Social Security: pgec-preaderare

8/14/2019 Social Security: pgec-preaderare

http://slidepdf.com/reader/full/social-security-pgec-preaderare 1/103

PRE-ACCESSION ECONOMIC PROGRAMME

ROMANIA

EXECUTIVE SUMMARY



Pre-Accesion Economic Programme Romania

1. Introduction

The present Pre-Accession Economic Programme is the expression of the full commitment of theGovernment to finalise the necessary reforms needed for integration in the EU. Due to its unity

and strong parliamentary support, the present Government is bound to act in a more disciplinedand decisive fashion in the delicate reform areas. Moreover, there is a broad political consensus

around the goal of Romania’s joining the EU.

This Pre-Accession Economic Programme is based on the Government Programme for the period

2001-2004, on the Romania’s National Programme for Accession to the European Union

(NAPR-2001) and on the Economic Medium Term Strategy, which was presented to theEuropean Commission in March 2000. It is taking into account the current problems with whichthe Romanian economy is tackling, the inherited delays in restructuring and stabilisation, but also

the present favourable trends, which are backed by statistical data valid as of Semester I 2001.

For the year 2002, macroeconomic figures and economic policies are in line with the

memorandum agreed upon with the IMF.

The program was prepared under the leadership of the Romanian Ministry of Development and

Forecast. Several ministries and institutions like the National Bank contributed to the drafting.The final draft of the PEP was formally approved by the government and thus represents a

political commitment. All ministries of the government have been asked to update their medium-term strategies in compliance with the PEP. The programme has been submitted to Parliament for

information.

The Romanian economy has not yet been acknowledged as a functioning market economy,

within the latest Regular Report from the European Commission (November 2000), and it is

considered as “not being able to cope with competitive pressure and market forces within theEuropean Union in the medium term”.

Nevertheless, there are clear signals that recent stabilisation efforts have started to bear fruits,following the restructuring programme launched in the second part of 1999, aimed at improving

the financial system and the external viability of the economy. After the up swing in 2000, it

seems that the economy entered a recovery path, and the set of economic and social policies isconfigured – in the short and medium term – such as to ensure that the economic growth becomes

more and more sustainable.

The main objective for the macro-economic policies in the next period is to stabilise the economy

and to put it on a durable growth path, with the final goal of increasing the standard of living in

Romania by continuously reducing the existing gap that separates Romania from the averageEuropean Union standard. At the same time, we envisage to create the fully functioning




In order to achieve this objective, the policies will be aimed at:

Securing consolidated macrostabilisation by gradually lowering inflation rates, whichhave been historically among the highest in Europe (last decade), in such manner that they

will come down to one-digit level by and after 2004.

Starting 2002, the growth rates for the GDP are targeted to be around or above 5%, inorder to narrow the income-per-capita gap between EU and Romania. This is possible if a

number of micro and macro policies are implemented. It is the firm intention of Romania to

pursue such actions.

- The fiscal stance will continue to be reformed and further fiscal consolidationachieved. On the medium term, Romania needs to increase budget expenditure in order to

finance the EU accession process and to sustain the improvement in human capital.

Therefore, we envisage to reform the structure of the expenditure and to take all necessarysteps in order to increase budget revenues, without affecting the taxation rates.

Improving the financial and banking system stability, with the permanent task of

supporting a viable market economy in Romania.

- Fostering the development of a functioning and attractive business environment.

Restructuring of the economy will continue at a faster pace, related to privatisation of

important companies in the still very large state-owned sectors. The reduction in financial

arrears and curtailing the soft-budget policy will accompany the restructuring programme.

Current economic development

The experience of the Romanian transition presents evidence of the boom-and-bust economic

cycles. Along with structural strain and institutional fragility, this was caused by theinconsistency of policies pursued. It was only in March 2000 that all the social and political

partners in Romania agreed on a Medium-Term Economic Development Strategy.

Table 1.1. Recession and growth episodes in Romania, number of years, 1990-2001 First

transformationalrecession

Recovery Second

transformationalrecession

Growth Total years

of recession

Total years of

growth

No. years 3 4 3 2 6 6

The aim of the Government is to introduce more continuity and predictability in the social and

economic policies, in order to induce more credibility within the business environment, to




country had on international financial markets and the lack of credibility needed a well-designed

economic strategy, aimed at braking the recession circle and at bringing back the potential for

durable growth.

Growth revisited starting 2000, and the estimates for 2001, based on statistical figures at mid-year, show that the positive trend is vigurously supported by the new set of economic policies,

which we are proposing within this Programme.

The external position of the country was continuously improved since end-1999, with foreign

exchange reserves growing steadily from the very low initial level and debt service peak being

financed successfully in 1999 and 2000.

The fiscal reforms implemented in 2000 improved the financial discipline and were aimed at

lowering the consolidated budget deficit in the medium term. Nevertheless, we are aware of the

still very high level of financial arrears and our commitment to support further faster restructuring and privatisation is envisaging the diminishment of these arrears in the short run.

The development in 2001 suggests that the GDP growth this year will be above 4.5%, based on

the recovery in manufacturing and in agriculture. On the demand side, the signs are also showinga boost in the domestic market, given the growth registered in real income at the end of 2000 and

the beginning of 2001. Knowing that the real wages growth was not correlated entirely with thedevelopment in productivity in some public services sectors, we will carefully observe the future

evolution of this indicator in the next period in order to curb down any overheating effects that

may appear.

Inflation is continuing to be the most important peril in the short and medium term. In 2001, the

December-to-December inflation rate will come down only to a 30% level, due to the impact of nominal wages increases in the beginning of the year and to the adjustments made to some

administered prices, mainly energy prices.

The current account position started to deteriorate again in the beginning of 2001, as a

consequence of high rates of growth in Romanian imports, induced by the domestic aggregatedemand that still presents a high income-elasticity of imports. The process of restructuring, which

will have impact primarily on energy-intensive and loss-making sectors, will help in reducing this

elasticity in the medium term and increase the demand elasticity of Romanian exports. Thus weexpect a smaller negative influence of economic growth on the trade deficit in the years to come.

The budget deficit will be steadily reduced, starting this year, in such a manner that it will come below 3% of GDP in the next four years, with chances of further reduction. The efforts will be

oriented mainly towards increasing the share of budget revenues in GDP, in order to finance the




Final household consumption (real growth, %) -1.2 3.3

Final public and private administration

consumption (real growth, %)

15.6 3.2

Gross Value Added Structure (%)

Primary 12.8 12.6

Secondary 36.3 36.7

Tertiary 50.9 50.7

Investments (% GDP) 18.4 19.6

Exports of goods and services (% GDP) 34.1 37.5

Imports of goods and services (% GDP) 39.4 45.6

Current account balance (% of GDP) 3.7 5.5

CPI (annual average, % growth) 45.7 33.8 Unemployment (at end of year, ILO, %) 10.8 9.9

Real gross wage (annual growth, %) 2.7 9.1

Government revenues (% of GDP) 31.5 32.1

Government expenditures (% of GDP) 35.1 35.7

Budget deficit/surplus (% of GDP) -3.7 -3.5

2. The Medium-Term Macro-Economic Framework




The “Successful and credible Romania” scenario

The baseline restructuring successful scenario is based on the Government’s MDF officialforecast, released in August 2001. It is checked for consistency with the help of the Romanian

version of the World Bank’s RMSM-X model. The results presented in Table 2.1. are based onseveral assumptions of increased consistency within the set of economic policies, as compared to

the more moderate alternative scenario:

The efforts of fiscal consolidation and accelerated restructuring and privatisation

process will improve the external image Romania currently has. This will be possible as

the steps towards EU accession are accelerating their pace.

The social pact we propose and intend to implement during the next period will enjoy

credibility from the main partners involved. Keeping income policy under control and

ensuring social cohesion will be key factors in achieving macrostabilisation.

The political turmoil in the neighbouring region will cease, inducing increased co-operation within the Southeast Europe. The positive expectation on future growth rates

for the countries in this area will have an additional positive impact on the Romanianeconomy.

Improvement in the business environment and successes in macro-stabilisation efforts

will increase FDI inflows to a higher level than in the previous periods and than isexpected. Their positive impact will be seen not only in the effects on Romanian exports

or production structure, but also in the higher external financing capacity, given the

improvement in Romania’s rating and the better functioning of financial markets.

The baseline scenario is based on the Romanian Government’s commitment to stay close to the

consistent macro and micro policies we are emphasising from our development programme. Weare confident that the positive achievements highlighted by this scenario are within reach given

an increased credibility in Romania’s development potential. In the short run, we envisage that

the immediate effects of the fiscal consolidation and of the privatisation of large enterprises could be perceived as a risk to faster growth, but their stabilisation impact is expected to bear fruits

towards the end of the period. The economy will grow on average at an annual rate of 5.1%.,

reducing thus the gap with the economies in the European Union area.

Table 2.1. Medium term economic framework 2001-2005. The baseline scenario (credible and

successful Romania)Macro-economic indicators 2001 2002 2003 2004 2005

GDP ( l h %) 4 5 5 0 5 2 5 5 5 1




Exports of goods and services (% of GDP) 37.6 37.4 37.2 36.9 36.7

Imports of goods and services (% of GDP) 46.1 45.7 45.2 44.3 43.7

Current account balance (% of GDP) -6.0 -5.5 -5.2 -4.8 -4.5

FDI (% of GDP) 3.42 3.07 3.01 3.01 3.02

CPI (annual average, % growth) 33.8 26.0 17.0 11.0 8.0

Unemployment (at end of year, ILO, %) 9.9 9.2 8.9 8.6 8.4

Labour productivity (real growth, %) 4.7 4.5 5.4 5.7 5.4

Real gross wage (annual growth, %) 4.0 4.0 3.6 4.0 3.3

Government revenues (% of GDP) 32.7 31.8 32.9 34.0 34.6

Government expenditures (% of GDP) 36.2 34.8 35.9 37.0 37.6

Budget deficit/surplus (% of GDP) -3.5 -3.0 -3.0 -3.0 -3.0

Primary deficit/surplus (% of GDP) 0.7 0.8 0.2 0 0Government debt (% of GDP) 32.2 30.6 30.3 29.5 28.5

The contribution to GDP growth will come equally from all components of the aggregate

domestic demand, but investments will be the most dynamic factor. The assumption is basedon several factors that may allow investments to grow at a rate higher with 5-7 percentage points

than the annual GDP rate, during 2003-2005.

First, the increase in domestic savings due to the improvement in the business

environment and the effects of the ongoing privatisation and restructuring will foster new

investments of the domestic private sector.

Second, the steady growth of the FDI inflows into the economy will start producing positive effects on the economy, with their share in total investment reaching around 15-

20%, well above their average levels in the past.

Third, a large part of the EU transfers to Romania will be channelled towards public

investments, while the expected increase in the share of budget revenues will permit a

higher share for government investments in the budget expenditure.

The total consumption will grow at a lower rate than the GDP, with private consumption showing

higher dynamics than the government consumption, the latter being constrained mainly by themeasures taken for fiscal consolidation. This will bring inflationary pressure down on the

domestic demand side.

The inflation will come down at a fast pace, reaching a level below 10% (December-to-

December), starting 2004. Such accelerated reduction in the inflation rate is due to the better fiscal performance and to the realisation of the social pact we are proposing to implement within

the Romanian society. Nonetheless, we acknowledge the inflationary impact of the higher

i i th i f t d bl th i th i f t d bl d d th h th




phenomenon. On the other hand, the FDI stock will come closer to a level that may start

producing spreading-out effects within the entire Romanian economy.

The budget deficit will be reduced following the efforts of fiscal consolidation, after 2003, and

maintained at levels around 3% by 2004-2005, while budget revenues are expected to raise their share in GDP. Therefore, the public debt will decrease slowly throughout the forecast period.

Obviously, lower GDP growth rates could be expected, given a tightening in the budget deficit

targets.

The expected stability and increase in future FDI inflows, following the measures that will be

taken for macro-stabilisation, will bring positive spreading-out effects within the economy, thuswe expect to see the trade deficit stabilising at a level close to 6-7% of GDP in the next four years. Starting 2002, we expect to see the negative impact produced by the demand related

increases in imports cancelled by the effects on the economic structure and import structure

produced by large-scale privatisation and better management in the state-owned sector. Thus, the

current account deficit is forecast to start reducing after 2003, despite high rates of growthforecast for the Romanian imports.

The Alternative Scenario

The alternative scenario was run under assumptions of a prudent policy aimed primarily at theachievement of macrostabilisation. It has taken into account the trade-offs between economic

growth and the need of ensuring social stability and fiscal consolidation within the economy. The

alternative scenario also considers the possible constraints coming from the recent events in theworld economy and from a slower pace of the reform process, under pressure coming from

restrictive fiscal and monetary policies.

The medium-term economic forecast, based on a more restrictive macro-stabilisation scenario,

shows an average growth rate of the GDP around 4.3% for the period 2001-2005, under the

assumptions of no remarkable changes occurring in the external conditions. The domestic policyassumptions that are responsible for the expected growth are based mainly on the ongoing

process of restructuring and privatisation in the state-owned sector and on the consolidation of

the fiscal stance. The perceived risks are related to lower international flows towards Romaniathan in the case of the baseline scenario, to lower external demand following the slowdown in the

world economy and to delays in restructuring induced by negative social reactions to the very fast privatisation programme proposed within the PEP.

Annual GDP growth rates will vary between 4% and 4.2% after 2003, while the inflation rate will

steadily come down reaching levels of one digit by the end of 2005.




GDP (real growth, %) 4.5 5.0 4.2 4.0 4.0

Final household consumption (real growth, %) 4.4 3.8 3.2 2.8 2.5



3.2 3.0 2.5 2.0 2.0


Primary 12.6 12.5 12.3 12.2 12.1

Secondary 36.6 36.9 37.1 36.9 36.6

Tertiary 50.7 50.6 50.6 50.9 51.3

Investments (real growth, %) 10.0 9.7 6.0 8.0 8.0

Exports of goods and services (USD terms

growth, %)14.8 8.4 5.4 4.0 5.3

Imports of goods and services (USD termsgrowth, %)

21.0 9.3 5.3 3.8 4.6

Current account balance (% of GDP) 6.0 5.5 5.3 5.0 4.7

FDI (% of GDP) 3.26 2.90 2.46 1.99 2.52




Real gross wage (annual growth, %) 4.0 4.0 3.2 2.8 2.5

Government revenues (% of GDP) 32.7 31.8 32.4 32.8 33.2

Government expenditures (% of GDP) 36.2 34.8 35.4 35.8 36.2Budget deficit/surplus (% of GDP) -3.5 -3.0 -3.0 -3.0 -3.0

Primary deficit/surplus (% of GDP) 0.7 0.9 0.4 0.2 0.2

Government debt (% of GDP) 32.2 30.9 30.6 29.7 28.9

The alternative scenario takes into account the initial conditions that may act as risk factors on

the fixed capital formation side. Romania has one of the lowest investment rates at this moment,and one of the lowest savings rates, as compared to other candidate countries. It was also

characterised by very low FDI inflows per capita throughout the transition period.

Nevertheless, the Government is decided to act together with the National Bank of Romania,

aiming at accelerating the process of disinflation and reforming further the fiscal system in such

manner that it will reinforce investment incentives and will make the Romanian businessenvironment more attractive. As a result, we expect domestic savings and foreign direct

investment to increase at a sensibly higher rate than in the past, bringing the saving rate from a

current 13.3% to 17% by 2005. This will allow investment to grow at an average real rate of

8.3% per year, still above the GDP growth rate.

The evolution of trade and current accounts in recent years demonstrates the installation of a

chronic deficit and a direct linkage between the size of the deficit and the GDP growth rate. The

main factor behind this phenomenon is the high-income elasticity of Romanian imports

(especially for raw materials, fuel and energy-related products, and food products), that is related




Given the actual structure of the Romanian economy and the high income elasticity of Romanian

imports, it is expected that the net exports will be a negative contributor to growth, as we forecast

a slight enlargement of the trade balance deficit after 2003, based on domestic demand growthand financed through external borrowing financing capacity. Nevertheless, the borrowing

capacity will be much lower than in the case of the baseline scenario. The repercussion of the

increasing trade deficit on the current account will be entirely compensated through a morefavourable evolution in the rest of the current account components.

Recognising the fact that Romania is the worst performer among accession countries in its

previous attempts to bring inflation down, there is a major commitment in order to reduce its

levels in incoming years and to succeed in stabilising the macro framework of the Romanianeconomy.

Given the adjustments in administrative prices that are considered for 2001 and 2002 and the still

very high level of financial arrears in the Romanian economy (mounting at 40% of GDP in

2000), the forecast assumes annual inflation rates of 33% and 26% for these two years,respectively. Starting 2003, there are solid grounds for a faster process of disinflation, but at a

lower pace than in the baseline scenario.

Given the history of lax income policy in Romania, this scenario focuses on maintaining the real

net wage increases in line with the productivity growth, particularly in the public utilities andstate-owned sectors of the economy. The Government has already curbed down the negative

impact of the increase in real gross wages that showed up before the election period in 2000, and

the forecast envisages wage growth rates below the productivity growth rates after 2002.

The alternative scenario, like the baseline scenario, assumes that budget deficit will be brought in

line with the target of 3% of GDP starting 2002 and will be kept at this level throughout theentire period. Not having in mind any change in the level of taxation, we foresee an improvement

in the share of the budget revenues in GDP after 2003, coming from the economic growth effect,

but also from the hardening of the government’s budget policies. This will allow expenditures togrow in real terms at a higher rate than the GDP, fulfilling the increased needs during the EU

accession period. During the whole forecast horizon, the primary budget balance will show a

small surplus.

The main problem of Romania, however, lies not with the size of the deficits, but with their financeability. Compensatory flows financed the current account deficit in the first years of transition and, despite losing ground in favour of autonomous flows, they remain influential. The

level of Romania’s foreign debt is not particularly high, and the forecast evolution doesn’t show a

strongly increasing trend. It will steadily increase from 33% to around 36.5% until 2005.




hand, the previous effect will be fully compensated by the acceleration of the microeconomic

restructuring process caused by the speed up of the privatisation process and by the hardening of

the budget constraints determined by the tax collection improvement.




3. Public Finances

The main objective of the Romanian Government is to pursue a fiscal policy oriented toward the

preparation for the EU accession, improvement of social conditions by supporting policies inhealth, education and environment, and development of the economy trough investments. The

focus of our fiscal policy measures will be on increasing the equity, transparency and efficiency

of the tax system. The principle instrument will be the reforming of the tax administration.

The 2002 budget is constructed to respect one major constraint – the 3 percent of GDP deficit

agreed upon with the IMF. On an overall view the structure of the revenues and expenditurefollows closely the structure of this year budget and total revenues are projected to reach 31.8%

of GDP and total expenditures 34.8%.

According to the macroeconomic scenarios in the previous section there are two sets of budget

deficits. In the baseline scenario the economic growth will reach on average 5 percent, the

consolidated budget revenues will represent 34.6 percent of GDP in 2005 and the budget deficitwill be maintained at 3 percent. In the alternative scenario the economy is forecasted to grow on

average with 4.3%, the budget deficit will have a similar path with previous scenario and theconsolidated budget revenues are expected to reach 33.2% of GDP in 2005. For both scenariosthe budget revenues growth is due partially to the positive cyclical boost generated by the

economic growth and also to the improvement in collection. The Government is determined to

pursue consistent action in order to restructure fiscal sector and to control budget deficit. On themedium term, we will need additional budgetary revenues to finance the European integration

process and the pension reform. On the other hand comparing with other candidate countries,

Romania has allotted a very low level of public resources to health, education, infrastructure and

environment. Given the above expenditure needs, the Government is aware that the currentrevenue level of 31,5 percent of GDP (in 2000) is not sufficient to meet them and is determined

to increase the revenues up to an appropriate level without increasing tax rates.

As tax rates are relatively lower (except social contribution tax rate) compared to Central

European countries average, the Government will not commit itself to further reduction until

budgetary performance allows it but on the other hand the increase in budget revenues will not bethe consequence of tax increases. In the case of social contribution tax rate reductions will be

possible provided a very favourable context materialise, such as a significant tax base

enlargement and substantial collection improvement.

We acknowledge the presence of four factors that explain the low level of budget revenues. First

the poor collection of taxes is determined by weak fiscal administration, thus building up the

t k S d t ti t d t i t t di i i h th t b d




a) Reducing fiscal and quasi-fiscal deficit, containing the current account deficit and sustaining

more effectively disinflationary efforts

b) Making Romanian tax regulations compatible with EC legal normsc) Improving the conditions for competition in the real economic sector

d) Increasing the efficiency of tax administration

e) Reducing the current high share of the informal economyf) Exerting more efficient corporate governance and increasing tax revenues collected to budget

up to potential level.

Short run attempts to balance the twin objectives of raising revenues and providing incentives for

investment undermined the integrity of company income taxation throughout the 1990s. Far from benefiting investment and employment, these frequent changes and the attendant instability of the

fiscal regime eroded the credibility of tax policy, and made holding out a more valuable option

for potential investors. The 2000 reform has greatly improved the investment climate, and brought Romania taxation more in line with regional standards. Most importantly, all previous

tax-holiday and investment-incentive legislation was abrogated and the statutory tax rate lowered

from 38 to 25 percent, while an investment allowance of 10 percent was introduced.

VAT collection has only recently begun to reverse the downward trend since the inception of thetax and stabilised to around 6 percent of GDP. With a statutory rate of 19 percent, international

experience would have suggested that revenue collections of 9 percent of GDP were well withinreach. This poor performance reflects the fact that tax administration became heavily burdened

by a large number of exemptions and multiple rates. Moreover, VAT collection was restricted by

tax evasion. Therefore, the government is determined to increase value added tax revenue up toits potential. In addition, as the new law on the promotion of direct foreign investment does not

provide for customs duty and VAT exemptions for imported raw materials, the government

intends to eliminate the respective provisions in Law 133/1999 by end-December, 2001.

Romania collects to public budget lower excise revenues. Compared to CEECs average above 4

percent, Romania currently collects less than 3 percent. The new excise tax law, expected to

become effective on January 1, 2002, will codify all the existing provisions in the field of excisetaxation, while the rates are envisaged to increase in order to reduce the significant differences

relative to EU standards.

Romania collected on average 11 percent of GDP from social contribution tax with a statutory tax

rate of 60%. Romania has now one of the highest social contributions rates among transition

economies. However, this has failed to alleviate the problem, because the increased taxation has pushed even more people out of the legal economy, mostly into the informal one. Therefore it is

obvious that the two-fold objective of increasing the revenues from this tax and lowering the tax

i d di i i h i l i i b h d l b b d i h




with the new global income tax legislation in 2000. Average budget revenues from income tax in

other transition countries are 5.5 percent of GDP, a figure close to that of Romania before global

income tax. Therefore it is important for Romania to bring back these revenues to their potential.A considerable contribution to the increase of the revenues from the income tax could be

obtained by broadening the tax base with two separate measures. One would be to broaden the

tax base in order to cover agriculture revenues. The Government has already decided recently totax agricultural properties larger than 10 hectares. In order to increase the tax base the

Government contemplates the complementary measure of a lump-sum tax in the form of a fixed

amount that should be paid by all agriculture income earners. The second measure envisages thelevelling of the income tax as wage earners pay more than remitted income from dividends.

The strategy to increase revenues should consist of the following measures:

a) Simplifying the tax system. The Government is committed to simplify and to unify existing tax

regulations in a new tax code by the end of 2002. Five bills will replace the 400 ordinances now

regulating taxes in Romania. In the same context the Government intends to eliminate some of

the special funds.

b) Restore tax discipline in profitable firms. The tax authority will increase pressure on thesefirms so that they will choose to hold down wages or borrow from banks rather than accumulatetax arrears. The tax authorities will start and follow through bank accounts seal off and asset

seizures. Such a program would have personal commitments from the Prime Minister and

Finance Minister and every major step of the program should be accompanied by officialstatements that the government is determined to improve collection and increase revenues up to

potential level. In this context the media could play a more important role in amplifying the

message with the purpose of changing attitudes and perceptions, educate people and rebuild

institutional credibility stock.

c) Restore tax discipline in utilities. In the case of energy suppliers, the Government will

essentially allow them greater freedom in cutting off supplies to non-paying customers. Thiswould improve utilities’ revenues and reduce or eliminate the incentive to accumulate tax arrears.

d) For all categories of firms the Government will avoid programs that write off or reschedule taxarrears.

e) Changing the psychology in the tax administration. The Government intends to upgrade theexisting skills of the tax administration employees’ trough continuos training in order to improve

the overall image of the Ministry of Finance. Moreover, renewal of the staff with young

employees will be encouraged and wage increases will be correlated with productivity.




Capital expenditure decreased steadily from 5.3 percent of GDP in 1995 to 3.07 percent in 2000.

However, on the medium term government investment is expected to grow substantially due to,

among others, increasing EU transfers.

Over the last three years, Romania has seen a substantial change in the way its health-care sector

is financed, namely, a shift towards the funding of health-care by means of an insurance system.However, at 4 percent of GDP (2000), public expenditure in Romania remains among the lowest

in the region. Therefore the Government will increase expenditure in health sector.

Romania currently allots 3 percent of the GDP to the education area, comparatively lower to the

average from other transition countries of 4.5 percent of GDP. There is a general agreement thatadditional funding is needed in order to insure adequate human capital input to sustain long term

economic development.

If the current level of the revenues is maintained we perceive four major fiscal risks. First, in theshort term the worsening of the quasi-fiscal imbalance alongside the recent substantial

deterioration of current account deficit hamper the macro-stabilisation effort. Second, on the

medium run (2001-2004) Romania will have to face a new major fiscal bailout of the banking

and enterprise sectors due to unrestructured economy, partial privatised banking system andassociated pressures from interest groups to preserve the status-quo. Moreover, the budgetary

burden will be further increased by the poor quality of state guarantees granted. Third, another medium term risk is the incapacity to fulfil the commitments related to EU accession, due to lack

of resources. Fourth, in the long run the financing of the second pillar of the new pension system

is at risk because the current level of revenues will not be able to sustain this transition. Further

costs will be incurred due to negative demographic trends – shrinking and ageing population.

