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Romania Economy

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Romania is a country of considerable potential: rich agricultural lands, diverse energy sources (coal, oil, natural gas, hydro, and nuclear), a substantial industrial base encompassing almost the full range of manufacturing activities, an educated work force, and opportunities for expanded development in tourism on the Black Sea and in the Carpathian Mountains.

The Romanian Government borrowed heavily from the West in the 1970s to build a substantial state-owned industrial base. Following the 1979 oil price shock and a debt rescheduling in 1981, Ceausescu decreed that Romania would no longer be subject to foreign creditors. By the end of 1989, Romania had paid off a foreign debt of about $10.5 billion through an unprecedented effort that wreaked havoc on the economy and living standards. Vital imports were slashed and food and fuel strictly rationed, while the government exported everything it could to earn hard currency. With investment slashed, Romania's infrastructure fell behind its historically poorer Balkan neighbors.

Since the fall of the Ceausescu regime in 1989, successive governments sought to build a Western-style market economy. The pace of restructuring was slow, but by 1994 the legal basis for a market economy was largely in place. After the 1996 elections, the coalition government attempted to eliminate consumer subsidies, float prices, liberalize exchange rates, and put in place a tight monetary policy. The Parliament enacted laws permitting foreign entities incorporated in Romania to purchase land. Foreign capital investment in Romania had been increasing rapidly until 2008, although it remained less in per capita terms than in some other countries of East and Central Europe.

Romania was the largest U.S. trading partner in Eastern Europe until Ceausescu's 1988 renunciation of most favored nation (MFN, or non-discriminatory) trading status resulted in high U.S. tariffs on Romanian products. Congress approved restoration of MFN status effective November 8, 1993, as part of a new bilateral trade agreement. Tariffs on most Romanian products dropped to zero in February 1994, with the inclusion of Romania in the Generalized System of Preferences (GSP). Major Romanian exports to the U.S. include shoes, clothing, steel, and chemicals. Romania signed an Association Agreement with the European Union (EU) in 1992 and a free trade agreement with the European Free Trade Association (EFTA) in 1993, codifying Romania's access to European markets and creating the basic framework for further economic integration.

At its Helsinki Summit in December 1999, the European Union invited Romania to formally begin accession negotiations. In December 2004, the European Commission concluded pre-accession negotiations with Romania. In April 2005, the EU signed an accession treaty with Romania and its neighbor, Bulgaria, and in January 2007, they were both welcomed as new EU members.

Romania suffered through a deep economic recession beginning with the 2008 global financial crisis, but should return to positive if very modest growth by the end of 2011. Due to rapidly deteriorating economic conditions, a ballooning budget deficit, and large external imbalances, the Romanian Government was forced to conclude a 2-year, $27 billion financial assistance package with the International Monetary Fund (IMF), the European Commission, and the World Bank in March 2009. Under the terms agreed with the IMF, the Romanian Government embarked on a difficult austerity program to reduce the budget deficit, cut public sector employment, and restructure local and national government agencies. Austerity measures included a 25% cut in public sector wages, a hike in the national value added tax (VAT) rate from 19% to 24%, and thousands of layoffs. GDP declined by 7.1% in 2009 and a further 1.3% in 2010, but the government succeeded in meeting IMF-agreed deficit targets despite strong opposition to the austerity measures from labor unions. In late 2010 and early 2011 the government also pushed several important pieces of reform legislation through Parliament, including pension reforms, an overhaul of public sector pay systems, and modernization of the labor code. The final IMF review under the 2009 agreement, conducted in February 2011, declared the agreement a “success” in stabilizing the economy and setting the stage for a return to growth. A new 2-year “precautionary” agreement between Romania and the IMF, effective March 2011, focuses on deepening structural reforms and restructuring or privatizing unprofitable state-owned enterprises.

