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Law No. 84 Of 6 June 2011

Original Language Title:  LEGE nr. 84 din 6 iunie 2011

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LEGE no. 84 84 of 6 June 2011 on the ratification of the Letter of Intent signed by the Romanian authorities in Bucharest on 9 September 2010, approved by the Decision of the Board of Directors of the International Monetary Fund of 24 September 2010, and amending Government Emergency Ordinance no. 99/2009 on the ratification of the stand-by arrangement between Romania and the International Monetary Fund, agreed by the Letter of Intent sent by the Romanian authorities, signed in Bucharest on 24 April 2009, and by the Council Decision Monetary International of May 4, 2009, as well as of the Additional Letter of Intent, signed by the Romanian authorities on September 8, 2009 and approved by the Decision of the Board of Directors of the International Monetary Fund of 21 September 2009
ISSUER PARLIAMENT
Published in OFFICIAL MONITOR no. 417 417 of 15 June 2011



The Romanian Parliament adopts this law + Article 1 The Letter of Intent *) signed by the Romanian authorities in Bucharest on September 9, 2010, approved by the Decision of the Board of Directors of the International Monetary Fund of 24 September 2010, amending and supplementing the Letter of intention signed by the Romanian authorities in Bucharest on 16 June 2010, updated by the Additional Letter of Intent, signed in Bucharest on 29 June 2010, approved by the Decision of the Board of Directors of the International Monetary Fund of 2 July 2010 2010, ratified by Law no. 257/2010 , published in the Official Gazette of Romania, Part I, no. 35 35 of 14 January 2011. -------- Note * *) Translation. + Article 2 Annex "Scadentary refund Stand-by arrangement" at Government Emergency Ordinance no. 99/2009 on the ratification of the stand-by arrangement between Romania and the International Monetary Fund, agreed by the Letter of Intent sent by the Romanian authorities, signed in Bucharest on 24 April 2009, and by the Council Decision Monetary International of May 4, 2009, as well as the Additional Letter of Intent, signed by the Romanian authorities on September 8, 2009 and approved by the Decision of the Board of Directors of the International Monetary Fund of September 21, 2009, published in the Official Gazette of Romania, Part I, no. 629 of 22 September 2009, approved by Law no. 37/2010 , as amended, shall be amended and replaced by the Annex which forms an integral part of this Law. This law was adopted by the Romanian Parliament, in compliance with the provisions of art. 75 75 and art. 76 76 para. (2) of the Romanian Constitution, republished. CHAMBER OF DEPUTIES PRESIDENT ROBERTA ALMA ANASTASE p. SENATE PRESIDENT, IOAN CHELARU Bucharest, June 6, 2011. No. 84. + LETTER OF INTENT ROMANIA: LETTER OF INTENT Mr Dominique Strauss-Kahn Bucharest, 9 September 2010 Managing Director International Monetary Fund Washington, DC, 20431 U.S. Dear Mr. Strauss-Kahn, 1. The anti-crisis program supported by the International Monetary Fund (IMF), the European Union (EU) and the World Bank (WB) continued to play a crucial role in stabilizing the Romanian economy, reversing economic imbalances and creating the prerequisites for sustainable economic growth. Despite these improvements, the recovery will be delayed due to domestic demand that continues to remain precarious, due to negative developments in the region and recent floods. Therefore, we are now projecting economic growth of -2% in 2010 and a return to positive values of 1 'bd-2% in 2011. Inflation is expected to increase temporarily significantly in the third and fourth quarters as a result of isolated effects from the recent VAT hike, reaching a peak of 7-8% at the end of 2010 before returning to the range. targeted by the National Bank of Romania (NBR), during 2011. We are still projecting a current account deficit of around 5% of GDP for 2010. 2. Our results in terms of quantitative targets and the structural reform programme were significant (Tables 1 and 2). -Quantitative performance criteria and indicative targets. All quantitative performance criteria set for the end of June 2010 were met, with the exception of the consolidated general budget arrears (paragraph 7). As a preliminary action, our intention is to pay the amount of 1.9 billion lei, representing the arrears of the health sector (the largest source of arrears). The indicative target on the financial balance of state-owned enterprises (IS) with the highest losses set for the end of June was also met, but the one related to the current primary expenditure was missed by 0.15% of GDP ((being offset by lower capital expenditures). At the same time, inflation remained within the inner range of the inflation consultation mechanism for the entire period. -Structural benchmarks. The local public finance reform was completed before the deadline. The parliamentary discussion on the pension reform law is at an advanced stage and we expect it to be approved by Parliament before mid-September (prior action). We are making significant progress in drafting the law on implementation of the law on unitary pay as well as on other structural benchmarks under the programme. We expect to also complete the reform of the Deposit Guarantee Fund (FGD) financing regime by the end of September, as scheduled. 3. Given these results-and the additional and corrective actions outlined in this letter-we call for the completion of the fifth assessment under the Stand-by Agreement. We also request a derogation for the performance criterion at the end of June on the arrears of the consolidated general budget. 