COMMISSION OF THE EUROPEAN COMMUNITIES 
C0M(91) 129 final 
Brussels,12 April 1991 
Proposal for a 
COUNCIL DECISION 
providing medium-term financial assistance 
for Romania 
(presented by the Commission) 
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EXPLANATORY MEMORANDUM 
Romania's request for financial support 
After a long period of political turmoil following the collapse of the 
Ceauscescu regime in December 1989, the Romanian authorities have now 
embarked upon a comprehensive reform programme aimed at stabilising the 
economic situation and initiating the process of transformation from a 
highly centralised planned system to a market oriented economy. The 
starting conditions for this process are unfavourable, however. The 
previous regime's overriding policy concern of repaying the foreign 
debt through a policy of import compression has left the country with 
an obsolete capital stock and huge pent up demand for consumer goods. 
As a result, major imbalances started to appear as the command system 
was abolished and resources were redirected towards meeting the 
consumption needs of the population. 
In support of the economic reform and adjustment programme, the 
authorities have requested assistance from the IMF in the form of a 
stand-by arrangement as well as drawings under the oil-import element 
of the Compensatory and Contingency Financing Facility. The IMF has 
concluded the negotiations with the Romanian authorities and the 
Executive Board is expected to consider the stand-by arrangement at the 
beginning of April. As a precondition for approving the arrangement the 
IMF has formulated a number of prior actions which have to be taken by 
the Romanian authorities. 
In addition to resourses likely to be forthcoming from the IMF and the 
World Bank, the authorities have requested complementary financial 
assistance from the Group of Twenty Four to close a remaining financing 
gap, which is estimated at some $ 1 billion. If such additional 
financing would not be found, the IMF might have to renegotiate the 
programme, which could delay its implementation. Inadequate financing 
would also risk jeopardising the success of the reform programme by 
requiring additional cut-backs in the already heavily constrained level 
of imports. 
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The economic reform programme 
During 1990, the Romanian government already implemented several 
measures to facilitate the introduction of its macro-economic 
adjustment programme. These measures included the elimination of almost 
three quarters of the stock of unservicable debts of enterprises to the 
banking sector, and two devaluations of the lei by a cumulative 60% in 
foreign currency terms. 
The government also began to introduce a number of economic reforms. 
Since November 1990, a partial price liberalisation and adjustment of 
controlled prices have brought prices of most imported inputs broadly 
in line with world market prices at the current exchange rate. As a 
consequence, at the end of January the consumer price index was about 
50% higher than the level prevailing in October last year. Furthermore, 
a separation of the central and commercial banking functions of the 
National Bank of Romania constituted a first step towards the creation 
of a market based financial system at the same time as it enhanced the 
authorities' ability to enforce monetary control. 
In continuation of these initial measures, the complete policy 
programme currently under implementation aims at reforming the 
organisation of the economy into a market-based system while 
eliminating or reducing major economic imbalances that might jeopardize 
the reform effort. The programme's stabilisation objectives for 1991 
are to contain the decline in output, to arrive at a rate of inflation 
of 15% per annum by the end of the year — after an initial significant 
jump in the price level — and to rebuild the level of foreign currency 
reserves to some $ 1 billion by the end of 1991. To achieve these 
objectives, the authorities intend to maintain a tight fiscal policy-, 
to adopt a flexible interest rate policy; to ensure wage restraint 
through incomes policy and to follow an appropriate exchange rate 
po11cy. 
The structural reforms include a general liberalisation of foreign 
trade; extension of price liberalisation to a greater number of goods 
and services; privatisation and restructuring of state enterprises; and 
financial sector reform. 
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With respect to fiscal policy, the government intends to maintain a 
strict financial discipline in the general government sector through 
the adoption of a very small deficit target (1.5% of GDP). The 
government also plans to introduce a value added tax by 1992 to replace 
the existing turnover tax system, and is committed to introduce a 
personal income tax this year. 
To prepare for the process of privatisation, the authorities have also 
begun to transform most state owned companies into commercial 
enterprises, with only a limited number to be converted into public 
entities remaining under state ownership. Several measures that would 
distribute shares among the population are being explored, including a 
free voucher system and the sale of shares through public auctions. 
Furthermore, legislation will be developed to strengthen financial 
discipline of enterprises and to discourage bank credit to loss making 
firms. 
In the area of price liberalization, the authorities have decided to 
carry out a second major stage of the price reform process on April 1, 
1991. This will entail the liberalisation of prices on those basic 
consumer goods that were not affected by the first stage of price 
reform in November. In addition, the government is committed to 
adjusting prices of imported goods (including energy) to any future 
changes in the exchange rate in order to keep them at international 
levels. 
Incomes policy will be oriented towards offsetting part of the impact 
of the price reform by authorising compensation payments for workers. 
To restrain wage growth, however, a tax-based incomes policy has been 
introduced according to which a tax will be levied on enterprises that 
grant wage increases in excess of government guidelines. 