4. Monetary and exchange rate policy

Managed floating, the exchange rate regime currently in place in Romania - USD being used as

the reference currency -, has been associated with quantity control, meaning targeting the

volumes of the monetary aggregates. The National Bank of Romania (NBR) considers that 2002will witness the preservation of this regime, but only as a transitory step towards a new strategy

t b i l t d i 2003




(such as minimum reserves); the abandoning of the monetary financing facility of the State

Treasury. Concordant with the disinflation process, remonetization of the Romanian economy

will take place primarily through the increase in net foreign assets.

Should conditions for inflation targeting not be entirely fulfilled (in terms of deepening structural

reforms, reducing fiscal constraints in the pursuing of the monetary policy, higher price predictability, diminished external imbalance pressures), the alternative policy would be a more

predictable exchange rate regime, that would also contribute to disinflation through enhanced

exchange rate stability.

Irrespective of the monetary and exchange rate policy choice, NBR will use EURO as thereference currency since 2003. This will reflect the orientation of the Romanian foreign trade

flows, also reducing transaction costs, bringing Romania closer to the EU exchange rate

mechanisms.

As a normal consequence of the Balassa-Samuelson effect applied to an EU candidate

(assimilated to a catching-up economy), prices will gradually converge towards EU levels, whichwill lead to gradual real appreciation of the Leu against EURO.

5. Structural reforms

5.1. Enterprise sector5.1. 1. Privatization

The Government of Romania is fully committed to speed up the privatization process, whilst

emphasizing the quality aspect of the process, targeting serious investors with the requiredfinancial resources and expertise to carry through a full company turnaround.




The majority of small enterprises, including retail and service companies, were privatized in the

early years of transition. During December 1992 – May 2001, 1881 industrial companies were

privatised. Private sector prevails in fertilizers, car manufacturing, non-ferrous metallurgy, tires,textiles, footwear, cosmetics, detergents, glassware and pottery. Cement industry was fully

privatized to strategic investors. State ownership predominates in machinery and equipment

industry, pulp and paper, extractive sector and metallurgy.

The Government of Romania is determined that privatization will be conducted in a true, fair andtransparent manner. We intend to also use the capital market for privatization. In case of

strategic/ highly important companies, complex privatization programs (also using share capital

increases) will gradually reduce state ownership, with support from international financialinstitutions and advisers.

Until 2004, we will focus on privatizing SOEs with critical mass in the economy and with large

spreading-out effects. Ownership transfer of large SOEs targets efficiency and competitiveness

gains, but also enhanced hard budget constraints and social welfare preservation. Due to thesecompanies’ complex situation, transfer of property will be achieved on a case-by-case basis.

Sidex, the largest Romanian and East European integrated steel producer and second largestgenerator of arrears in the domestic economy was recently privatized. The sale is scheduled for

completion by October 2001. Sidex privatization spares the state budget of large and persistentlosses and stands proof of the Government’s political will to complete difficult privatization

cases, from a social point of view. Social problems represented a tough part of negotiations, as

60% of population of Galati-area depends on Sidex.

On short term, privatisation of large SOEs will target the capital goods industry (IUG,

Hidromecanica, Electroputere, Tractorul), metallurgy (Alro, Alprom, Siderurgica), means of transportation (Roman Brasov, Romvag), chemicals including pharamaceutical sector

(Nitramonia, Antibiotice).

In March 2001 a “first wave” comprising 17 companies was approved for privatisation. Eight of

these companies are also included in RICOP program. In June 2001 a “second wave” of 19

companies was launched for privatisation.

The privatisation process of the national oil company Petrom will be resumed throughconsultations with the selected advisor, in order to decide the optimum moment and most

appropriate method for selling an important stake (35%) of the company. Petrom was recently

listed on Bucharest Stock Exchange and will issue an Eurobonds issue (EUR 150m) without state

guarantee.




thorough assessment based on market demand will be performed to privatize segments that are

either profitable or potentially profitable, and to divest loss-making units.

Currently tax and inter-enterprise arrears represent a key problem. As part of various measures

decided to control and reduce arrears, 35 companies were identified (with arrears exceeding 50%of assets) and legal proceedings for liquidation will start before the end of 2001.

5.1. 2. Restructuring

Restructuring is another important element of structural adjustment, directed to prepare

companies for privatization. In this respect, performance criteria, established for management

teams of state owned companies, will include: closing down inefficient capacities, market andcompany strategic analysis to determine core business segments, divesting non-core segments/capacities, personnel layoffs, upgrading equipment and technologies in core business, increasing

use of outsourcing to cut operating costs.

Metallurgic industry represents one of the first sectors targeted for comprehensive restructuring.

In this regard, the Ministry of Industry and Resources has issued a strategy to be discussed and

approved by the Government of Romania.

Defense industry restructuring, upgrading production capacities and privatization of companies

without strategic character will continue.

Structural adjustment in utilities sector, within a coherent framework, is a priority for theGovernment of Romania. Explicit programs will be designed to cut losses, in line with schedules

agreed upon with the World Bank. Deregulation and liberalization will continue along with

partial privatization of infrastructure network industries, aiming to increase market competition.

Full or partial privatization of National Rail Freight System, National Salt Company, National

Mineral Water Company and National Radio Communications Company are also envisaged.State ownership dilution in the voice telephony operator Romtelecom will be sustained.

5.2. Financial sector

5.2.1. Banking

The share of state-owned banks in total social capital, and in total assets, has decreased

dramatically over the last four years; hence, private capital represents now 54% of total assets,and 45% in total social capital. Furthermore, foreign capital accounts for 50% of total assets and

39% of total social capital in the Romanian banking sector. This evolution severely restricted the

scope of resource misallocation through banking channels, therefore reducing the share of d b f l d d li bili i i l f 14 54% i 1998 0 25% i h fi




Plans are set for further downsizing the state’s stake in the banking sector, through the

privatization of Romanian Commercial Bank (the largest bank in the system) and CEC (TheSavings Bank). The completion of these privatizations would significantly reduce the quasi-fiscal

deficit, and, consequently, would diminish the need for NBR’s intervention to sterilize excessive

increase in net domestic assets.

Another range of measures taken in the financial sector deals with the issue of transparency. A

new regulation on credit co-operatives is already in place, forcing them either to turn into

commercial banks under NBR supervision or to cease functioning.

The institutional framework is also improving in the insurance business, as a reshapedsupervisory body is in place. This is an emerging segment of the financial sector, given the

expected involvement of the insurance companies in the administration of the private pension

system.

5.2.2. Capital market

The Stock Exchange recently adopted (June 2001) “The Management and Administration Code”.In fact, this can be considered as the first corporate governance guideline in Romania, mainly

referring to the minority stakeholders’ rights to be timely informed and to be involved in thedecision-making process in the companies they hold stakes in; the companies adopting this code

can be listed at a so-called “transparency category” (or “T+”) of the Stock Exchange. It isenvisaged that all companies listed on BSE and Rasdaq to present their financial statements in

accordance to International Accounting Standards (IAS); subject to regulations and guidelines to

be issued by NBR, all banks will also apply IAS in their reporting. The intention is, withinforeseeable future, to standardize financial disclosure procedures and to made them compatible

with internationally accepted norms.

Transparency and market openness are fostered as well by the decision to allow securities

companies that fulfill certain conditions to trade T-bills on the secondary market, and by

underway legislative changes that strengthen the payment and clearing system, including the

development of an Electronic Payment System.

The implementation of the Article VIII of the IMF Status, and its subsequent changes, in

conjunction with the policy of adopting the acquis communautaire, determined the NBR todesign a schedule for achieving the full liberalization of the capital account.

- in the first stage, by the end of 2001, outward direct investment and real estate

purchases abroad by residents will be liberalized.- -in the second stage, by 2004, all credit and guarantees operations will be liberalized, as

well as other capital movements with significant impact on the real economy.

i h hi d d l b h i f i h i l fl ill b




The Government of Romania has recently (August 2001) issued “The Medium-Term National

Strategy for Energy Development of Romania”, outlining the strategic lines of action for 2001-2004 as follows:

- reducing arrears in the energy sector;

pursuing privatization in the energy distribution and production segments;

stimulating greenfield investments to secure the durable development of the energy sector.

Complying with the general commitment undertaken by the Government towards real sector

restructuring and more efficient use of energy, the strategy is built on the assumption of reducingthe energy-intensive character of the Romanian economy by 3% each year. At the same time,

given the sustained economic growth forecasted over the coming period, the final consumption isexpected to rise by 4% each year.

As a result of the process of profound restructuring of energy sector, the Government willadequately promote the progressive adjustment of energy prices in order to correlate them at the

world price level.

Electric and heat energy sector

The electric energy market will evolve towards an open transnational market, primarily integratedwithin the energy market of the EU. The heat energy market will instead evolve towards local

competitive structures. The creation and consolidation of these markets are supported by thecontinuation of the process of restructuring and privatization of production and distribution

companies.

Thermal power production will be privatized within the range of 25-40% of total production

capacities. The production system will be decentralized. Already a number of seven thermal

power plants were transferred under the management of local councils. At the same time, twelveother units will be closed due to their inefficiency.

The energy production market has already been opened to 15%, reducing significantly the

number of captive consumers. For the supervision and regulation of the electric energy market,the Romanian Electricity and Heat Regulatory Authority was set up; a Market Operator was also

created as an autonomous company, with the aim of establishing a stock exchange for the energy

sector. The role of nuclear energy production will increase by 2005, by the completion of the 2nd

Unit of the Cernavoda Nuclear Plant.

Rehabilitation and modernization of the transport sector will include the full interconnectionwithin The European Union System for Electricity Transport Coordination (UCTE) by 2002.

di ib i ill b f ll i i d h G l i d l h




The main operator in the system remains Petrom S.A., the national oil company responsible with

oil deposits exploration and exploitation. Petrom is an integrated enterprise, comprising tworefineries and two petro-chemical units. The company is currently undergoing a deep

restructuring programme and is considered by the Government in its privatisation strategy.

The reorganization of the natural gas sector led to the functioning of one exploitation, production,supplying and storage company, one national company for transportation and two commercial

companies for distribution. The natural gas market has already been opened to 10%; similar to

the electric energy sector, a National Authority for Natural Gas was set up, and a MarketOperator was established.

Coal and mining sector

The reform process will be enhanced in the mining sector, with a target of closing 190 mines in

the 2001-2004 period, out of which 20 mines are scheduled to be closed in the current year.External funds will continue to be used for professional reconversion, job creation and

environment supporting.

5.4. Business Environment

Recognizing the fundamental role of private-sector-led growth for sustained economic and socialdevelopment, the Government of Romania is committed to promote a stable, neutral and efficient

business environment. As general principles, we will focus on removing barriers, disincentivesand distortions that discourage investment and diminish the use of tax holidays and special deals

for investment promotion. Investment (foreign and domestic) is yet to have a significant impact

on Romanian economy as a whole. This becomes even more visible if compared to other transition countries in Europe.

Numerous changes in legislation and facilities offered have constituted a serious barrier toinvestment (particularly FDI). Therefore, an important goal of the Government of Romania is to

simplify and unify legislation concerning enterprises, providing for an even treatment in

accordance with EU legislation. All pre-existing investment legislation will be compiled, duly

cleansed of all redundancies (and in respect of transparency principle), into a unitary directinvestment code. In this regard, a new law has already been passed (Law 332/2001), referring to a

set of fiscal incentives only for investments exceeding 1 mil. USD.

The court system is still weak. Procedures take about two years to complete and judgements are

unpredictable. Courts for commercial issues lack both experience and special skills. We are

concerned about establishing effective training systems to address officials’ current lack of expertise in specialized fields such as intellectual property issues.

k di ill b i d d li d i i f l i b i f i d




chambers of commerce and industry. Registering systems of the trade registry and the fiscal

registry will be integrated nationwide.

Along with the development of the business sector, we recognise the increasing need to tackle

corporate governance aspects. Primarily at the level of state owned enterprises, this would

prevent parallel tactics of the management personnel that led to asset depletion, hence increasingthe accountability and responsibility of the state’s representatives; it would also improve

visibility of capital flows, the resulting increased transparency improving the effectiveness of

state funding, and favouring foreign direct and portfolio investments. As for the private sector, protecting minority shareholder rights and more adequate information disclosure are seen as

priorities.

Competition regulation, in accordance to EU provisions, should complement trade liberalization,

deregulation, and privatization. Currently, two laws (competition law and state-aid law) providethe basic framework for Romania’s competition policy. On medium term, specific secondary

legislation will be completed. Main short-term priorities refer to enforcing the role of competition

authorities and building up their administrative capacity. Existing and new laws will be clearlyadvertised. FDI also have side effects in terms of changing competition structures; the

competition authorities must make sure that such changes are only to the benefit of consumers.

New legislation on industrial parks is currently prepared, part of the broader framework aiming tosupport the surge in greenfield investment, in the medium term. The evolution of greenfield

investment towards becoming the main source of FDI is needed, as privatization should be

roughly completed in the coming years.

The Government of Romania is highly concerned to develop a strategy aiming to take the

Romanian industry from the production fragmentation stage, to the phase of integration with theEuropean networks of production and distribution. As part of this broader strategy, new

regulation on subcontracting aims to stimulate the numerous local firms acting as subcontractors

to develop, by own efforts, the characteristics of the products made under license.

The Government is also concerned to encourage efficient R&D programs, including

technological parks development. Special attention will be given to IT and related fields. We aim

at promoting effective legislation to protect industrial and intellectual property, especially

patents, trademarks, design, etc.

Customs procedures were improved, targeting especially aspects most mentioned by the tradecommunity, but several problems remain to be addressed. Entry points are almost entirely (90%)

computerized, with international financial support. Declaration procedures were updated in line

i h d d b l i l i d l l




5.5. Other policy areas

Agriculture and rural development The underdevelopment of the agricultural sector is one of the main obstacles in Romania’s way to

EU accession. Last year this sector concentrated 40,8% of the labour force while the contributionof the sector in the overall gross value-added was 12,8%. For this reason, the government is

committed to create the framework for increased productivity in the agricultural sector.

The completion of land restitution and the creation of a functional land market are top priorities

for the agricultural reform. Up to 2000, 82,1% of those who claimed land ownership have alreadyseen their property rights reinstated. The process continues at a fast speed, and full restitution is

envisaged by 2004.

The privatisation of the agricultural sector has been largely completed. The value added in the

agricultural sector is 97% created by the private sector. From a total number of 737 enterprises

held by the state, 264 have already been privatised. The privatisation of the remaining 473 state-owned enterprises (former IAS) will be completed until the end of 2003 as follows: 170 in 2001,

200 in 2002 and the remaining 103 in 2003. The legislative framework has been recentlyreinforced with the adoption of Law 268/2001 and with the help of Government Decision

626/2001 concerning the relevant privatisation methodology.

In parallel with agricultural reform, the Government is promoting rural development as a second

pillar of sustainable development in Romania. According to the National Plan for Agriculture andRural Development approved by the EU Commission on December 12, 2000, a special attention

will be directed to the efficient use of the SAPARD Programme as a pre-accession instrument.

By 2004 the SAPARD Agency will be complemented with the creation of the Agency for Intervention and Payments, which in a realistic scenario will become fully operational by 2006.

In addition to EU structural funding and internal co-financing, rural reform and development will

be funded also with the help of specific projects financed by the World Bank and theInternational Fund for Agricultural Development.

Information Society

In line with the initiative “eEurope+” and realizing that the intensive use of informationdramatically enhances overall economic productivity, the Government plans to develop several

projects in order to increase Internet access, develop e-commerce and provide e-government

services to the population. For this purpose, the Prime Minister has recently taken leadership of aGroup for IT Promotion, which has the task to draft a coherent strategy for transforming Romania

t d i f ti i t




The remaining restrictions, refering to voice telephony and supplying leased lines, will be lifted

starting with January 1, 2003, when the Government will allow full liberalization of thetelecommunication services and networks market. The legislation will be entirely harmonized

with the existing EC directives by March 30, 2002, when the National Regulatory Authority for

Communication will enter into force in order to separate the supervising activity from policy

making.

Labour Market

The government program for 2001-2004 aims at increasing the participation rate and harmonisingthe domestic legislation concerning labour market with the relevant acquis communautaire. The

main policy in this sector will be to gradually shift from passive to active measures by placingless weight on unemployment safety net and more on training and job creation.

The incentive structure will be changed by the adoption of a new law aimed at reforming thecurrent unemployment benefit system and at stimulating job creation. One of the topical actions

envisaged in the legislative proposal is to allow the existence of only one type of passive

protection measure – the unemployment benefit, all the other allowances and aids beingintegrated in the social security system.

Public administration The Government identifies public administration reform as a central objective of its programme.As a result, we propose a series of measures aimed at increasing the efficiency of the public

sector such as intensive training, simplifying public management structures as well as increasing

the use of information technology.

Another measure envisaged by the Government is increasing wages through staff reductions. For

this purpose, we are in the full process of trimming the public sector staffing levels across the board in order to reduce the fiscal burden of the public administration and to cut through the red

tape which previously undermined real reforms.




6. The main messages of the Pre-Accession Economic Programme of Romania

The macro-objective is to ensure, at the same time, more growth and more stability. To achieve

that, a number of policies are necessary. They are mentioned in this Pre-Accession Economic

Programme. Implementation of these policies is a pre-requisite.

Sound budgetary policy is essential. Over and above the direct positive effects, such as lower

inflation or lower interest rates, targeting a budget deficit lower than 3% of GDP will increasereputation, credibility and confidence in favour of Romania. The consequences will be seen in

higher FDI inflows, increased financing capacity and a functioning market economy.

Romania needs more fiscal revenue in order to finance increased needs of budget expenditure inthe coming years. This goal have to be fulfilled not through higher tax rates, but through an

enlarged tax basis and a more efficient tax administration and collection. Fiscal reform, in a broad

sense, is essential.

The monetary and exchange rate policies will accommodate the disinflation target. The state will

further reduce its share in the banking system, with the goal of increasing the solvency ratio andthe well functioning of the financial sector.

The Romanian economy has to become more efficient, more productive and more flexible. Thisis why it is suggested:

- to accelerate the privatisation and restructuring process.

- to significantly improve the business environment.

- imposing corporate governance regulations on state owned enterprises.

- to increase FDI inflows to Romania.

Romania needs that the main objectives, policies and instruments are better understood and

shared by the main partners. The country has to develop in a more stable and predictableeconomic framework. In order to involve the main partners in the same national effort, so that

objectives, ways and means are broadly agreed, we propose a Tripartite Agreement for Growth

and Social Prosperity within this paper. It would foster sustainable economic development of Romania by safeguarding the disinflation target, promoting sound job creation, and protecting

living standards.



ROMANIAN GOVERNMENT

PRE-ACCESSION ECONOMIC PROGRAMME

September 2001

P A i E i P R i




Contents

INTRODUCTION.............................................................................................................3

1. RECENT MACROECONOMIC EVOLUTIONS ..................................................... 4

2. THE MACROECONOMIC FRAMEWORK ............................................................ 10

2.1 Strategic options and the main hypothesis .............................................................102.2 International environment....................................................................................... 12

2.3 Macroeconomic policy..............................................................................................13

2.3.1 Main features of the fiscal policy ....................................................................... 13

2.3.2 Income policy .......................................................................................................14

2.3.3 Monetary and exchange rate policy...................................................................15

2.4 The medium-term and macroeconomic sectoral framework ............................... 17

2.4.1 The “successful and credible Romania” scenario............................................ 18

2.4.2 Structural development – sectoral approach ...................................................222.4.3 The alternative scenario..................................................................................... 24

3. PUBLIC FINANCE.......................................................................................................27

3.1 Medium term targets ad general framework of the budgetary policy.................27

3.2 The structure of the budgetary revenues and expenditures ................................. 29

3.2.1 Changes within the budget components ............................................................29

3.2.2 Expenditure and revenues policies. Instruments..............................................31

3.3 Management of government public debt and the financing of the

budget deficit ...................................................................................................................353.4 Fiscal risks .................................................................................................................38

3.4.1 The twin deficit....................................................................................................38

3.4.2 New enterprises and banks bailouts and state guarantees.............................. 39

3.4.3 Pension reform.................................................................................................... 39

4. STRUCTURAL REFORMS ........................................................................................41

4.1 Enterprise sector.......................................................................................................41

4.1.1 Privatisation .........................................................................................................41

4.1.2 Small ad Medium sized Enterprises...................................................................46

4.1.3 Restructuring real economy (including public utilities) .................................. 48

4.1.4 Competition policy...............................................................................................52

4.2 Financial ad banking sector..................................................................................... 53

4.2.1 Banking sector .....................................................................................................53

4.2.2 Capital market ....................................................................................................54

4.2.3 Insurance market.................................................................................................55

4.3 Labour market ..........................................................................................................564.3.1 Employment ......................................................................................................... 56

4.3.2 Pension system reform ........................................................................................ 58

4.3.3 Social security ......................................................................................................59

4.4 Central and local public administration reform.................................................... 60

4.5 Agriculture and rural development ........................................................................ 62

P A i E i P R i




INTRODUCTION

The Pre-Accession Economic Programme (PEP) gives the measure of the full commitment

undertaken by the Government of Romania to finalise the reforms needed in order to join the EU.

Due to its unity and strong parliamentary support, the current Government has the capacity to actconsistently and decisively in implementing reforms. Furthermore, there is a wide political

consensus on the target of EU accession.

The PEP, a milestone document regarding the medium-term economic policy, is based on the

stipulations of the Government Programme for 2001-2004 that accounts for the major optionswithin The National Strategy for Economic Development of Romania on Medium-Term. The

Government Programme refers to a set of economic and social policies that would secure a

higher fulfilment of the strategic objectives to create a functioning market economy able to copewith competitive pressures and market forces in the European Union, in the context of achieving

durable economic growth to help catching up with EU countries. For 2002, the macroeconomic

data and economic policies are concordant with the memorandum agreed with the IMF.

The PEP is also correlated with the National Programme of Romania for EU Accession, the

economic policy measures being accorded with the programme set for adoption of the acquiscommunautaire.

The PEP was elaborated with the participation of ministries and institutions responsible for designing and

implementing different components of economic policy, under the direct co-ordination of the Ministry of

Development and Prognosis.

Given the fact that PEP represents an ample work of maximum significance in the process of EUaccession, having implications in all segments of the Romanian society, during its elaboration

various non-governmental organisations, unions and employers associations were consulted, and

it benefited from the contributions of a number of academic personalities.

The PEP draft was discussed within the Interministerial Committee for the Harmonisation of Strategies, Programs and Plans of Sectorial and Regional Actions. The Government, thereforerepresenting a political commitment formally validated the final version of PEP. All ministries

were asked to update their medium-term strategies in accordance with PEP.

The PEP was elaborated and structured in accordance with the EU requirements, being focused

on emphasising the economic policy measures needed to fulfil the accession criteria set inCopenhagen; at the same time, within each section, and in accordance with the specificity of the

Romanian economy, additional, particular issues were addressed. Among these issues additionalto the economic reform, we mention pension reform, local administration, regional policies,

transportation, health care.

Pre Accesion Economic Programme Romania




Continuation of pursuing macrostabilization measures, structural adjustment of the economy, andcreation of the favorable business environment, based on a coherent and stable legal environment

– these represent the main options and responsibilities of the Government in its strive to promote

sustainable economic growth and a functioning market economy, compatible with the principles,

norms, mechanisms, institutions and policies of the European Union.

The macroeconomic policy measures undertaken in 2000, concordant with the The National

Strategy for Economic Development of Romania on Medium Term, put an end to the second

transformational recession that started in 1997 and provided for a rise in GDP in the context of investments and exports recovery. Nevertheless, the reform process lacked sufficient consistency,

which led to the persistence of some macroeconomic disequillibria reflected in the structuralevolution of specific indicators and primarily in terms of macroeconomic performances.

The experience of the Romanian transition presents evidence of the boom-and-bust economic

cycles. Along with structural strain and institutional fragility, this was caused by theinconsistency of policies pursued.

Table 1.1. Recession and growth episodes in Romania,

number of years, 1990-2001First

transformational

recession

Recovery

Second

transformational

recession

GrowthTotal years

of recession

Total years of

growth

Number of

years3 4 3 2 6 6

After the up swing in 2000, the results recorded in the first semester of 2001 confirm that theeconomy entered a growth path able to sustain high rates of growth that would allow Romania to

close the gap with EU countries.

Following a three years period in which it plunged by 11.6%, GDP increased by 1.6% in 2000, due to domestic

demand, that contributed with 4.4% to the GDP increase. Within domestic demand, the final consumption of

population represented the main component, but it had a negative contribution to the real GDP increase (-0.8%); inturn, the consumption of private administration (+1.8%), the inventory change (+1.9%), and the gross fixed capital

formation (+1.0%) contributed mostly. The gross capital formation rose by 5.5% in 2000 as to 1999 and the

investment ratio reached 18.5%. This dynamics is the exclusive result of the surge in private investments (+15.7%,

reaching a share of 67.6% of total investment), while investment financed by budgetary loans reduced its share from

17% in 1999 to 12.5% in 2000. Despite the increased volume of exports in 2000, due to a favourable externalmarkets outlook, the heavy reliance on energetic and complementary imports determined a negative contribution of

net exports to GDP (-2.8%).





followed by industry (construction and energy distribution included) (36.4%) and primary sector (12.8%).