4. We believe that the policies set out in the letters of intent of April 24, 2009, September 8, 2009, February 5, 2010, June 16, 2010, June 29, 2010 and in this letter are appropriate to realize the objectives of our economic program, but is ready to take the necessary additional measures to ensure the achievement of its objectives. As is standard practice in all agreements with the IMF, we will consult with the IMF before amending the measures provided in this letter or adopting new measures that would deviate from the aims of the program and make available to the IMF and European Commission (EC) information needed to monitor the programme. Tax Sector 5. Despite poor economic conditions, we met the target of the total deficit set for the first semester of the year, largely due to strict spending control measures and a reduction in the number of employees of 27,000 people. Our fiscal adjustment effort for the rest of 2010 will be supported by the recently promulgated adjustment package (which generates 4.6% of GDP on an annual basis), which includes a VAT increase of 5 percentage points, a 25% reduction in public sector salaries and a 15% reduction in the majority of social benefits, complemented by the further reduction in the number of employees (74,000). It is expected that the weaker growth prospects will generate a decline in revenue relative to projected revenues in the program and we have taken further steps to prevent widening the deficit. In particular, we reduced spending on goods and services by 10% on an annualized basis and brought forward some provisions of the pension reform legislation that could bring some improvement in the situation in the short term. So, we are about to meet the deficit target set for this year, at 6.8% of GDP. 6. For 2011, we remain committed to reduce the deficit to 4.4% of GDP, according to the target set by the program. The full year impact of the measures taken in 2010 as well as the further restriction of expenditure will be sufficient to ensure that this target is met. Provided that the number of employees is further reduced by at least 15,000 by the end of 2011, we will be able to grant a modest salary increase in 2011, while respecting the commitment made in respect of maintaining the salary envelope for the next year under 39 billion lei (including all forms of remuneration, but excluding the social security contribution due by military personnel). The law on implementation of the unit salary law will ensure the consistency between the new pay scale that will be introduced from January 1, 2011 and the reduced salary envelope. Other savings will be achieved by restricting expenses, eliminating the 13th salary and holiday premium, further freezing pensions, eliminating heating subsidies (originally planned for 2010) and revising the tax bill. the social assistance system that is anticipated to generate at least 0,2% of GDP (see paragraph 12). Parliament's approval of the 2011 budget reflecting these commitments, including 24% VAT, will be a structural benchmark for mid-December 2010. 7. Our medium-term fiscal strategy continues to focus on the achievement of the Maastricht objective of deficit 3% in 2012, in parallel with ensuring the future stability and predictability of the fiscal system. Achieving the 4.4% deficit target next year will make it easier to achieve this goal, but further restricting spending will be an imperative to reduce the deficit in parallel with the gradual recovery in real value. the remuneration of civil servants and the provision of greater investment, co-financed by EU funds, to support growth. The medium-term fiscal strategy for the period 2011-2013, which will be published soon, is an important step in the implementation of the Fiscal Responsibility Law and in strengthening our commitment to the fulfilment of the Maastricht targets. We will strengthen the recently constituted Fiscal Council, providing it with adequate funding, allowing full employment of the posts provided for the Council secretariat with persons who have the appropriate training. 8. Measures aimed at solving the chronic problem of internal payment arrears are undertaken. At the level of local authorities, amendments to the local public finance law-which will ban the accumulation of arrears locally in the future-were approved by emergency ordinance at the end of June, marking the fulfilment before the deadline of the reference structural criterion set for the end of September. Starting in 2011, local authorities will be obliged to include in their budget execution and payment of arrears and will no longer be able to commit new expenses or contract loans before the previous obligations are extinguished. Until then, we issued an ordinance allowing local authorities to use swap agreements to offset mutual debts and partially extinguish some arrears. At the central level, given that most arrears are registered in the health sector, we are implementing a health sector restructuring plan [see Letter of Intent (SI) of 16 June 2010 and paragraph 16] and allocated an amount of 1,9 billion lei in the rectified budget of 2010 for the payment of arrears (prior action for the completion of this evaluation). In order to improve the monitoring and control mechanisms of the arrears, we affirm our commitment to integrate the accounting reporting system with the payment system into the Treasury (structural benchmark for the end of March 2011), to use budget appropriations as commitment ceilings, to require ordering ministries to monitor units under them for them to comply with the ceilings and to apply sanctions against those institutions and individuals. exceed the ceilings. 9. Market turbulence-generated by uncertainties around the approval of fiscal measures in June and the perception of an upward risk in the region-have led us to temporarily reduce the volume of public debt issues and use gradually the financial buffer (buffer) existing in the Treasury. With the improvement of market conditions we expect to return to the trajectory of strengthening this financial buffer to represent about 4 months of financing the fiscal deficit and public debt redemption. Tax reforms 10. We continue our efforts to reduce tax evasion and increase revenue collected. Following a first round of reforms in April, we approved in June an ordinance on combating tax evasion. Among other things, the ordinance provides for the authorization to access bank accounts, important for the development of indirect control methodologies for the imposition of individuals with great wealth. In accordance with the recommendations of the IMF technical assistance mission, we are working on a draft ordinance that includes other provisions on the imposition of individuals with large fortunes, with the deadline for issuing the end of August. We will broaden the definition of the concept of income, so that it allows the imposition of income from any source that is not exempt by law and we will take other measures, mentioned in the SI of 16 June 2010 and in the IMF technical assistance reports. In order to further attack the tax evasion phenomenon, we will engage in discussions with the EC in relation to the promotion of other amendments to the national tax system. We intend: (i) to request an increase of the mandatory VAT ceiling imposed by the Council of Ministers of the EU per 100,000 euros; (ii) establish a lower ceiling for those who are optionally registered as VAT payers, so as to eliminate taxpayers who fraudulently claim VAT refunds; and (iii) to reduce the ceiling for the administration of medium-sized taxpayers (currently at 6.7 million lei). We will extend the administration of medium-sized taxpayers, so that it covers 20% of revenues, we will target a share of the revenue direction of the management of large taxpayers in total revenues of 70% and we will strengthen the process of putting Prosecution of tax cases. Our work to streamline the tax units and improve the information technology network (TI) will be based on the recommendations of the IMF technical assistance mission in July 2010. We will also reform the productivity-based incentive system over the next year (consistent with the implementation legislation of the unit pay law), limiting the granting of these incentives to those directly involved in the collection. taxes and duties and strictly limiting them to sustained income improvements. We will continue to cooperate with EC services to ensure that our legislation is consistent with European tax regulations. 