction. The currency date of a repurchase for a purchase financed from borrowed resources, based on this arrangement, will normally be the 6th or 22nd day of the month or the next business day if the day chosen is not a business day, subject as Redemptions will be completed at the latest in 7 years from the date of purchase. 11. During the stand-by arrangement, Romania will remain in close consultation with the Fund. This consultation may include correspondence and visits of the Fund's staff in Romania or of Romania's representatives at the Fund. Romania will provide the Fund, through reports, at the intervals or data required by the Fund, some information that the Fund may request in relation to the progress made by Romania in achieving the objectives and policies set out in the letter Annexed. 12. In accordance with the letter of the authorities, Romania will consult with the Fund regarding the adoption of any measures that may be appropriate at the initiative of the Government or whenever the Director General requests a consultation when any of the criteria in paragraph 4 above have not been complied with or when he considers that a consultation on the programme is desirable. In addition, after the period of the arrangement, because Romania has to make repurchases in the upper credit tranches, the Government will consult periodically with the Fund, at its initiative or at the request of the Director General in terms of policy in the area of Romania's balance of payments. Dear Mr Camdessus, The Romanian government has been carrying out an economic reform program since 1990. This program was supported by a one-year stand-by credit arrangement that began in 1991, and benefited from the Fund's technical assistance. We very much appreciate both forms of support. Considerable progress has been made to achieve our goal of creating an environment where individual options and market forces play a prominent role. We believe that this transformation of the economy will lead to a sustained increase in production and a steady improvement in the standard of living of the population. However, the stabilisation phase of our effort for reform is not yet over and the elimination of macroeconomic imbalances will continue to call for decisive adjustment efforts. In these circumstances, we are calling for a new stand-by arrangement with the 10-month Term Fund, in an amount equivalent to DST 314.04 million, to support our adjustment programme and economic reform since 1992. We also intend to seek financial support under the offsetting and unforeseen financing facility, for the oil import item (FFCN), in an amount equivalent to DST 76.8 million, based on an excess of oil import. in the year ending on 30 September 1991, as soon as we carry out the reimbursement of a previous drawdown made on the basis of the oil import item of the FFCN. The efforts made by us, so far, in an external framework, much more harsh than initially foreseen and aggravated by delays in the immobilization of external financing, are a clear proof of our decision to continue the reform process. We have adopted a number of decisive measures for adjustment and reform, including the liberalisation of prices and trade, prudent financial and income policies, reforms in the fiscal and financial sectors and the liberalisation of the currency system. In addition, we have introduced a number of important structural measures, in order to stimulate private economic activity, to privatise state assets and to create a legal and institutional framework, which are essential for the development and operation of efficiency of a market economy. We hope that in 1992 we will advance on the path of progress made so far. Moreover, it will be particularly important to stop production decline, reduce inflation at a reasonable rate and strengthen external accounts. The details of the economic policy that the Romanian Government intends to follow in order to achieve its economic objectives are described in the attached memorandum. The Romanian government is ready to take any other measures that may be necessary if the economic objectives or the overall process of the reform are threatened. The Romanian authorities will consult closely with the Fund, in accordance with the Fund's policies on such consultations. In this regard, the Romanian Government will provide the Fund with that information that it will request, in connection with Romania's progress in fulfilling the economic policy measures and the achievement of the objectives of the program for 1992. In order to facilitate the pursuit of progress made under the Programme, an analysis with the Economic Development Fund and economic policy measures will be carried out by 15 October 1992. You're honest, George Danielescu, Minister of Economy Mugur Isarescu, Governor of National Bank of Romania + Annex Memorandum on economic policy of the Romanian Government Mr Michel Camdessus, Managing Director International Monetary Fund Washington, D.C. 20431 U.S.A. MEMORANDUM on economic policy of the Romanian Government I. Introduction 1. Romania is in the midst of carrying out a comprehensive reform program, which aims to transform the country quickly, from a centralized planning system to a market economy. Achieving a macroeconomic stability is the basis for the successful reform programme. As a result, the main purpose of the 1992 programme is to conclude the stabilisation phase of the reform 2. The 1992 programme aims to eliminate the current internal and external imbalances. Apart from the continuation of a prudent financial policy, the aim of this objective is to introduce new structural measures aimed at improving the allocation of resources and increasing potential and actual production. These measures include further progress in the liberalisation of markets, the introduction of a corresponding policy in the field of interest rates, the creation of a private property in fact and the development of a legal and institutional framework facilitating the operation of the private sector. The existence of a foreign exchange and trade system that allows Romania to integrate into the world economy continues to be the key to foreign policy. 