Romania: ECONOMY

ECONOMY



Overview: The pace of Romania’s transition from a centrally planned to a market economy has been slower than in neighboring post-communist states. Following the 1989 revolution, governments enacted reforms sporadically. During the 1990s, macroeconomic imbalances persisted, as did government subsidies for loss-making industries. Fiscal debt and inflation were problems throughout the decade, and much of Romania’s external debt was financed by credits from multilateral agencies, which in turn pressured Romania to pursue stabilization and restructuring programs. Nevertheless, Romania failed to complete any of the five standby agreements it had with the International Monetary Fund in the 1990s. Since 2000, progress has been made, but in 2003 the European Union (EU) concluded that Romania, although close, was not yet a functioning market economy. It remains to be seen whether Romania will be able to meet the economic criteria for entry into the EU in 2007.



Gross Domestic Product (GDP): Economic growth in Romania has been unstable since the fall of the Ceauşescu regime, which was obsessed with eliminating the country’s foreign debt, largely at the expense of the broader economy. GDP contracted significantly after the 1989 revolution, and, despite recent growth, it is estimated that in 2003 Romania’s GDP was still just below the 1989 level. GDP growth between the years of 1998 and 2002 averaged just 1.3 percent. In 2002, the most recent year for which complete figures are available, GDP reached US$45.7 billion, an increase of 4.9 percent from the previous year. In 2003 agriculture represented 13.1 percent of GDP, industry 38.1 percent, and services, 48.8 percent.



GOVERNMENT Budget: Although budget deficits have declined since 1999, government expenditures continue to outpace revenues. In 2003 (the most recent year for which figures are available), the budget deficit represented 2.4 percent of gross domestic product (GDP). In 2002 the government had expenditures of approximately US$12.9 billion on revenues of approximately US$11.1 billion. Figures for the first 10 months of 2004 show the consolidated budget posted a surplus of 0.1 percent of GDP.



Inflation: For most of the 1990s and into this century, Romanians have endured double-and even triple-digit inflation, and it remains a major concern for the economy. Inflation in this period peaked in 1993, when it was a staggering 256 percent per annum. Inflation declined to a still very high 28 percent in 1995 but was back into triple digits a few years later, when government spending and exchange-rate liberalization pushed the rate to 151 percent by the end of 1997. By 1999 the rate had fallen to 54 percent, and over the next few years it continued to decrease gradually. In 2004 inflation was estimated at 9.3 percent, the first time since the revolution that Romania experienced single-digit inflation (thanks in large part to the leu’s appreciation against the U.S. dollar). However, some outside observers speculate that Romania’s consumer price index fails to accurately reflect the true impact of energy costs (which are rising faster than average), and therefore is a flawed measure of inflation.



Agriculture: Romania has rich agricultural lands, with conditions amenable to a variety of crops, and has historically been a major agricultural producer. Since 1989, no other industry has been privatized as extensively as agriculture, where, as of 2004, 85 percent of arable land and 98 percent of livestock were privately held. Nevertheless, the agriculture sector remains weaker than in other European Union accession states. Although in 2002 agriculture accounted for 38 percent of total employment and 68 percent of rural employment, it accounted for just 13 percent of gross value added. Under the post-revolution privatization policies, some 4 million small parcels (representing 80 percent of arable land) were returned to their original owners or heirs, and no one person or family was permitted to claim more than 10 hectares. By 2000, largely as a result of this policy and the slow pace of consolidation among small farm owners, the average Romanian farm was just 2.4 hectares, and only 2 percent of farms were larger than 10 hectares. This fragmentation is one reason the agricultural sector is undercapitalized and means most farming in Romania is still very labor-intensive. Legal, capital, and political restrictions continue to stifle growth in the agricultural sector. Principal crops in Romania include corn, wheat, potatoes, barley, grapes, sunflower seeds, sugar beets, and cabbages; principal livestock inventories include chickens, sheep, pigs, and cattle (both in descending order of production, as of 2002).