11. The accelerated absorption of EU funds is a central objective of the Government. We have already taken measures that should ensure an increase in absorption this year, by improving tenders and by facilitating access to projects, ensuring co-financing through special guarantee facilities. Next, our efforts will focus on developing the administrative capacity of the units managing funds, especially in the transport sector; modernizing and strengthening the legislative and regulatory framework in the field of public investment; and prioritize investments to ensure sufficient funds for essential projects. In concrete terms, we are committed: (i) to prioritise only investment projects co-financed by EU funds, when new investments are started; (ii) to reduce the existing portfolio of capital projects financed by national funds in order to be able to focus on priority projects for which funding can be totally secured, with the rest of the projects interrupted; (iii) strengthen the project evaluation process by requiring the private sector to analyse the bankability of the projects; (iv) encourage private sector participation in projects through outsourcing or public-private partnership arrangements; and (v) ensure the full employment of the project management units and the appropriate remuneration of the specialist staff, financed by technical assistance funds. 12. The revision of social assistance benefits will be an important support for the fiscal adjustment strategy, while improving the effectiveness of the protection afforded to the poorest and most vulnerable members of society. Social assistance expenditures account for almost 4% of GDP, but they are poorly targeted and generating waste, often being granted to those quite well-off and not reaching those in need. We have initiated extensive reforms of the system (with assistance from the WB), aimed at: ((i) better targeting, by immediately or gradually eliminating programmes that are not subject to financial means testing; (ii) rationalisation and consolidation of the benefits of the various levels of the administration; (iii) increasing control over claims for social benefits; and (iv) capping the maximum benefit per person. It is anticipated that the legislation introducing these reforms will be approved by the Government by the end of October 2010. 13. The government remains committed to improving the performance of IS. The 10 IS that recorded the highest losses met the indicative target of operating losses in the second quarter. However, the arrears have continued to grow, which suggests that further measures will be needed to comply with the EU conditionality on the quarterly reduction of arrears. The government is considering implementing measures to improve the revenues of these enterprises (through higher tariffs), but also to reduce costs through staff cuts and restructuring. The process of liquidation or privatisation of IS (including Termoelectrica and CFR Marfa) provided for in SI since June 2010 is ongoing. The privatization agency The State Assets Authority (AVAS) is preparing the sale of 18 small companies fully owned by its ownership and the minority packages it owns in at least 150 other companies by the end of the year. , but the completion of some of these sales will be postponed to 2011. 14. The elaboration of the implementing legislation of the unit salary law is carried out as planned. The legislation will consist of two parts: an implementation framework law introducing the new pay system and an annual specific law establishing the salary parameters. The legislation will be subject to a cost analysis before being submitted to Parliament, in order to ensure the classification of personnel expenses for 2011 in the agreed envelope of 39 billion lei that the recent salary cuts in the country entail. the public domain and the system's compliance with the agreed limits for the wage envelope over time. The legislation will also reform the productivity-based incentive system, by integrating them into the base salary. We are committed to having this legislation approved by the end of October 2010 (structural benchmark) and we will agree on the text of the legislation with the international financial institutions and the EC before passing on this legislation Parliament. 15. The approval of pension reform has been somewhat delayed thanks to a loaded legislative agenda, but now we expect this law to be approved by Parliament before mid-September (prior action). The part of this reform relating to the reduction of special pensions has already been implemented. We started checking disability pension beneficiaries to remove fraudulent claims. We have suspended early retirements until the new pension law comes into force (which discourages early retirement by means of a larger pension reduction factor) on January 1, 2011. The new provisions on pension indexation will come into force in 2012 after the 2011 pension freeze ceases. We are committed to continuing the gradual integration of the two pension pillar, through the planned increase in contributions from 2.5% to 3% in 2011. 16. We continue to undertake the commitment to ensure the functioning of the health system at the 2010 budget allocations and to achieve further savings in 2011. On the revenue side was implemented the turnover tax for drug distributors (clawback), and a bill regulating the co-payment system, including a drastic restriction of exemptions compared to plans. It will soon be approved by Parliament to enter into force on 1 January 2011. To improve the efficiency of medical services, the administration of many hospitals was transferred to local authorities. At the same time, a ceiling was introduced for staff expenses, equal to 70% of hospital costs, and orders to reduce 95% of the 9,200 initially targeted hospital beds have already been transmitted, with the rest planned for mid-August. A reference price scheme for selected pharmaceuticals has been put in place and it will be extended in the coming months. Finally, reference systems are introduced to control the costs of pharmaceutical products and the costs of medical services. 