The upward economic trend allowed for a higher occupancy ratio, as unemployment decreased to

10.5% in 2000 and 8.8% in the first semester of 2001. The inflation pace was slowed down, yet at

a rate that exceeded projection (40.7% December-to-December, as against plans for 27% and

compared to 54.8% figure of the previous year). The rise in consumer prices was triggered both by costs and demand, and by the relative adjustment of administered prices (mainly for public

utilities – electricity, thermal energy, telecom, railway transportation) and changes in the fiscalregulations (reducing the standard VAT rate). Apart from exogenous conditions, the inflation

target was missed due to concurrent targets pursued by the NBR simultaneously: liquidity

control, export competitiveness, lower interest rates to help financing the budget deficit,

supporting banks in distress, increase of reserves.

M2 rose by 38%, meaning a real cut of 1.9% in the monetary aggregate. Net governmental creditalso declined in real terms, by 13.2%, due to extra-budgetary funds and bonds issues, which

allowed NBR’s net foreign assets to increase by almost 58%, and the average real interest rate for

t-bills to more than halve, from 16.6% to 8.1%. Non-governmental credit decreased in real terms by 7.6%, while the share in it of state-owned companies was reduced, reflecting the continuation

of privatisation efforts; non-performing loans were severely diminished by 78.4%, while their

share in total bank loans decreased from 14.8% in 1999 to 2.5% in 2000.

The year 2000 witnessed an export boom (+22.1%), after three years of relative stagnancy,

partially stimulated by the cut in profit tax on exports to 5%; imports, however, grew even faster (+23.7%), driven, on the one hand, by the recovery in investments and overall growth, and, on

the other hand, by the effects of draught and higher oil prices. Upward shares in total exports

were held by minerals (7.9% in 2000), chemicals (7.2%), metallurgy (16.0%), machinery andequipment (19.3%), while textiles (32.7%) and agricultural products (3.3%) reduced their weight.

Rising shares in total imports came from: minerals (14.5% in 2000), metallurgy (6.8%),machinery and equipment (31.5%), while agricultural products (7.1%) and chemicals (12.7%)

downsized.

Figure 1.1. Trade balance and current account balnce,

as percentage of GDP

-3.00%

-2.00%

-1.00%

0.00%

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

trade balance / GDP





The trade imbalance (trade deficit reaching 2689 million USD in FOB-CIF terms) was partiallyoutbalanced by the rise in current transfers (net sum of 860 mil.USD), which allowed the current

account deficit to further downsize (from 1469 million USD in 1999 to 1359 million USD in

2000).

By the end of 2000, NBR’s foreign exchange reserves added up to 2.5 bn. USD (+1 bn. USD

compared to 1999), reflecting the policy of building up and consolidating foreign reserves.Medium and long term foreign debt increased with 12.8% compared to end-1999, reaching 9.86

bn USD by end-2000, but the indicators of vulnerability improved, with short term debt to totaldebt ratio below 4% and foreign debt servicing ratio halved to 18.8%.

The outlook for Semester I 2001

It is worth mentioning that growth was realised during the first semester of 2001, in a lessfavourable context of a slowdown in the pace of growth in developed economies. At theaggregated level of the economy, the growth recorded in the first semester of 2001, when GDP

went up by 4.9% -a figure above initial estimations-, shows that the positive trend is vigorously

supported by the new set of economic policies proposed in the Government Programme and

reiterated in the PEP.

This rise was significantly determined by the increase in value-added in industry (+11.2%) and

construction sector (+9.4%). Industrial production grew by 10.4% in the first semester (manufacturing grew by 12.7%), on a monthly upward slope. Labour productivity in industry

surged by 14.9% (16.5% in manufacturing), in the context of only a 3.9% cut in the number of employees.

On the demand side of GDP, total final consumption increased by 6.4%, mainly due to the 7.6% rise in household

consumption, in result of a 6% surplus in average real wage. Gross fixed capital formation went up by 6.7%, while

the investment ratio recorded 19%. The growth in domestic investments (+4.2%) was triggered by state sector contribution (+9.1%). Bank loans (raising to 19.2% of total investment) and budgetary sources (increasing at 9.7% of

total investment) supported the investment process.

The inflation rate was 14.8% on the first semester (18.9% on the first eight months), reflecting the continuation of

the disinflationary evolution.

Exports grew significantly again (+16.0%), mainly driven by an increased integration in the

European networks of production and integration in machinery and equipment (+40.4% in

volume, +3.6% in share in total exports). European Union accounts for 68.1% of total exports, a

share comparable to intra-EU figures. Reflecting both the need for technological transfer (machinery and equipment sector receives 28.9% of total imports), and the unfavourable energy

balance, imports rose substantially (+29.6%), almost doubling the trade deficit. Consequently, thecurrent account started to deteriorate again (-1337 mil. USD during the first Semester 2001,

compared to 581 mil. USD in the same period of 2000), but it seems that it will not exceed the

6% of GDP threshold due to the strong positive influence of foreign remittances and to the slight




g

The developments in the first semester suggest that GDP growth will be significant, based, on thesupply side, on the revival of industrial production and agriculture, and, on the demand side, on

the upswing in final consumption consequent to real wage gains. However, the Government

intends to better correlate the real wage dynamics to productivity gains in certain public services.

Table 1.2. – Economic indicators for 2000 and 2001 (estimation)

Macro-economic indicators 1999 2000 1st

semester

2001

1.GDP (real growth, %), of which: -2.3 1.6 4.9

Gross value added in industry -1.5 6.1 11.2

Gross value added in agriculture 3.4 -15.8 -2.2Gross value added in constructions -2.3 6.3 9.4

Gross value added in services -3.4 3.1 1.9

2.Final households consumption (% change) -4.6 -1.2 7.6

3.Gross fixed capital formation (% change) -4.2 5.5 6.7

4.Investment ratio (% of GDP) 18.0 18.5 19.0

5.Domestic demand (% change) -4.8 4.2 8.7

6.Industrial production (% change) -2.2 8.2 10.4

7.Exports – mil. USD

% change

8487

2.2

10366

22.1

5696.7

16.08.Imports CIF – mil. USD

% change10557

-10.8

13055

23.7

7744.1

29.6

9.Imports FOB – mil. USD% change

9744

10.8

12050

23.7

7148

29.6

10.Trade balance




In the context of macroeconomic evolutions and constraints, financial policy continued to havean austerity characteristic. General consolidated budget’s foundations, its structure and its size

have been drawn concordant with objectives and priorities of the governmental policy towards

economic growth.

A. The budgetary policy targeted increased efficiency and transparency of public expenses, considering short and

medium-term challenges and upcoming trends that might affect the budget. Following restrictive management of

public expenses and measures to improve their administration, budgetary expenses reached 35.1% of GDP in 2000.

The low level of revenues led to a deficit of 3.7% of GDP by the end of 2000.

In 2001, for the first time in recent years, the Report on the Law of state budget was elaborated

on medium-term perspective, formulating the main tendencies and directions of the fiscal and budgetary policy for 2002-2004, which represents a significant step forward towards improving budgetary philosophy. The Report on the Law of state budget signalled the change from a budget

“of resources” to a budget “policy-oriented”.

The budgetary rectification passed in August 2001 provided for budgetary expenses adding up to

36.1% of GDP. In the first seven months, revenues collected reached 53.6% of total revenuesexpected for the entire year 2001, and expenses represented 54% of total expected expenditures.

The deficit (-22498.7 bn. Lei) was kept within limits intended, due to the positive influence of local budgets (+3072 bn. lei), unemployment benefits fund (+2453.5 bn. lei), and social security

fund (+1923.4 bn. lei). In June regularisation operations were done between state and local budgets, as certain financing in education, agriculture and health was redirected to the

responsibility of local administrations.

B. The package of fiscal reform measures, initiated at the beginning of 2000, led to collecting revenues (totaling

250702,8 bn. Lei), mainly generated by direct taxes (56.5%), followed by indirect taxes (37 %).

General consolidated budget revenues’ share in the GDP is set to increase by 1.1 % in 2001, as compared to 2000.

Higher volume of revenues is not determined by higher tax rates, but by measures envisaged, targeting improvedcollection of current and overdue liabilities. As regards the state budget, operational indicators are maintained within

the limits projected. 2001 witnesses higher volume of indirect taxes collected, primarily from VAT and excise duties.




2. THE MACROECONOMIC FRAMEWORK

Romania has overcome the second wave of recession and the economy is expected to enter a sustainable growth pathafter the upturn registered in 2000. However, the Romanian economy has not yet been acknowledged as a

functioning market economy, within the latest Regular Report from the European Commission (November 2000),and it is considered as “not being able to cope with competitive pressure and market forces within the European

Union in the medium term”. Therefore the main objective for the macro-economic policies in the next period is tostabilise the economy and to put it on a durable growth path, and at the same time, to create the functioning

mechanism of a market economy, able to cope with competitive pressure within the European market. Economic

growth will provide in the same time for the acceleration of the structural reform and privatisation through the

lowering of the social costs of these processes.

2.1. Strategic options and the main hypothesis

The strategic options on which the future economic policies are based, and which are co-ordinated with thoseincluded in the National Development Strategy of Romania on the medium term, concentrate on the following

targets:

Achieve a consolidated macro-stabilisation by progressing significantly in the structural reform and financialdiscipline, obtaining sustainable budget deficits, developing the domestic market, promoting the domestic

output, encouraging the SMEs, managing properly the public debt and the current account deficit, such as to

attain a gradual reduction of inflation rate up to a single digit level by 2004;

Improve substantially the business environment by providing a proper economic and financial framework

mainly by simplifying the mechanisms of entering and operating on the Romanian market. There are already in

action measures to simplify the operations for registering the companies, while the Law for encouraging theDirect Investment and the Law for Industrial Parks specify clear incentives for action.

Accelerate and deepen the fiscal reform in a coherent way, by reducing the taxation level, improving the controlon budgetary expenditures and increasing the efficiency of tax collection.

Accelerate the privatisation and restructuring in a framework of increased efficiency and transparency, on the

principle of “privatisation for re-launching” thus as for the ownership transfer to result in re-capitalisation,modernisation, investment, better management and positive effects on the economic efficiency.

Promote coherent policies, compatible with the EU mechanisms aiming at selective restructuring of the

economy, developing and modernising the infrastructure, replacing the technologies in the competitive

industries, establishing optimal size farms, encouraging the activities based on the information technology,

creating a proper environment for developing the tourism, diversifying the financial services and the tertiarysector. Thus the necessary conditions will be met for the Romanian economy to be able to cope with the

pressures of the competition in the EU at the moment of the integration.

As stated in the Government Programme for 2001-2004 the main hypothesis of the estimations regarding the futureevolution of the Romanian economy, based on the recent trends already stated, are the following:

• Increasing the domestic demand without neglecting the role of the external demand;

• Improving significantly the relation between the elements of the domestic demand as to favour theaccumulation. Following the measures taken in order to enhance investment and the savings behaviour, the gross

capital formation will increase at a superior pace than the other elements of the domestic demand.

• An income policy that will back up the disinflation process, which means that their evolution will follow strictlythe economic performance;

• Increasing the output, specially in those manufacturing sectors that have superior value added levels;

• Changing the structure of the exports toward the products which include more value added;

• Improving the relative prices in the economy such as to help the disinflation process to reach the target of single

digit inflation;


Th bili i h l d b i d i l h l GDP ill i



• The macrostabilisation process has already obtained some important results: the real GDP will increase

significantly this year, the disinflation process continues and the deficit of the consolidated budget is sustainable;

• The international financial position of Romania (the external debt service and the NBR reserves) has been

improved;

• The willingness of the EU, WB, IMF to assist the Romanian transition;

• The broad support of the society for the integration, despite its emotional nature; • The experience of more advanced candidate countries will help in designing and implementing the proper

measures.

Among the factors that are not favourable:

The most important of all is the delay in reforms. Moreover, the Romanian economy is still weakly structured

from the institutional point of view;

Despite the disinflation process, the inflation expectations of companies and households are very strong,

generating a significant pressure on increasing the nominal incomes. The widespread poverty implies an

important social burden on the budget and makes more difficult the restructuring of the inefficient sectors; The lack of financial discipline contributes to the growth of the arrears (they represent almost 40% of GDP),

while the informal economy continues to have a very high share;

In 2001 the trade deficit is going to reach very high levels. Additionally, the hesitation of the foreign private

capital to invest in Romania has not yet been surpassed.

2.2. International environment

After the record growth of almost 5% of GDP of the global economy in 2000, influenced largely by a similar growth

in the USA, the slowing down of the growth rates compared to those forecast for 2001 surprised the specialists.

Thus, if the IMF forecast for 2001 envisaged a global growth of 4,2% and a 7.2% of the world trade, these figureswere later revised to 3.2% and respectively 6.7%. The explanations reside in a higher than expected slowdown of the

USA economy (from 3.2% to 1.5%) as an effect of the increase in oil prices, the shock of the drop of the stock exchange – in particular of the IT stocks- and also the more restrictive conditions of credits. All these and, lately, theforeseeable effects of the events on September 11 have determined a slower growth rate of the demand. To this

evolution of the USA economy added the weak performance of the Asian economies and of Japan. For the latter,

despite a forecast of 1.8% growth for 2001 considering the output decrease from the first semester due to the IT stock

drop, the last figures indicate a 0% growth if not worse – a decrease.

The EU countries were affected by the slowdown of the American and Japanese economies more severely than itcould be depicted in the bilateral trade relations, and this added to the losses due to the foot and mouth disease and

the mad cow disease. In the EURO area the growth forecast for this year was downgraded from 3.4% to 2.4%. For

Italy, Germany and France, the most important trade partners of Romania, the growth rate is expected to be between1.9% - 2.6% in 2001 and between 2.5% - 2.6% in 2002.Due to the measures regarding the decrease of the income taxes in the EU and to the continuous drop in

unemployment it is expected that the incomes will grow, which will translate in the end in an increase of the

households consumption. If the investors’ confidence has decreased due to the economic environment in manycountries, the risk of decreasing productive investment is limited because of the high degree of using the production

capacities and of the high demand. Also the decrease of the interest rate and the relative increase of the importance of

the banking credit could contribute to diminishing the risk of decreasing investment. Thus, the development

perspectives on the short-term are more favourable in the Euro area than in North America and Japan.

For the countries in Central and Eastern Europe the economic growth is expected to remain high in 2001 – 3.9% -,although this area is vulnerable to a slowdown more important than the one in Western Europe. In the circumstances

of a weaker foreign demand and of higher current account deficits it is recommended for these countries to re-

balance the policy mix towards a more restrictive fiscal policy. This will contribute to limiting the domestic demandand further slowing down the pressures on the interest rate and exchange rate.

Between 2003-2006 the global economy is expected to rise on average with 4.5%. The volume of the world trade is

expected to grow faster than the world GDP, on average with 6.8%. For the developed economies imports will




- Controlling the consolidated budget deficit

- Reducing fiscal and quasi-fiscal deficit, containing the current account deficit and

sustaining more effectively the disinflation efforts- Improvement of the collection in order to increase budgetary revenues

- Making Romanian tax regulations compatible with UE legal norms

- Improving the conditions for competition in the real economic sector

- Increasing the efficiency of the tax administration- Reducing the current high share of the informal economy.

Currently, the structural feature of the budget deficit generates the main problems of the fiscal

policy. The reduction of this deficit is one of the key concerns of the Romanian Government and

will be realized only trough adapting in an appropriate way the structure of the revenues andexpenditures in order to diminish the high percent of compulsory expenditures related to social

security, health etc. The recent economic recovery will create the conditions necessary for a

slight reduction of the budget deficit from 3.5 percent in 2001 to 3 percent in 2002.

The budgetary policy will follow several guidelines:

- Budgetary expenditures will be designed depending on revenues that are completely possible to be achieved;

- Fiscal transparency will be increased by absorbing to the budget the great number of extra-budgetary funds currently available, and the Ministry of Finance will follow a

policy of step by step reduction in the off-budget transactions;

- Programs-oriented management of the budgets will be extended significantly and the budgetary expenditures will be restructured depending on a realistic assessment of

the priorities ranking at national level.

At the same time, the Government is aware of the necessity to finance the consolidated budget

deficit from non-inflationary sources and to orient the financing towards external sources.

External financing has to be consolidated and increased in order to eliminate supplementary pressures on the credit markets and to release the monetary policy from the additional difficulties

encountered during the process of disinflation and interest rates reduction. The efficiency of the

public debt management is going to be improved in order to identify the most suitable budget

deficit financing sources and to ensure the payment of the public debt service at a minimum cost.

The tax policy will not witness substantial change, reflecting a relative stability of the tax rate

levels. The changes to tax rates would be related only to the harmonization needs of the fiscalregulations according to the EU legislation. Specific measures will be taken in order to improve

the tax collection efficiency. The tax base will be increased through the elimination of the tax


- in 2001 there is going to be a net wage increase equal to the estimated level of the CPI computed as the



- in 2001 there is going to be a net wage increase equal to the estimated level of the CPI, computed as the

average of 2001 against December 2000; this increase was granted in three phases – 7% in March, 7% inJune and 6% in September;

- compared to these increases the base wages at the maximum limit the grows were granted to less than half

of the level;

•

Harmonisation of the wage system in the public institution with that from the EU will be implemented starting in2002 through the law of wages in the state sector which will be approved by the end of 2001. The objectives of this law are: improvement of the relation between the base wages of the functions with the highest responsibility

and the complexity of the tasks against those corresponding to the unqualified activities, as well as from the base

wages of the staff with university degrees and those with high school degrees; insuring the coherence necessary

for implementing the measures that will observe the evolution of the wages in different fields of the state sector according to the priorities formulated as well as to the financial resources allocated;

• Condition the wage increases for the state owned companies, regies autonome and national companies, on the

economic performance;

- strengthening the wage discipline in this sector will be accomplished firstly by granting the wage rights to

the manager of the company according to the fulfilment of the performance criteria, including the programme of reducing the arrears, and due payments;

- surveying the way in which wage rights are granted will be very strict and will be observed by the bodies of

the central or local administration;

- limiting the wage funds through the company budget and granting of wage increases only strictly related tothe labour productivity increases. Thus on one hand the increase of arrears of the state owned companies

will be contained, and on the other hand this will be an incentive for increasing the labour productivity and

for improving the overall management.

• Promote a higher level of the minim wage on the economy as a reference for the entire wage system in order to

stimulate the motivation of labour;- starting with March 2001, the minimum gross wage was increase in real terms with 12.5% against

December 2000;

- moreover, for a higher stability of the minimum wage that will allow the companies to calculate for a longer

period the labour cost and the firm strategy regarding the products, this level has been fixed in nominalterms for a period of one year;

- in 2002 the real level of the gross minimum wage will increase in real terms with 12.5% against the level

from 2001.

• Initiate measures for reducing the cost of labour in order to cut the employment in the underground economy ,

with a direct increasing effect on the budgetary revenues;• Implement policies to encourage companies to hire young graduates from the Universities.2.3.3. Monetary and exchange rate policy

The main objective of the Romanian economic programme is the disinflation programme. For 2001 the objective is

reducing the inflation to a level of 29%, this being perceived as the first step for reducing the level of inflation to asingle digit by 2004. This evolution combines the objectives of the monetary policy and those of the Government

Programme aiming at increasing the financial discipline and the acceleration of structural reform.

For the monetary policy, the period 2001-2004 will represent the change de jure and de facto towards a clear

formulation of the objective of the NBR. This transition will be over in the second period (2003-2004) as the official

status of the NBR will be modified, its independence will be strengthen and its efforts will focus only on oneobjective. These objectives will find support in the implementation of other macroeconomic policies as well as in the

structural transformation produced by the reforms already realised in the period 2001-2002.

Although on the downsize trend, the high and volatile rates of inflation, mainly determined by structural causes, willmake more proper the keeping of the strategy of monetary targeting. The relative low efficiency of this strategy will

be improved by giving up the use of the exchange rate as an instrument in securing the external equilibrium, as

allowed by a relative relaxation of the external constraint. Under these circumstances the monetary policy will focus


Increasing the transparency and the responsibility of the monetary policy will enhance the efficiency of the monetary



Increasing the transparency and the responsibility of the monetary policy will enhance the efficiency of the monetary

policy in fighting inflation, including the mitigation of inflation anticipations that feed the price increase. Moreover,such a strategy will allow a greater flexibility for the central bank in using monetary policy instruments, by adopting

those measures, which correspond to the nature of the shocks that put in danger the inflation target.

In order to consolidate the disinflation process the monetary policy will remain prudent for the entire period.

Subsequently this will aim the re-monetisation of the economy that will be sustained by re-building the confidence in

the currency and by the economic growth. At least in the first period and even in the second one, if the inflationtargeting is adopted, the monetary policy decisions will be based both on the evaluation of the monetary aggregates

and on the information given by other indicators (the interest rate, the exchange rate, the reserves).

The instruments of the monetary policy, which have already been partly harmonised, with those of the ECB, will beimproved in order to increase the efficiency of the monetary policy. The main aspects are:

• The completion of the necessary infrastructure for using the market instruments;

• Diversifying the sterilisation instruments of liquidity on a longer term or even permanently;

• Increasing use of market operations against a seldom use of more administrative measures (minimum reserves);

• Increasing the capacity of the NBR to function as a creditor of the banking system, necessary in influencingeffectively the short-term interest rates;

• Eliminating the facility to finance monetary the Treasury.

Increasing the efficiency of the monetary policy in this period will depend both on deepening the monetary policy

and reducing the fiscal accent, which affect seriously the current conduct of the monetary policy.The exchange rate policy will change radically in the period 2001-2003. These changes have started this year and

consist of relaxing the control on the exchange rate. This relaxation comes from the option of reducing the

subordination of the exchange rate policy to the objective of external equilibrium and from taking advantage of the

appreciation trend of the ROL in order to accelerates disinflation. This method will be used also in 2002 as atransition period towards the adoption of an exchange rate regime that will define a different type of monetary policy

strategy. In the case of implementing an inflation targeting strategy the exchange rate regime will keep in certainlimits the characteristics of a managed float, which will fade away as the productivity will increase its proportion insustaining the external competitiveness.

The second option for the exchange rate regime for the 2003-2004 period, if the conditions for adopting the inflation

targeting are not met, is a more predictable exchange rate regime. This will represent an alternative because of the

favourable perspective of the relaxation of the external constraints, including the gains in productivity generated by

the structural policies. This will enhance the stability of the exchange rate contributing also to the consolidation of the disinflation process.

The advantages and disadvantages of the two alternative regimes of the monetary policy depend on the answer to

different shocks, which may occur, on the transparency of the definition and on the instruments used.In the 2003-2004 period Euro will become the reference currency for the exchange rate of the ROL. Giving up theUSD and adopting the Euro as the reference currency will be prepared by complex actions that will envisage all the

aspects including the psychological one. During all this period the ROL will gradually appreciate in real terms

against the European currency; by a sustained adjustment of the relative prices the gap with the EU will be graduallyreduced.

2.4. The medium-term macroeconomic and sectoral framework The steps implemented by the Government, according to the present Pre-accession Economic Programme, will

ensure reaching the major objective of entering the path of a sustainable high rate of growth, enhancingcompetitiveness and narrowing the gap with the EU economies. The future development of the Romanian economy

is illustrated by the forecast performed by the Ministry for Development and Prognosis on two scenarios that take

into account potential positive or negative outcomes, within the internal and external influential framework. Thescenarios are built by combining formal methods (the use of the Dobrescu Model) and less-formal methods, and their

consistency was checked with the Romanian version of the WB RMSM-X model. The baseline scenario considers

that the present consistent line in the set of economic policies will be maintained, that the privatisation and


perceived as a risk to faster growth, but their stabilisation impact is expected to bear fruits towards the end of the



p g , p p

period. The economy will grow on average at an annual rate of 5.1%, reducing thus the gap with the economies inthe European Union area.

Aggregate demand

The forecast shows that the main source of macroeconomic stability will be an improvement in the structure of

aggregate demand, favouring fixed capital formation and net exports. Given the current distortions, it is envisaged

that starting 2003 the negative contribution of net exports to GDP growth will fade away.Table 2.1.

- contributions to GDP growth (percentages) -

2001 2002 2003 2004 2005

Gross Domestic Product 4,5 5,0 5,2 5,5 5,1

Domestic Demand 7,1 6,3 5,6 5,6 5,3

Net Export -2,1 -1,3 -0,1 -0,1 -0,2

Exports of goods and services 4,0 3,6 3,2 3,1 2,7

Imports of goods and services 6,6 4,9 3,6 3,2 2,9

The increase in Romanian competitiveness will reduce the income elasticity of imports, therefore we forecast a

reduction in the imports annual growth rate from 29% in 2000 to 6.5% in 2005, which will bring this rate below the

annual growth rate of exports by the end of the forecast horizon. The data presented in Table 2.2. show that the

contribution of final consumption to GDP growth will also diminish in comparison to the contribution of gross fixedcapital formation, bringing the share of final consumption (private and public) to a level of 66% of GDP, in year

2005. Such a development will favour the disinflation process, as well.

Table 2.2.

- percentage change compared to the previous year -

2001 2002 2003 2004 2005Average

annual rate

2001-2005-% -

Final household consumption +4,4 +3,8 +3,6 +4,0 +3,3 3,8

Final public and private

administration consumption

+3,2 +3,0 +3,0 +3,0 +2,5 2,9

Gross fixed capital formation +10,0 +9,7 +11,2 +13,2 +12,0 11,2

Inventory change +144,9 +49,3 +9,9 -5,6 +1,7 31,0

Domestic demand +6,5 +6,0 +5,1 +5,2 +4,9 5,5Exports of goods and services +12,6 +8,9 +8,6 +8,3 +7,4 9,1

Imports of goods and services +16,6 +10,6 +7,8 +7,1 +6,5 9,7

GDP +4,5 +5,0 +5,2 +5,5 +5,1 5,1


The envisaged improvement in the business environment and in the functioning of market



g p gmechanisms will be the main drivers behind the investment booming performance, during 2001-

2005, which will make investment the main contributor to GDP growth. The assumption is based

on several factors that may allow investments to grow at a rate higher with 5-7 percentage pointsthan the annual GDP rate, during 2003-2005, without registering high annual fluctuations.