3. Changing the current situation characterized by the decrease of production and the existence of high inflation constitute one of the best ways to ensure social protection. At the same time, the Government is convinced that economic reform and adjustment can succeed only if measures are taken to reduce the burden of adjustment that weighs on the most vulnerable groups of the population. The social protection provided for in the programme is intended to ease this burden through a well-defined policy. II. Recent economic policies and developments 4. In 1991 the economy was hardly affected by a number of unforeseen negative developments, and the decrease in production was higher than expected. Real gross domestic product (GDP) fell by 13%, with industrial production about 21% below its 1990 level. These decreases reflect a number of related factors, including the absence of external financing, the decrease in trade with the U.R.S.S. and other countries in the former C.A.E.R., the problems associated with the Gulf crisis, the lack of raw materials and imported energy, as well as economic disorganization and bottlenecks in the payment system due to arrears between enterprises Heavy, energy-intensive and extractive industries were the worst affected. The floods and problems associated with the application of agrarian reform contributed to the decline of agricultural production The decline in real GDP has been reflected in rising unemployment. At the end of June 1991 there were 195000 registered unemployed, out of which 128000 received unemployment benefits. These figures increased to 337500 and 266000 respectively at the end of 1991. 5. Despite a prudent financial policy, inflation was much higher than expectations. Since November 1990, the month in which the price liberalization program began and until the end of 1991, the price level has increased by 345%. The unification of the exchange rate in November 1991, which raised the rate from 60 lei to 180 lei for a U.S. dollar, also increased the pressure on the price level. Among the products affected, energy prices (except for domestic consumption) increased immediately, as a reflection of the propagation effects of this exchange rate movement. Real wages have decreased by 22% since the start of the liberalization of prices, despite the increase in salaries for salaries provided for in the wage indexation scheme. 6. The net international reserves (RIN) of the banking system decreased in 1991 by $822 million U.S. During 1991, the decrease in the RIN was dominated by the current account evolution; less than half of the current account deficit was offset by net capital reinforcements. The main factors that affected the current account's evolution were the collapse of trade with former C.A.E.R. member countries and some Middle Eastern countries, as well as financial constraints arising from the fall of long-term capital inflows. medium and long; as a result, trade flows were much lower than had been foreseen in the 1991 programme. 7. Monetary policy was the main anchor of our economic program and as a result, an important objective of the National Bank of Romania (B.N.R.) was to maintain the expansion of internal credit within the banking system under a strict control. Until September 1991, the net domestic assets of the banking system increased by 99 billion lei (19.2% of the money supply at the beginning of the period). This amount was slightly less than the provisions of the program supported by the stand-by arrangement of 1991, thanks to the net credit granted to the Government, which increased much less than planned-as a result of a lower deficit than expected. foreseen for the general administration-as well as the massive decrease in credits for extra-budgetary funds. 8. Combining the weak financial discipline of enterprises with a tight monetary policy led, however, to a rapid accumulation of arrears payments between enterprises that prevented the implementation of a strict financial policy and contributed. to create an inflationary pressure. These arrears, estimated to have reached a global amount of about 1800 billion lei at the beginning of 1992, and that a net amount of about 400 billion lei also led to a serious "deadlock" of the payment system, with negative consequences on production. Since October, B.N.R. has begun to allow an expansion of bank credit to enterprises in an effort to ease the problem of arrears. On December 23, 1991, the Parliament ratified a law requiring the increase of bank credit for the liquidation of arrears between enterprises. This operation, known as global clearing, ended at the end of January 1992. 9. In order to keep the inflation pressure under control and to reduce the adjustment effort on the normal path, B.N.R. sterilized in February 1992 most of the liquidity injected into the economy as a result of global compensation. Moreover, the Government recognizes the importance of sending a clear signal to businesses in terms of its commitment to prevent the reappearance of arrears and to avoid any other global clearing operation in the future. In connection with this, two government decisions were adopted to force the repayment of loans received in the framework of global compensation and to impose a severe financial discipline on businesses. The Government's decision on financial discipline establishes that all firms must meet their legal obligations in the order of maturities, regardless of the fact that payments must be made to workers, Government, suppliers, etc. This decision also establishes that companies can be declared insolvent if they do not meet