17. We are preparing a labor market reform to resolve existing rigidities and weaknesses. Specifically, we develop amendments aimed at modernising the Labour Code and the rest of the labour market legislation, in order to increase market flexibility, reduce the informal nature and tax evasion and improve the negotiating framework. Salary. We anticipate that the revised legislation will come into force before the end of 2010. Financial sector 18. The Romanian banking system was affected by the prolonged recession and recorded losses in the first semester of the year. Loans classified as doubtful and losses reached 17.8% at the end of June 2010, while loans with delays of more than 90 days, classified in the Loss category, were 10.2%; in the second semester of the year we we expect an increase in them, given that economic activity continues to remain at low levels. The capitalization rates were under pressure, but as a result of the capital's proactive increases by shareholders, the average capitalization rate in the banking sector was 14.3% at the end of June 2010, with all institutions having more than 10%. In particular, the parent banks of the 9 largest foreign banks retained capital ratios of more than 10%, thus broadly respecting the commitment to maintain the exposure assumed under the European Banks Coordination Initiative (ICBE). In order to strengthen Romania's external position, it was agreed to allow a reduction of banks ' exposure commitments to 95%, starting with the end of September 2010. 19. We remain committed to continuing to strengthen the safety net designed to deal with financial problems. We have strengthened the winding-up framework of the troubled banks by filling in the special powers of the special administrator so that it can promptly implement a wide range of restructuring measures. We intend to get Parliament's approval of these amendments by 1 December 2010 (structural benchmark). With technical assistance from the IMF, we will amend the FGD law, in order to allow the use of the resources administered by FGD (including through guarantees) in order to facilitate the restructuring measures authorized by the NBR on the transfer of deposits, including acquisition and assumption transactions, if such use would be less expensive than direct payment of collateral on deposits. It is preparing to increase the coverage ratio of ex-ante funding for FGD to 2%. To achieve this, the banks ' contribution rate will be increased to 0.3% starting in 2011 and stand-by credit lines will be removed (structural benchmark for the end of September 2010). We will also review the governance arrangements in the FGD Act, to ensure that neither the Council members nor the employees of the credit institutions participate in the FGD Management Board (structural benchmark for the end of December 2010). 20. As far as over-indebted households are concerned, the efforts implemented by the banks in the direction of decentralized restructuring and rematurity have been broadly sufficient to resolve the pressures raised by the debt service. We remain committed to supporting financial stability by withholding from the promotion of legislative initiatives, such as the current draft of the personal insolvency law, which would undermine the discipline in terms of lending. We will try to maintain the existing framework that allows banks to rely on internal expertise in collecting their claims. We will encourage banks to continue their restructuring efforts and we will closely monitor the results. We will consider the recent emergency ordinance ( Government Emergency Ordinance no. 50/2010 ) to ensure transparency in the interest rates for consumer credit agreements, in order to ensure full harmonisation with EU law, in particular as regards non-retroactivity. 21. The current provisioning framework is healthy and the NBR does not consider that other new prudential regulations would be necessary at this time. The NBR will continue to consult with IMF and EC experts before the introduction or amendment of other aspects of the regulatory framework. The NBR and the Ministry of Public Finance continue to undertake the commitment to adopt by the end of the program the legislative framework necessary for the comprehensive implementation of International Financial Reporting Standards (IFRS), in the application of IFRS from the beginning of 2012. The NBR sent the banks the notifications on the changes, together with a calendar, on June 30. 22. We express our commitment to amend recent legislative initiatives that have negatively affected the independence of the central bank and supervisory authorities in the non-banking financial sector. The recently adopted tax adjustment package included the central bank and supervisory authorities in the non-banking financial sector among institutions subject to 25% pay cuts, which undermined financial independence for the financial sector. and violated the provisions of art. 130 130 of the EU Treaty. The European Central Bank also found that the transfer to the state budget of savings from the salary fund represents a prohibited monetary financing of the budget deficit. We express our commitment to issue an order, before mid-September, to remove the provisions on monetary financing and to resolve the issue of the central bank's breach of independence before the end of December. Monetary and foreign exchange policy 23. The recent VAT increase will lead to a temporary but significant increase in inflation in the rest of the current year, pushing this indicator well outside the range targeted by the NBR. We estimate that the jump due to VAT, combined with planned increases in managed prices and the effects of the latest floods on food prices, could push inflation about 3 'bd-4 'bd percentage points above the projected trajectory, Standing at 7-8% at the end of 2010. Excluding significant increases in a second round, the effects of price levels should dissipate after the half of 2011, thus allowing the 2011 target of 3% ± 1 percentage point. 