First, the increase in domestic savings due to the improvement in the businessenvironment and the effects of the ongoing privatisation and restructuring will foster new

investments of the domestic private sector.

Second, the steady growth of the FDI inflows into the economy will start producing positive effects on the economy, with their share in total investment reaching around 15-

20%, well above their average levels in the past.

Third, a large part of the EU transfers to Romania will be channelled towards public

investments, while the expected increase in the share of budget revenues towards the end

of the period will permit a higher share for government investments in the budgetexpenditure.

Given the above results, both saving rate and investment rate will follow an ascending trend, presented in table 2.3.

below:

Table 2.3.- % of GDP -

2001 2002 2003 2004 2005

Domestic saving rate 14,0 15,2 16,8 18,7 20,7

Investment rate 19,4 19,7 20,4 21,7 22,9

Consequently, the self-financing capacity of the Romanian economy will improve from a level of 74% to 90% in

2005. The gross saving rate in GDP will increase from 15.8% in 2001 and 17.4% in 2002 to 22.5% in 2005, while

the gross accumulation rate will show a lower trend of growth, from 22.5% in 2000 to 27.7% in 2005. Another important outcome of the restructuring process will consist of the diminishing share of inventory change in the

overall accumulation. By 2005, inventory change is forecast to represent only 0.1% of GDP. Labour force and productivity

Given the fact that economic growth sustainability implies the intensive use of factors, and that Romania shows

obvious comparative advantages in labour intensive industries, the Government targets particularly the establishment

of equilibrium on the Romanian labour market and the increase in the quality of the human capital.

Demographic constraints are a fact within the Romanian economy. They are outlined by the data shown in Table 2.4.Given the forecast decline in the participation rate, the most important objective remains the improvement in the

quality of work and education, aimed at enhancing labour productivity.

Table 2.4.% as compared to the previous year

Pre-Accesion Economic Programme Romania*) The share of employment in total population



The forecast evolution of labour productivity shows an increasing trend, maintaining rates above

the GDP rate with 0.5-1 percentage point, following the particularly good performances in theyears 2000-2001. The measures taken on the privatisation and restructuring front, together with

those envisaging macro-stabilisation will be the main factors for such a phenomenon. They willalso bring new pressure on the already low level of the occupancy rate. On the other hand, theFDI stock will come closer to a level that may start producing spreading-out effects within the

entire Romanian economy. The SMEs are expected to contribute positively to the creation of new

jobs, as well, especially in the field of non-wage paid employment. Nevertheless, the labour

market will remain tensioned in the medium term, and we are envisaging specific activemeasures, including programmes of labour force training and education.

Inflation Recognising the fact that Romania is the worst performer among accession countries in terms of attempts to bring

inflation down, there is a major commitment in order to reduce its levels in incoming years and to succeed in

stabilising the macro framework of the Romanian economy.Both monetary and fiscal policies will be aimed at lowering inflation, in a joined effort of the Government and of the

National Bank of Romania (NBR). The inflation will gradually come down at fast pace, reaching a level below 10%

starting 2004. Such reduction in the inflation rate is due to the better fiscal performance and to the realisation of the

social pact we are proposing to implement within the Romanian society. Nonetheless, we acknowledge the

inflationary impact of the higher increases in the prices of non-tradable than in the prices of tradables, produced

through the Balassa-Samuelson effect during the EU accession and catching-up process, which will maintain ahigher level of core inflation than in the EU countries, fuelled by the lack of a strong exchange rate anchor. The main

factors supporting disinflation will be:

• Speeding up the structural adjustment within the economy.

• Clear separation of the economic sectors in which administrative control of prices is allowed (limiting

intervention only to natural monopolies, in the narrow sense).

• Maintaining a prudent monetary policy, able to lead to a re-monetisation of the economy in a non-

inflationary manner.

• Diminishing the exchange rate inflationary pressure; it is forecast that the exchange rate will depreciate

at a lower rate than the inflation.• Gaining credibility among economic agents, which will reduce the inflationary expectations given the

sustainability of growth.

• Hardening the financial discipline, reducing the level of arrears and fighting speculative inflation.

• Improving the mechanism of administered prices.

• Investigating the particular markets in order to identify distortions and oligopoly type of pricing, and

taking legal actions for corrections in the market functioning.

• Fully enforcing the Law of Competition (21/1996) within the Romanian business environment.The whole process of disinflation is entirely dependent on the implementation of measures addressed by the

programmes of restructuring that were recently negotiated with the IMF and World Bank. The forecast evolution of prices is presented in Table 2.5. The fixed capital formation deflator will remain below the correspondent GDP and

consumer prices deflators.

Table 2.5.

- annual rate %-2001 2002 2003 2004 2005

i i d


while imports will grow at a 10.3% annual rate, keeping the trade deficit within the limits of 2.7-3.5 bn USD (FOB-

FOB)



FOB).European Union will consolidate its position as main trade partner of Romania, the share of EU in Romanian exports

being forecast at 70% by 2005 and its share in Romanian imports at 60%. Continuing the trend already outlined, the

structural change of trade will be more and more oriented towards increasing shares in exports of those products

having a higher share of value added or being labour-intensive. This phenomenon is enhanced by the expected higher

influence of FDI stock within the domestic economy. Should energy prices move in line with the recent forecasts and political turmoil in the world economy does not explode following terrorist attacks, the main contributor to import

growth will be the Romanian demand for fixed capital goods and technology. Imports of these types of products are

forecast to grow at 14% annually, inducing positive effects in the medium and long run.The expected stability and increase in future FDI inflows, following the measures that will be taken for macro-

stabilisation, will bring positive spreading-out effects within the economy, thus we expect to see the trade deficit

stabilising at a level close to 6-7% of GDP in the next four years. Starting 2002, we expect to see the negative impact produced by the demand related increases in imports cancelled by the effects on the economic structure and import

structure produced by large-scale privatisation and better management in the state-owned sector. Thus, the current

account deficit is forecast to start reducing after 2003, coming below the threshold of 5% of GDP. From the level of 6% estimated for 2001, it will gradually reduce to 5.5% of GDP in 2002 and 5.2% in 2003. The main factor

positively influencing the current account will be the current transfers’ component, which is expected to grow from0.9 bn USD in 2001 to 1.3 bn USD in 2005.

The current account deficit will be financed more and more through autonomous flows of capital, thus reducing the

share of compensatory flows. The scenario is based on the assumption that foreign direct investment, includingrevenues from privatisation, will grow from 1.2 bn USD in 2001 to 1.8 bn USD in years 2004-2005. An important

aspect within the larger context of business environment improvement is linked to the measures taken in order to

increase the FDI absorption capacity of the Romanian economy, such as reducing bureaucracy in market entries,

accelerating the privatisation process and establishing full and clear property rights.The external borrowing requirements are forecast at levels in the range of 1-1.5 bn USD annually. Given the

envisaged improvement of Romania’s rating on international financial markets, we do not foresee any problem in

ensuring financing for such a demand. Another positive influence may come during the process of pre-accession

from the increased EU funds transfers and from the improvement in their absorption capacity.

Maintaining the assumptions on monetary policy described further in the respective chapter of the present PEP,considering adequate intervention coming from the NBR in case of potential financial shocks or speculative attacks,

we forecast that the net foreign exchange reserves will double until 2005 as compared to its level at the end of 2000, being able to cover 3.5-4 months of imports.

The foreign debt, despite its foreseen growth, will stay in the range of 30-32% of GDP, well below the acceptable

international standards. Given the reduction in the share of foreign debt service, from 20% of exports in 2001 to 15%of exports in 2005, we consider that the capacity of the Romanian economy to reimburse its debt will not be affectedand credibility will be further increased.

2.4.2. Structural development – sectoral approach

On the supply side, the scenario shows higher growth rates than the one for GDP for industry and construction

sector, inducing the same accelerated pace in the related services subsectors (trade, transportation). Table 2.6.

presents the growth rates for the value added in the economy’s major sectors for the period 2001-2005.

Table 2.6.


F ll i th t d ti it i t it i t d th t th i t t ill b i d b



Following the recent productivity improvement, it is expected that growth in output will be accompanied by arelative diminishment of the share of intermediary consumption (inputs), expected to grow at a 5% annual rate, and

an increase in the share of value added, estimated to grow at a 5.4% annual rate. In 2001, we envisage that the share

of intermediary consumption in agricultural sector will increase, due to the measures taken in order to revitalise

technology capital in this area (irrigation system expanded, increased use of selected seeds, larger volume of

fertilisers).Despite high rates of growth in the industrial output, which are forecast to reach 7.6% in real terms in 2003, the

output in 2005 will stay below its level in 1989. Higher volumes than in the year before transition started are

expected to be reached only in few industries, such as textile clothing and wearing apparels, machinery andequipment and furniture. Some of the industries will grow driven by the domestic stronger demand, such as

construction materials, fertilisers, pharmaceuticals, metallic constructions and agricultural machinery.

The leading segment of the Romanian industry will be the manufacturing sector, whose output is forecast to grow atan annual rate of 6.1% until 2005, becoming the driving force of the Romanian economic recovery. The aggressive

component of manufacturing sector will include those industries growing at a higher annual rate than the average:

chemicals (+7.6%), clothing (+7.4%), oil processing (+7.2%), machinery and equipment (+7.1%), and food processing (+7%). The neutral component includes the industries growing at the same pace with the rest of the

Romanian industry: paper, road transportation means. Some industries will diminish their share in overallmanufacturing, forming the defensive component: textiles (+1.8% annual rate), metallic constructions.

The forecast for agricultural sector, estimated to grow during 2001-2005 at an average annual rate of 4.2%, has

taken into account several assumptions:

• The weather conditions were presumed to be normal and cyclical.

• The total agricultural and arable land surface will be kept constant, but the utilisation capacity increased.

• The land reform will speed up its implementation steps.

• The area served by the irrigation system will increase.• The volume of fertilisers used will increase in line with the expected ongoing process of farm concentration.Given the envisaged investment growth, the programmes announced for rehabilitation of infrastructure and for

supporting housing starts during 2001-2004, the forecast for the construction sector is bright, showing an annual

growth rate between 6 and 7%. The activity in the transportation services sector will be driven by the overall

economic growth and by the increased aggregate demand and will grow at a rate of 5%, in line with the GDP.

Consequently, by the end of 2005, the volume of merchandise transported will be 24% higher than last year, and thenumber of passengers will increase with almost 10%. The economic boom will be present as well in the tourism

industry, with the external component estimated to grow faster, due to the regain of economic credibility for

Romania.2.4.3. The alternative scenario

The alternative scenario was run under assumptions of a prudent policy aimed primarily at the

achievement of macrostabilisation. It has taken into account the trade-offs between economic

growth and the need of ensuring social stability and fiscal consolidation within the economy. Ithas also envisaged at possible downsize risk coming from a deterioration of the external demand

as compared to the baseline successful scenario.

Annual GDP growth rates will vary between 4% and 5%, with an average of 4.3%, while the

inflation rate will steadily come down slower than in the baseline secanrio, reaching levels of onedigit by 2005.

The quantitative baseline projection for the development of the Romanian economy during the


Table 2.7. The alternative scenario for the Romanian economy 2001-2005



Macro-economic indicators 2001 2002 2003 2004 2005

GDP (real growth, %) 4.5 5.0 4.2 4.0 4.0Final household consumption (real growth, %) 4.4 3.8 3.2 2.8 2.5



3.2 3.0 2.5 2.0 2.0


Primary 12.6 12.5 12.3 12.2 12.1

Secondary 36.6 36.9 37.1 36.9 36.6

Tertiary 50.7 50.6 50.6 50.9 51.3

Gross fixed capital formation (real growth, %) 10.0 9.7 6.0 8.0 8.0

Exports of goods and services (growth USDterms, %)

14.8 8.4 5.4 4.0 5.3

Imports of goods and services (growth USD

terms, %)

21.0 9.3 5.3 3.8 4.6

Current account balance (% of GDP) -6.0 -5.5 -5.3 -5.0 -4.7




Real wage (annual growth, %) 4.0 4.0 3.2 2.8 2.5

The alternative scenario takes into account the initial conditions that may act as risk factors on the fixed capitalformation side. Romania has one of the lowest investment rates at this moment, and one of the lowest savings rates,

as compared to other candidate countries. It was also characterised by very low FDI inflows per capita throughout

the transition period.

Nevertheless, the Government is decided to act together with the National Bank of Romania,

aiming at accelerating the process of disinflation and reforming further the fiscal system in such

manner that it will reinforce investment incentives and will make the Romanian businessenvironment more attractive. As a result, we expect domestic savings and foreign direct

investment to increase anyway at a sensibly higher rate than in the past, bringing the saving ratefrom a current 13.3% in 2000 to 17% by 2005. This will allow investment to grow at an average

real rate of 8.3% per year.

The total consumption will grow at a lower rate than the GDP, like in the baseline scenario, with privateconsumption showing higher dynamics than the government consumption, the latter being constrained mainly by the

measures taken for fiscal consolidation. This will bring inflationary pressure down on the domestic demand side.

The evolution of trade and current accounts in recent years demonstrates the installation of a chronic deficit and a

direct linkage between the size of the deficit and the GDP growth rate. The main factor behind this phenomenon isthe high-income elasticity of Romanian imports (especially for raw materials, fuel and energy-related products, andfood products), that is related to the still very high share of energy-intensive and raw material-intensive industries in

the Romanian economy. Most of these industries are still subject to state ownership to a large extending, and the

restructuring process is particularly aimed at improving their performances. In addition, the gradual rise in the“capital-intensive goods” trade is adding to the deficit, as technological imports are needed for a fast-developing


possibility of bringing inflation below 10% before 2005. Anyway, the inflation rate will decreaseft ll i f b tt ll ti f l d d d f t i th d



year after year, allowing for a better allocation of supply and demand factors in th economy and

creating the necessary stable macroeconomic framework for nominal convergence with the EU

economic system.

Given the history of lax income policy in Romania, we will focus on maintaining the real net wage increases in linewith the productivity growth, particularly in the public utilities and state-owned sectors of the economy. We have

already curbed down the negative impact of the increase in real gross wages that showed up before the election

period in 2000, and the forecast envisages wage growth rates below the productivity growth rates after 2002.

The alternative scenario assumes that budget deficit will be brought in line with the target of 3%of GDP starting 2002 and will be kept at this level throughout the entire period. Not having in

mind any change in the level of taxation, we foresee an improvement in the share of the budget

revenues in GDP, coming from the economic growth effect, but also from the hardening of the

government’s budget policies. This will allow expenditures to grow in real terms at a higher ratethan the GDP, fulfilling the increased needs during the EU accession period. During the whole

forecast horizon, the primary budget balance will show a small surplus, while the public debt willincrease its share in GDP at a moderate rate, bringing its level at 34.5% by 2005.

The main problem of Romania, however, lies not with the size of the deficits, but with their financeability. Compensatory flows financed the current account deficit in the first years of

transition and, despite losing ground in favour of autonomous flows, they remain influential. The

level of Romania’s foreign debt is not particularly high, and the forecast evolution doesn’t show astrongly increasing trend.


3. PUBLIC FINANCE



3.1. Medium term targets and general framework of the budgetary policy

The actions included in the programme aimed at meeting the economic criteria and the pursuing a path of economic

growth are conditions for reaching macroeconomic stability in Romania. In order to reach this objective there is avital need to formulate coherent fiscal and monetary policies in order to decrease the inflation and interest rates in the

economy, and to sustain the acceleration of the structural reform process.

The main objective of the Romanian Government is to promote a fiscal policy aimed at speeding up the European

integration process by improving the social conditions, allotting more financial resources to health, education,

environment and by sustaining economic growth through increasing investments. Increasing the equity, transparency

and efficiency of the tax system will be the main focus of the fiscal policy.

A key feature of the fiscal and budgetary policy is the low ratio of the budgetary revenues and expenditures as

percent in GDP. In Romania, the revenues to the general consolidated budget decreased from 41.2 percent of GDP in1991 to approx. 32.7 percent of GDP in 2001, and the expenditures decreased from 38.1 percent of GDP to 36.2

percent of GDP. The sharp decrease of the budgetary revenues is the result of the adjustments occurred in the

management of the tax system in the context of difficult conditions brought by economic transformation. The

phenomenon reflects not only the process of the institutional dissolution of the former centralised system, but alsothe weaknesses of the new institutions.

This represented one of the restrictive factors, which narrowed the Government options and required an excessive

decrease of the budgetary expenditures in order to control the budgetary deficit. Additionally, the unstable

macroeconomic environment, the high inflation and interest rates generated a quick increase of the interest paid for the public debt and added supplementary pressures on other budgetary expenditures.

The 2002 budget has been designed to face a major constraint – a deficit of 3% of GDP, agreed during negotiations

with the IMF. This target constitutes at the same time an objective integrated within our efforts to converge with theEuropean Union countries. This deficit constraint is going to be followed through the next period as well.

The trends of the revenues and expenditures for 2003 – 2005 have been designed on the basis of the macroeconomicscenarios presented in the previous chapter. The baseline scenario, corresponding to an average economic growth of

5 percent, estimates that the revenues and expenditures of the consolidated government budget will reach approx.34.6 percent and respectively 37.6 percent of GDP by 2005. The alternative scenario, corresponding to an average

economic growth of 4 percent, estimates that the revenues and expenditures of the consolidated government budget

will reach approx. 33.2 percent and respectively 36.2 percent of GDP by 2005.

Table 3.1. 1. – Trends of the revenues and expenditures for 2003-2005*)

- % GDP-

2000 2001 2002 2003 2004 2005

Revenues 31.5 32.7 31.8 32.4(32.9) 32.8(34.0) 33.2(34.6)

Expenditures 35.5 36.2 34.8 35.4(35.9) 35.8(37) 36.2(37.6)

Expenditures with interest rate

for public debt 4 9 4 2 3 9(3 8) 3 4(3 2) 3 2(3 0) 3 2(3 0)


compared to other candidate countries, Romania has allotted a very low level of financial resources for health,

education, infrastructure and environment. Taking into consideration the above-mentioned expenditure needs, the



, g p ,revenue level of 31.5% (in 2000) is not sufficient and has to increase up to 33.2 - 34.6%, without an increase of the

taxation rates.

The evolution of the budgetary revenues will reflect a relative stability of the tax levels, a sustained harmonisation of

the fiscal regulations according to the EU legislation and a better collection of taxes. The tax base will be increasedthrough the elimination of some tax holiday and exemptions and the informal economy will be diminished. On the

same time, the rollovers and unconditional forgiveness from tax payment will be gradually contained or even

removed in order to reduce the moral hazard behaviour and to increase the fiscal equity and transparency.

As a result during 2001-2005 period the budgetary policy will abide to the following guidelines:the budgetary expenditures will be projected depending on revenues that are secured, or easy

to be secured without recurring to inflationary financing sources - the principle of

budgetary revenues sizing; beginning with 2001, the budget will be based on new regulations and principles that should

reflect the following: the increase of the informational content of the budget, the improvement of

its distributive function through a more transparent allocation of budgetary funds depending onsectoral priorities as well as the improvement of the coherency of the budgetary components. The

budgetary expenditures will be restructured depending on a realistic assessment and ranking of

the priorities at national level. This will allow the transition from a means-oriented budget to a programme-oriented one. Beginning with 2000, eight governmental institutions have already

structured their budgets on programs. The number of governmental institutions, which adopted programme-oriented budgets, increased to thirteen in 2001, and their number is expected to

increase considerably next year. fiscal transparency will be increased by absorbing in the budget the large number of extra-

budgetary funds currently available, as well as by following a policy of step by step reduction

of the off-budget transactions will represent a key factor which will help the consolidation process of the public finance system - the principle of budgetary transparency and

concentration. Beginning with 2001, seven extra-budgetary funds were absorbed in the state

budget and one special fund was totally eliminated.

Participation of Romania to the procedures of fiscal supervision, the system of ESA 95

accounts

Regarding the adoption of the new structure of the national accounts according to ESA 95 methodology, Romaniasent to the European Commission in March 2001 the first notification concerning the debt and the governmental

deficit drafted in line with the recommendations contained in the technical norms and regulations. Though the

elaboration of the tables composing the Notification were drafted according to ESA 95 provisions, there are some problems, highlighted also by the EUROSTAT experts, concerning the lack of the accrual data related to the taxes,

social contributions and interest.

The statistics regarding the governmental operations generally use accounting methods that are cash-based. Theadvantage of this methodology is the possibility to assess in a more accurate way the impact of the government


Revenues 34.5 (31.5) 36.1 (32.7) 34.5 (31.8)



Expenditures 38.6 (35.5) 39.9 (36.2) 37.5 (34.8)

Deficit 4.1 (4.0) 3.8 (3.5) 3.0 (3.0)

3.2 The structure of the budgetary revenues and expenditures

3.2.1 Changes within the budget components

Based on the two scenarios of economic growth, The Ministry of Public Finance issued two paths of revenues and

expenditures.

Baseline scenario

For the baseline scenario, the total revenues will increase from 32,7 percent of GDP in 2001 to 34,6 percent of GDP

in 2005, and the expenditures will increase from 36,2 percent of GDP in 2001 to 37,6 percent of GDP in 2005. From

2002 onwards, the budgetary deficit will be maintained to 3 percent of GDP. In 2002, the budgetary revenues willdiminish by 0,9 percent of GDP compared to 2001, because of removing of some special funds; the improvement of

collection will have significant impact starting with 2003.

% of GDP

2000 2001 2002 2003 2004 2005

TOTAL REVENUE 31,5 32.7 31.8 32.9 34.0 34.6

Tax revenue 29.5 30.5 30.0 31.5 32.7 33.3DIRECT TAXES 17.8 18.7 18.3 18.6 18.7 18.9

Corporate income tax 2.6 2.3 2.3 2.3 2.3 2.3

Personal income tax 3.4 3.4 3.1 3.3 3.4 3.4

Social security contributions 10.9 11.9 12.1 12.2 12.2 12.4

Other direct taxes 1.0 1.1 0.8 0.8 0.8 0.8

INDIRECT TAXES 11.7 11.8 11.7 12.9 14.0 14.4

VAT 6.3 6.5 6.5 7.2 7.8 8

Duties 1.1 0.8 0.7 0.6 0.5 0.5

Excises 2.6 2.6 2.7 3.2 3.8 4Other indirect taxes 1.7 1.9 1.9 1.9 1.9 1.9

Non-tax current revenue 1.9 2.1 1.8 1.4 1.3 1.3

Non-tax capital revenue 0.1 0.0 0.0 0.0 0.0 0.0

Grants 0.0 0.0 0.0 0.0 0.0 0.0

TOTAL EXPENDITURE 35.5 36.2 34.8 35.9 37.0 37.6

Goods and services 12.6 12.6 12.1 11.6 11.6 11.6

Wages and salaries 5.5 5.3 5.2 5. 5.0 5.0

Other goods and services 7.1 7.3 6.9 6.6 6.6 6.6

Interest payments for public debt, otherexpenditure

4.9 4.2 3.8 3.2 3.0 3.0

Subsidies, bonus, and transfers 14.6 15.7 15.3 16.5 17.0 17.3

Subsidies 2.2 1.7 1.5 1.3 1.2 1.2

Transfers 12.3 13.8 13.9 15.0 15.6 15.9

Reserves 0.2 0.1 0.2 0.2 0.2


In the alternative scenario based on an average economic growth rate of 4%, the evolution of budgetary revenues and

expenditures will know a moderate growth, reaching 33.2% and 36.2 percent of GDP in 2005.



Given the existence of a major risk related to the worsening of the current account deficit, the Romanian Government

prepared a contingency scenario in which the average economic growth would be 4 percent or less. Within this

framework, the total budgetary revenues will increase from 32.7 percent of GDP in 2001 to 33.2 percent of GDP in

2005 and the expenditures will be maintained relatively constant to 36.2 percent of GDP.

Similar to the previous scenario, beginning with 2002, the budget deficit will be maintained constant to 3 percent of

GDP. The increasing trend of revenues in this scenario is due exclusively to the improvement of tax collection and tomeasures aimed at increasing the taxation base. These measures will compensate completely the decrease of

budgetary revenues caused by the elimination of certain special funds.

% din PIB

2000 2001 2002 2003 2004 2005

TOTAL REVENUE 31,5 32.7 31.8 32.4 32.8 33.2Tax revenue 29.5 30.5 30.0 31 31.5 31.5

DIRECT TAXES 17.8 18.7 18.3 18.5 18.5 18.5

Corporate income tax 2.6 2.3 2.3 2.3 2.3 2.3

Personal income tax 3.4 3.4 3.1 3.2 3.2 3.2

Social security contributions 10.9 11.9 12.1 12.2 12.2 12.2

Other direct taxes 1.0 1.1 0.8 0.8 0.8 0.8

INDIRECT TAXES 11.7 11.8 11.7 12.5 13.0 13.0

VAT 6.3 6.5 6.5 6.8 7.2 7.2

Duties 1.1 0.8 0.7 0.6 0.5 0.5Excises 2.6 2.6 2.7 3.2 3.4 3.4

Other indirect tax 1.7 1.9 1.9 1.9 1.9 1.9

Non-tax current revenue 1.9 2.1 1.8 1.4 1.3 1.3

Non-tax capital revenue 0.1 0.0 0.0 0.0 0.0 0.0

Grants 0.0 0.0 0.0 0.0 0.0 0.0

TOTAL EXPENDITURE 35.5 36.2 34.8 35.4 35.8 36.2

Goods and services 12.6 12.6 12.1 11.6 11.6 11.6

Wages and salaries 5.5 5.3 5.2 5.0 5.0 5.0

Other goods and services 7.1 7.3 6.9 6.6 6.6 6.6Interest payments for public debt, other

expenditure

4.9 4.2 3.9 3..4 3.2 3.2

Subsidies, bonus, and transfers 14.6 15.7 15.3 16.2 16.3 16.5

Subsidies 2.2 1.7 1.5 1.3 1.2 1.2

Transfers 12..3 13.8 13.9 14.7 14.9 15.1

Reserves 0.2 0.1 0.2 0.2 0.2

Capital expenditure 3.1 3.6 3.3 4.1 4.6 4.8

Lending 0.5 0.1 0.1 0.1 0.1 0.1

SURPLUS(+)/DEFICIT(-) (4.0) (3.5) (3.0) (3.0) (3.0) (3.0)• according with GFS methodology

3.2.2 Expenditures and revenues policies. Instruments.


making Romanian tax regulations compatible with E.U. legal norms; improving the conditions for competition in the real economic sector;



increasing the efficiency of the tax administration;

reducing the current high share of the informal economy.