their obligations within 30 days. Firms declared insolvent still have 30 days, before they are subject to forced repayment, including through bankruptcy proceedings, if they fail to obtain an arrangement with their creditors. Parliament was presented with a draft law in which the Government Decision on financial discipline is incorporated, in order to give it greater legal force, by establishing the legal and administrative liability of the council. directors of companies for their financial management. In addition, a new bankruptcy law is currently in Parliament's debate, to update and strengthen the existing trade code. 10. On April 1, 1991 the interest rates were liberalized within the financial system reform. Despite this measure, interest rates on deposits have moved a little, reflecting in good part the rigidity of the financial system, as well as the lack of incentives for banks to increase interest rates to attract deposits under some conditions. bank specific credit ceilings. The new banks were able to draw deposits from the C.E.C. through better quality of service, but their very small size didn't presage too much on the C.E.C., which essentially remained reluctant to increase the interests. In order to increase the cost of funds for banks, B.N.R. raised the interest rate of refinancing in several stages, during 1991 and again at the beginning of 1992, at 28% compared to 3% at the end of 1990. However, despite the Government's efforts to increase pressure for the liberalisation of interest rates, they remained negative in real terms. 11. In order to cope with large and growing macroeconomic imbalances in previous years, the Government promoted a moderate fiscal program in 1991 and the achievements during the year were higher than those provided. In the last quarter of 1991 some difficulties arose in the collection of taxes as a result of the deadlock in the payment system. However, after the global compensation was completed in January 1992, all tax arrears in the previous year were liquidated. The total deficit of the general administration was only 16.2 billion lei (0.8% of GDP) compared to the much higher deficit of 50.2 billion lei (2.4% of GDP). In the 1991 program, the unemployment fund and other extra-budgetary funds were not included in the general administration. If these funds, which recorded higher surpluses in 1991, were included, the general government balance would also have been surplus by 5.6 billion lei (0.3% of GDP). 12. After the unification of November 11, 1991, the exchange rate of the leu fluctuated between 180 lei/dollar U.S. and about 200 lei/dollar U.S. As regards the trade regime, consistent with the effort of the reform to a market economy, the Government has liberalized the export regime by constantly reducing the number of products that are prohibited or are subject to export quotas and by increasing quota limits. The government has also removed quantitative restrictions on import. III. The Government's macroeconomic programme for 1992 13. The Government's macroeconomic program for 1992 aims, in particular: a) to stop the decline of real economic growth; b) to drastically reduce the inflation rate from about 15% monthly, in the first two months of the year, to 1.2% monthly by the end year; and c) increase international reserves by $500 million to cover 1.7 months of imports by the end of the year. In order to achieve these objectives, the authorities intend to maintain prudent financial (fiscal and monetary) policies and a proper policy of interest rates; to ensure a salary limitation through a tight income policy; to follow a flexible exchange rate policy. These macroeconomic stabilisation policies will be complemented by structural policies aimed at making the economy more efficient and productive. Structural reform measures will include further liberalisation of prices, privatisation, strengthening of financial discipline through the restructuring and liquidation of state-owned enterprises and the continuation of reforms in the financial and fiscal fields. 14. By curing, the Government has taken a number of measures in an effort to lay the groundwork for its economic programme for 1992 and give the right signals for creating a reform-friendly perspective. The measures, mentioned above, were taken to resolve the problems related to the arrears between businesses. Interest rates on loans and deposits were raised in January 1992. In the foreign trade system a new customs tariff entered into force in that month. Several tax reforms were introduced at the beginning of the year. Details of the adjustment program, including these measures, as well as the future ones, are described below. 1. Tax policy and social protection 15. Maintaining a strict fiscal discipline and reducing the size of the governmental sector are key elements of the Government's economic program, both in terms of short-term and medium-term stabilization effort. For 1992, the draft budget submitted for approval to Parliament provides for a general administration deficit of no more than 2% of GDP. Achieving this goal will be an especially difficult task, considering the recent experience of Eastern European countries that show that income from corporate tax and ICM will decrease and pressures to increase current and future spending. capital will increase. Considering these difficulties, as well as the need to maintain the credibility of the adjustment program and the increase of internal accumulations to finance the investments needed to restructure the economy, the Government is still determined to follow a prudent fiscal policy. We believe that in these circumstances, the achievement of the burden on the budget deficit will represent a substantial adjustment effort. 