24. Although the singular nature of the VAT-induced price increase does not justify a monetary policy response, increased vigilance is required to keep inflationary forecasts under control and to annihilate possible effects. Second round inflationary. The NBR Council decided to discontinue its monetary policy easing cycle until the likely effects of the VAT increase became clearer. In the future, monetary policy will be calibrated towards achieving the projected path of inflation reduction, net of fiscal effect. Schedule changes and monitoring 25. The program will continue to be monitored through periodic evaluation missions, prior actions, quantitative performance criteria and indicative targets and structural performance criteria. The quantitative targets for the end of September and the end of December 2010 and the permanent performance criteria are set out in Table 1 and the structural performance criteria are set out in Table 2. The IMF and the IMF experts on the quantitative performance criteria and the structural measures described in this Letter of Intent are specified in the attached Technical Memorandum of Understanding. Gheorghe Ialomitianu, public finance minister Mugur Constantin Isarescu, Governor of the National Bank Table 1. Romania: Quantitative targets under the programme 200820092010 December attainedMarch attainedSeptember attainedDecember attainedMarch attainedJune programJune preliminarySeptember programmeprogram I. Quantitative criteria of performance 1. Cumulative change in net foreign assets (million euros) 1,325.532-3.500-5.119-4.566-4.874779-4.040-509-2.000-2.000 2. cumulative balance of consolidated general budget (million lei) 2-24.655-8.300-14.456-25.563-36.101-8.422-18.200-18.015 -28.200-34.650 3. Cumulative stock of arrears of the consolidated general budget from the end of the previous year (billion lei) 1,061,411,551,41,501,761,091,80,810,48 4. The ceiling of guarantees of the consolidated general budget issued during the year (nominal value, in billion lei) 0,0 ... 0.020, 72, 24, 612,05, 612,012, 0 II. Permanent performance criteria 5. Non-accumulation of arrears on external debt 0000000...00 III. Consultations on inflation 6. Inflation rate at 12 months in consumer prices External range (upper limit) ...... 8,47 ,76 ,56 ,56 ,0 ... 10,010, 0 Inner range (upper limit) ...... 7,46 ,75 ,55 ,55 ,0 ... 9,09, 0 Central6,36,75,94,84,74,24,04,48,08,0 Inner range (limit lower) ...... 5.44, 73, 53, 53, 0 ... 7,07, 0 External Interval (lower limit) ...... 4,43, 72, 52, 52, 0 ... 6,06, 0 IV. Guideline 7. Current primary expenditure of the consolidated general budget (excluding EU funds and social assistance, million lei) 292.32722.14943.23863.87885.63732.74966.20066.124100.000131.000 8. Operating balance (income without taxes and interest), excluding subsidies, for the 10 IS defined in MTI -495-2.000-1.947-3.000-4,000 Article of Memorandum Cumulative projected revenues of the consolidated general budget, without EU funds (million lei) ............ 151.50836.35574.95074.669114.700157.950 ------- * * 1) The figure for December 2008 is the stock. * * 2) The figure for December 2008 is for the whole year. * 3) The net foreign asset target (AEN) for the end of June 2010 was adjusted because the actual drawdowns were lower than the projection by 1.5 billion euros. Table 2. Romania: Performance criteria for the fifth evaluation and proposed new conditionalities Measure Data Subject Comment Prior measure 1. Payment of arrears worth 1.9 million-burn lei, mostly in the health sector 2. Parliament's approval of the pension reform law Quantitative Performance Criteria 1. Net external active ceiling 2. Total balance of consolidated general budget 3. The ceiling of guarantees of the consolidated general budget Ceiling of the internal arrears of the consolidated general budget 5. Non-accumulation of external arrears on payment indicative quantitative target 1. Current primary expenditure of the consolidated general budget 2. Indicative target of the operating balance of IS with the highest losses Interval consultation on inflation Inside Interval external Interval Reference structural criteria 1. Approval of institutional reforms to counter the fiscal risks related to local authorities 2. Approval of the legislation implementing the organic law on salarization in public secto-rul 3. Approval of pension law 4. Parliament's ratification of fiscal measures approved by the Government 5. Reform of the FGD funding regime by increasing bank contribution rates and eliminating stand-by credit lines and reviewing the governance arrangements of FGD 6. Reform of the tax administration methodology of individuals with large wealth 7. Integration of the accounting reporting system with the Treasury payment system New proposed conditionalities 1. Parliament's ratification of the fine-ments at the closing framework of banks 2. Parliament's approval of the budget agreed on 2011 3. Amendment of the deposit guarantee legislation to ensure that neither the members of the Council nor the employees of the credit institutions participate in the FGD Board June 2010 June 2010 June 2010 June 2010 June 2010 June 2010 June 2010 June 2010 June 2010 June 2010 30 September 2010 31 October 2010 30 September 2010 30 September 2010 30 September 2010 30 November 2010 31 March 2011 1 December 2010 15 December 2010 31 December 2010 Fulfilled Fulfilled Fulfilled Fulfilled Fulfilled Fulfilled in June 2010 Revised from 30 September 2010 In the course of independence (prior action Ratification of VAT in the course of completion Revised from 30 September 2010 + Annex ROMANIA: TECHNICAL MEMORANDUM OF UNDERSTANDING 9 9 September 2010 1. This Technical Memorandum of Understanding (MTI) updates and replaces the MTI dated June 16, 2010. This: ((i) define the variables subject to the quantitative targets specified in the Letter of Intent (SI); ((ii) describe the methods that will be used to assess the performance of the programme and the needs of information to ensure adequate monitoring of targets (Section I); and ((iii) specify some of the structural conditionalities under the programme (Section II). Under the standard under all agreements with the Fund, we will consult with the Fund before amending the measures contained in this letter or before adopting new measures that would deviate from the programme's goals and provide the Fund. information required to monitor the programme. 2. In the acceptance of the program, the exchange rates of the Romanian leu (RON) against the euro are set at 3,9852 RON = 1 EURO, against the US dollar at 2,8342 RON = 1 $, compared to the Japanese yen at 3,1419 RON = 100 ' a5 and against the pound at 4,1169 RON = 1 ' a3, the rates being those posted on the website of the National Bank of Romania (NBR) on December 31, 2008. Exchange rates against other currencies, where applicable, will also be those posted on the NBR website on December 31, 2008. 