In order to sustain the additional expenses needed by the acceleration of the economic privatisation and restructuring

process and to co-finance the programs related to European integration, Romania needs supplementary budgetary

resources. Such resources will be needed also in the health, education, environment and infrastructure areas.

Short run attempts to balance the twin objectives of raising revenues and providing incentives for investmentundermined the company income taxation base throughout the 1990s. Far from benefiting investment and

employment, these frequent changes and the attendant instability of the fiscal regime eroded the credibility of tax

policy, and made holding out a more valuable option for potential investors. The 2000 reform has greatly improvedthe investment climate, and brought the Romanian taxation system closer to regional standards. Most importantly, all

previous tax-holiday and investment-incentive legislation were abrogated and the statutory tax rate lowered from 38

percent to 25 percent. A temporary incentive was introduced for exporters, their statutory tax rate being establishedat 5 percent.

The Romanian Government intends to unify existing regulations and to remove facilities, which distort the economy.

Thus, the new profit tax law will gradually increase the tax rate for export activities, toward the level of the statutory

tax, with a first increase from five percent to six percent in 2002. Moreover, from the end of 2001, custom duty

exemptions will be strictly regulated by the custom code and will be settled at the same level for all the economicunits.

Regarding VAT, the number of exemptions and zero quota will be reduced considerably and the automatic link between custom duty exemption and VAT exemption for the goods and services imported by the budgetary sector as

well as for health and other social programs will be diminished. These measures will have a positive impact

regarding the increase of the tax base and will be accompanied by substantial measures for improving themonitoring, control and collection of the budget revenues from VAT.

Meanwhile, the new law will ensure the required institutional framework for reducing delays in VAT disbursements

to less than 30 days. As a transitional measure, an uniform system for suspending VAT due to investment goods will

be introduced in order to replace zero quotas and exemptions provided for in certain laws.

It is worth noting that the international experience suggests that VAT revenue collections of 9 percent of GDP are

well within the reach with a statutory tax rate of 19 percent. Taking into consideration that the current level of revenues from VAT is 6% of GDP, the Government is determined to reduce this comparative disadvantage.

The excise tax quotas will be increased to reach E.U. standards. This measure will have a positive impact on

budgetary revenues, in both scenarios excise revenues having an increasing trend.

Romania has now one of the highest social security contribution rates among transition countries. The Government

is aware about the need of diminishing the tax rate with the purpose of increasing budget revenues and of reducing

the disadvantage in fiscal competitiveness.

In 2002, the contribution rate will decrease with 1% (from 3% to 2%) for the special fund for disabled and with

another 2% through the elimination of the special education fund.

However, it has to be emphasised that the Government has no intention to diminish the contribution rate unless the


In the previous years public expenditure structure was distorted by the high rate of the compulsory expenditures and

payments of the public debt account. The evolution of the general consolidated budget items will be correlated withthe macroeconomic forecasts in the medium term



the macroeconomic forecasts in the medium term.

For the 2001-2005, the public expenditure policy will reflect the diminishing trend in interest costs outlays due to the

significant reduction in inflation and nominal interest rates. This will lead to a significant reorientation of the

budgetary policy by releasing additional resources in order to sustain the economic reform process. The decrease inthe public debt expenditures is based mainly on the diminishing trend of the pressure exerted by the interest

payments and on the improvement of the public debt management resulted from the establishment of the “Treasury

Management Unit”.

Beginning with 2000, revenues from privatisation, as well as revenues from the recovery of the non-performing

banking assets will be used for the repayment of the internal public debt service.

At the same time, the estimated subsidies for 2001-2005 will reflect the need of sustaining some of the economic

activities included in the restructuring process, but in the medium term, their diminishing trend is a consequence of the gradual reduction of the state role in the economic area.

Moreover, the expenditures related to social transfers will know the greatest increase as the Government considers a

top priority the need to reduce the negative social impact produced by the economic decline between 1997 and 1999.

This increase in the transfers expenditures is determined by the additional financing needs related to the social protection of the unemployed people resulted from the acceleration of the economic restructuring process.

Another objective factor reflected in the transfers expenditures developments is represented by the increase in

pensions expenditures, amplified by the unfavourable demographic evolutions caused especially by the ageing population.

The lax legislation (which stimulated a rather earlier retirement than unemployment) led to a significant increase in

the social security expenditures. The new pension law adopted from April 2001 has increased substantially the length

of the compulsory employment period and introduced penalties for early retirement. It is anticipated that this law willlead gradually to an improvement in the dependency ratio.

Social security budget deficit appeared for the first time in 1995, widened in the last years and increased significantly

in 2000, because of the pension recorrelation. The increased expenditures, due to the extremely generous legislation

regarding the large pension amount, the early retirement and the weak collection of the social security contributionsare the main causes of the actual situation. Without pension system reform, the objective of reaching a sustainablefiscal position will be seriously compromised.

Consequently, the Government envisages the design of a complex pensions system consisting of a capitalised

component managed by private pension funds having on the same time a compulsory and an optional character.

In the transfer category expenditures is also included the co-financing needs of the EU financial assistance (PHARE,

ISPA, and SAPARD). During 2001 - 2005, Romania will benefit of additional EU financing valued at about 1,187.2

millions of euro. The estimated co-financing needs from the state budget amounts to 247.45 millions of euro. TheEU pre-accession funds will add to the Romanian investment efforts in order to recover the economic gap and will

speed up the process of integration in the EU structures. The amounts allotted until now to Romania, through the

Financing Memoranda, investment projects within 1998 National PHARE Program and 2000 National PHARE

Program benefits of counterpart financing from the state budget estimated at 4.60 millions of euro. From 2000 to2006 Romania will benefit annually of 240 millions of euro granted through ISPA financial assistance programs, this


financing of EU projects (transfers, loans, and subsidies for public institutions). Between 2001 and 2005, the

Government intends to increase the expenditures for public investment to around 6 percent of GDP.



The ability to maintain an increasing trend in capital investments is sustained by the perspective of a significant

change in the structure of budgetary expenditures caused by the decreasing trend in the public debt expenditures

which will lead to a release of new resources for additional investment, and also by a better management of the

budgetary process. The maintenance of this level of investment expenditures reflects the commitment to sustain theEU integration process as well as the investment needed in infrastructure environment and rural development.

3.3. Management of Government public debt and the financing of the budget deficit

The legal and institutional framework was established through the public debt law, which states that the Ministry of

Public Finance is responsible with the issuing and management of the internal and external public debt.

Budgetary deficit financing and the analysis of the medium and long term debt sustainability

The main goal of the public debt management is to identify the resources needed for budget deficit financing and toensure the payment of the public debt service at a minimum cost.

In both the National Medium-Term Development Strategy of the Romanian Economy and in the GovernmentProgram for 2001-2004 is stipulated the necessity to finance the consolidated budget deficit from non-inflationary

sources. In this respect, the budget deficit will be financed from external sources and additionally from the internal

market, in a balanced way, the main goal of the debt management being to maintain a sustainable level of the debt,

issued directly or guaranteed by the state.

The public debt stock represents currently around 30 percent of GDP and its level does not represent a major

problem. Although the debt stock is very low, the interest expenditure service was 7 percent of GDP in 1999,

representing a third of the total state budget expenditures. The large amount of the expenditures for interest payment

imposed severe constraints upon other expenditure priorities leading to a drastic adjustment. In the last years, thetrend was reversed and the public debt service diminished to 4.9 percent of GDP in 2000.

Because of the decrease in inflation and interest rates, the trend of the expenditures for public debt service will be a

diminishing one. The forecast for 2005 shows that the interest expenditures will reach a level of 3 percent of GDP.

These developments in public debt service related expenditures would create the proper conditions for a significantchange in the orientation of the budgetary policy. The decrease of the public debt service will release additionalresources in order to sustain the economic reform process.

Table 3.3. – Debt sustainability on the 2000-2005 period

- % of GDP -

2000 2001 2002 2003 2004 2005

Total public debt interest

expenditures (5% scenario)

4.9 4.2 3.8 3.2 3.0 3.0

Total public debt interest

expenditures (4% scenario)4.9 4.2 3.9 3.4 3.2 3.2

Total public debt baseline (5%) 31.6 32.2 30.6 30.3 29.5. 28.5

Total public debt alternative(4%) 31.6 32.2 30..9 30. 6 29.7 28.9


be maintained from 2001 to 2005 in order to eliminate supplementary pressures on the credit markets and to release

the monetary policy from the additional difficulties in the process of inflation and interest rates reduction. This trendwill be reversed as soon as the macroeconomic stability will be consolidated and the internal market will allow a



will be reversed as soon as the macroeconomic stability will be consolidated and the internal market will allow a

cheaper financing of the consolidated budget deficit.

Description of the key features of the debt stock

At July 31, 2001 the total internal public debt stock was 91,288.7 billions lei reflecting the total state obligations

related to the loans issued directly from the internal market, including the amounts temporary borrowed from the

state treasury resources. This stock was issued in order to finance and refinance the budget deficit and to cover thegovernment needs approved through special laws.

From the point of view of the financing destination, the internal public debt is structured as follows: 55,8% fromstate loans contracted on the domestic market, 27% from state loans contracted on the basis of special laws and

14,4% temporary financing of the internal public debt from resources of the governmental accounts collected in the

general account of the state treasury.

The instruments used for the building up of the internal public debt stock are the following: 47,1 percent treasury

certificates, 35,7 percent state bonds (from which 70,4 percent in local currency and 29,7 percent in foreigncurrency) and 17,2 percent other state securities.

The current issued internal public debt is composed in a percentage of 64,4 percent from short-term debt and 35,6%from medium and long-term debt. The banking sector owns 58,9% of the total stock of the internal public debt, the

non-banking sector detains 23,9% and the rest of 17,2% is distributed to others (governmental accounts).

From the type of loans point of view, 82,8% of the total debt stock consists of consolidated short and long term

loans and 17,2% represent temporary loans from the resources belonging to governmental accounts collected in thestate treasury: the special fund for social health insurance, the special fund for the development and modernisation of

the customs, redistributing special funds etc.

Considerable efforts were done in order to improve the management of the internal public debt. The issuing volumes

of six months and one-year maturity debt were increased. The population was allowed to buy debt certificates with

one-year maturity.

Significant efforts were done in order to improve the management of the public debt and to increase the duration of

the public debt instruments. Despite the temporary decrease in the refinancing period of the internal public debt stock

due to the maturity of the instruments issued by special laws, the extension of the refinancing duration of the

instruments specific to the financing and refinancing of the budget deficit inscribes on the positive path of the

improvement in the public debt management.

The issue of the public debt foreign exchange instruments with maturity greater than one year is intended to sustain

the efforts oriented toward the extension of the duration of the public debt instruments.

This extension of the maturity curve of the instruments related to the financing and refinancing of the internal public

debt will lead to a reduction in the following years of the monthly volume of debt that needs to be refinanced. Thisdevelopment will decrease the pressure on market interest rates and will ease further the pressure upon public budget

expenditures exerted by the debt service.


The analysis of the debt portfolio at December 31, 2000 shows that the main foreign currency of the external debt

stock is the US dollar (almost 60 percent), followed by EURO, DEM, CHF, JPY etc. At the same time, it is worthmentioning that 60 percent of the external public debt is represented by loans issued at variable interest rate.



g p p p y

Regarding the maturity structure, the greatest weight has the external loans with maturity of more than 12 years. This

analysis reveals the importance of the use of derivative instruments in order to protect against interest rate risk and

currency volatility.

After three years of absence from the international capital markets, in October and November 2000, Ministry of

Public Finance launched two securities issues of 150 millions of euro each with maturities of three and five years in

order to finance the budget deficit. In January 2001, the issue with five year maturity has been extended to 300millions euro, and in June 2001, a new issue of 600 millions of euro has been released with seven years maturity.

Despite the longer maturity, the last issue was released at a lower interest rate compared to the previous issues due to

the improvement of country rating by some of the well-known international rating agencies. In this way, Romaniahas re-established its presence on the international capital markets, the medium term intention being to release new

issues of securities in order to maintain a constant presence on the external capital market.

3.4. Fiscal Risks

In the second half of the 1990’s, total tax revenues collected to the public budget situated around 30 percent of GDP.

Compared to averages of over 40 percent in more advanced transition economies, Romania redistributes by public

budget a very low level of GDP.

If Romania is unable to increase the level of government revenues collected to the budget towards the CEECs

average, it will face three major fiscal risks:

a) In the short run the macrostabilisation effort could be jeopardised by the twin increase of the quasi-fiscal deficitand the current account deficit;

b) In the medium term (2003-2004) the unrestructured economy and partially privatised banking system will require

new public budget bailouts, such budgetary effort being further compounded by the increasing stock of loan

guarantees granted by the government

c) In the long run financing the second pillar of the pension system will represent a problem because the current levelof revenues does not provide to cover the transition costs and also because of unfavourable demographic trends.

3.4.1 The twin deficit

In the first five months of 2001, current account deficit surged to 1.2 billion dollars. If such a trend is maintaineduntil the end of the year current account deficit may reach 2.2 billions dollars, almost 6 percent of GDP.

Soft budgetary constraints led to widespread moral hazard behaviour and allowed enterprises to preserve their

inefficiency and to resist to the restructuring process. Arrears allowed enterprises to finance in a relatively cheap way

their imports for current production needs. The result was evident in a high and persistent inflation rate and in a

deterioration of the current account deficit. The current account deficit was further aggravated by the large increasein imports due to multiple tax exemptions and facilities.

Thus, it must to be emphasised that the arrears are mirrored in the quasi-fiscal and current account deficitsdevelopments, representing a very important risk for the recent disinflation program announced by the government

and by the central bank.

3.4.2. New enterprises and banks bailouts and state guarantees


These evolutions were sustained and strengthened by NBR’s decisions to merge trough absorption Bancorex withRomanian Commercial Bank in 1999 and to introduce in bankruptcy procedures two well-known private banks (BIR



and Bankcoop) in 2000.

However, such statistics do not take yet account for high-risk state guaranteed loans granted in 2012 by the

government. Such developments will send negative signals and increase the risk of budget constraint relaxation fromthe banking system.

At the same time fiscal arrears were situated on an increasing trend encouraged by unconditional tax forgiveness,rollovers and poor collection. Due to the above-mentioned developments the government will face mounting

pressures from vested interests to cover such liabilities.

There are further risks related to loan guarantees granted in previous years to selected industrial enterprises and the

agricultural sector. There is an obvious increasing trend of the implied default rate of guaranteed debt.

If this trend is maintained the budgetary burden associated to defaulted guaranteed debt would be increased thus

introducing a new arbitrary variable in the budget expenditure forecast.

3.4.3. Pension reform

The problems of the Romanian pension system were present already at the beginning of the 1990’, as the pay-as-you-

go system was already unsustainable. Financially this mechanism was compromised by the extension of pension

benefits to non-contributing employees - notably farmers and employees in agricultural enterprises - while the

contributions were kept at a level too low to cover the replacement rate. This initial imbalance was further influenced by other counterproductive policies, such as offering early retirement as an alternative to unemployment, which led

to a significant increase of the retired population.

Starting with April 1, 2001 the new pension law became effective and represents a real improvement compared to

previous stance. Under the new law, the public pension system is expected to attain a balanced position by 2005 andmaintain modest positive flows through 2015, assuming the maximum point value defined in the legislation (50

percent of average gross wage) is applied. The enhanced financial position will stem from coverage expansion tonew labour groups, from a higher retirement age, increased penalties for early retirement, and a lower replacement

rate. Thereafter, deficits will re-emerge and will reach 3 percent of GDP in 2040. The growing long-term deficits

reflect the ageing demographics and the new participants reaching retirement age.

The medium term savings from the public pillar reform will lead to a deficit lower than 1 percent of GDP allowing

for the introduction of the second pillar by 2005. From this point of view a risk factor is the intention to re-correlate

the pension of the pre-1998 retirees, so as to increase their pension points to a minimum level of 1.15 valued at the

2001 point level, reform to be completed between 2002-2005.

Such a re-correlation plan will lead to a jump in pension expenditures close to 1% of GDP by 2005 and also its

impact will be significant on the long term as in 2010 the net expenditure could be as high as 0.8% of GDP.

Therefore, the risk is that starting with 2005 the second pillar will not be implemented and therefore the first pillar will be seriously unbalanced. To this trend one should add demographic developments - lower fertility, ageing

population - which will put further pressure on pension funds.


4. STRUCTURAL REFORMS



Structural adjustment process will involve development and modernisation of potentially

competitive companies, as well as redirecting, resizing, partial closing down or liquidation of certain business units that lack domestic or export markets. However structural adjustment is

expected to lead to temporary painful social consequences, layoffs and higher poverty.

Addressing those problems is considered a top priority, indispensable for the success of

reforms in the real sector.

Structural adjustment will be undertaken on the basis of speeding up privatisation. Ownership

transfer, from the state sector to private sector, favours higher competitiveness of domestic

companies and promotes adjustment of supply to internal and external market demand. At the same time, the whole process will take into consideration responsibilities undertaken by the

Romanian Government in relation to international organisations.

Structural adjustment will especially target enhancing productivity, work efficiency and quality

of goods and services, changing production structures in accordance to standards and

practices used in European Union countries. At every stage, particular attention will be given

to controlling and substantially lowering costs of structural reform.

4.1. Enterprise Sector

Enterprise restructuring is the second priority objective, envisaged to complement

privatisation. The state owned companies are the main targets for restructuring, with the

general purpose of improving their performances, diminishing losses and arrears. We are

particularly concerned about restructuring and liberalisation in the sector of public utilities,

measures that will be undertaken in accordance to principles of a well-functioning market

economy.

4.1.1 Privatisation

The Government of Romania is fully committed to speed up the privatisation process, whilst

emphasising the quality aspect of the process, targeting serious investors with the required

financial resources and expertise to carry through a full company turnaround.

In order to speed up the privatisation process, under fully transparent and efficient circumstances, the main authority responsible for the process, the State Ownership Fund, was

deeply restructured. As a first consequence, the Authority for Privatisation and Management

of State Ownership (APMSO) was established. Another significant decision was to involve

ministries in the privatisation process, by transferring some of the state owned companies from


privatisation control, as regards actual implementation of investment program previously

agreed, maintaining the company’s business and preserving social protection of employees.



Privatisation, in our view, should not be undertaken on a slogan-manner. Transfer of

ownership should lead to re-capitalisation, updating, investment, better management of

companies, with substantial benefits with regards to enhanced efficiency as well as improved business and financial performance of companies.

The Government of Romania is determined that privatisation will be conducted in a true, fair

and transparent manner. We also intend to use the capital market for privatisation. In case of

strategic/ highly important companies, complex privatisation programmes (also using share

capital increases) will gradually reduce state ownership, with support from international

financial institutions and advisers.

Industry

The majority of small enterprises, including retail and service companies, were privatised in

the early years of transition. During December 1992 – May 2001, 1881 industrial companies

were privatised. Private sector prevails in fertilisers, car manufacturing, non-ferrous

metallurgy, tires, textiles, footwear, cosmetics, detergents, glassware and pottery. Cement

industry was fully privatised to strategic investors. State ownership predominates in machinery

and equipment industry, pulp and paper, extractive sector and metallurgy.

Current portfolio of the Authority for Privatisation and Management of State Ownership

comprises 556 companies, of which 512 are active in the manufacturing industry, 29 in power,

gas and water sectors and 15 in extractive industry. During January 1st-July 27th, 2001

APMSO privatised 58 companies, of which 6 large companies, 9 medium ones and 43 small

firms.

Among the most important privatisation contracts concluded, some examples are:

- SIDEX SA Galaţi – buyer LNM Holdings N.V., Antilele Olandeze;

- OLTCHIM Râmnicu-Vâlcea – buyer Exhall Resources Limited Canada;

- Navigaţia Fluvială Română Drobeta Turnu Severin – buyer Transport Services

Trade SA România;

- ICEPRONAV Galaţi - buyer Sutton Engineering Ltd. Marea Britanie;

- BUCIN Gheorghieni - buyer Ferrex KFT Ungaria;

ICPET Cercetare Bucureşti buyer Ingenieurbuero Oskar Von Miller Gmbh


Aiming to increase chances for faster completion of deals in respect of objectives targeted and

presented previously, APMSO decided to launch privatisation of companies included in PSAL

I programme, in subsequent steps, according to the response of investors as expressed by



p g , q p , g p f p y

letters of intention, and also according to the time necessary to solve specific problems for each

company concerned. The purpose is to leverage on interest manifested by investors in order to

accomplish best possible results in each deal.

In March 2001 a “first wave” comprising 17 companies was approved for privatisation. Eight

of these companies are also included in RICOP program. In June 2001 a “second wave” of 19

companies, included in PSAL I programme agreed with the World Bank, was launched for

privatisation. Announcements of selling-purchasing of shares in these companies will be

launched during June-October 2001.

Privatisation of industrial enterprises will be accomplished by attracting domestic and foreigninvestors able to make proof of their financial and market potential, of their research and

development capabilities within the respective sector and also who provide guarantees of

performing significant investment in the period post-privatisation. Initial targets for

continuing and completing privatisation/ restructuring, are the companies included in PSAL I

programme.

In the medium term, the process of privatisation / restructuring of SOEs included in PSAL

I program will continue. Simultaneously, the following actions will be completed:

Agreement by the Government of Romania, in co-operation with the

privatisation consultant and in consultation with the World Bank, with regards

to the strategy for privatisation in case of two large metallurgical companies:

ALRO SA and ALPROM SA;

Concluding the sale of four out of five SOEs included in PSAL I component,

as regards case by case privatisation (SC Hidromecanica SA, SC ElectroputereSA, SC Romvag SA and SC Antibiotice SA);

Launching the offer for privatisation of the main three companies from the

former Tractorul group (Tractorul UTB, Motor and Turfor, companies directly

involved in key manufacturing stages preceding the end-product) or launching

the offer for privatisation of the enterprise that results from the merger of the

three aforementioned companies. Privatisation / restructuring of former

Tractorul will be completed by the spin off / restructuring / liquidation of theother three companies which were spun off in 1999 from Tractorul, as part of the

splitting process effected at the time

Offering for privatisation of at least 30 enterprises out of the 50 companies-


Among SOEs with more than 1000 employees which were already launched for privatisation,

we envisage that four will be sold by the end of October 2001, other four will be sold by the end

of December and additional four companies will be privatised before March 2002.



f f p p f

With regards to SOEs, which are to be privatised, the Government will decide the value of debt

to the state budget, including penalties, which will be cancelled at the moment of privatisation,when shares are transferred from the state to private investors. This amount will be announced

in advance and will be included in the tender documentation.

Energy Sector

Privatisation of the electric energy distribution system will start in 2002, following an

appropriate planning and preparation. In a first stage, privatisation targets two regional

distribution companies, separate from the current distribution operator. The process will continue in the following years by maintaining the rhythm of privatisation of at least two

regional distribution companies, annually.

In the field of electric and thermal power production, cost centres were established to allow a

correct differentiation of operating performance of companies within the sector. On the basis

of financial analysis and results from these costs centres, as a first step, those activities which

are proven to induce losses will be outsource, in view of improving performance of the parent-

company but also of the companies that resulted subsequent to outsourcing. If some of thenewly established enterprises will be proven as non-efficient, they will be closed down.

Thermal power production units will be privatised by 2004, within the range of 25-40% of total production capacities. The production system will be decentralised. A number of thermal

power plants will be transferred under the management of local councils or will be transformed in

companies in which Termoelectrica SA will hold shares. We envisage privatisation of at least

two production units per year. We also envisage the possibility to diversify the privatisation

process within this sector by attracting investors interested in a partnership with TermoelectricaSA, in view of joint exploitation of domestic capacities of strategic importance for the NationalEnergy System. Furthermore, a number of electric and thermal power production plants that

belong to the above-mentioned company, will be partially/ fully offered to investors interested in

producing or co-producing electrical energy necessary to industrial consumers and households.

Increasing electrical energy output in hydro-electric power plants, will be achieved on the basis

of attracting investors interested in finalising the necessary works to start operating of certain

capacities within the hydro-electric plants. Thus, financial support by S.C. Hidroelectrica S.A. tocomplete those investments will no longer be required.

In addition, domestic and foreign investors will be attracted to establish joint ventures, in

association with producers of thermal- and hydro-electric power.


petroleum products, the largest retail network of filling stations covering the entire territory of Romania; petro-chemical units.

l li d h h k h ( ) d l f



Petrom was recently listed on the Bucharest Stock Exchange (BSE) and currently 6.7% of Petrom

share capital (representing private stockholdings) is traded on BSE. The company is currently

undergoing a deep restructuring programme. The privatisation process of the national oilcompany will be resumed through consultations with the selected advisor, in order to decide theoptimum moment and most appropriate method for privatisation.

With regards to the national companies for distribution of natural gas, professional teams

were organised with the purpose of formulating the strategy for privatisation. The law stipulatingthe transfer of natural gas distribution to local authorities was also approved.

The Defence Production

Diversification of the privatisation process within the defence production sectors will beundertaken on the basis of the plan of action of the Government Program for the period 2001-

2004 and on the basis of the Annual National Plan. In this respect, key principles are: launching

tender offers for selling shares on the domestic or international capital markets (2002-2004) andsetting up of joint ventures, with renowned, strong international partners, in view of integration in

the globalisation process. First companies targeted are SC IAR SA Braşov, SC ROMAERO SA

Bucureşti, SC AVIOANE SA Craiova.