16. In terms of revenue, their total is expected to be 33.5% of GDP in 1992 compared to 36.7% of GDP in the previous year, in comparable terms. Several important tax reforms have been introduced since 1 January 1992, with the aim of increasing the simplicity and transparency of the tax system and minimising incentives for tax evasion. In this regard, the ICM scheme now comprises five categories (levels) compared with more than 20 as they existed before. The corporate profit tax scheme was also simplified; now there are two levels of 35% and 45%, compared to the progressive scheme containing before 67 levels. It is also expected that the measures taken to eliminate the problems related to the formation of arrears in the past between enterprises will boost the collection of taxes, especially for corporate profit tax. 17. The policy of maintaining strict control over all spending categories, which was successful in 1991, will be improved in 1992 by adopting a system of cash expense ceilings to maintain monthly spending in the year. Consistent with revenue collection. The government is determined to develop a program to reduce the level of subsidies to 16 essential consumer goods, including some household energy items. On 1 May and again on 1 September 1992, the level of subsidies will be reduced by 25% compared to their levels in the period from January to April 1992, as prices will be increased, and they will be fully eliminated by the end of the year. 1993. The government has also set out a programme to restructure businesses, which are expected to cut subsidies to businesses, including the mining industry. This programme is currently being discussed with the World Bank. 18. Benefiting from improved data and the experience of a year, the Government decided to extend the definition of the tax sector under the program, in order to have a more comprehensive explanation of tax operations. To this end, the unemployment fund, which in 1991 had a surplus equivalent to 1.4% of GDP, will be included in the fiscal objectives. Taking into account the development of production and business closures, this fund was projected to have in 1992 a deficit of 0.4% of GDP, which was included in the total deficit of 2% of GDP. 19. Reflecting his decision to maintain a conservative fiscal policy, the Government is ready to introduce, through a short notification, a set of fiscal measures for unforeseen situations, in order to protect the objectives of fiscal policy. Deviations from the program may arise, for example, due to the macroeconomic evolution and its effects on the various revenues and expenses provided in the budget. Among the most important potential measures that the Government has identified, if, during the year, the fiscal deficit target would be threatened, it can be listed: increasing corporate profit tax rates; the introduction of an agricultural income tax, from the middle of the year; the passage of the collection of the ICM on imports from the first domestic point of sale at customs points, the indexation of local taxes on property, which are currently fixed in fixed amounts; the introduction of excise duties on products such as alcoholic beverages, Tobacco and gas. If in the course of 1992 there is a need for additional budgets, the Government is determined to keep them balanced. 20. The government will largely lean on bank credit for meeting its funding needs, though it will strive to issue government securities to cover part of the deficit. As a result, the program limits the cumulative modification of the net credit granted to the Government by the banking system and it will be a performance criterion (Annex no. 1 1). When setting this limit, an important consideration was to leave enough room for private sector applications for credit in the banking system. The limit will be adjusted, in the sense of reduction, with the amount of domestic financing from non-bank sources and with any equivalent in the local currency of external loans, including loans from the World Bank, which are used to finance expenses included in budget. 21. The government gives a high priority to structural reforms in the tax system that reduce distortions that prevent the efficient allocation of resources and strive to maintain the basic objective of equity. Preparations are being made to replace the ICM with the added value tax (VAT) and the Government is determined to introduce a simplified value added tax at the beginning of 1993. The government also plans to replace the progressive tax system with the global income tax, starting January 1, 1994. 22. The government is determined to maintain and strengthen social protection to prevent further hardship for the population during the transition period. In 1990-1991 laws were approved that improved the pension system, sickness benefits, temporary incapacity for work, birth and introduced unemployment benefit. These categories of allowances will remain, in large, unchanged in 1992, and the total payments of this kind in the budget will be equivalent to 9.6% of GDP, that is slightly lower than in 1991, because the number of employees who will opt for a retirement before the age limit is met, it is estimated to be lower. However, unemployment is expected to rise rapidly in the course of 1992 and reach 1.5 million (14% of the workforce). As a result, the period for which unemployment benefits are granted has been extended from 6 months to 9 months and an additional unemployment benefit has been introduced, but much lower, for the period exceeding 9 months. The total amount of unemployment benefits to be granted in 1992 is expected to rise to 2.2% of GDP, compared with 0.2% of GDP in 1991. In addition to this aid, the Government grants substantial subsidies to the population for basic food, energy and public transport. These subsidies amounted to about 5.5% of GDP in 1991, the same amount being provided for 1992. The government will, however, strive to improve how to establish subsidies and will seek to increase the use of cash transfers as a more efficient form of income support. In this regard, the Government intends to eliminate the 20% reduction in taxes, given to people with children, and to simplify the system of child benefits. 