Privatization of industry was first pursued with the transfer in 1992 of 30% of the shares of some 6,000 state-owned enterprises to five private ownership funds, in which each adult citizen received certificates of ownership. The remaining 70% ownership of the enterprises was transferred to a state ownership fund. With the assistance of the World Bank, European Union, and IMF, Romania succeeded in privatizing most industrial state-owned enterprises, including some large state-owned energy companies. Romania completed the privatization of the largest commercial bank (BCR) in 2006. Two state-owned banks remain in Romania, Eximbank and the National Savings Bank (CEC), after an attempt to privatize CEC Bank was indefinitely postponed in 2006. Four of the country's eight regional electricity distributors have now been privatized. Privatization of natural gas distribution companies also progressed with the sale of Romania's two regional gas distributors, Distrigaz Nord (to E.ON Ruhrgas of Germany) and Distrigaz Sud (to Gaz de France). Further progress in energy sector privatization has been delayed as the government is contemplating the creation of two integrated, state-owned energy producers. However, this “bundling” scheme has been challenged in court and is also under review by the Romanian Competition Council and by competition authorities at the European Commission. Romania has a nuclear power plant at Cernavoda, with one nuclear reactor in operation since 1996 and a second one commissioned in the fall of 2007.

The return of collectivized farmland to its cultivators, one of the first initiatives of the post-December 1989 revolution government, resulted in a short-term decrease in agricultural production. Some four million small parcels representing 80% of the arable surface were returned to original owners or their heirs. Many of the recipients were elderly or city dwellers, and the slow progress of granting formal land titles remains an obstacle to leasing or selling land to active farmers.

Financial and technical assistance continues to flow from the U.S., European Union, other industrial nations, and international financial institutions facilitating Romania's reintegration into the world economy. The IMF, World Bank, European Bank for Reconstruction and Development (EBRD), and European Investment Bank (EIB) all have programs and resident representatives in Romania. U.S. Agency for International Development (USAID) programs were phased out completely in 2008, except for Small Project Assistance Grants, which are still available through the Peace Corps. According to the National Office of the Trade Register, which measures foreign direct capital registered and disbursed to firms, between 1990 and November 2010 Romania attracted a total of $37.91 billion in foreign direct investment, of which the U.S. represented 2.59%. The actual level of U.S. investment, however, is underreported as much of it flows to Romania through European subsidiaries of U.S. companies.

After years of consistently high inflation in the 1990s, Romania's inflation rate steadily decreased through 2004, only to rise again along with high GDP growth rates of 4% to 8% through 2008. The deep recession beginning in late 2008 dramatically reduced inflationary pressures, but the VAT tax hike from 19% to 24% imposed in mid-2010 reversed that trend and pushed prices higher. Stoked also by rising global food and energy prices, inflation hit an annualized rate of 8% at the end of 2010, the highest in the EU. The IMF has been critical of Romania's low rate of tax collection and poor enforcement mechanisms as a medium- to long-term impediment to growth. Tax arrears are slightly decreasing, but Romania still has one of the lowest percentages in the EU of revenues collected, at 33% of GDP in 2010. The current account deficit had been a concern, as it reached 13.6% of GDP in 2007 and 12.4% of GDP in 2008. However, due to the recession, the current account deficit dropped to 4.2% of GDP in 2010. Deteriorating education and health services and aging and inadequate physical infrastructure continue to be seen as threats to future growth.

Romania's budget deficit dropped steadily from 4% of GDP in 1999 to only 0.8% in 2005, but then skyrocketed, peaking at 7.2% in 2009. The major culprits for the rising deficit were tax evasion and lax enforcement; runaway government procurement spending; and big increases in public sector wages, retirement pensions, and social assistance. Under the IMF agreement the deficit was pared to 6.5% of GDP in 2010 and is on track to reach the target of 4.4% in 2011, though additional austerity measures may be needed to get the deficit under 3% by 2012.

Driven by the recession, official unemployment peaked at 7.8% in December 2009 but then dropped to 6.9% by the end of 2010 despite substantial layoffs in the public sector, and declined further to 6.74% in January 2011. More public sector layoffs are expected in 2011, though a gradual return to growth in the private sector should fuel a correspondingly gradual recovery in job creation.


Information by U.S. Department of State




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