Communications

Privatisation of Romania’s national telecommunication company Romtelecom was launched

during 1998. The first stake of 35% of Romtelecom share capital was acquired by OTE, thenational telecommunication company of Greece.

The Minister of Communications, Technology and Information will continue throughout thecourse of this year, the privatisation process of Romtelecom (second stage). In addition

privatisation of the National Radio Communications Company will be launched. A selection

process is presently underway, in order to choose the privatization advisor. We also envisage privatization of the National Postal Company.

Transportation sector

The national and international road transport sector was the most dynamic as regards adjusting tomarket economy principles. Thus far, approximately 70% up to 100% of freight and passengers

transport activities were privatised, the range differs depending on specific activities.

The market for freight railway transport was opened by licensing four private freight transport


independent functioning of the nine railway societies, which negatively affected the passenger

transport services.

I th fi ld f i l d t t t t f th t t t d ll i t



In the field of inland waterways transport, two of the transport operators and all nine port

operators are privatised. Port services are provided by different companies, most of which are

privately owned.

The main air carrier in Romania is TAROM SA, the Romanian National Company for Air

Transport. The project “Restructuring and preparation of TAROM in view of privatisation”,

financed by the EU through the PHARE programme, was launched in October 2000. The

consultant, Lufthansa Consulting, presented the restructuring programme, related business

plan for the period 2001-2205, as well as the training program for TAROM staff. Those

documents were analysed by the members of the Co-ordinating Committee of the project and

their observations and comments were passed further on, to the consultant.

Tourism

Concluding the privatisation process, by the end of this year, represents one of the main

government priorities in the field of the tourism. We regard this objective as fundamental for

overall development of tourism. Tourism privatisation targets to attract strong investors, such

as international hotel chains or investors with an established reputation in this sector,

possessing significant financial resources and management expertise.

The Ministry of Tourism is responsible for the privatisation process since the beginning of

2001. The portfolio of companies taken over by the Ministry of Tourism from the Authority for

Privatisation and Management of State Ownership, comprises 51 enterprises.

The initial portfolio consists, mostly, of companies in which the state is either majority

shareholder or holds controlling interests.

We estimate a decrease of the capital quota held by the state in certain companies as a result of

retrocession of certain assets pertaining to these companies. Restoration will be effected on the

basis of the law on buildings abusively taken over, during the period March 6, 1945 —

December 22, 1989, in cases where this measure is possible, so that the privatisation process of

the company on the whole, will not be impaired. Furthermore, in accordance to the spirit of

the above-mentioned law, packages of shares in the respective companies will be directly

assigned to persons entitled to this right.

The privatisation strategy is taking into account the ambiguous and confusing patrimony

status in case of some companies. The status refers to those assets which are under different

forms of administration, and which, this way, reduce attractiveness of respective assets and

subsequently lower attractiveness of the shares of the companies concerned.


The speed up and completion of privatisation process of tourism companies, is supported by

fiscal incentives, which are subject to the purchaser’s compliance with obligations assumed

and implementation of investments for upgrading and improving the tourism assets acquired.



4.1.2 Small and Medium Sized Enterprises

The Government of Romania considers that small and medium sized enterprise (SME) sector,

including co-operatives, represent a key factor for promoting an efficient and dynamic market

economy.

Government strategy with regards to SME development, targets to maximise the potential of SMEs and co-operatives to contribute to sustainable economic growth, creation of new jobs,

innovation, technical and technologically-driven progress, higher competitiveness of domestic

economy and development of the social middle class which should support economic and socialstability of the country.

Although during the previous years there was no coherent, consistent policy to stimulate SME

growth, still, currently, SME sector has a dominant position in most fields and in particular in the

services sector. However, SMEs have a limited contribution to industrial production, especiallyin business sectors, which are more capital intensive and where investments take longer time to

amortise and pay back initial capital.

The legal framework pertaining to SME sector was adjusted with the general purpose of

establishing a friendly and favourable environment, fostering SME set up and development. In

this respect, recent legislative provisions aimed to lower barriers to entry by simplifyingregistration and administrative procedures, elimination of various discriminations against SMEs,

as well as by allowing SMEs access to available assets of enterprises where the state is majority

shareholder. Further measures target direct support at the firm level, by providing assistanceservices, information, consultancy, research-innovation, developing of an entrepreneurial culture,

as well as different fiscal and banking facilities.

For the period 2001-2004 we intend to continue simplification and improvement of the legislative

and administrative framework; to promote organisations and associations representing SME

sector; to consolidate the process of evaluating the mix of policies and measures regarding SMEs;to improve access to financing for SMEs as well as to expand the scope of services for the SME

sector.

In view of permanently enhancing the domestic business environment, a Plan of Action wasformulated and one of the first objectives included in the Plan of Action was alreadyimplemented. This regards simplifying and improving the registration process, procedures to

obtain all approvals, authorisations and licences necessary for operation of a SME. The

aforementioned Plan of Action also envisages to facilitate access to financing for SMEs, to set up


scheme component; PHARE 2000 – SME assistance component; PHARE 2001 – SME assistancecomponent.

Another priority objective also outlined in the Action Plan refers to enlarging the scope of



Another priority objective, also outlined in the Action Plan, refers to enlarging the scope of

services for SMEs by providing support for development of business infrastructure networks,

designing effective professional training programs for managers as well as for employees withinthe SME sector, publishing information leaflets and materials. We also envisage supporting business incubators development as well as innovation centres.

Further support for SME development will rely on economic measures and instruments that will

not distort the operation of market mechanisms. Administration, implementation andmanagement of support measured will be decentralised towards local authorities, or contracted to

commercial banks, non-governmental organisations, or consultancy centres for SMEs.

4.1.3. Restructuring real economy (including public utilities)

The continuation of the restructuring process of the Romanian economy addresses a set of

policies aimed at achieving intra-sector compatibility with existent and potential EU structures,

and adjusting and consolidating economic structures towards the gradual catching-up with the

competitiveness’ level of EU countries – including improved use of Common Market entry

conditions for Romanian products.

Industrial companies

Industrial sector adjustment targets enlarging the process of reshaping production structures

and capacities, revitalisation of medium and large size companies with competitiveness

potential, restructuring sectors intensive in energy and raw materials, restructuring and

opening to competition of public utilities.

RICOP Programme for restructuring enterprises and professional re-conversion, financed bythe European Commission, deals with a number of 60 commercial companies administered by

APAPS (The Authority for Privatisation and Administration of State’s Stakes). Its objectives

are to reduce the consequences of laying-off personnel and to promote and encourage job

creation initiatives.

Out of these 60 companies, 18 were privatised, while for other 30 of them specific restructuring

programmes were approved – including the measures needed to correlate the number of

employees with the production volume. Under these circumstances, the total number of lay-offs

is 32,635 people, as compared to an estimated number of 44,882 lay-offs in all the 60

companies selected.

The financial analysis undertaken as of end of May 2001 for the 30 companies being


Firm measures will also be taken to harden budget constraints focusing on companies that

have fiscal arrears; rescheduling overdue payments will be accepted if only viable

restructuring programmes are implemented.



Electrical and heat energy

The main objective in the energy sector, on medium-term, is to create efficient energy markets.

Their durable development should be achieved under high quality and safety standards,

following conditions of efficient use of energy and environment protection, towards increased

compatibility with provisions of both EU legislation and international conventions undersigned

by Romania. The fulfilment of the main objective will reduce the energy-intensity

characteristic of the Romanian economy by 3% each year.

The restructuring process evolved in line with demand on the electric energy market and it took into account the conditions associated to Romania’s accession to the EU.

The energy sector comprises independent producers of electric and heat energy, S.N.

Nuclearelectrica S.A. and Regie Autonome for Nuclear Activities. On this market, that is

building up, The National Transportation Company (Transelectrica S.A.) operates, including

both the transportation and the system operator. Electric energy distribution is provided by

distribution companies that have a natural local monopoly and that could be privatised

provided that they demonstrate their economic viability.

In accordance with EU regulations, the restructuring policy of the energy sector is founded on

the following principles: splitting up the basic operations (production, transportation,

distribution, commercialisation); promoting competition on production and

commercialisation; maintaining transportation as a natural monopoly; instituting the right of

large eligible consumers to buy electric energy directly from producers; securing non-

discriminatory access to transportation and distribution networks for producers, distributors

and eligible consumers. At the same time, there will be organised activities to regulate the en-

gross energy market and the stock exchange for energy.

The creation and development of the national energy market has been possible given the

continuation of the reform process in the energy sector. Therefore, there have been set

independent electricity producers (e.g. Termoelectrica, Hidroelectrica, Nuclearelectrica). Apart

from small captive consumers that can not choose their energy supplier, there have appeared

eligible consumers that with large consumption, having the right to select their energy supplier, as well as electricity suppliers licensed by ANRE (National Agency for Energy

Regulation) to operate in production, transportation, control, distribution, supply of electric

and heat energy. The energy production market has already been opened to 15%, currently

allowing larger quantities to be directly contracted by eligible consumers with any of the 18


The main objective in this sector is to adapt the mining industry to the general programme for

durable development of the national economy set in the Government Programme, in order to

meet demand in energy and other industrial sectors, to maintain production capacities by

investments correlated to market needs in mining products to enhance management role in



investments correlated to market needs in mining products, to enhance management role in

environment protection – in case of active mines – and in ecological reconstruction – in case of

mines closed.

During 2000, there were 32 mines closed to and cleaned from budgetary funds, and an

additional number of 20 mines were set to be closed in 2001, within the limit of 400 bn. Lei

allocated from the state budget. Moreover, a 44.5 mil. USD programme financed by the World

Bank and agreed upon in 1999 is undergone to close mines and alleviate the social impact.

The total budget of 24.5 mil. USD is used to finance the seizure of 29 mining areas, the

creation of alternative jobs through The National Agency for Development and

Implementation of Reconstruction Programmes for Mining Areas (17.5 mil. USD), and aninstitutional adjustment component administered by The National Agency for Mineral

Resources (2.5 mil. USD).

Oil and natural gas sector

The largest operator in the system remains the national petroleum society Petrom S.A., that

meets 60-65% of domestic demand in petroleum products and 45% in natural gas production,

while the national natural gas society Romgaz S.A. Medias realises 55% of total natural gas production.

The petroleum products market is open to competition; seven out of the eight operating

refineries were privatised. Distribution is also highly competitive, containing a diversity of

large foreign and Romanian private companies.

The reorganisation of the natural gas sector led to the functioning of one exploitation,

production, supplying and storage company, one national company for transportation and two

commercial companies for distribution. The natural gas market has already been opened to

10%; similar to the electric energy sector, a National Authority for Natural Gas was set up,

and a Market Operator was established.

The general strategic objective in the oil and natural gas sector is to secure short and medium-

term supply at low costs, under safety, quality and limited impact on environment conditions.

Exploitation sector will have to realise the maximum possible volume of production under efficiency constraints, and to secure a high level of reserves. In the short run, fulfilling this

objective means to maintain the current levels of production, given the long term in use of

exploitations, the low level of reserves detected, the lack of adequate technical infrastructure. On


developing natural gas transit capacities from the Russian Federation to Turkey, Greece,Bulgaria, Serbia.

The measures proposed will result in outbalancing natural decline through improving recovery



p p g g p g y

factor and exploiting new resources at depth below 4.000 meters, inclusive by the foreign

investors’ operations in conceded areas.


Defense industry

Defence industry comprises 20 companies, Romarm Bucharest being the largest of them, with

16 affiliates (production and research units); the vertical links of the defence industry include



ff p f f y

420 companies.

Specific objectives of this sector are:

- meeting the quantitative and qualitative demands of the forces of The National Defence

System, both in time of peace and in case of necessity, by scheduling them according to The

Programme for Preparing Economy for Defence in the period 2001-2004;

- restructuring the defence industry and realising its convergence required for Romania’s

accession to EU and NATO, a process in which efficiency gains must be obtained by all

companies involved;

- promoting co-operation with the main producers located in NATO or EU countries, aiming at securing inter-operability and compatibility under NATO standards.

The entire restructuring, modernisation and production programme is directly influenced by

the access to specific know-how offered by NATO members.

To reach the proposed objectives, the National Public Budget must provide funds for:

restructuring of Romarm S.A. and other companies operating in the defence sector;

conversion of military production capacities to civil production, while maintaining specificcore operations for supplying military products used and demanded by the forces of The

National Defence System in times of peace; preservation of specific technological lines unused

in times of peace, but needed to satisfy military needs in case of necessity.

Speeding up transition to the information society

In the area of developing an information society, the national priorities follow from the

objectives defined within the “eEurope+” initiative and the recommendations of the Ministerial Conference in Warsaw (May 2000). During 2001-2004, under governmental co-

ordination, there will be realised a number of projects to widen Internet access, to foster

education, to stimulate e-commerce, to provide fast access to public administration services

and to fasten transition towards e-government.

The main actions of the “eEurope+” plan are linked to three major objectives, namely:

providing cheaper, faster and safer Internet; investing in human resources; stimulating the

use of Internet.

The creation of the information society, in which information becomes a value in itself, a

factor of production available to everyone, will be the result of a partnership grouping the


4.1.4. Competition policy

According to commitments made in The Association Agreement, Romania has harmonised the

basic legislation on competition, creating the legislative framework in this area (Competition



Law, Law on state aid).

The main objectives on competition and state aid continue to be: enhancing and upgrading the

legislative framework through the implementation of the acquis communautaire, which is seen

as permanent process; enforcing legislation more effectively; involving competition authorities

in promoting market structures and mechanisms that favour competition.

Regarding state aid, emphasis will be placed on following: adopting rules on regional aids,

aids on sensitive sectors and exemptions on types of aids; elaborating the regional map of

maximum admissible intensity of state aids. In addition to adoption and implementation of theacquis, the legislative framework will also account for EU jurisprudence. The Competition

Council and the Competition Office will permanently supervise all state aids, intervening in

any situation in which they contradict provisions of existent legislation or of the acquis and

affect the normal competition environment.

To the end of enforcing legislation in a more effective manner, the enhancement of the

administrative capacity of competition authorities is envisaged. This will take place gradually,

starting from 2001, depending on budgetary funds allocated, own extra-budgetary revenuesadministered, and external financing attracted through PHARE programmes.

Regarding state monopolies of commercial nature, public enterprises and companies with

special or exclusive rights, sector-based policies have been designed to separate activities with

natural monopoly, as well as those with special rights by law, at the same time with opening

auxiliary sectors to competition (e.g. electric and heat energy, natural gas, railway transport of

goods).

Public enterprises, and those with special or exclusive rights granted for operating services of

public interest, are subject to regulations referring to their adjustment through restructuring

and privatisation and the enforcement of competition rules, to secure non-discriminating

access to basic services and to avoid the abuse of dominant position.

The scope for administered prices and tariffs is downsizing, towards the European level. The

liberalisation measures adopted, some of which are under implementation, have addressed all issues that might affect the existence and development of a normal competitive environment.

On January 1 st , 2003, the telecommunication sector will fully open to competition. By the

national programme of legislative harmonisation, Romania undertook the commitment to pass,

by March 30, 2002, legislation reflecting the European Commission directives on liberalisation


4.2. Financial and banking sector

The financial and banking policy will harmonise the objective of sustainable and durable

growth with the macrostabilisation constraints, by stimulating saving and investment.



Structural changes in this sector primarily target the development of the banking sector, of

credit and stock exchange institutions, in the context of improved efficiency and discipline.

4.2.1. Banking sector

The Romanian banking sector has developed rapidly after 1990. The number of banks,

registered as Romanian companies, was 33 by end of June, 2001 (as compared to 7 in 1990);

also operating were 8 branches of foreign banks.

To deal with the specific problems of the Romanian economy, restructuring was also enhanced in the banking system, through privatisation of a number of important banks (Romanian

Development Bank, Banc Post, Banca Agricola).

In addition, NBR conducted, throughout the period 1999-2001, an intensive programme

destined to increase the soundness of the banking system, including the imposition of tough

measures such as closing down the largest state owned bank in the system (Bancorex) and

filling bankruptcy on four ailing private banks.

In this context, it is worth mentioning that the number of state owned banks halved, while the

number of private banks increased by 6 times. The share of state-owned banks in total social

capital, and in total assets, has decreased dramatically over the period 1998-2001; by end of

June, 2001, private capital banks had 54% of total assets and 45% in total social capital.

Furthermore, in the same period, foreign capital has become dominant in the Romanian

banking sector, with 39% of total social capital and over 50% of total assets.

This seriously restricted the scope of resource misallocation through banking channels.

Together with the improvement of the legislative framework and supervising mechanisms in

line with the EU principles of prudence and best international practices, this led to better

financial and prudential indicators.

Table 4.2.1.1. Evolution of specific indicators of the banking system

1998 1999 2000 1

st

semester 2001Overdue and doubtful receivables

/ total assets, %14.54 2.36 0.29 0.25

Overdue and doubtful receivables

/ own capital, %253.64 31.21 3.32 2.04


4.2.2. Capital market

Acting as a barometer of investors’ confidence in the economic environment, the capital

market did not recover significantly in 2000. The limited market size, and the persistency of

ti it i hi h th i ffi i t f t t l f



causes preventing its expansion, among which the insufficient progress of structural reforms

and privatisation, led the capital market not to respond correspondingly to outer signals, and not to reflect the beginning of a new cycle of economic growth.

Under these circumstances, the capital market faced a serious competition from t-bills offering

high interest rates and minimum risk, as well as from high returns on banking products both

in lei and in foreign currency. Nevertheless, it is worth noting an upturn in demand for

financial products, constituting the basis for future development of the capital market.

Following a crisis in early 2000, occurred on the background of poor legislation, mutual funds started to recover, operating on higher risk due to the gap between interest rates and dividends.

In the first semester of 2001, the Stock Exchange witnessed a surge with 117% in the nominal

value of its capitalisation (bn. Lei); in the same period, Rasdaq market also increased its

capitalisation with 29.7%.

During 2000-2001, there were adopted a number of regulations meant to improve listing and

transaction requirements on Rasdaq, resulting in increased transparency and more rigorous standards.

The supervisory and regulatory organism approved regulations for listing companies on three

different levels, depending on companies’ performances, allowing for better access to

information and increased transparency. This will be implemented once the regulation of The

National Securities Commission is finalised, containing the principles on regulatory bodies set

by the International Organisation of Securities Commissions (IOSCO).

The regulations adopted on the authorisation and operation of securities firms, the minimum

requirements for establishing and functioning of securities firms were modified in line with the

provisions of the Directive 93/6/EEC. Furthermore, on the Rasdaq market elements of

securing transactions were introduced, by setting protection standards, limits to individual

transactions’ volume and margins of prices’ variation.

The objectives towards better functioning of the capital market aim at: improving legislation inline with the acquis; establishing and functioning open investment funds and investment

societies, as financial intermediaries institutions; diversifying financial products and

increasing the level of capitalisation; preparing, by listed companies, of financial statements

compatible with EU standards.


Later changes, complemented by authorities’ intention to fully align to the acquis, determined

NBR to design a schedule for achieving the full liberalisation of the capital account, as

follows:

- in the first stage, by the end of 2001, outward direct investment and real estate purchases

b d b id ill b lib li d



abroad by residents will be liberalised.

-in the second stage, by 2004, all credit and guarantees operations will be liberalised, as well asother capital movements with significant impact on the real economy.

- in the third and last stage, by the time of accession, short-term capital will be targeted.

A new exchange rate regulation (that accommodates for changes occurred between 1998-2001

and for the first stage of liberalisation) will be elaborated by the end of 2001.

4.2.3. Insurance market

Despite recent positive evolution, the market volume continues to be way below not only the

EU average, but also the levels recorded by other candidate countries.

As for qualitative measures, a feature of the insufficient development of insurance market is

represented by the predominance of the compulsory component of insurance policies, most of

whom are acquired under legal or contractual constraints.

Another distinct feature of Romanian insurance market is the low share of life insurance, thismarket segment being yet to be developed.

In 2000, a new insurance law was passed substantially modifying aspects of activity, positive

effects being envisaged towards enhancing market credibility and dynamics.

The implementation of legislation regarding insurance and insurance supervision companies

provides the basis for insurance market access and development concordant with international

standards and with the acquis, while determining the reorganisation of the national insurance

market.

The establishment of the Insurance Supervisory Commission, as a specific autonomous

administrative authority, secures the gradual adoption, by the time of accession, of all EU

requirements in this area, creating the framework for operating under prudential norms

protecting insurance beneficiaries.

By the end of 2001, the secondary legislation mentioned in the law on insurance and insurance

supervision companies will be designed, by which the gradual adoption of the acquis is

realised, beginning with the first generation of directives in the insurance sector.


4.3 Labour Market

4.3.1 Employment

The 2001 2004 Government Programme aims at increasing the integration of the active



The 2001-2004 Government Programme aims at increasing the integration of the active

population and implicitly decreasing unemployment, as well as at fully harmonising thedomestic legislation relevant to this sector with the acquis communautaire. These goals will be

met by complying with the European employment strategy, by shifting social protection for

unemployment from passive to active measures such as stimulating job creation and

supporting the reintegration of unemployed people.

The action plan in the field of employment envisages also the decrease of unemployment

among the vulnerable population groups (e.g. long term unemployed, youth, women, persons

with disabilities) as well as the increase of the efficiency and ratio of active measures in thetotal spending from the Unemployment Benefits Fund.

Among these measures, training and retraining actions will be given consideration in order to

better meet the existent demand on the labour market as follows:

• Starting with the academic year 2001/2002, the educational curricula will be improved,

especially in vocational studies, with the purpose of improving the balance between

demand and supply on the labour market;

• Programs for professional reconversion will be designed taking into account the structural

adjustments undertaken by the national economy; these programs will target especially

youth and women reintegration on the labour market;

• Information, consulting, mediation and training services inside the National Agency for

Employment (ANOFM) will be developed in accordance with the principle of lifetime

formation.

Moreover, the Government will encourage private agents involved in labour training and educational activities, which offer guarantees for jobs after graduation.

The main active measures applied so far are the following:

• Offering SMEs low interest credits from the Unemployment Benefits Fund in order to

create new jobs, out of which 50% need to be filled by unemployed persons;

• Planning and organising training courses meant to ensure that 60% of graduates will get a

job within the next 6 months after graduation;

• Designing and running special programs for creating jobs for community service – public

services for maintaining and rebuilding the infrastructure, for protecting the environment,

as well as social services (baby-sitting, ill, elderly and disabled caring);

• Elaborating and running programs comprising active measures specific to each county, as


• Elaborating, together with the professional associations, with the Commission for Job

Standards, with the unions and owners associations, the job standards, in accordance with

the existing European standards;

• Adopting the Law on unemployment benefit system and employment stimulation.



The present situation of the labour market, as well as the necessity for harmonising thedomestic legislation with the E.U. directives, made necessary revising the Law on

unemployment benefit system. The project of a new Law on unemployment benefit system and

employment stimulation has already been submitted to the Parliament, and proposes the

following actions:

• Decreasing the weight of passive measures to reduce unemployment to the benefit of active

measures;

• Offering only one type of passive protection – the unemployment benefit – as social security. The other allocations and aids given at the present moment will be integrated in

this single benefit;

• Calculating the amount of the unemployment benefit as to provide a minimum of 60% of

the last wage, and correlating this amount with the minimum wage and the minimum

guaranteed income. The unemployment benefit will be given only in the cases in which the

potential beneficiary contributed at least 12 consecutive months to the Unemployment

Benefits Fund. At the same time, the amount will be set according to the total contribution

period to this fund;

• Establishing the categories of persons which take part into the mandatory collection system

for covering unemployment risks (employees, public servants etc.) as well as those who may

opt for it on a facultative basis (persons who work on the basis of civil conventions, persons

authorised to pursue independent activities, Romanian citizens working abroad etc.);

• Encouraging the recruitment of recent graduates by offering the employers financial

facilities.

In order to increase employment in over 70 areas in which the unemployment rate exceeds by

far the national average, the National Agency for Employment designed and is currently

implementing a series of programs providing specific actions, adapted to the local existing

conditions.

Starting with March 2001, the Government began drafting the National Action Plan for

Employment (PNAO), under the framework of a PHARE twinning project carried out by the

Ministry of Labour and Social Solidarity together with the Federal Ministry of Labour and Social Affairs from Germany, and the Ministry of Social Affairs and Employment from the

Netherlands.

The Plan will be designed from a multi annual perspective according with the European


electronic service for labour mediation via Internet – system already expanded at a national

level and functional starting with the first term of 2001 – will contribute to increasing

employment and labour mobility.

4 3 2 Pension system reform



4.3.2. Pension system reform

The evolution in the last couple of years of the social security system was marked by the

decrease of the purchasing power, by the sharp increase of the retired population, by

unjustified inequalities as regards the pension amount. Such evolution made necessary an

urgent reform in this field.

Taking into account that the financial safety of elderly people will be better secured through a

multi-component pension system, the Government reform envisages the creation of a system

based on three pillars as follows:• A mandatory component, based on redistribution, publicly managed – legal framework set

by the Law on the public pension system and other social security rights – Ist pillar;

• A mandatory component, based on capitalisation, privately managed – legal framework set

by the Law on organising and functioning of universal pension funds – IInd pillar;

• An optional component, based on capitalisation, privately managed, addressed to persons

with income higher than the limit calculated for the public system – legal framework set by

the Law on supplementary pension funds – IIIrd pillar.

For the Ist pillar, the Government aims at improving the legislative framework, in order to

meet the following objectives:

• Eliminating the inequities among different generations of retired persons as regards the

pension amount, through recorrelating pensions on the basis of a three year program;

• Rebalancing the financial equilibrium of the public pension system through rationalising

spending on the basis of adjusting the formula for calculating pensions and establishing a

minimum value for the pension point guaranteed by the state, through achieving a better

collection of contributions by tightening the financial discipline, as well as through

increasing revenues by enlarging the pool of contributors.