2. Monetary policy 23. Monetary policy will be one of the two main pirates of the program on 1992 and, together with fiscal and wage policy, will be tasked with reducing inflationary pressures that will result from adjustments and liberalizations. Price selective, exchange rate changes and external shocks. The government believes that the implementation of a strict monetary policy is of particular importance for establishing the credibility of its reform program and for reducing inflation. In order to achieve the desired inflation reduction, a strict credit policy is required; consequently, the Government has set targets for increasing the money supply based on moderate forecasts in terms of price developments. and the demand for money. To this end, the Government will allow an 88% increase in money supply (in national currency). The loan program for 1992 is projected to be compatible with this projected monetary growth and the established growth of US $476 million of net international reserves. As a result of the above, the increase in net domestic assets of the banking system will be 67% of the money supply recorded at the end of 1991. The ceilings for the growth of net domestic assets of the banking system will be a performance criterion, as detailed in Annex no. 2. 24. The National Bank of Romania switched to indirect methods of monetary control and gave up the establishment of bank-specific credit ceilings. In this regard, the National Bank of Romania implements the measures recommended by the recent technical assistance missions of F.M.I.; the requirements for reserves and the auctioning of refinancing loans have already been introduced. In order to increase the effectiveness of the credit policy and not to allow the past losses of businesses to become a burden on the financial system, the Parliament adopted, in February 1992, a law stating that unflattering debts to the banking system, from before 1991, to be replaced by special accounts of public debt, to be paid, among others with the amounts obtained from the sale of assets of the state and from the recovery of enterprises ' claims. 3. Policy of interest rates and financial sector reform 25. In order to improve the efficiency of credit allocation and to provide incentives for financial accumulations, the Government will rely on a flexible structure of interest rates and ensure that they reflect market conditions. The proper policy of interest rates is a necessary complement to exchange rate policy and, in this regard, internal interest rates must be sufficiently attractive to encourage accumulations and asset ownership. internal. As a result, the Government decided to take measures to ensure the internal rates of interest rates real positive. 26. In addition, measures must be taken, however, to promote the demand for domestic financial assets and to improve the functioning of internal markets in particular by making the C.E.C. a restructuring vineyard, more sensitive to economic realities and to forces market. From now on, the Government will ask the C.E.C. for its existing negotiable instruments (e.g. the C.E.C. bonds) to pay interest that reflects market conditions. For the promotion of a competitive banking structure, foreign banks have been granted the right to act on the domestic market. Until now, four foreign banks operate in Romania, and the Government will continue to encourage such activities. 4. Prices and salaries 27. The government will continue its policy of liberalizing prices. The prices of 16 consumer goods, still controlled, will be increased in two stages in 1992 and fully liberalized until the end of 1993. In terms of energy, the Government is committed to reviewing its prices at least monthly, and making those necessary adjustments that maintain domestic prices, taking into account changing the exchange rate, all processing costs. necessary, as well as taxes, at world market levels for the entire duration of the programme. The domestic price of natural gas, which is now about 30% lower than the prices charged internationally, will increase by 10% quarterly, in real terms, until it reaches the parity of world prices. 28. Income policy, the other main pyramid of the program is considered by the Government as essential for the frining of inflationary pressures and promoting the competitiveness of the Romanian economy. Accordingly, the Government has adopted a long-term wage indexation policy with the intention of keeping wage increases below the rate of inflation. In addition, the Government follows a taxable income policy that sets penalty taxes for those businesses where payroll expenses exceed the established benchmark salary fund that takes into account performance. economic activities of each enterprise. Such taxes can reach up to 500%. We believe that this policy also stimulates the removal of labour surplus. In the mid-programme analysis, the evolution of wages and the functioning of the taxable wage policy will be examined. 5. Enterprise reform and privatization 29. The government considers the privatization of state assets as essential for the realization of a market economy, strengthening the financial discipline of enterprises and improving their productivity and efficiency. To this end, the Government has triggered a comprehensive privatisation programme. The privatization law, promulgated in 1991, provides for the privatization of about 6000 state-owned enterprises. The process of privatizing some of these businesses has begun. The capital related to the rest of the enterprises will be transferred 30% to five Private Property Funds (FPP) and 70% to a State Property Fund (FPS). These funds will be set up on 1 June 1992. 