External policies will be characterised by important changes in the 
trade and exchange system. The authorities intend to abolish 
quantitative restrictions on imports, and export licensing will be 
limited to products subject to domestic price controls or imported at 
the official exchange rate. 
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With respect to the exchange regime, in addition to the recent 
devaluations of the official rate, in February the authorities 
introduced an interbank foreign exchange market with a freely 
determined exchange rate. Enterprises will have the possibility to 
sell part of their export earnings on this market. So far, however, 
the amount of foreign currency available for the free market has been 
quite modest, which helps to explain the large gap that persists 
between the official exchange rate and the free rate. The spread 
between the two exchange rates is monitored closely and the 
authorities are committed to unify the rates as soon as possible. 
Major progress in this direction is expected to be achieved before the 
IMF stand-by arrangement takes effect. 
The need for additional financial support 
Like other countries in Central and Eastern Europe, Romania is faced 
with exceptionally large external shocks in 1991. The disintegration 
of trade relations with other CMEA countries, aggravated by their own 
economic difficulties, is causing a sharp drop in trade volumes in the 
whole region, which is also being felt by Romania. The shift to world 
market prices in intra-Comecon trade has also had an adverse effect on 
Romania's terms of trade, although the impact is likely to be smaller 
than in other Central and Eastern European countries. The Gulf crisis 
has aggravated the situation further, partly by reducing the chances of 
repayment through oil deliveries of outstanding credits to Iraq 
amounting to some $ 1.7 billion. 
Apart from these external influences, the volume of exports is likely 
to be constrained by the disruption of domestic production while strong 
pent-up demand for imports is likely to persist. In these circumstances 
it is clear that a major adjustment effort will be required to contain 
the current account deficit at a level of some $ 1.7 billion, which is 
the target underlying the policy programme1. Taking into account the 
need to replenish external reserves, the overall financing requirement 
is estimated at some $ 2.7 billion. 
To finance the projected deficit, the Romanian authorities will have to 
rely primarily on credit from official sources. Both direct foreign 
investment, commercial bank lending and suppliers credit are likely to 
remain modest this year. Some $ 1.1 billion of the financing 
requirement is expected to be covered by the World Bank and the IMF. 
The assistance from the IMF would include access under the oil window 
of the CCFF ($ 360 million) and a stand-by arrangement ($ 455 million). 
To cover the remaining financing gap of $ 1 billion the Romanian 
government has requested complementary financial assistance from the 
Community and the Group of Twenty Four. 
Main features of the loan 
The Commission is proposing that the Community would participate up to 
ecu 375 million in a medium-term financial support package from the G-
24 and possibly other countries, the total amount of which would be 
some ecu 750 million. This assistance is expected to take the form of 
loans, with a maximum duration of seven years. 
The loan the Commission is envisaging will be closely linked to the IMF 
programme and would be disbursed in two tranches, the first tranche 
being subject to approval of the IMF agreement, the second one - which 
is to be disbursed in the fourth quarter of the year - subject to 
compliance with a number of performance criteria which are to be 
discussed with the Romanian government in consultation with the 
Monetary Committee. 
The 1991 current account target of $-1.7 billion covers 
transactions with both the convertible currency area and the CMEA 
area. In 1990, Romania registered an estimated deficit of $1.7 
billion in convertible currency and the approximate equivalent of a 
$1.4 billion deficit in non-convertible currency. 
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The Community would provide the funds through market borrowing with a 
guarantee by the Community budget. Romania would subsequently borrow 
from the Community. The borrowing and lending operations will be 
matched and without any commercial risk for the Community. 
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Proposal for a 
COUNCIL PEdSIQN 
providing medium-term financial assistance 
for Romania 
THE COUNCIL OF THE EUROPEAN COMMUNITIES, 
Having regard to the Treaty establishing the European Economic 
Community, and in particular Article 235 thereof, 
Having regard to the proposal from the Commission1 submitted following 
consultations within the Monetary Committee, 
Having regard to the opinion of the European Parliament2, 
Whereas Romania is undertaking fundamental political and economic 
reforms and has decided to adopt a market economy model; 
Whereas the said reforms are already under implementation and their 
financial support from the Community will strengthen mutual confidence 
and bring Romania closer to the Community; 
Whereas, following the changes in the international environment, the 
Romanian economy is in deep recession and facing external shocks which 
might deteriorate sharply its balance of payments and weaken its 
precarious reserve position; 
Whereas the Romanian authorities have requested financial assistance 
from the International Monetary Fund (IMF), the Group of 24 Industrial 
Countries (G-24) and the Community; whereas, over and above the 
estimated financing which could be provided by the IMF and the World 
Bank, a financial gap of some ECU 750 million remains to be covered in 
1991, inorderto prevent a further erosion of Romania's uncertain 
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reserve position and avoid an additional degree of import compression 
which could seriously jeopardise the achievement of the policy 
objectives underlying the Government's reform effort; 
Whereas the Commission as coordinator of assistance from the G-24 has 
invited them and other third countries to provide medium-term financial 
assistance to Romania; 
Whereas the grant by the Community of a medium-term loan to Romania is 
an appropriate measure to support the balance of payments and to 
strengthen the country's reserve position-, 
Whereas the Community loan should be managed by the Commission; 
Whereas the Treaty does not provide, for the adoption of this Decision, 
powers other than those of Article 235, 
HAS DECIDED AS FOLLOWS : 
Article 1 
1. The Community shall grant to Romania a medium-term loan facility of 
a maximum amount of ECU 375 million in principal, with a maximum 
average duration of seven years, with a view to ensuring a 
sustainable balance-of-payments situation and strengthening the 
reserve position. 