• Revising the tax system applied to pensions in order to protect the purchasing power of the

retired persons.

From an institutional perspective, in the year 2001, the Government founded the National

House for Pensions and other Social Security Rights. This is a public institution of national interest working under the framework of the Ministry of Labour and Social Solidarity, and

which manages financial-wise the system of public pensions and other social security.

For the IInd pillar the Action Plan for the 2001-2004 Government Programme envisages the


The organising and functioning of the universal pension fund will create new opportunities for

increasing pension incomes and for promoting a stable mechanism, able to withstand

demographic and macroeconomic pressures.

For the IIIrd pillar, the Action Plan for the 2001-2004 Government Programme aims at



For the IIIrd pillar, the Action Plan for the 2001 2004 Government Programme aims at

adopting the Law on optional schemes of supplementary pensions in 2003, creating supervising and regulatory institutions and reinforcing population trust in private pension

schemes.

4.3.3. Social Security

The Government believes that the family should be the primary concern of the social security

programs. Therefore the family will benefit from two types of social aid – subsistence

allowance and family development allowance.

Subsistence allowances will aim at alleviating poverty by following the principle of shifting

from universal programs to programs targeted the specific population strata in need. These

allowances will have an impact by:

• Setting state allowances for children at 10% of the average wage in the economy before the

end of 2004;

•

Introducing the minimum guaranteed income for fighting against extreme poverty. For this purpose, the Law on minimum guaranteed income was adopted and will enter into

force on 1 January 2002. The law will provide the following measures:

setting monthly amounts for the minimum guaranteed income in accordance with the

family structure, exceeding by far the present income levels;

implementing a system for stimulating employment; individuals from families benefiting

from the minimum guaranteed income will be required to pursue, on demand from the

mayor, activities or work as community service. If the beneficiary will not comply with the

demand, the social aid will be suspended; granting other aids such as the allowance for newly born children, the aid for the wives of

military conscripts, the financial aid for heating, the aid for emergency circumstances, the

aid for covering part of the funeral expenses;

Providing the low income families with necessary items for preparing children for

starting the school year; currently school supplies are granted to pupils entered full

time into state education, primary and secondary school. In the school year 2001-

2002, such pupils are members of families with a monthly average net income per

family member, which was less than 50% of the minimum wage in the economy in July 2001.

The allowance for family development will represent a non-reimbursable amount granted to

young families with the purpose of facilitating the access to a house or to household utilities


this legislative project attempt to facilitate the access to a job and a house, as well as providing

access to health and education services.

One of the major objectives of the reform in the field of social security is expressed through the

project of the Law on the national social security system. Currently debated by the Senate, the



p j f y y y y ,

project aims at creating a single framework, responsible with organising and co-ordinating the social security system by providing protection for families, children, elderly, disabled, and any

other persons in need.

This legislative project proposes the following:

• Regulating the conditions for granting social security rights, as well as the types of aids

and social services;

• Creating a unitary system of social aid targeted towards the unfavoured categories, having

as purpose the implementing of active measures designed for persons in desperate need, in

order to avoid marginalisation and social exclusion;

• Increasing the degree of local councils involvement in order to identify the real social

problems in throughout the country and to elaborate sustainable strategies for social

development;

• Highlighting the importance of partnerships with civil society representatives in order to

develop social security programs;

• Defining the categories of personnel working in the field of social security;

• Establishing the financial resources necessary for the functioning of the national system of

social security, in order to help adopting measures to prevent or limit the situations

involving high social risks;

The measures proposed in this legislative project are promoting social cohesion, through

enhancing solidarity within the community as regards the most vulnerable categories of

individuals.

4.4. Central and local public administration reform

In order to facilitate the development of the Romanian society, the reform of the central and

local public administration will focus on four levels:

Strategic change – redefining the role of the state in the sense of separating it from that of

private organisations; Legal change – decreasing the legislative density, increasing the use of framework laws

and leaving therefore more space of manoeuvre to executive authorities;

Organisational change – reducing hierarchies, simplifying procedures and increasing

flexibility by giving the power to delegate the execution of public services to organisations


At the local level, the purpose of the reform strategy is to create administration structures able

to fulfil their functions in such ways as to contribute to social development and economic

growth of the region, and to prepare the ground for further economic and organisational

development of the respective area.



p f p

In order to improve the relations between the administration and the public service

beneficiaries, the Government will continue the process of decentralisation of services, of

increasing decision autonomy, of facilitating the involvement of citizens in the decision

making process. In order to put into practice these actions, several measures will be taken such

as simplifying administrative procedures, eliminating parallel and overlapping tasks of

different public institutions, rationalising administrative procedures and paper work, selecting

and training public servants who are working directly with the citizens and with economic

agents. The system of a multipurpose “single desk” will be generalised in order to simplify theissuance of permits and approvals. The increased transparency of administrative acts and of

the effectiveness in communicating with the citizens by facilitating the information access and

establishing mandatory office hours for public officials from the central and local

administration will contribute significantly to pursuing a public service in the benefit of the

citizens.

Strengthening the decision making capacity at the governmental level will be made possible by

creating a working system able to prepare rapidly and efficiently the decision making process. Such improvement is related to increasing the efficiency of inter-ministerial groups focused on

several action fields and is closely linked with improving co-ordination at the level of

ministerial experts in order to formulate sectoral policy and regulation proposals.

Strengthening the public function and creating a stable body of public servants, selected on a

competitive basis and without political involvement, with the help of a general recruitment

system based on merit and open competition, will enhance the capacity of the public

administration to design and implement the necessary economic and social reform measures.

Another action line for the future is strengthening the institutional capacity for rural

development and promoting the access to infrastructure services. As concerns the developing

and modernising of rural and urban settlements, the Government envisages the transformation

of an important number of developed villages into towns, in the cases where the existing

infrastructure is close to the status of urban settlements. At present, a Rural Development

Programme funded by the World Bank is currently run with the purpose of investing in rural infrastructure, providing therefore good premises for implementing of the SAPARD

Programme.

In order to increase the efficiency of the public administration, there is a need for modernising


with those aimed at introducing the general cadastre in at least 30% of administrative territory

of each county, at providing necessary equipment and training for the personnel of the

cadastre, geodetic and cartography offices at the county level.



4.5. Agriculture and rural development

The high contribution of the agriculture to the national economy, and the multitude of

objectives which need to be met in the view of E.U. accession are two strong arguments which

determines the Government to give a special attention to implementing reform programs in

order to increase both quantitatively and qualitatively the agricultural production.

At present, the agriculture contributes with approximate 12% of the total gross value added in

the economy and with approximate 3% to Romania’s export. The employed population in this sector represents 41% of total employed population and the agricultural area accounts for

approximate 62% of total country area.

By utilisation, more than 63% out of total agricultural area is arable, around 33% consists of

grazing fields and hayfields, while the rest is taken by vineyards and orchards. In 2000, the

private sector’s share represented 86% of total agricultural area, and more than 85% of the

arable area. The area taken by vineyards and orchards diminished since 1994.

In the rural area, agriculture represents the main economic activity, using close to 70% of the

labour force. It is the only sector of the Romanian economy involving predominantly elderly

people. Near 55% of the employed population in agriculture was in 1999 aged over 50 years,

and close to 25% over 65. Only approximate 27% of the employed population in agriculture

were youth under 35 years old. The labour force under 40 years in agriculture would be

enough for an optimal exploitation with adequate equipment.

In the year 2000 in the private sector of agriculture were functioning 11000 exploitations

owning more than 2200 thousands ha. (3573 agricultural firms and 6264 family associations).

Individual households were exploiting 9377 thousands ha, meaning an average of only 2.28 ha

per household.

The evolution of the agricultural production in the 1991-2000 period was marked by yearly

oscillations related to the climatic conditions and the degree of input allocations, especially in

the plant production.

In the structure of the Romanian agricultural production, the predominant sector is the cereals

sector. The share of areas cultivated with cereals is very high in all regions, even though not

all regions possess a soil suitable for agriculture and an adequate climate for cultivating the


The profound transformations occurred in the agricultural sector in Romania after 1990 had

also impact on downstream industries, and especially on the food processing industry, the

main beneficiary of agricultural produces. As a result of the excessive dismantling of the

agricultural exploitations and of the agricultural produce supply, the individual agricultural



producers became more inclined to household consumption, and the manufacturing capacitiesof the foodstuff industry remained to a great extent unused, being dimensioned only for large

suppliers of agricultural produces.

The low degree of exploitation of the production capacities caused high fixed cost per unit of

final product, and together with the harsh reduction in the purchasing power of the population

led to the diminishing of the domestic demand for foodstuff, which is the main hindrance on

the way to production growth and increased performance in the sector.

Given the status of the agricultural sector, the Government, through the Government

Programme, considers that the principal objective for the development of agriculture on short

and medium term is the quantitative and qualitative increase of the agricultural production in

order to guarantee food safety for the population in sufficient amounts and in accordance with

the protection of the environment. The envisaged objectives aim at attaining the minimal

performance parameters in the view of E.U. accession.

The accomplishment of the agricultural policy objectives will include the effects of implementing a legislative package, formed by the Law on associative forms and partnerships

in agriculture and food processing industry, the Law on agricultural credit, Law on

Zootechnics - comprising three main components: breeding and genetically improving

animals, improving and exploiting pasture stock, producing and effective using of fodder - ,

Law on insurance and compensation of crops and animal stocks to reduce the economic effects

of natural risk factors.

The legislative package will be completed, in accordance with the “Development Strategy for

Agriculture, Foodstuff and Forestry”, with supporting programs as follows:

• The strategy on fighting and eradicating animal-transmitted diseases;

• The strategy on animal nourishment;

• The strategy on identifying and registering animals;

• The strategy on inspection and veterinary control at frontiers;

•

The strategy on veterinary use products.

All these actions will determine the reduction of the areas cultivated with cereals on a yearly

average of 2-3% in the benefit of areas cultivated with technical and oil-bearing cultures, so

that in 2004 the area cultivated with vegetables, technical plants and high productivity cultures


All these measures will led to improving the activity in the food processing industry, altogether

with the quantitative increase of agricultural products (milk, meat, fish, vegetables and fruits,

sugar beet), as a result of creating commercial enterprises for collecting, processing and

marketing these products through the implementing of the SAPARD programme.



Moreover, in the fito-sanitary and veterinary sectors, on the medium term, Romania will aim at adopting the European legislation for the veterinary sector. The Government estimates that by

end of 2003 will complete the process of harmonising the domestic veterinary legislation (more

than 630 E.U. legislative acts).

Among the objectives are the following:

• fito-sanitary custom and origin control;

• providing with adequate equipment, compatible with the international standards, the

inspection points for fito-sanitary quarantine at customs at the future border of the E.U.;

• tightening the control on pesticide residues in plants and vegetal products and the quality

control on fito-sanitary products in conformity with the acquis communautaire;

• increasing the efficiency of public services through privatisation, concession and

representation , among which the services related to veterinary assistance and to the

control of products of animal origin;

• strengthening the administrative capacity of the central veterinary administration and of

the veterinary services through strategies aiming at increasing the efficiency of theveterinary sector and through training programs of all specialists.

Together with agricultural policy, rural development represents the second pillar of durable

integrated development, focusing on: promoting an ample rural development programme in all

areas, within a rural development concept for the economic integration of Romanian villages;

creating a favourable environment for attracting foreign capital in support of investment and

production development programmes; implementing project contained by the SAPARD

Programmes, and others alike with external financing.

It is also envisaged the creation of competitive structures similar to those in the EU, capable to

implement agricultural programmes, co-financed from the public budget, such as: SAPARD,

PHARE, SPP, etc, concurrently with diminishing the economic role of the state and increasing

labour productivity towards EU levels.

Romanian authorities elaborated The National Plan for Agriculture and Rural Development

(NPARD), approved the European Commission on December 12th , 2000, setting the

foundations of the SAPARD Programme, as a pre-accession instrument (pre-FEOGA),

designed to support agriculture and rural development. Its strategy intends to contribute to

Romania’s accession to the EU, to support Romanian agriculture coping with EU market


Given all these strategic objectives, priority will be given to investments concordant with the

implementation of the Acquis. It is worth mentioning that both the national and the EU

contribution represent non-repayable transfers.



Regarding rural development for 2001-2004, in addition to the SAPARD Programme other projects and programmes will be implemented, such as: “The Project for Rural Development

in the Apuseni Mountains”, financed by the International Fund for Agricultural

Development”; “The Project for Rural Development in Romania”, with the World Bank; “The

Project for Extending Rural Financing”, with the World Bank.

An important role in implementing rural development programmes is assigned to reforming

central public administration, aiming at gradually transferring towards local communities the

application of the strategy and programmes for agricultural and rural development, depending on the potential of each rural area.

To fully adopt the Acquis, and to gain access to structural funds, the following steps are to be

taken:

♦ Consolidating existent institutional structures at central and county level, creating and

developing regional structures able to elaborate rural development policy and to design the

subsequent programmes by the end of 2003;

♦ Modifying and firmly setting the structures and roles of the SAPARD Agency, towards theefficient administration of structural funds, within the Agency for Interventions and

Payments, as scheduled:

- 2002-2003 – introducing technical and legislative actions to implement the

intervention system in Romania;

- 2004 – setting up the Agency for Interventions and Payments;

- 2005 – designating the competent authority to ratify the Agency and the certifying

body;

- 2006 – the Agency becomes fully operational ♦ Training the personnel within institutional structures at central, regional and county level in

charge with rural development, as well the Agency personnel.

The key point of structural reform in agriculture is the clarification of property rights,

meaning the solving of retrocession claims, and finalising privatisation in the rural area, that

would secure the building up of agricultural exploitations.

The privatisation of the 737 agricultural enterprises (former IASs), with an aggregated social

capital of 8,768 bn. Lei, has taken place as follows: 114 enterprises were privatised (social

capital – 1,134 bn. Lei); 150 enterprises are subject of closing down procedures (social capital

– 1,873.2 bn. Lei); 473 enterprises yet to be privatised (social capital – 5,760.6 bn. Lei). The


Deepening structural reforms presupposes legal and institutional framework improvement

towards the efficient functioning of the rural and agricultural markets (markets for products,

raw materials and services, credit market and real estate market).

The current malfunctioning of produces market is generated by: incomplete specific practices



and instruments; limited development of specific institutions; lack of complete and correlated regulations.

The Government elaborated this year a legislative proposal on the organisation and

functioning of the market for agricultural produces and products, designed to lead to market

equilibrium and stability. This legislative proposal aims at: creating competitive structures in

demand and supply of agricultural produces; facilitating market entry for new operators;

extending rural services market; creating physical and information infrastructure in support

of market functioning; introducing new financial instruments to operate on markets;determining mechanisms, instruments and institutions for intervention.

To increase market efficiency, related institutional building is envisaged, comprising: stock

exchanges specialised on specific goods; insurance companies specific to agriculture; rural

banking and crediting; The Fund for Rural Credit Guaranteeing; The Agency for Stabilisation

of Agricultural Markets. Some of these institutions are already in place, without being

regulated by law.

In designing market institutions, the following issues will be addressed: stimulating

competitiveness; market balancing; fostering development of private partnerships; securing

the collection and distribution of goods considered to belong to the private domain of the state

(national/regional information system); supporting private investments by proper financial

leverages; levelling rural development; providing legislative system and assistance to creation

and development of commercial practices.

The limited experience and the price liberalisation create the need for public intervention onthe produces’ networks. The products proposed to be subject of the public intervention system,

in the first stage, are wheat, corn, sunflower, sugar beet, milk and poultry.

4.6. Other structural reforms

4.6.1. Infrastructure development and transportation modernisation

The rehabilitation, modernisation and development of the transportation infrastructure aims at

improving the comfort of passengers, increasing their safety and growing a more efficientmerchandise transport in order to align the national system of transportation to the European one.

Moreover, it is envisaged maximising the positive effects on the environment by a series of


Thus, 957 km of national roads have been rehabilitated, the rehabilitation of the Bucharest-Pitestihighway has been fulfilled and the first phase of the work for modernising the international

airport Bucharest-Otopeni has been completed.

Starting from the strategic option of Romania in the field of transportation infrastructure which



aims at developing an efficient network compatible with the European network, the following projects are projected to be finalised in the next period:

• The project for the rehabilitation of the Romanian railways consists of 13 components,including the technical assistance for implementing the restructuring of the railway, which

has started in 1996. The main objectives of this project are: acquiring equipment and

installations for maintenance, rehabilitating the carriages and the trucks, modernisation of thetelecommunication system and of the information system IRIS, introduction of Diesel and

electric frames.

• The project for the modernisation of the air traffic services, regarding the blueprinting,acquiring, implementing and performing of the installations and equipment aiming atincreasing the efficiency, the capacity and the safety of the air traffic. Special interest is to be

given to the correlation of the specification systems and to the necessary standards of a new

pan-European system. The works for building a new Centre for Flight Control are in the final

stage.

• The project for the modernisation of the TAROM fleet with a value of 81.4 million Euro, duein 2002 targets the renewal and enlargement of the TAROM fleet to which adds the

rehabilitation of the maintenance hangar of TAROM (including the equipment) fromBucharest-Otopeni airport as well as the Technical Project and the Documents for the Auctionfor the rehabilitation of the maintenance facilities from Bucharest-Otopeni International

Airport. The implementation of this project allowed for TAROM to use currently almost

exclusively new airships both on the intern and extern flights.

• The project for the rehabilitation and modernisation of the naval transportation envisages the

implementation of a performing system for monitoring and supervising the traffic on thechannels Danube- Black Sea and Poarta Alba-Midia. On the short- term this system is to be

implemented also at the harbour offices in Galati, Tulcea and Drobeta-Turnu Severin. Also,the implementation of the monitoring system of the ships’ traffic has started in Constanta

harbour and is due to be ready at the end of this year. A programme for rehabilitation and

modernisation of the searching and rescuing means from the Constanta harbour will beginand a project for the environment and the infrastructure in Constanta harbour is underway.

The road network

The main objectives of the roads rehabilitation is improving the infrastructure and of the traffic

conditions in conformity with the European norms, increasing the lift capacity of the rehabilitated

sectors such as to move from 10 tones weight per axle to 11.5 tones, upgrading the bridges to theE class for loading improving the geometric elements of the roads building the third lane on


It is planned to metal 6163 km of communal roads until the end of 2010 from a total of 7663 km.

The railway network



The programmes for the rehabilitation of the railway network started in 1997 and consist of:modernisation to the level of the European standards of 13 railway stations and of the electronic

centralisation installations from 18 important railway stations situated on the corridors IV and IX;continuing the operation and improving the parameters of operation of the railways and of theinstallations; consolidating the railway infrastructure from Portile de Fier area; introducing an

electronic system of booking and issuing the tickets.

Up to now the rehabilitation of 167km of railway has started on the section Bucharest-Brasov due

in 2004. Also, during this year the rehabilitation/modernisation of other 411 km will begin on the pan-European transport corridor IV due in 2007.

The interior navigable ways and harbours network

The programmes in this area envisage hydrotechnical arrangements, arrangements of highgradient and bank defences, arrangements for the securing the navigability on the Danube,

including a system of signaling and topohydrographic measurement on the Danube.

Airports

It is envisaged the completion of the Bucharest-Otopeni International Airport until 2004, the

modernisation of the international airports Bucharest-Baneasa (2005), Constanta (2004),Timisoara(2005), and the modernisation of regional airports Cluj, Oradea, Sibiu, Satu Mare,

Bacau, Iasi in 2007.

4.6.2. Housing policy

An ample Government programme for housing units development was implemented at the beginning of this year and targets the development and the rehabilitation of the dwelling fund and

implicitly the significant improvement of the living conditions in Romania. The programmes is

structured as follows:

• The development and the rehabilitation of the existing dwelling fund by: improving therelation between the market cost of the dwellings and the average income per family;

securing the access to a decent dwelling for those excluded from the coordinates of the free

market; facilitating the private investment;

• Improving the life quality in the rural areas, that will be accomplished by promoting projects

and programmes with the local administration for enlarging the local road infrastructure and


during 2001; the European principle for spatial development will be observed in order to back up the regional development policies.

4.6.3. Regional Policy



The legal framework for the regional development is mainly given by the Law regarding theregional development, which sets the objectives, the legal framework, the abilities and the

specific instruments for the accomplishment of the regional development in Romania.

The general objectives of the regional development policy are: decreasing the current regional

differences, promoting a balanced development, revitalising the unfavoured areas, preventing the

creation of new unbalances, stimulating the internal and external inter-regional co-operation

contributing to the economic and social progress.

The strategic objectives of the regional development in Romania envisage:

• Promoting the market mechanism in all the regions of the country in order to improve the

competitivity and to accomplish a permanent economic growth;

• Promoting a harmonious spatial development;

• Enhancing the capacity of the regions to sustain their one development process;

• Creating equal chances for the access to information, technological research and

development, education and continuous learning;

• Promoting distinct policies according to the specific of the areas;

• Reducing the disparities among counties, rural and urban areas, central and periphery areas;

• Preventing the development of areas with problems.

In order to ground the objectives of the regional policies and to implement them, the Government

drafts the National Plan for Development (NPD) strategic document which sets the development

priorities, funded from domestic and foreign resources. The NPD represents in the same time the

document that grounds the Romanian demand for financial assistance from the EU, granted under the three pre-accession instruments – PHARE, ISPA and SAPARD.

According to the needs of the current period and to the preparations for EU accession, the NPD

sets the axis for the development for the national policy for rural development: improving theregional economic structure; improving and developing the local and regional infrastructure;

developing the human resources; developing the tourism; promoting the scientific research and

technological development; developing socially and economically the rural area.

The NPD 2002-2004 is drawn up currently, in a framework which comprise a large partnership –

of institutions from local and central administration, regional development agencies, other non-

governmental institutions, other numerous institutions with relevant activity for the developmentas well as economic and social partners


In order to fulfil this role, the NPD will be backed by a strong legislation base and will be able toimpose, within the financial estimated limits, the strategic directions and the identified objectives

that have to be observed.

For the regional development important sums are allocated from the state budget, from other

sources and from external funds.



Between 2001-2005 we envisage to allocate funds from the State Budget in order to completesome projects of local or regional importance, in different area of the country (4886 billion ROLfrom the National Fund for Regional Development, 230 million Euro which represent the co-

financing from the Romanian side of the funds allocated by the EU through the PHARE

Programme for economic and social cohesion and 6.7 million Euro for special programmes for

stimulating the development in destitute areas).

Estimations show that Romania will benefit between 2001-2005 of 750 million Euro from the EU

through the PHARE Programme – the economic and social cohesion component- for investmentsin areas considered as priorities for the preparation of the accession of Romania: SMEs

development, infrastructure and human resources development, development of social services,

development of tourism.

Moreover, accent will be put on the development at the regional level of the capacity for

monitoring and financial management of projects in order to answer to the needs formulated bythe European Commission for the creation of a solid system for financial management.

The cross-border co-operation has an important role in the regional development. The general

objective of the cross-border co-operation is enhancing the economic and social development of the region by highlighting the co-operation possibilities. Romania was declared eligible country

for the programmes for cross-border co-operation according to the Regulation No. 2760/1998 of

the European Commission.

The PHARE Programmes CBC with Bulgaria and Hungary, for which 23 million Euro have been

allocated, are implemented considering the Documents of the Common Programme approved for 2000-2002. The priority programmes for the short, medium and long-term, from the border with

Bulgaria and Hungary, set by the Common Committee for Co-operation that will be funded from

the PHARE funds are:

• Improving the existing transport infrastructure on the Trans-European corridor IV (Dresden-Constanta- Thesaloniki- Istanbul) and IX (The Baltic Sea- The Aegean Sea, on the sector

Bucharest- Dimitrovgrad);

• Promoting the improving of the environment quality, particularly the management of the

water resources;

• Free movement of persons, goods and services at the borders.


4.6.4. Environment protection

The quality of the environment in Romania has a significant gap against the requests of the

environment standards of the European Union. This is rooted in the low level, from the qualityand quantity point of view, of the investment in the rehabilitation and development of the

infrastructure for the environment protection.



The way the refuse are finally stored is the main cause of the environment pollution and specially

of the pollution of soil, surface and underground waters, as every year 80% of the refuse produced are stored. Presently there are 1254 dumps for industrial and household refuse which

occupy around 13222 ha, of which 5 ecological dumps for household refuse.

From the analysis of the global quality of the surface running water results that 55.8% represents

water from the first quality category. The municipal water cleaning premises in Romania havedeveloped very slowly in the last 10 years. The flow of the cleaned water represents only 49.29%of the installed flow of water supplying at the national level. Thus, 17.87% of the 236

municipalities and towns do not have water-cleaning stations or these are not functional, and

from the 15779 rural localities only 0.35% have water-cleaning stations. Around 80% from theused waters, coming from the main pollution sources, flow into the natural receivers, especially

rivers, not cleaned or insufficiently cleaned. From the total length of the sewerage network in

Romania, 94.25% is in the urban area and only 5.75% in the rural area.

The short and medium-term priorities of the environmental policy concern: strengthening the

institutional capacity necessary for implementing the harmonised legislation and of the

environment policy both at the central and local level; drafting a financial strategy and detailedinvestment plans; making operational the Environment Fund; acquiring performing equipment

for monitoring the quality of the environment and accrediting the laboratories in the field of air

quality and managing the waters; modernising the information system for providing anenvironment information exchange, according to the requirements of the European Agency for

the Environment.

Because of the high level of financing needed on medium and long term for investment inenvironmental actions, the implementation and control phase of the application of the new

legislation depends on the economic development of the society. Although the expenditures for

the environment protection increase significantly in 2001, raising their share in the GDP from0.126% to 0.38% they are still very low compared to the quality of the environment.