3. In the program's acceptance, the consolidated general budget includes the entities defined in the 2010 budget. These are: the central government (state budget, treasury, self-funded state entities included in the budget, etc.), local authorities, social insurance funds (pensions, health and unemployment), National Highway and National Roads Company. from Romania and the Property Fund administration. This definition of the consolidated general budget also includes any new funds or special budgetary and extra-budgetary programmes that could be created during the programme period to carry out tax operations, as is defined in the IMF Manual for Government Financial Statistics 2001. The authorities will inform the IMF experts about the creation of any such new fund or program. I. Quantitative performance criteria, indicative target and permanent performance criteria A. Limit on net foreign assets 4. In the program's acceptance, net foreign assets (AEN) are defined as NBR's AEN minus treasury obligations to the International Monetary Fund. 5. AEN of the NBR are defined as the euro value of the gross foreign assets of the NBR (including the mandatory reserves of the commercial banking system held at the NBR) minus the gross external liabilities of the NBR and will be measured on the basis of the operational definitions of NBR and not those accounting. Euro non-denominated foreign assets and liabilities will be converted into euro at the exchange rates of the programme. 6. Gross foreign assets of the NBR are defined as including the DST holdings of the NBR, the position of the country's reserves at the IMF, the holdings of cash, securities and deposits abroad in convertible foreign currencies. Excludes from reserve assets: ((i) gold and other precious metals; (ii) assets in non-convertible currencies; ((iii) non-liquid assets; ((iv) any assets that are engaged, collateralised or under another obligation, if they are not associated with them and a gross external liability; (v) claims on residents; and ((vi) foreign currency receivables deriving from derivatives in foreign currencies opposite the national currency (such as futures, forwards, swaps and options). 7. The gross foreign liabilities of the NBR shall be defined as all liabilities in foreign currency to residents and non-residents, including commitments for the sale of foreign currency arising from derivatives (such as futures, forwards, swaps and options) and all the grant from the Fund, but excluding: ((i) foreign currency deposits of banks linked to required reserves; and (ii) the Government's foreign currency deposits with the NBR. This definition aims to bring the concept of external liabilities closer to the definition of balance of payments, on which targets are based. Limit for cumulative changes in the AEN since the beginning of the year (in mil. euro) 1) 2009 20102) DecemberseptemberDecember (stock) attainatedCPCP Cumulative Change in AEN20.658779-509-2.000-2.000 Position of the Memorandum: Brutal external assets 28.4183.1451.8382.1003.000 --------- * 1) CP=performance criterion; data at the end of the month. * 2) The flows in 2010 are compared to the final stock in 2009. 8. The AEN targets will be adjusted increasing (decreasing) with the surplus (deficit) from the draws within the program related to the base projection. The draws in the program are defined as external draws from official creditors (World Bank and European Commission) that are usable to finance the total state budget. The AEN targets will also be adjusted upwards with the increase of the mandatory reserves of commercial banks held at the NBR compared to the end of December 2009 (7.874 million euros), measured at the exchange rates of the program. External draws from the program-Basic projections (in mil. euro) 2010 March-December-December Cumulative flows from the end of December 20091.0002.2002.5004.100 B. Consultation mechanism for inflation rate at 12 months 9. Quarterly consultation interests for the 12-month inflation rate in consumer prices [as measured by the Consumer Price Index (CPI) published by the National Institute of Statistics] are specified below. If the year-on-year CPI inflation rate is outside the outside ranges specified below, the authorities will conduct a consultation with the Fund on the proposed policies in response before calling for further draws within the framework. the program. In addition, the NBR will have discussions with the Fund's experts if the CPI-per-year CPI inflation rate is outside the inner ranges specified for the end of each quarter in the table below. 2008 December (realized) 2009 December (realized) March 2010 (realized) June (realized) septemberDecember Outer range (upper limit) 10,010,0 Inner range (upper limit) 9,09,0 Central6,34,74,24,48,08,0 Inner range (lower limit) 7,07,0 External range (lower limit) 6,06,0 C. Performance Criterion on the balance of the consolidated general budget 10. The budget deficit will be monitored quarterly by the cash balance of the consolidated general budget. The authorities will consult with IMF experts on corrective measures in case of slippages of government revenues and funding. Limit for the balance of the consolidated general budget (in millions of lei) Fines of December 2009 (realized) -36.101 Fines of March 2010 (realized) -8.422 Fines of June 2010 (realized) -18.015 Fines of September 2010 (performance criterion) -28.200 End of December 2010 (performance criterion) -34.650 11. The budget deficit will be measured above the line using the budget execution data. The Ministry of Public Finance (MFP) will also provide monthly data to measure the deficit below the line. The consolidated general budget balance measured below the line will include: + (i) net external financing, excluding revaluation gains and losses; + (ii) changes in net domestic credit in the financial system, excluding gains and losses from revaluation of foreign currency denominated deposits and including adjustments for: + (a) EU funds received and unspent yet (advance payments); + (b) requests for reimbursement of the Government from EU funds; + (c) obligations of the Unpaid Property Fund; + (iii) changes in the stock of government securities issued, net of revaluation changes; + (iv) net changes in other financing. 12. If the difference between the deficit of the consolidated general budget measured above the line and below the line is more than 200 million lei per quarter during 2010, the MFP will consult with the IMF experts. 