30. The privatization law also provides for the possibility for commercial enterprises to sell up to 75% of the total value of their assets in the form of commercial units and the use of the amounts thus obtained to finance investments. At least 400 commercial units are expected to be sold by mid-1992. Progress in the process of business privatisation and sale of assets will be assessed in the mid-programme analysis. Moreover, the Government will continue the sale of housing to the population, the application of the Land Fund Law, and the distribution of land. 31. The government also envisages the liquidation/closure of non-viable state-owned enterprises as an essential element of its programme. In addition, a restructuring strategy will be adopted to complete the privatisation and winding-up process. In order to strengthen the budgetary constraints on enterprises, the Government submitted a new bankruptcy law to Parliament but, in the meantime, will apply the bankruptcy proceedings of the existing Commercial Code. The government will also establish with support from the World Bank, under the proposed loan, for structural adjustment, a system for the monthly tracking of the financial situation of businesses, including arrears between businesses. 32. By liberalising the prices and economic reform measures under way, companies will be able to make market-based decisions using profitability criteria. It is imperative, however, that in making their operational decisions, businesses should not consider that a global clearing operation will take place. As a result, the Government attaches great importance to Parliament's approval of the bill to combat moral risk issues resulting from the previous global compensation. The adoption of the law will be a topic for mid-term review of the program. Moreover, the financial discipline of enterprises will be strengthened by a Government decision, which requires state-owned enterprises to charge interest at the market level for new loans granted between enterprises (to be paid). pursued through the financial system of monitoring); the same purpose will serve the development of a competitiveness law, the rapid implementation of bankruptcy procedures and a strict banking supervision to support the underlying loan decisions strictly on economic considerations. 6. External Sector and Balance of Payments Objects on 1992 33. One of the basic objectives of the reform effort in Romania was to integrate Romania into the world economy by eliminating deformations from the commercial and foreign exchange system. As previously mentioned, a remarkable progress has already been made. Within the currency system, a basic element of this effort was the unification of foreign exchange markets on November 11, 1991. Consequently, Romania has faced a serious economic policy dilemma. The low level of liquid reserves and the lack of external funding created high pressure on the exchange rate. This pressure was compounded by the failure of the transferred currency, coming from export receipts. In this last aspect, the prospects of a depreciation of the exchange rate, fuelled by the lack of currency, exacerbated the problem of disposal, as the interest rates did not insufficiently attractive to the amounts held in lei. In an effort to maintain price levels for wage negotiations, some official interventions were made, which kept the exchange rate below 200 lei for one U.S. dollar In addition, a large gap emerged between the interbank exchange rate. and the one practiced at the exchange offices, as a consequence of the effort to control the flight of capital through the segmentation of the two markets and the limitation of the amount that individuals can buy from the exchange offices. However, the Government has coped with its external obligations, even in these tough conditions. 34. In order to improve the situation and stimulate exports to abandon the increasing use trend of barter arrangements and other compensation arrangements, the Government is examining the modification of certain elements of its system. currency, including the 100% yield requirement of the currency. The currency system will operate in directed flotation, based on a classic procedure of fixing, and foreign exchange offices will participate in the interbank market. External reserves will be used for leveling operations and not to support a hard course to maintain. In line with its objectives of reducing deformities in the economy, the Government is leaning on adequate financial policies, including interest policy, to make domestic assets attractive enough to support the exchange rate. Change. 35. In the commercial system a new code of customs tariffs entered into force at the beginning of January 1992. The previous code was not considered appropriate for Romania's long-term needs to have a rational and transparent system, as an integral part of its development strategy in perspective. In general, the new Customs Tariff Code provides for lower and less dispersed taxes than the previous one. The average rate, calculated on the basis of a weighted average is about 12%. So even if a moderate, temporary and uniform import surcharge were used ad valorem protection degree would remain low. In line with the market orientation of the reform effort, other measures aimed at liberalizing the trade system were also taken. The requirements of approvals from interested ministries, which covered 86 items were removed in mid-1991. In terms of exports, the number of "controlled" exports, including those banned and those subject to temporary quotas, have been steadily reduced. Since March 1992, 33 articles have been temporarily banned, while only 35 items have been subject to temporary export quotas; the limits for 13 of these last items have been increased in that month. The government intends to eliminate, practically, by mid-1992, all requirements for import and export licences (with a few exceptions, such as explosive and toxic products related to public health and national security). In addition, with the exception of some goods subject to price control and subsidies and some products that are considered strategic and deficient in the internal market (e.g. wood, wheat, sugar), all export quotas will be eliminated. In the future, as price controls and subsidies for the various goods will be removed, the corresponding quotas will automatically be removed. 