Forestry: In 2000 (the most recent year for which figures are available), Romania had roughly 6.5 million hectares of forest cover. In 2002 roundwood removals totaled 12.4 million cubic meters, and sawnwood production totaled 3.7 million cubic meters.



Fishing: In 2002 the catch of aquaculture and captured fish in Romania totaled 16,237 tons (live weight), down from 18,445 in 2001. These were mostly bighead, common, and silver carp, and European sprat.



Mining and Minerals: Romania has modest deposits of minerals, including bauxite, copper, gold, iron ore, lead, salt, uranium, and zinc. Reserves of bauxite are estimated at 2.5 million tons, copper at 1.5 million tons, zinc at 1.4 million tons, and lead at 600,000 tons. In 2002 iron ore production totaled 77,400 tons, zinc 25,400 tons, and lead 23,000 tons. The mining sector has declined, in part as a result of poor maintenance and a lack of investment, and has a poor environmental record.



Industry and Manufacturing: The industry and manufacturing sector in Romania is burdened by a concentration of old, and in some cases nearly obsolete, plants in metallurgical, heavy engineering, and chemical industries. During the communist era, concentration was the norm in industry and manufacturing, which left the country with a number of very large enterprises. Restructuring, and the subsequent closing of some of those factories, has further weakened the sector. Privatization has taken place, but at a slower pace than in other sectors of the economy. As of 2000, the Romanian government still owned roughly 80 percent of the country’s industrial core (namely, mining, aluminum, iron, and steel production, and power generation), which accounted for nearly 69 percent of total industrial production. In that same year, industry employed 27.3 percent of the labor force. In 2003 industry accounted for 38.1 percent of gross domestic product. Major industrial items include tires, cement, crude steel, household consumer items, passenger cars, tractors, wine, and beer. Continued foreign direct investment is needed for further industrial restructuring.



Energy: Analysts generally agree that Romania is the only central European country with significant primary energy reserves (both fossil fuel and hydroelectric resources) and that these offer the potential—not yet realized—for several decades of energy self-sufficiency. With 6 percent of the Romanian labor force working in the energy sector, it is the third largest employer in the country, and it accounts for 5 percent of total industrial output. Energy production has declined since the early 1990s, as contractions in heavy industry have reduced demand. In 2002 primary energy demand decreased by 3.3 percent and was equivalent to 37.9 million tons of oil, of which 24.7 million tons were produced domestically. Per-capita energy consumption in 2002 was 1,904 kilograms of oil equivalent, lower than in Bulgaria (3,001 kilograms) but higher than in Turkey (1,061 kilograms). Since 2000, the Romanian government has accelerated efforts to restructure and privatize the inefficient systems of energy production and distribution inherited from the Ceauşescu regime.



As of 2002, Romania had proven crude oil reserves of about 955 million barrels, with daily production averaging 125,000 barrels per day. Roughly 10 percent of crude production is from offshore wells in the Black Sea, where further oil exploration is planned. The discovery of oil and gas reserves in the Black Sea has heightened an unresolved dispute with Ukraine over claims to an island in the area known in Romania as Insula Serpilor (Serpent Island) and in Ukraine as Zmiyinyy Island. Proven coal reserves at the end of 2002 were roughly 1.5 billion tons, mostly lignite and sub-bituminous. Annual coal production peaked in 1989 at 66.4 million tons but since then has declined by more than 50 percent. At current rates of extraction, Romania’s coal reserves should last another four to five decades. Proven natural gas reserves are small, at 3.6 trillion cubic feet, sufficient for only a few years at 2002 rates of consumption.



