ECONOMY
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 that of even its historically poorer Balkan neighbors.
Since the fall of the Ceausescu regime in 1989, successive governments have sought to build a Western-style market economy. The pace of restructuring has been 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 has been increasing, but remains significantly less in per capita terms than in most other transition economy countries in 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 EU 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 members.
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 International
Monetary Fund (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. The privatization of the last state-owned bank--the National Savings Bank
(CEC)--was stopped in 2006 and has been indefinitely postponed. 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, however, has been delayed as the government reconsiders
its strategy on the Rovinari, Turceni, and Craiova energy complexes,
contemplating the creation of an integrated, state-owned energy producer.
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 is 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 International
Monetary Fund, World Bank (IBRD), the European Bank for Reconstruction and
Development (EBRD), and the U.S. Agency for International Development (USAID)
all have programs and resident representatives in Romania, although USAID
programs will phase out at the end of 2007. As of August 2007, Romania had
attracted $21.8 billion in foreign direct investment. Of this total, U.S. direct
investment accounted for $915.7 million (4.9%), ranking sixth among national
investors but first among non-EU countries.
After years of IMF-guided economic reforms, Romania' stand-by agreement with the
IMF expired on July 7, 2006. Romania's inflation rate has steadily decreased,
while growth rates have been between 4% and 8% since 2001. However, the IMF has
been critical of Romania's 2005 adoption of a 16% flat tax, pointing to the
country's low rate of tax collection as a medium- to long-term impediment to
growth. The IMF has also criticized Romania's public sector wage policy as
inflationary. Public sector wages increased 36% through 2006 and the Government
of Romania has approved public sector wage increases of 14%-19% over three
rounds in 2007. Analysts have warned about increasing macroeconomic imbalances,
such as the growing current account deficit (10.3% of GDP in 2006 and possibly
reaching 15% in 2007, the IMF estimates). This along with deteriorating
education and health services, aging and inadequate physical infrastructure, and
a looming real estate price bubble are all seen as threats to future growth.
Romania's budget deficits also dropped under IMF guidance, though the trend is
reversing. Actual deficits decreased from 4% of GDP in 1999 to only 0.8% in 2005
and 1.7% in 2006. However, the 2007 deficit is expected to approach 3%, driven
by rising spending on infrastructure, public sector wages, and pension
increases. In response the IMF has recommended that Romania strive to keep the
2007 deficit below 2%, dropping to 1% of GDP in 2008. The IMF also advises that
Romania is lacking a realistic fiscal policy framework for the medium term. The
country made progress in combating domestic tax arrears and expanding the tax
base in 2005, though Romania has one of the lowest collection rates in Europe,
at 31.0% of GDP in 2006.
Unemployment was officially 3.9%in August 2007, although these figures do not
capture high levels of temporary emigration, gray-market employment, or
under-employment.
In the early 1990s, inflation was one of Romania's most serious economic
problems. Inflation rates have gradually declined, finally reaching single
digits in 2004. Inflation in 2006 stood at a historical low of 4.9%. The Central
Bank has set an ambitious annual target band of 4% plus/minus 1% for 2007, but
outside analysts note that inflationary pressures are growing and predict that
the rate for the year will slightly exceed the top of this band.
GDP (2006): $122.3 billion.
Annual GDP growth rate (2006): +7.7%; +5.8% (Jan.-June 2007).
GDP per capita (2006): $5,662.
Natural resources: Oil, timber, natural gas, coal, salt, iron ore.
Agriculture (2006): Percent of GDP--8.0%. Products--corn, wheat, potatoes, oilseeds, vegetables, livestock, fish, and forestry.
Industry (2006): Percent of GDP--23.9%. Types--machine building, mining, construction materials, metal production and processing, chemicals, food processing, textiles, clothing. Industrial output increased by 7.1% in 2006 and 6.1% in Jan.-June 2007.
Services (2006): Percent of GDP--61.1%.
Construction (2006): Percent of GDP--7.0%.
Trade: Exports (2006)--$32.3 billion; (Jan.-June 2007): $18.6 billion. Types--textiles, chemicals, light manufactures, wood products, fuels, processed metals, machinery and equipment. Exports to the U.S. (2006)--$827.5 million; (Jan.-June 2007): $391 million. Major markets--Italy, Germany, Turkey, France, Hungary, U.K., U.S. (2.6%). Imports (2006)--$50.9 billion; (Jan.-June 2007): $31.3 billion. Types--machinery and equipment, textiles, fuel, coking coal, iron ore, machinery and equipment, and mineral products. Imports from the U.S. (2006)--$1.2 billion; (Jan.-June 2007): $414.1 million. Major suppliers--Germany, Italy, Russia, France, Turkey, Austria, U.K., China, Hungary, U.S. (2.4%).
Exchange rate: 2.38 new Lei=U.S.$1 (end-October 2007).