36. The structural reforms presented above, together with the outward orientation of foreign exchange and trade policy, aim to support the growth of export. At the same time, it will work to create an information system regarding prices and external markets, accessible to all potential exporters. While the main focus of efforts to increase exports is on the use of appropriate incentives arising from economic policy, it is hoped that these efforts will further boost the promotion of exports. 37. The government appreciates that the 1992 program will be applied in a difficult context. It is estimated that the current account deficit in 1992 will be US $1.3 billion, with an estimated net capital input of US $1.7 billion (excluding exceptional financing) and considering the need to bring international reserves. At a reasonable level, Romania needs an exceptional financing of about 650 million U.S. dollars to be met by draws from the Fund and the countries of the Group of 24. In accordance with the objective of the total balance of payments on 1992, which advertises a surplus of about 476 million U.S. dollars, quarterly tasks were set for the net international reserves of the banking system that will constitute a performance (Annex no.3). 38. The government attaches great importance to the role that foreign direct investment can play in economic restructuring and maintaining external debt at controllable levels. In the framework of the strategy to attract foreign investments, the foreign exchange system has been modified to eliminate the restrictions on repatriation of dividends and revenues. Foreign investors can also open and maintain accounts in foreign currency. In accordance with the provisions of the Foreign Investment Law, which entered into force in May 1991, there is no limitation on the participation of foreign capital in the formation of companies in Romania, and investments are Encouraged in almost all sectors of activity; some tax exemptions also apply. It is estimated that inflows from foreign direct investment will amount to about 200 million U.S. dollars in 1992 and to much higher amounts in the coming years. 39. Regarding the creation of external debt, the Government considers that it must be shown that external financing sources are used so that the resulting burden for the debt service is bearable and the external solvency maintained. In order to achieve this goal, the Government oversees very strictly all external loans contracted or guaranteed by the public sector and an Inter-Ministerial Committee has been created that will inventory all possible credits and decide on priorities before government guarantees are given. Moreover, the Government intends to limit the contracting of public or publicly guaranteed external debt with maturities over 1 year and up to including 12 years, to US $3.5 billion in 1992, with a separate subcap of US $2.5 billion for loans with maturities over 1 year and up to and including 5 years. These two categories of ceilings will be performance criteria (Annex no. 4 4). The public sector will limit its contracting or guarantee of short-term debt only to normal commercial import credits. 7. Application and review of the 40. The Government considers that the policies and measures established in this memorandum are compatible with the objectives of the program or, if necessary, will take any additional measures that may become necessary. In any event, the Romanian authorities will consult closely with the Fund in accordance with its policy on such consultations and provide the Fund with the information requested to track progress in achieving its objectives. the program. In order to facilitate the implementation of the programme implementation, an analysis with the Fund will have to be carried out by 15 October This analysis will focus on the merits of structural reforms, in particular in the areas of enterprise reform, price liberalisation, privatisation and financial sector reform. Particular attention in the analysis will also be given to the realization of fiscal and monetary policy, the evolution of salaries, interest rates, external financing and the functioning of the foreign exchange market. + Annex 1 Limits on the cumulative change of net credit granted by the banking system to the consolidated general government Limits Cumulative change from December 31, 1991, to: (in billion lei) 30 June 19923.8 30 September 199225,5 31 December 1992110,0 The consolidated general administration is defined as including the central government, the social security fund, the supplementary pension fund and the local government; to these are the funds for research, health, education and unemployment, as well as self-funded organs. The central and local funds for the construction of housing, the fund from the revaluation of gold, as well as other extra-budgetary accounts, are excluded from this definition. The net credit granted by the banking system to the administration is defined as including all claims of the banking system on the administration minus all deposits of the administration made in the banking system The data are taken from the accounting balance sheets of the National Bank of Romania and other banks. In order to follow the program, the administration's deposits will be reduced by the equivalent in lei of all external loan receipts (minus the repayments) that are used to finance the fiscal deficit, including loans from