2. To this end the Commission is empowered to borrow, on behalf of the 
European Economic Community, the necessary resources that will be 
placed at the disposal of Romania in the form of a loan. 
3. This loan will be managed by the Commission in full consultation 
with the Monetary Committee and in a manner consistent with any 
Agreement reached between the IMF and Romania. 
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Article 2 
1. The Commission is empowered to negotiate with the Romanian 
authorities, after consultation with the Monetary Committee, the 
economic policy conditions attached to the loan. These conditions 
shall be consistent with any agreement as referred to in Article 
1(3) and with arrangements made by the G-24. 
2. The Commission shall verify at regular intervals, in collaboration 
with the Monetary Committee and in close coordination with G-24 and 
the IMF, that the economic policy in Romania is in accordance with 
the objectives of this loan and that its conditions are being 
fulfilled. 
Article 3 
1. The loan shall be made available to Romania in two instalments. The 
first instalment shall be released as soon as a "stand-by 
arrangement" has been concluded between Romania and the IMF and the 
second instalment not before the fourth quarter of 1991 subject to 
the provisions of Article 2(2). 
2. The funds shall be paid to the National Bank of Romania. 
Article 4 
1. The borrowing and lending operations referred to in Article 1 shall 
be carried out using the same value date and must not involve the 
Community in the transformation of maturities, in any exchange or 
interest-rate risk, or in any other commercial risk. 
2. The Commission shall take the necessary steps, if Romania so 
decides, to include in the loan conditions, and also to exercise an 
early repayment clause. 
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3. At the request of Romania, and where circumstances permit an 
improvement in the interest rate on the loans, the Commission may 
refinance all or part of its initial borrowings or restructure the 
corresponding financial conditions. Refinancing or restructuring 
operations shall be carried out in accordance with the conditions 
set out in paragraph 1 and shall not have the effect of extending 
the average duration of the borrowing concerned or increasing the 
amount, expressed at the current exchange rate, of capital 
outstanding at the date of the refinancing or restructuring. 
4. All related costs incurred by the Community in concluding and 
carrying out the operation under this Decision shall be borne by 
Roman I a. 
5. The Monetary Committee shall be kept informed of developments in 
the operations referred to in paragraphs 2 and 3 at least once a 
year. 
Article 5 
At least once a year the Commission shall address to the European 
Parliament and to the Council a report, which will include an 
assessment, on the implementation of this Decision. 
Done at Brussels, For the Council 
The President 
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FINANCIAL RECORD 
1. Budget Une concerned 
Article ( ) loan guarantee for aid to Romania (to be created 
through an amending and/or supplementary Budget). 
2. References (legal base) 
Article 235 of the Treaty 
3. Classification of the Expenditure 
Obi Igatory 
4. Description and Justification for the action 
a) Description of the action 
Provision of a guarantee from the Community for a loan to 
Romania in view of supporting its balance of payments and 
strengthening the country's reserve position. 
b) Justification for the action 
The G24 and the Council of the EEC have endorsed the 
principle of providing assistance in response to a request 
from Romania. 
The budget entry Is intended to provide a budgetary support 
for guarantee offered by the European Community to cover a 
loan extended to Romania. 
5. Nature of the expenditure and method of calculation 
a) Nature of the expenditure 
A guarantee to a loan to Romania. 
b) Method of calculation 
A token entry is proposed given that the amount and timing of 
any call on this budget line cannot be calculated in advance 
and because it is expected that this budget guarantee will not 
be cal led. 
6. Effect of the action on intervention credits 
Only in the case of an effective call on the guarantee. 
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7. Financing of intervention expenditure 
Endowment of the line by transfer, by reutilisation of 
reimbursed amounts (Article 27(3) of the Financial Regulation 
of 1977), or by amended and/or supplementary budget. 
In order to fulfill its obligations, the Commission can 
provisionally ensure the debt service with funds from its 
treasury. In that case, Article 12 of the Council Regulation 
(EEC, Euratom) no. 1522/89 of 29.5.1989 will apply. 

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