Romania has an installed electricity generating capacity of 22.2 gigawatts, making it the largest power sector in southeastern Europe. Operational capacity, however, is only 16 gigawatts. Romania is a net electricity exporter. Domestic demand for electricity declined sharply after the fall of Ceauşescu but increased for the first time in 2000. In 2002 Romania produced 54.7 million megawatts of electricity, 60.5 percent of which was thermal, 29.4 percent hydroelectric, and 10.1 percent nuclear. Planned improvements to the energy production sector include the rehabilitation of 10 thermal power stations (with a combined capacity of 1.36 gigawatts) and construction of a second unit at the Cernavoda nuclear power plant (expected to go online in 2007). In addition, three more units at the Cernavoda station are planned but awaiting financing. The U.S. Department of Energy estimates that there may be more than 5,000 locations in Romania favorable to hydroelectric power plants, and that current exploitation of hydropower resources is far below capacity.



Services: In 2003 the services sector accounted for 48.8 percent of gross domestic product; in 2000 services employed 31.3 percent of the labor force. Despite rapid change since the end of the Ceauşescu regime, the energy sector remains underdeveloped by Western standards. According to a 2001 assessment by the U.S. Department of Commerce, areas in the services sector expected to register the fastest growth include information and communications technology, banking, financial services, insurance, accounting, tourism, and advertising and other media development.



Banking and Finance: Privatization and restructuring of banking and financial services began after much delay in December 1998 with the sale of the state’s majority stake in the Romanian Development Bank. The privatization of Banc Post followed in 1999. Bancorex, the second largest bank in Romania, and one that held a large number of non-performing loans, was placed under government administration and then absorbed by the Banca Comerciala Romana (BCR) in 1999 as well. By 2003, state-owned banks accounted for 40 percent of total net assets, compared with 75 percent in 1998. With the full privatization of the BCR, that share is expected to fall to 10 percent. The number of banks has declined, mostly through mergers and the revocation of licenses, to 38 by early 2003 (of which 31 were majority foreign-owned). Majority foreign-owned banks accounted for 55.9 percent of total bank assets and 65.4 percent of non-government-sector lending. Practices at domestic banks continue to favor short-term lending, at the expense of investment in new ventures and existing small and medium enterprises. Oversight and regulation of the commercial banking system has improved, reducing vulnerability; financial services, however, remain underdeveloped.



The Bucharest Stock Exchange (BSE) resumed trading in 1995, and the RASDAQ, an electronic network for registering over-the-counter share sales, was launched the following year. Stock values were affected negatively by both the 1997 Asian and 1998 Russian financial crises but since then have recovered. Growth in the BSE composite index grew (in nominal terms) by 26 percent in 2003. Market capitalization on the BSE was 10 percent of gross domestic product in 2003 (up from 5 percent in 2002), low by regional standards.



Tourism: Romania has a variety of natural resources that could serve the tourism industry well, including the Black Sea and Danube Delta, the Carpathians and Transylvania, and a well-established wine industry. Unfortunately, as with other sectors, growth in tourism is hindered by poor infrastructure, in particular a shortage of luxury hotels. Foreign investment in tourism has not been brisk despite privatization of the hotel industry. The Romanian government has stepped up efforts to boost foreign tourism, including starting an advertising campaign and opening tourism promotion offices abroad. Revenue from international tourism in 2003 was down to US$400 million from a high in 1995 of US$590 million. In contrast, Hungary had revenues in 2003 of US$4 billion.



Labor: The collapse of the Ceauşescu regime instigated a series of dramatic changes in both the size and composition of the labor force in Romania. Perhaps the most significant shifts took place in industry, which in 1989 employed roughly 4 million workers. By 2001, industry employed just 2 million Romanians. During the 1990s, employment in the gray market increased significantly, complicating efforts to assess the condition of the labor market. As of March 2004, the labor force was estimated at 8.8 million workers, or some 40 percent of the population. According to estimates in 2004, nearly 3 million Romanians worked in industry and commerce, 2.8 million in services, and 2.4 million in agriculture. Unemployment peaked in 1999 at 11.8 percent. Registered unemployment for 2003 (the most recent year for which figures are available) was 7.2 percent, one of the lowest regional official unemployment rates. Many observers believe that the unemployment rate is kept unrealistically low in part by the significant migration of Romanians abroad in search of employment. Estimates suggest that between 600,000 and 2 million Romanians have moved abroad since the fall of the Ceauşescu regime. The minimum wage was raised in January 2005 to slightly more than 3 million lei per month (around US$98 at that time).