World Bank. All proceeds from the revaluation of business stocks will be attributed to the Enterprise Restructuring Fund and will be excluded from the administration's deposits Financial instruments issued by banks in exchange for outstanding loans existing on April 1, 1991 will be excluded from the bank system's claims on the administration. No transfer from the gold revaluation fund to general government accounts as defined in the program will be admitted. The limits on net credit granted by the banking system to the general administration will be reduced by all loans taken by the general administration from non-bank domestic sources. + Annex 2 Limits on the cumulative change of net domestic assets of the banking system1) 1) As defined in the program. Limits (in billion lei) 31 December 19911,000 Cumulative change from 31 December 1991 to: 30 June 1992524 30 September 1992723 31 December 1992694 Net domestic assets of the banking system (which include all newly created commercial banks) are defined as the difference between the banking system arrangements towards non-bank public (broad money = money in the broad sense) and net international reserves, both expressed in lei. Broad money (money in the broad sense) includes residents ' foreign currency deposits and excludes all deposits of the administration's organs and deposits of foreign currency institutions and other non-residents. Net international reserves are defined in Annex no. 3, but in order to determine these limits they exclude the counterpoint of deposits in foreign currency of residents. Net domestic assets comprise the sum of the following assets and liabilities: net credit to the general government (as defined in Annex no. 1, with a view to pursuing the programme), the net credit to the administration, coming from the deposits of the fund for the restructuring of enterprises, the fund for the construction of housing and other extra-budgetary funds, and the by external loan receipts (minus repayments), credit to the non-government sector, medium and long-term external commitments, other external assets, net (including net claims on bilateral and payment agreements, availabilities in non-convertible currencies and debt in rubles transferable), capital and reserve accounts, transit accounts of the National Bank of Romania payable to depositaries, as well as other assets and liabilities, representing, among other things, the adjustments in the evaluation. In the provisions of the program, net international reserves, as well as those components that define broad money will be converted into lei at the calculation exchange rates that were agreed on the basis of a real, constant exchange rate forecast. The quarterly limits will be cumulated and will be tracked by bank system accounts. + Annex 3 Objectives for the cumulative minimum change of net international reserves in convertible currencies Objective (in million U.S. dollars) December 31, 1991-89 Cumulative increase from December 31, 1991, to: June 30, 199226 September 30, 1992151 December 31, 1992476 Net international reserves comprise the gross official reserves less the reserve commitments. For the purposes of the program, gross official reserves will be defined by monetary gold, special drawing rights availabilities, reserve position from F.M.I. and currency availabilities in convertible currencies held by the National Bank of Moldova. of Romania and commercial banks. It excludes from reserve assets the long-term assets, the counterpoint of deposits in foreign currency held by resident individuals and enterprises, all assets in non-convertible currency, as well as precious metals other than gold. Monetary gold will be valued at a registration price of $362.18 U.S. per ounce. On December 31, 1991, Romania's gross official reserves, defined as above, amounted to US $1.109 million, including gold valued at US $814 million. For the program, the reserve commitments will be defined as the commitments of the National Bank of Romania and commercial banks in convertible currencies against non-residents with an initial maturity of up to 1 year inclusive, as well as the use of resources Fund. On December 31, 1991, Romania's international reserve commitments, as defined above, amounted to US $1.198 million. All assets and liabilities denominated in currencies other than the U.S. dollar, including special drawing rights, will be converted to their courses from December 31, 1991 against the U.S. dollar. The objectives will be pursued on the basis of the information provided to the Fund staff by the National Bank All changes in the definition or valuation of assets or liabilities, as well as details of operations relating to sales, purchases or gold swaps will also be communicated to the Fund's staff. + Annex 4 Limits for contracting or guaranteeing new external debt External debt contracted or guaranteed Maximum limits (in billion U.S. dollars) With maturities of over 1 year and up to 5 yearsWith maturities of over 1 year and up to 12 years During the period from 31 December 1991, to: 30 June 19922,53,5 30 September 19922,53,5 31 December 19922,53,5 The limits for external loans shall apply only to the debt contracted or guaranteed by the administration, the National Bank of Romania or other public property units with initial maturities of over 1 year and up to and including 12 years. The administration is defined as shown in Annex no. 1. The debts included in the international reserve commitments, as defined in Annex no. 3. The debts that fall under these limits will be assessed in U.S. dollars in the existing courses on the date when the contract or guarantee becomes effective. The classification within limits will be verified on the data shown above on the basis of the information transmitted to the Fund's staff on all contracting and guarantees for new debts, which fall both within and outside the limits. -----------