13. If budget revenues excluding non-refundable funds will exceed the projected value under the program, the deficit target will be adjusted down by one half of the surplus and will allow additional capital expenditures reducing at the same time deficit. The following table shows the budget revenues exclusively cumulated non-reimbursable funds projected for 2010, compared to which the realized revenues will be compared. Cumulative revenues projected in the consolidated general budget, excluding EU funds (in millions of lei) Fines of December 2009 (realized) 151.508 Fines of March 2010 (realized) 36.355 Fines of June 2010 (realized) 74.669 Fines of September 2010 (projection) 114.700 Fines of December 2010 (projection) 157.950 14. If current expenses in the previous quarter exceed the indicative target (defined below), the deficit target for the next quarter will be adjusted downward by the value corresponding to this overshoot. D. Performance criterion limiting the issuance of government guarantees to the non-financial private sector and public enterprises 15. The issuance of government guarantees to the non-financial private sector and to public enterprises will be limited during the duration of the program. The ceiling can be adjusted up by up to 4.3 billion lei compared to the initial ceiling of 7.7 billion lei for guarantees intended to finance payments in counterparty within the framework of investment projects financed by the EU or for guarantees for projects co-financed by the EBRD, IFC or the EIB. Ceiling for guarantees from the newly-issued consolidated general budget from the end of 2008 to: (in billion lei) Fines of December 2009 (realized) 2.2 Fines of March 2010 (realized) 4.6 Fines of June 2010 (realized) 5.6 Fines of September 2010 (performance criterion) 12 Fines of December 2010 (performance criterion) 12 E. Performance Criterion regarding the non-accumulation of internal arrears by the consolidated general budget 16. The established performance criterion on the internal arrears stock of the consolidated general budget envisages the non-accumulation of new arrears and their elimination for the duration of the program. In case of necessity, the Government will take the corrective measures to prevent the accumulation of new arrears. In the program's acceptance, arrears means past payment amounts of maturity by 90 days (in accordance with the definition of ESA95 expenses). The stock of arrears of the consolidated general budget from the end of the previous year (in billions of lei) Fines of November 2009 (stock, realized) 1,40 Fines of March 2010 (realized) 1,76 Fines of June 2010 (realized) 1.8 Fines of September 2010 (performance criterion) 0,81 Fines of December 2009 (performance criterion) 0,48 Fines of April 2011 (indicative target) 0,00 F. Permanent performance criteria regarding the non-accumulation of arrears on payments on account of external debt at the level of the consolidated general budget 17. At the level of the consolidated general budget will not accumulate arrears on external debt during the program. In the sense of this performance criterion, a payer to the payment on account of the external debt will be defined as a payment of the government sector, which was not carried out within 7 days after maturity. The performance criterion will apply on a permanent basis. G. Indicative target on the primary current expenditure of the consolidated general budget 18. The indicative target on the primary current expenditure of the consolidated general budget is defined as including personnel expenses, expenditure on goods and services exclusively EU funds (specified in the category of external loans non-refundable), subsidies, transfers to public entities, pensions (social assistance category in the social insurance budget and one third of the same category in the state budget), state aid and other expenses in the other category transfers, Reserve Fund and other expenditure classified in the reporting tables Monthly: Cumulative changes in the primary current expenditures of the consolidated general budget (in millions of lei) Fines of December 2009 (realized) 85.637 Fines of March 2010 (realized) 32.749 Fines of June 2010 (realized) 66.124 Fines of September 2010 ((indicative target) 100,000 Fines of December 2010 (indicative target) 131,000 H. Monitoring of public undertakings 19. Since 2009, the Ministry of Public Finance, the Ministry of Labour and Social Protection and other competent institutions have implemented a system for monitoring public institutions. During the duration of the program information will be provided to show the sanctions-remuneration reductions or the management of the management in accordance with the provisions Government Emergency Ordinance no. 37/2008 on the regulation of financial measures in the budgetary field, approved with amendments Law no. 275/2008 ,, with subsequent amendments and completions, and of Government Emergency Ordinance no. 79/2008 on economic and financial measures at the level of some economic operators, approved with amendments and completions by Law no. 203/2009 -that are imposed if the company's budgets and targets for restructuring are not respected. 20. Quarterly indicative target for 2010 for the operational aggregate balance (EBIT-earnings before interest and tax-income before interest and taxes and fees), excluding subsidies for the following public enterprises: (1) The National Railway Company "CFR"-S.A.; (2) National Travel Society "CFR Calatori"; (3) The National Company of Huilei-S.A. Petrosani; (4) The Commercial Company "termoelectrica"-S.A.; (5) National Highway and National Roads Company; (6) Commercial Transport Company with the Bucharest Metro "Metrorex"-S.A.; (7) National Railway Transport Society "CFR Marfa"-S.A.; (8) Commercial Company "Electrocentrale București"-S.A.; (9) Commercial Company "Electrification CFR"-S.A.; and (10) Commercial Company National Administration of Land Improvement. The data will be provided by the company, along with the operational results. The targets for September 2010 and December 2010 will be -3,000 and -4,000, respectively. I. Reporting requirements 21. The performance under the program will be monitored based on the data provided to the IMF by the NBR and the MFP as presented in Table 1. The authorities will promptly forward to the IMF experts any data reviews as well as any other information necessary to monitor the agreement with the IMF. Table 1. Romania: Providing data to the IMF Article Periodicity to be provided by the Ministry of Public Finance Preliminary monthly data on consolidated general budget accounts Quarterly final data on consolidated general budget accounts deficit of the consolidated general budget (BGC) using the definition of ESA95 Preliminary data on sub-line financing for BGC Quarterly final data on sub-line financing for BGC Total amounts of payment and total arrears of BGC Foreign arrears stock of central government Debt public