Foreign Economic Relations: Prior to Ceauşescu’s renunciation of most-favored-nation (MFN) trading status in 1988, Romania had been the United States’ largest trading partner in Eastern Europe. The U.S. Congress approved restoring Romania’s MFN status in 1993 (since 1998 MFN status has been known as normal trade relations, or NTR). Also in 1993, the Romanian government signed a free-trade agreement with the European Free Trade Association, and in 2004 Romania concluded pre-accession negotiations with the European Union (EU). Romania is scheduled to join the EU in January 2007, pending implementation of reforms outlined by the EU. As of early 2005, the EU was Romania’s largest market for exports and largest provider of imports. Romania joined the World Trade Organization in 1995. The Romanian government is working to improve trade relations with neighboring Black Sea states, and has championed the creation of a free-trade area for manufactured goods with Bulgaria and Turkey.



Imports: In 2002 (the most recent year for which figures are available), imports totaled US$17.8 billion; goods from Italy, Germany, Russia, and France accounted for slightly more than 50 percent of all imports. Principal imports included textiles, petroleum and petroleum products, chemicals and related products, electric machinery, and food and live animals.



Exports: In 2002 (the most recent year for which figures are available), exports from Romania totaled US$13.8 billion dollars. More than 50 percent of all exports went to Italy, Germany, France, and the United States. Major exports included electrical machinery, clothing and accessories, and machinery and transport equipment.



Trade Balance: Romania has had a persistent trade imbalance, with imports consistently outpacing exports. In 2002 the trade deficit was US$4 billion.



Balance of Payments: Romania ran a current account deficit throughout the 1990s and into 2002 (the most recent year for which figures are available). Between 1999 and 2002, however, it has had a positive overall balance of payments. In 2002 the overall balance of payments was nearly US$1.8 billion.



External Debt: In 2002 (the most recent year for which figures are available), Romania’s external debt reached US$15.6 billion, up from US$9.9 billion in 1998. The bulk of Romania’s external debt in 2002 was medium- and long-term debt.



Foreign Investment: Although the potential for foreign direct investment (FDI) in Romania is high, the level of FDI has been disappointingly low and has lagged far behind other transitional economies in the region. Some 50 percent of FDI has been targeted to privatization. Cumulative FDI between 1989 and 2002 reached US$9 billion, whereas during the same time period in Hungary, cumulative FDI amounted to US$22.5 billion. Annual FDI peaked in 1998 at US$2 billion, an indicator of international approval of the newly formed center-right government. FDI in 2002 (the most recent whole year for which figures are available) was US$1.1 billion, or 2.4 percent of gross domestic product (GDP). Average FDI in the Baltic states in 2002 was much higher at 6.1 percent of GDP.



Foreign Aid: According to the World Bank, in 2004 foreign aid to Romania totaled US$697 million.

Currency and Exchange Rate: Romania’s currency is the leu (pl., lei); 100 bani (sing., ban) equal one leu. On July 1, 2005, Romania redenominated the currency; a new (or heavy) leu is valued at 10,000 old lei. New notes will have the same dimensions as euro notes of similar value, and they will use the same colors and design as their corresponding old leu equivalents (for example, the 100 new lei note will look similar to the 1,000,000 old lei note). Prior to redenomination, the leu was one of the least valued currencies in the world, with US$1 buying 29,891 lei. As of early July 2005, US$1 equaled 3.02 new lei.



Fiscal Year: Calendar year