CELEX: 51991PC0129
Language: en
Date: 1991-04-12
Title: PROPOSAL FOR A COUNCIL DECISION PROVIDING MEDIUM-TERM FINANCIAL ASSISTANCE FOR ROMANIA

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)
 ---pagebreak---                                   - 2 -
                         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.
 ---pagebreak---                                        - 3 -
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.
 ---pagebreak---                                        - 4 -
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
 ---pagebreak--- the target underlying the policy programme 1 . 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.
 ---pagebreak---                                  - 7 -
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.
 ---pagebreak---                                    - 8 -
                              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
 ---pagebreak---                                    - 9 -
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.
 ---pagebreak---                                    - 10 -
                                 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.
 ---pagebreak---                                  - 11 -
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
 ---pagebreak---                                  - 12 -
                            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.
 ---pagebreak---                                 - 13 -
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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                                                                C0M(91) 129 final
                                                      DOCUMENTS
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