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Economy of Romania

Economy - overview: After the collapse of the Soviet Bloc in 1989-91, Romania was left with an obsolete industrial base and a pattern of industrial capacity wholly unsuited to its needs. In February 1997, Romania embarked on a comprehensive macroeconomic stabilization and structural reform program, but reform subsequently has been a frustrating stop-and-go process. Restructuring programs include liquidating large energy-intensive industries and major agricultural and financial sector reforms. In 1999 Romania's economy contracted for a third straight year - by an estimated 4.8%. Romania reached an agreement with the International Monetary Fund in August for a $547 million loan, but release of the second tranche was postponed in October because of unresolved private sector lending requirements and differences over budgetary spending. Bucharest avoided defaulting on mid-year lump-sum debt payments, but had to significantly draw down reserves to do so; reserves rebounded to an estimated $1.5 billion by yearend 1999. The government's priorities include: obtaining renewed IMF lending, tightening fiscal policy, accelerating privatization, and restructuring unprofitable firms. Romania was invited by the European Union in December 1999 to begin accession negotiations.

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 intelligent, well-trained work force; and opportunities for expanded development in tourism on the Black Sea and in the mountains.

In 1993, the economy reached the end of a decline in output that had begun well before the 1989 revolution. The Romanian Government had borrowed heavily from the West in the 1970s to build a massive state-owned industrial base. Following the 1979 oil price shock and a debt rescheduling in 1981, Nicolae Ceauşescu 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. 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 technological infrastructure rapidly fell behind that of even its Balkan neighbors.

Since the fall of the Ceauşescu 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 move rapidly and eliminate consumer subsidies, float prices, liberalize exchange rates, and put in place a tight monetary policy. The Parliament has enacted laws permitting foreign entities incorporated in Romania to purchase land and has identified a large number of government enterprises for rapid privatization or restructuring. Foreign capital investment in Romania has been decreasing and is significantly less than in some other Central European countries.

Privatization of industry was 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 a mandate to sell off its shares at the rate of at least 10% per year. The privatization law also called for direct sale of some 30 specially selected enterprises and the sale of "assets" (i.e., commercially viable component units) of larger enterprises.

Subsidies to loss-making state-owned enterprises continue to be a serious drain on the state budget. Despite delays in privatizing certain large companies, the State Ownership Fund has made progress. Altogether, the private sector now accounts for an estimated 55% of gross domestic product and employs approximately 52% of the work force.

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 was an obstacle to leasing or selling land to active farmers.

An acute shortage of foreign exchange and a poorly developed financial sector have also been obstacles to rapid economic transition. Outside factors such as the collapse of trade with Soviet bloc trading partners, economic slowdown in the industrialized West, increases in imported energy costs, and large losses from United Nations sanctions against Iraq and the Former Republic of Yugoslavia, contributed to a precipitous drop in industrial output after 1989. The fact that the Danube River remains blocked from the Kosovo conflict denies Romania an important transportation route for its goods and has further hampered economic recovery.

In 1993, Romania embarked upon an adjustment program that showed some results. GDP, which had fallen for three consecutive years, stabilized in 1993 and registered 3.4% growth in 1994, 6.9% in 1995, and 4% in 1996. Since 1997, there has again been a decline in GDP of -6.6% in 1997, -7.3% in 1998, and (est.) -4.5% in 1999. Monthly retail price inflation, which averaged 12.1% in 1993 (the equivalent of 256% annually), declined to 28% in 1995. However, inflation picked up again in 1996 and 1997 due to excessive government spending in late 1996, and price and exchange rate liberalization in early 1997. Inflation in 1999 hovered around 50%. The government has committed itself to reduce the inflation rate by half in 2000. Also, since 2001, the economy has grown steadily at around 4-5%. Therefore, the PPP GDP of Romania is $7,400.

Subsidies on most basic consumer goods were lifted in May 1993, but support for underproductive and loss-making state-owned industries continues to be a serious drain on the budget. The government nonetheless managed to cut the deficit, which totaled almost 4% of GDP in 1992, to only 1.7% in 1993. By 1995, however, the budget deficit had again risen to about 4% of GDP. The consolidated deficit, including internal arrearages, climbed to more than 10% of GDP in 1996.

Financial and technical assistance continue to flow in 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 (IMF), 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. Romania has also attracted foreign direct investment, which in 1997 rose to $2.5 billion.

Romania was the largest U.S. trading partner in Eastern Europe until Ceauşescu's 1988 renunciation of Most Favored Nation (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 and clothing, steel, and chemicals. Romania signed an Association Agreement with the 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 2002, the target date of 2007 was set for Romania, along with Bulgaria, for its accession efforts. This was confirmed in 2003 at the Thessaloniki Summit, and Romania is set to join the EU in 2007.

The below figures are all as of 2002 or 2003. They are also compared with figures from 1999 in brackets

GDP: purchasing power parity - $166 billion (2002 est.) ($87.4 billion in 1999)

GDP - real growth rate: 4.9% (2002 est.) (-4.8% in 1999)

GDP - per capita: purchasing power parity - $7,600 (2002 est.) ($3,900 in 1999)

GDP - composition by sector: agriculture: 15% industry: 35% services: 50% (2001)

Population below poverty line: 21.5% (1994 est.)

Household income or consumption by percentage share: lowest 10%: 3.2% highest 10%: 25%(1998)

Average gross monthly salary: 6,763,882 lei ($198.31; 169.98 Euro) (September 2003)

Average gross daily salary: 222,374 lei ($6.52; 5.59 Euro) (September 2003)

Inflation rate (consumer prices): 22.5% (2002) (44% in 1999)

Labor force: 9.9 million (1999 est.)

Labor force - by occupation: agriculture 40%, industry 25%, services 35%(1998)

Unemployment rate: 8.3% (2002) (11% in 1999)

Budget: revenues: $11.7 billion expenditures: $12.4 billion, including capital expenditures of $NA (1999 est.)

Industries: mining, timber, construction materials, metallurgy, chemicals, machine building, food processing, petroleum production and refining

Industrial production growth rate: 6% (2002 (-8.7% in 1999)

Electricity - production: 50.86 kWh (2001) (52.495 billion kWh in 1998)

Electricity - production by source: fossil fuel: 59% hydro: 31.67% nuclear: 9.33% other: 0% (1998)

Electricity - consumption: 49.552 billion kWh (1998)

Electricity - exports: 537 million kWh (1998)

Electricity - imports: 1.269 billion kWh (1998)

Agriculture - products: wheat, corn, sugar beets, sunflower seed, potatoes, grapes; milk, eggs, beef

Exports: $8.4 billion (f.o.b., 1999 est.)

Exports - commodities: textiles and footwear 33.4%, metals and metal products 19.1%, machinery and equipment 9.5%, minerals and fuels 6.1% (1998)

Exports - partners: Italy 22%, Germany 19.6%, France 5.9%, US 3.8% (1998)

Imports: $9.6 billion (f.o.b., 1999 est.)

Imports - commodities: machinery and equipment 23%, fuels and minerals 14.2%, chemicals 8.7%, textiles and footwear 17.1% (1998)

Imports - partners: Germany 17.5%, Italy 17.4%, France 6.9%, US 4.2% (1998)

Debt - external: $13.7 billion (2002) ($9 billion in 1999)

Currency: 1 leu (L) = 100 bani

Exchange rates: lei (L) per US$1 - 17,996.4 (December 1999), 15,332.8 (1999), 8,875.6 (1998), 7,167.9 (1997), 3,084.2 (1996), 2,033.3 (1995)

Fiscal year: calendar year

See also : Romania