4.6.5. Health policy

Romania makes considerably efforts for implementing a structural reform in its health system –

based on decentralisation and privatisation. Although the evaluation and the recommendations


In order to regulate the funding ways there are envisaged the objectives of making more efficientthe supply of the medical services, correlating the funding capacity with the level of development

of the economy, making more efficient the management of health insurance. Moreover, the

funding of the medical services will be improved starting from the planning system based on theneeds, changing and diversifying the mechanisms generating the financial resources, simplifying

the mechanisms for entering the market of the medical services suppliers and of the criteria of

di i G i fi l f ili i f h di l i li i i d i d



accrediting. Granting fiscal facilities for the medical services suppliers is envisaged in order to

acquire medical equipment, based on studies for evaluating the technology and on theintroduction of a new system of repayment of the drugs sold in the compensation system.

The harmonisation of the legal framework is indispensable before starting the privatisation in

order to guarantee the efficient functioning of the market mechanisms. The performance of the

health care system will be improved by co-opting the private sector with the following objectives:

increasing the consumption of health care, capital infusion, improving the efficiency, improvingthe quality of the health services, risk transfer.

The public and private health sector will work together in multiple ways: opening private

hospitals, doctors right to have patients in private and public hospitals, co-payment for

preferential conditions in public hospitals, common risks between public and private hospitals,establishing private health insurance.

In the field of human resources and of vocational training the policy of the Government isoriented towards the clear definition of the role of the professional organisations of the doctors, pharmacists, and medical assistants by concentrating on professional activities and on the rigour

of the praxis; drafting the statute of the physician, pharmacist and medical assistant; attracting the

qualified superior and medium medical personnel in the isolated areas by offering facilities; paying the wages of the personnel both general and specialised according to their work, to the

efficiency and quality of their performance.

In order to improve the health the following are envisaged:• Drafting necessary regulations in order to intervene on determinant factors of health which

situate outside the exclusive control of the health sector (smoking, alcohol and drug

consumption, nutrition, road traffic) observing the EU regulations for these;

• Developing the role and the competencies of the state authorities in the field of public health,

mostly in the information field, education, and promoting of behaviour favourable to health;

• Applying special policies for preventing and controlling the HIV/AIDS, cancer, and drugconsumption; the Romanian legislation will align to the EU rules also with regard to the

National Network for the survey and epidemic control of the diseases.

• Strengthening the capacity of the public health services to identify and monitor the population

groups presenting increased risks.


The expected results in applying this strategy are the decrease of the abandonment rate of

children by their own parents, a drop in the number of institutionalised children, decrease of the

residential institutions and closing down of those which from various reasons can not berestructured in order to provide a familiar type environment, improving the quality of children

care in the residential system following the application of the quality standards and securing a

b l b t th dit d th lit f th i id d



balance between the expenditures and the quality of the services provided.

The Government will study the possibility of transforming the Romanian Committee for Adoptions into a governmental institution, with an independent board which will constitute a

“fire wall” between the NGOs and the international adoptions, with its own law and regulation.

The Government aims at reducing the number of the international adoptions by strictly

controlling the adoption proceedings and implicitly the costs of this process, as well as atensuring the equal treatment of different adoption requests.


Annex no. 1

Matrix of economic policy commitments

Objectives Measures / actions



Objectives Measures / actions1. Sustained economicgrowth

- Maintaining macroeconomic stability by implementation of a prudentfiscal policy

- Intense dialogue between government institutions and the business

community, promotion of appropriate measures leading to continuous

enhancement of the business environment

- Raising the rate of investment by significant participation of domesticcapital and by attracting foreign resources

- Increasing the flow of foreign capital and international economic co-

operation, supported by an enhanced legislative framework and by

setting up complete packages of investment offers- Refurbishing and upgrading infrastructure, as an essential pre-requisite

for sustained economic growth

- Restructuring/ privatisation and elimination of state monopolies(natural monopolies) in areas such as energy, communication,

waterworks, transport infrastructure.

2. Monetary and exchange

rate policy: controlledincrease of foreign debt

Adopting a different approach with regards to external financing,

according to which attracting and respectively repayment of external debt will be envisaged as complementary, over a period of

at least 10 years.

3. Public Finances3.1 Budget deficit control - Limitation of budget deficit to maximum 3% of GDP

- Enhancing the management of state treasury activities

3.2 Improvement of public

finances administration: taxreform

- Extension of tax base of global income tax

- Improving legal framework on local taxes, in view of protecting individuals with very low income, who owe taxon property and revising of taxation according to the

number of property owned;

- Establishing a fiscal code in view of unifying thelegislation regarding taxation, as well as enhancing access

of companies and individuals to fiscal legislation;

providing legislative stability, in time

- Improving legislation pertaining to value added tax;revising of the current excise system

- Completing and harmonising the legal framework

concerning:

Fi i l f i di i li


Objectives Measures / actionsRestructuring budget accounting

3.4 Improved tax

enforcement and tax

collection

Initiating a complete set of measures aiming to reduce

payment arrears

Generalising fiscal record files for all tax payer companies



collection Generalising fiscal record files for all tax payer companiesInitiating a national programme for improving

administration of indirect taxes, with assistance fromthe EU;

Enhancement of measures to recover debt from bad debtors

Adjusting and completing legislation in view of providing a

complete legal framework for recovery of bank debt;Development of administrative capacity for management

and control of taxes paid by individuals and companies

Improving the legal framework for registration of companies, in case of changing the form of

organisation, ceding social parts, changing headquarters

or changing administrators.

3.5 Improve efficiency and

transparency of customsoperations

- Strengthening the characteristics of stability and predictability of import custom tariffs

- Compliance of commitments to reduce custom taxes for agricultural products, as assumed by Law no. 134/1994, which underlies Romania’s

membership to WTO;

- Continuous consultation with the business community and the overall

economic climate, in order to determine the level of custom protectionapplicable every calendar year

- Annual revision of quotas of minimal access and /or current access, for

those agricultural products for which there are assumed commitments

within the WTO and neutral and transparent administration of these

quotas- Improving the system of establishing the value of goods at the custom

points

- Ensuring that commitments assumed within WTO are respected, asregards the structure and level of subsidies for export of agricultural

products, as well as regarding domestic measures to support agriculture

- Initiating Programs for regional development, on the principle of

complementarity, practised in CEFTA countries- Protecting domestic producers against eventual actions of disloyal

competition from external partners- Ensuring correlation between commercial policies adopted by Romania

and obligations assumed through international agreements.

4. Implementing structural


Objectives Measures / actions- Formulating and drafting of methodology for disbursement

of funds for upgrading and improving technologies,subsequent to broad consultations and involvement of all

economic ministries

- Transfer to certain ministries of the right to manage and



Transfer to certain ministries of the right to manage and privatise some companies included in the portfolio of APMSO

- Formulating and drafting of a plan of actions targeting

restructuring or privatisation of the steel sector, on the basisof joint agreement by APMSO and EU

- Privatising 300 SMEs using all methods according to

Romanian legislation, including the use of capital markets

4.2 Business environmentimprovement and enhancing

market competitiveness

- Promoting competition by encouraging a friendly businessenvironment that fosters business growth; simplification of

legal, regulatory and administrative procedures pertaining

to the set up and development of new businesses:-

• integration of the trade and registry systems into a

sole registry• formulation of a plan of actions in view of continuing the process of integrating various systems of

identification of trade companies, such as the ones for import, export, protection of labour, fiscal and trade

• preparation and implementation of a program toeliminate administrative barriers, according to the Plan

of actions for improving the business environment and

according to recommendations from the Conference onadministrative barriers

• replacing the system of authorising forex

transactions by the Central Bank with a system of

notification applicable for financial institutions and

elimination of authorisation and notifications for non-financial institutions.

- Introducing an accounting system harmonised withEuropean Directives and International Accounting System

for companies listed on the capital market;

- Introducing the International Accounting System (IAS), in


Objectives Measures / actionsmutual funds, investment companies, etc)

- Effective implementation of stipulations of the CompetitionLaw

- Improving mechanisms with regards to the regime of

administered prices, by harmonising the latter with the state



p , y gof reform and with the evolution of the restructuring process within each field of activity, under the general

framework of the Competition Law.

4.3 Restructuring and

modernisation of manufacturing industry

Providing a whole legal framework for utilities

Strict control of arrears volume to utilities and of thelatter’s arrears to the state budget:

Suspending services to customers with delayed payments

Allotting transparent subsidies from the state budget, inview of paying overdue debt to utilities, accumulated by

customers from the lowest income categories;

Enforcing contract discipline (by collateral enforcement,

liquidation etc)

- Privatising a stake 10% of SNP PETROM S.A and listingthe company on BSE

- Establishing the technical conditions to join the European

inter-connected system of electrical networks- Privatisation of electrical and thermal energy production

and distribution

- Closing down capacities in excess of 4500 MW of the

former CONEL, subsequent to analysing the prospectsavailable for favourable exports

- Privatising at least 25% of natural gas distribution- Gradually doubling the Romania’s storing capacity for

natural gas, with benefits in achieving foreign currency

economies, enhanced supply with natural gas during the

cold season and creation of new jobs.- Analysis of transit capacities available on Romania’s

territory and inter-connection to the transport system of natural gas from Bulgaria –Turnu Măgurele area – Levski;

- Development of capacities of transit of gas from the

Russian Federation to third countries


Objectives Measures / actionsoperational restructuring

- development of the industry for equipment and programs

specific to IT and communication sectors

- correlation of restructuring programs designed for



g p g gindividual sectors, including the creation of new jobs bydeveloping industrial parks

4.4 Research and

Technological Development

- correlation of the National Plan for research-development-

innovation with objectives included in NPAR and in

Romania’s strategy for economic development on the

medium term- decentralising activities by assigning administration of

programs to specialised research institutions

- correlation of planning of multi-annual budgets for the National Plan with the laws of the state budget, to ensure

multi-annual financing (2001-2003)

- annual preparation and launch of activities for thefollowing year (in correlation with annual updates of

national programs CDI)

- promoting research projects completed jointly by R&Dinstitutes and universities, using the experiment facilities of the former and attracting participation of students who are

during their last years of study

- support for establishment of centres of excellence in fieldsconsidered as priority

- promoting, using national R&D programs, of co-operation

among R&D institutes and companies

- promoting company research (especially in the SME sector,and emphasising the High-Tec area)

- promoting development of domestic technologies by freetransfer of some results from the national R&D programs to

SME sector, or to other companies, with approval from the

Government

- programs to build up the network of information-documentation and technological support for SMEs

- promoting the development of centres of technologicaltransfer, of technological parks

- ensuring the interface research - industry at the national and

regional levels.


Objectives Measures / actions- participating at international fairs and exhibitions, to present

and promote Romanian exports of goods and services;- organizing economic units (missions) specialized in

products/groups of products on relevant markets to Romanian

exports;h i h l f h R i C f F i T d



- enhancing the role of the Romanian Center for Foreign Tradein its information and consulting activity to support companies

with export operations; taking advantage of the export

promotion facilities offered by the “Trade Point”;- sizing budgetary funds to support and develop mechanisms to

support export production and export operations, including the

enhanced role of Eximbank;

- upgrading the web site of the Department for Foreign Tradeand Economic Promotion to comprise a package of e-services

(information, education, presentation) supporting Romanian

exports.

5. Developing tourism products

- taking over of privatization competencies by the Ministry of Tourism and completing the privatization process;

- introducing regulations on quality, technical, statistical,

ecological, and professional qualification standards in tourism;- creating special tourism areas and spas for treatment;elaborating projects for the new investments, granting fiscal

facilities;

- re-launching, inclusive for tourism, of the geriatric treatment potential of Ana Aslan Institute - Otopeni;

- fostering rural tourism;

- designing and building up the “Europe” spa, on the seaside,

by partnership between Ministry of Tourism, other central public authorities, local administration, private investors;

- opening tourism offices in Budapest and Copenhagen, participating at international tourism fairs and exhibitions,

organizing Romania’s International Tourism Fair;

- reorganizing the national education system in tourism

according to EU norms;- introducing the system of competencies’ evaluation and

certification in tourism;- regulating the ticketing system;- involving professional groups, employers associations,

unions, NGOs, in the elaboration of strategies for development


Objectives Measures / actions- creating financing programmes for SMEs with external

and/or budgetary funds;- establishing The National Fund for Guaranteeing Credit to

SMEs;

- creating and implementing co-financing and assistancef i t i t t i th i it t



programmes for private investors, to improve their capacity toraise funds and use them efficiently;

6.2. Supporting SMEs by

providing information and

consulting

- setting criteria and procedures for accreditation of consulting

centers;

- constituting the national network of consulting and

information management centers for SMEs;- creating professional qualification programmes destined to

SMEs’ managers and employees;- promoting the use of information technology and technologytransfer by SMEs;

- elaboration and implementation of programmes designed to

encourage activities that contribute to extending access onmarkets, primarily on foreign markets.

7. Financial sector

7.1.Consolidating bankingsystem and continuing

privatization and restructuring process

- updating the privatization programme for the privatization of Romanian Commercial Bank, inclusive through rising social

capital;- restructuring Eximbank to better promote exports;

- enhancing supervision on the insurance market and providing

conditions for further capitalization of market operators by

privatizing, under efficiency and transparency conditions, stateowned insurance companies currently administered by

APAPS;- elaborating a plan regulating the restructuring of CEC (TheSaving Bank);

- promoting permanent dialogue with international financial

organizations (IMF, IBRD, EU, EBRD, EIB) in order toestablish a real partnership and a climate of mutual trust,

aiming at:

obtaining IMF’s favorable signal to the private capital

market;securing the external financing of different programmes

and projects for investments.

- fastening legal procedures towards recovery of bank


Objectives Measures / actionsimplement/ subcontract services for putting in place the active

measures, as well as for monitoring and evaluating the efficiency of

these measures;

- choosing the performance criteria for the services for putting in place

the active measures, funded from the unemployment fund.

9. Guaranteeing the quality of education and of professional

In the field of highschool education;guaranteeing the base education through programmes of compensation



education and of professionalqualification

- guaranteeing the base education through programmes of compensationtraining for those who left temporary the formal system of base

education;

- restructuring the network of rural education an improving the quality

of the education services such as to provide for equal access to

education for the children and teenagers in the rural area;- providing for the inclusion of children in the education system of the

pre-school education and generalising the preparatory group from the

pre-primary education;- providing the legislative framework for certifying the qualification in

the vocational and technical education, correlating with the labour

market;- providing the logistics for equipping with computers and access to

internet.

In the field of university education;

- strengthening the strategic function of the Ministry of Education and

Research in promoting the education policies in the universityeducation by respecting the university autonomy;

- integrating the private universities in the national system of education;

- increasing the participation of the universities in the international

university programmes;- stimulating the formation of research networks of the type

university/research institute (public or private), respectively university/

company and the capitalisation of the results of the universityscientific research.

10. Reform of the local and central

public administration

- harmonisation of the legislative framework with the EU regulations

- developing an integrate strategy regarding the reform of the public

administration, including the elaboration of a detailed action plan for implementing the strategy;

- institutional restructuring;- monitoring the implementing of the administrative reform and of the

operational performances of the central and local public authorities;

- strengthening the control of the administration of the public funds and

providing for the transparency of the expenditures by periodically

informing the tax payers;- revising the number of the employees in the public administration;

- introducing the public electronic acquisition by using the inernet andthe mechanisms of securing the confidentiality as well as of the

transparency;- strengthening the capacity of the local public authorities to fulfil their

responsibilities in a decentralised framework by adopting a project


Objectives Measures / actions11. Agricultural policy and rural

development

- proceeding the application of the Law no. 18/1991 and of the Law no.

1/2000, in order to constitute and reconstitution of the ownership right

on the terrain and forests;

- developing the policies for land improvement, acceleration of the

agriculture survey, securing the increase and improvement of the

national genetic fund;- stimulating and supporting the agriculture producers, for increasing the



stimulating and supporting the agriculture producers, for increasing the

farm size by association, leasing, concession and buying-selling of agriculture terrain and forests;

- developing the cereals exchanges , as well as the whole markets in the

agriculture field;

- preparing the services in agriculture in order to privatise them(veterinary assistance, seeds quality control, pest control,

mechanisation, quality control of the food products);

- harmonisation of the Romanian legislation with the EU one regardingthe agriculture, food and forestry and the adoption of the Acquis

Communautaire in these fields.

12. Social policy: poverty fighting - implementing a coherent policy of social assistance and consolidationof the institutional assistance in supplying the services and social

assistance;

- establishing an information system for social assistance at the national

level;

- vocational training according to the new duties of the staff whoadministrates and manages the national system of assistance;

- settle the value of the child allowance to 10% of the average net wage;

- promoting a new concept of assisting the persons with special needs;

- adopting the Law for the minimum guaranteed income through at least0.4% of the GDP is allocated for fighting extreme poverty.

13. Health care and child protection - developing the capacity of the Health and Family Ministry in the field

of health policies and regulating the health sector;- clear delimitation of the role of professional association (Physician

Association, Pharmacists Association), these concentrating on their

specific objectives, simultaneous with the strengthening of the role of

the governmental structures and of the National House for HealthInsurance regarding the rights of the insured persons and of the

conditions of the contract of the services;- collection of the contributions for the health insurance by one Fund:

- The Fund will be administrated by the National House of Health

Insurance;

- The Ministry of Health and Family will define the package of base care

covered through the contributions for the health insurance and anindicator associated to the risk structure;

- The contribution collected will be distributed by the Fund (the NationalHouse for Health Insurance) towards the insurance houses (the present

county houses, the transportation insurance house, the defenceinsurance house, and afterwards also to the private insurance

companies), according to the number of persons insured and of the risk


Objectives Measures / actions juvenile justice and the responsibilities of the NGOs with activities in

this field, according to the UN Convention regarding the child rights

and the principles established in the Hague Convention;

- Introduction of a budgetary chapter (10 million USD, for a period of 2

years) which should sustain the running of a programme regarding the

health of the Romanian children, in partnership with the World HealthOrganisation;



g ;

- Creation of familial type establishments and development of programmes of integration of institutionalised children in the natural or

substitute family.

14. Pension reform - introduction of multiple pillars for the social insurance:

- the public pension system which will be the fundament of the socialinsurance;

- the compulsory pension schemes, based on capitalisation and definite

contributions, administered by the private sector;- supplementary and optional pension schemes.

- re-correlation of the pensions in a 3 year programme, which will

envisage the remaking of the natural proportion among differentcategories of pensioners;

- settling of a minimum guaranteed by the state value of the pension

point;

- introduction of a system of quarterly indexation for total covering of

the inflation rate;- a better collection of the revenues through strengthening the financial

discipline; adoption of a restrictive policy regarding the facilities for

the payment of the arrears to the social insurance budget and

strengthening the financial discipline.

Pre-Accession Economic Programme Romania

Annex nr.2

EVOLUTION OF THE MAIN ECONOMIC INDICATORS



87

DURING 1999-2005

A. Main macroeconomic indicators

- percentage change over the previous year -

1999 2000 2001 2002 2003 2004 2005Average rate

2001-2005

1. Gross Domestic Product - bn. lei 539356,9 796533,7 1100000 1440000 1766800 2066000 2340000 -

- % -2,3 +1,6 +4,5 +5,0 +5,2 +5,5 +5,1 5,1

of which:

- Industry1) -1,5 +6,1 +6,2 +5,8 +6,0 +5,6 +5,2 5,8

- Agriculture1) +3,4 -15,8 +2,9 +4,6 +4,9 +4,6 +4,1 4,2

- Construction sector 1)

-2,3 +6,3 7,7 +6,8 +6,6 +7,4 +6,6 7,0- Transportation sector 1)

-4,2 +3,6 +4,8 +5,4 +5,4 +5,9 +5,5 5,4

- Trade services1) -2,5 +3,9 +4,7 +5,6 +5,1 +6,7 +6,0 5,6

• GDP per capita -USD/cap. 1567 1637 1693 1855 2027 2221 2403 -

2. Final consumption of households -4,6 -1,2 +4,4 +3,8 +3,6 +4,0 +3,3 3,8

3. Final consumption of public and private admin. -3,7 +15,6 +3,2 +3,0 +3,0 +3,0 +2,5 3,0

4. Gross fixed capital formation -4,2 +5,5 +10,0 +9,7 +11,2 +13,2 +12,0 11,2

• Investment rate (% of GDP) 18,0 18,4 19,4 19,7 20,4 21,7 22,9 -5. Domestic demand -4,8 +4,2 +6,5 +6,0 +5,1 +5,2 +4,9 5,5

6. Industrial output -2,2 +8,2 +5,6 +5,8 +5,7 +5,3 +4,9 5,4

7. Agricultural output +5,2 -14,1 +3,0 +4,5 +4,8 +4,5 +4,0 4,2

8. Consumer price index

• December-to-December 154,8 140,7 129,0 122,0 115,0 109,0 107,0 -

1) Gross value added


1999 2000 2001 2002 2003 2004 2005

Average rate

2001-2005

• Annual average 145,8 145,7 133,8 126,0 117,0 111,0 108,0 -

9.Exchange rate (annual average) - lei/USD 15333 21692 29078 34807 39190 41930 44000 -

10.GDP Deflator % 148,7 145,3 132,2 124,7 116,6 110,8 107,8 -



88

B. Main indicators for the foreign sector


1999 2000 2001 2002 2003 2004 2005Average rate

2001-2005

1. Exports - mil. USD 8487 10366 11900 12900 14000 15100 16200 -

-% +2,2 +22,1 +14,8 +8,4 +8,5 +7,9 +7,3 9,3

Exports of goods per capita - USD 378 462 532 578 629 680 732 -

2. Imports CIF - mil. USD 10557 13055 15800 17270 18660 19990 21290 -

-% -10,8 +23,7 +21,0 +9,3 +8,0 +7,1 +6,5 10,3

3. Imports FOB - mil. USD 9744 12050 14584 15940 17220 18450 19650 -

- % -10,8 +23,7 +21,0 +9,3 +8,0 +7,1 +6,5 10,3• Exports to imports ratio

(exports/imports CIF) 80,4 79,4 75,3 74,7 75,0 75,5 76,1 -

4. Trade balance deficit -mil.USD

- (FOB-FOB) -1257 -1684 -2684 -3040 -3220 -3350 -3450 -

- (FOB-CIF) -2070 -2689 -3900 -4370 -4660 -4890 -5090 -

5. Exports of goods and services +10,8 +23,9 +12,6 +8,9 +8,6 +8,3 +7,4 9,1

- % of GDP 29,0 34,1 37,6 37,4 37,2 36,9 36,7 -6. Imports of goods and services -1,1 +29,1 +16,6 +10,6 +7,8 +7,1 +6,5 9,7

- % of GDP 33,3 39,9 46,1 45,7 45,2 44,3 43,7 -

7. Current account balance - bn. USD

of which:

-1,5 -1,4 -2,3 -2,3 -2,4 -2,4 -2,4 -

• Goods and services (net) -1,7 -1,9 -3,0 -3,2 -3,3 -3,3 -3,4 -

- Tourism (net) -0,15 -0,07 -0,05 -0,03 0,02 0,1 0,15 -


1999 2000 2001 2002 2003 2004 2005

Average rate

2001-2005

• Factor revenues (net) -0,4 -0,3 -0,2 -0,2 -0,3 -0,3 -0,3 -

• Current transfers (net) 0,6 0,8 0,9 1,1 1,2 1,2 1,3 -

• Foreign direct investments, including capitaltransfers

1,1 1,1 1,2 1,5 1,8 1,7 1,7 -



89

8. Current account in GDP - % -4,2 -3,7 -6,0 -5,5 -5,2 -4,8 -4,5 -

C. Main indicators of financial equilibrium

1999 2000 2001 2002 2003 2004 2005Average rate

2001-2005

1. Total foreign debt*) - bn. USD 8,7 9,9 11,5 12,8 14,2 15,6 17,1 -

2. Foreign debt*) - % of GDP 24,9 27,4 30,4 30,9 31,4 31,7 32,1 -

3. Total public debt - % of GDP 33 31,6 32,2 30,6 30,3 29,5 28,5

4. Foreign debt/Exports of goods and services -% 242,1 215,6 213,8 200,2 185,0 169,0 159,3 -5. Budget deficit -% of GDP 1,9 3,7 3,5 3 3 3 3

6. Primary surplus - % of GDP 0,9 0,7 0,8 0,2 0,0

*) At the end of the year.

D. Main indicators of the standard of living



1999 2000 2001 2002 2003 2004 2005

Average rate

2001-2005

1.Total population (end of year) - thou inh. 22455 22430 22351 22300 22247 22190 22130 -

- % -0,2 -0,1 -0,3 -0,2 -0,2 -0,3 -0,3 -0,3

2. Active population (end of year) -2,9 -2,5 -0,3 -0,4 -0,4 -0,5 -0,5 -0,4

3. Employment (end of year) -4,5 -1,4 +0,7 +0,4 -0,1 -0,2 -0,2 0,1

4 Average number of wage paid employment -11 3 -6 3 +1 5 +1 0 +0 9 +0 8 +1 0 1 0



90

4.Average number of wage paid employment 11,3 6,3 +1,5 +1,0 +0,9 +0,8 +1,0 1,0

5. Unmeployment (end of year) - thou inh. 1130 1007 920 850 820 790 760 -5,5

- unemployment rate - % 11,8 10,8 9,9 9,2 8,9 8,6 8,4 -

6. Gross average wage +45,7 +49,7 +46,0 +32,9 +21,2 +15,4 +11,6 24,8

7. Net average wage +46,1 +42,7 39,2 +31,0 +21,2 +15,4 +11,6 23,3

8. Real wage +0,2 -0,1 +4,0 +4,0 +3,6 +4,0 +3,3 3,8

9. Household consumption -% of GDP 72,1 70,0 70,4 70,0 69,0 67,6 66,1 -10. Saving rate - % 12,8 13,6 14,0 15,2 16,8 18,7 20,7 -

11. Labour productivity*) +3,9 +2,6 +4,7 +4,5 +5,4 +5,7 +5,4 -

*) Calculated by dividing GDP by employment