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Romania - Economy (Notes)

Romania is a country of considerable potential: rich agricultural lands; diverse energy sources (coal, oil, natural gas, hydro, and nuclear); a substantial, if aging, industrial base encompassing almost the full range of manufacturing activities; an educated, well-trained work force; and opportunities for expanded development in tourism on the Black Sea and in the 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 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 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 with the transfer of the majority stock to foreign ownership. The privatization of the last state-owned bank--the National Savings Bank (CEC)--was stopped in 2006 and has been indefinitely postponed. The country made substantial progress in the energy sector in 2005, completing or launching numerous privatization projects, including privatization of two additional regional electricity distributors. Four of the country's eight regional electricity distributors have now been privatized, and the government is continuing the process. 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.

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 continue 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. As of February 2007, Romania had attracted $20.2 billion in foreign direct investment. Of this total, U.S. direct investment accounted for $869.1 million (4.3%), ranking sixth among country investors.

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 that increasing macroeconomic imbalances, such as the growing current account deficit (at 10.3% of GDP in 2006), deteriorating education and health services, and outdated and limited physical infrastructure may harm 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, deficits are expected to increase as Romania strives to absorb Structural Fund Assistance from the EU, as illustrated by a projected 2.8% budget deficit for 2007. 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 5.2% in February 2007, although these figures do not capture high levels of temporary emigration, grey-market employment, or under-employment.

In the 1990s, inflation was one of Romania?s most serious economic problems. Retail price inflation averaged 12.1% monthly in 1993 (the equivalent of 256% annually). Inflation rates gradually declined through the 1990s, reaching single digits in 2004. Inflation in 2006 stood at an historical low of 4.9%. The Central Bank has set an ambitious annual target of 4% plus/minus 1% for 2007.

Facts at a Glance: Geography - People - Government - Economy - Communications - Transportation - Military - Climate - Current Time - Ranking Positions
Notes and Commentary: People - Economy - Government and Political Conditions - Historical Highlights - Foreign Relations - Relations with U.S.

Facts at a Glance
Current Time
Ranking Positions

Notes and Commentary
Government and Political Conditions
Historical Highlights
Foreign Relations
Relations with U.S.

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