and newly-issued government guarantees Preliminary monthly data on BGC's primary expenditure, net of EU funds Quarterly final data on BGC's primary expenditure, net of EU funds Since 2010, operational balance, profits, arrears and personnel expenses of the 10 largest public enterprises after total expenditure Data on grants for EU projects (repayments and advances), capital expenditure and subsidies covered by EU advances or eligible for EU reimbursements related to EU-supported projects specifically agreed with the EU provided by the National Bank of Romania Data AEN, by component, both according to the exchange rate of program, as well as the real money analysis data in the format agreed with IMF experts The external contractual payments of the banking sector due in the next 4 quarters, interest and amortization (for medium-term loans and long) The scheme of external contractual payments of the corporate sector due in the next 4 quarters, interest and depreciation (for medium and long-term loans) payments in the IMF format currently used for reporting Exposure (deposits, loans, subordinated loans) of: (i) foreign parent banks to their subsidiaries in Romania; (ii) international financial institutions (IFIs); and (iii) other creditors to banks in Romania (in national and foreign currency) Quarterly, cash data, on the 35th day after the end of the period for which it relates Quarterly, accrual data, on the 55th day after the end of the period for which it relates Quarterly, with a 3 month monthly gap, with a gap of no more than 35 days after the end of the period for which it is reported Quarterly, no later than 45 days after the end of the period for which it is reported Preliminary monthly, within the next month Quarterly, within 55 days Daily, with a gap of no more than 7 days Monthly, within one month Monthly data preliminary will be reported to IMF experts within 25 days. Quarterly, within 35 days of the end of the period for which it is reported Quarterly, within 55 days of Lunar, within 3 weeks of the end of each month Weekly, every Monday after the reporting week and with a gap of 3 working days in the case of monthly end-of-month data, within 30 days of the end of the month, 45 days after the end of each month, 45 days after the end of each month, 45 days after the end of each month Monthly, 45 days after the end of each month Monthly, 20 days after the end of each month II. Structural conditionalities: detailing A. Legislation on pay in the public sector 22. Following the approval of the single salary law in the public sector in October 2009, a legislation to implement it will be approved by the end of October 2010, legislation that will comply with the following principles: a) ensure compliance with the quantitative targets set for public sector wage expenditures and included in the public sector wage bill, and that proposal will be based on a full cost analysis; b) ensure the simplification of the new pay scale and guarantee a remuneration based on responsibilities and qualifications. The new public sector pay system will relate to private sector wages (through a pay survey), to ensure that public sector wages are generally competitive relative to the other salaries, within the limits. constraints related to how much the budget allows; c) the law will gradually introduce a 30% limit on personnel expenses, other than salaries, and limit individual bonuses for civilian personnel. In the sense of this law, "incentives" payments will be treated as bonuses. + Annex ------- ((Annex to Government Emergency Ordinance no. 99/2009 ) -------------------------------------------------------- Maturity refund Arrangement stand-by ((DST) Date of reimbursements TOTALTransa ITransa IITransa IIITransa IVTransa VTransa VIITransa VIITransa VIII amount of refunded related BNRamount of refunded related MFPamount of refunded BNRamount to be refunded related MFPamount to be refunded related to BNRsuma to be reimbursed related to MFPamount to be reimbursed related to BNRamount to be repaid related to BNRamount to be repaid related to BNRamount to be refunded related to BNRsuma to be reimbursed related to BNR 6 August 2012546.250.000546.250,000 6 November 2012546.250.000546.250,000 23 December 2012214.750.000 107.375.000107.375.000 6 February 2013546.250.000546.250.000 23 March 2013214.750.000 107.375.000107.375.000 6 May 2013546.250.000546.250,000 23 May 2013271.875.000 88.062.50088.062.50047.875.00047.875.000 23 June 2013214.750.000 107.375.000107.375.000 6 August 2013546.250.000546.250.000 August 23, 2013271.875,000 08.062.50088.062.50047.875.00047.875,000 September 23, 2013214.750.000 107.375.000107.375,000 October 7, 201396.000.000 96.000.000 November 6, 2013546.250.000546.250,000 November 23, 2013271.875,000 88.062.50088.062.50047.875.00047.875.000 23 December 2013214,750,000 107.375.000107.375.000 28 December 201396.125.000 96.125.000 7 January 201496.000.000 96.000.000 6 February 2014546.250.000546.250,000 23 February 2014271.875.000 88.062.50088.062.50047.875.00047.875.000 15 March 201496.125.000 96.125.000 23 March 2014214.750.000 107.375.000107.375.000 28 March 201496.125.000 96.125.000 7 April 201496.000.000 96.000.000 6 May 2014546.250.000546.250,000 23 mat 2014271.875.000 88.062.50088.062.50047.875.00047.875.000 15 June 2014205.375.000 96.125.000109.250,000 23 June 2014214.750.000 107.375.000107.375.000 28 June 201496.125.000 96.125.000 7 July 201496.000.000 96.000.000 23 August 2014271.875.000 88.062.50088.062.50047.875.00047.875.000 15 September 2014205.375.000 96.125.000109.250,000 23 September 2014214.750 000 107.375.000107.375.000 28 September 201496.125.000 96.125.000 7 October 201496.000.000 96.000.000 23 November 2014271.875.000 88.062.50088.062.50047.875.00047.875.000 15 December 2014205.375.000 96.125.000109.250,000 28 December 201496.125 000 96.125.000 7 January 201S96.000.000 96.000.000 96.000.000 23 February 2015271.875,000 88.062.50088.062.50047.875.00047.875.000 15 March 2015205.375,000 96.125.000109.250,000 28 March 201596.125.000 96.125.000 7 April 201596.000.000 96.000.000 15 June 2015205.375.000 96.125.000109.250,000 28 June 201596.125.000 96.125.000 7 July 201596.000.000 96.000.000 15 September 2015205.375.000 96.125.000109.250,000 28 September 201596.125.000 96.125.000 15 December 2015205.375.000 96.125.000109.250,000 15 March 2016109.250,000 109.250,000 Subtotal 859.000.000859.000.000704.500.000704.500.000383.000.000383.000.000 TOTAL11.443.000.000 4.370.000.0001.718.000.0001.409.000.000766.000.000768.000.000 769,000,000 769,000,000 874,000,000 NOTE: The data of the reimbursement of the VI-VIII tranches are estimated and will be correlated with the data of the draws. ----------