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Romania - Economy

World Bank significantly improved its forecast on the advance of the Romanian economy , predicting 2016 growth at 5.1%, up from 4% predicted in June 2016, according to the WB report on the Europe and Central Asia region on 22 November 2016. This was the highest since 2008 and the fastest in the EU. Growth was fueled by an expansionary fiscal policy and labor market improvements which, combined with an increased support to vulnerable groups, contributed to poverty reduction. Growth was expected to remain solid in 2016 and 2017, but the international institution warned that the economic growth will slow down next year to 3.8%. In 2018, it will further decline to 3.4%. Some countries (such as Romania) show little difference between the distribution of peoples perceived income relative to others between 2005 and 2015.

The political polarization likely has many causes, and economic challenges or rising distributional tensions may well have played a role. However, this report shows that there is no clear link between the observed anxiety and a simple measure of income inequality. 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.

By mid-2014 the economy has continued to recover and was expected to grow by 2.8 percent this year. Fiscal imbalances have been reduced and the current account deficit remained low. Macroeconomic fundamentals strengthened further in 2013, and economic growth reached a post-crisis high. The current account deficit narrowed significantly in 2013. Inflation had fallen to historical lows. As a consequence the government and the private sector can now borrow at record low interest rates. It's also remarkable in that connection that Romanians for the first time pay less for bank loans in lei then in foreign currency. These strong macroeconomic fundamentals have served Romania well during the recent volatilities in capital market flows. It was less impacted than other emerging economies.

By 2014 Romania was expected to achieve energy independence by the end of the decade, due to shale gas and alternative energy sources like wind and nuclear power. It is the third most energy independent country in the European Union after Denmark and Estonia. Recent exploration efforts show Romania has significant offshore resources of natural gas in the Black Sea, with recovery expected to start by the end of 2019. These resources and unconventional shale gas will help Romania meet all its energy needs and even become an exporter of natural gas. Romania already met 80 percent of those needs from its own oil, gas, hydro, coal and nuclear energy sources, and imported the remaining 20 percent of gas and oil from Russia. The U.S. Energy Information Administration estimates Romania to have 1.4 trillion cubic meters of shale gas, the third largest reserve in Europe after Poland and France.

Romania in 2009 agreed to a $26 billion loan with the IMF, the EU, and the World Bank to help pay salaries and pensions. In 2010, the government upped the sales tax from 19 percent to 24 percent and cut public workers' salaries by one-quarter to reduce the budget deficit. Underinvestment in infrastructure, the lack of transparency in governmental decision making, and corruption all continue to have a negative impact on the overall business environment. Another growing problem is the outflow of skilled labor and energetic young people to higher paying jobs elsewhere in the EU.

Gradualism was the hallmark of reform in Romania in the 1990s. Macroeconomic stabilisation programs were undermined by a failure to undertake structural reforms, and periods of growth were superseded by bouts of high inflation and macroeconomic imbalance. Important structural reforms in the early part of the current decade helped to stabilise the economy, but lax fiscal and incomes policies in recent years led to overheating in 2007-08, as well as to rising external imbalances.

In line with the regional trend towards the introduction of lower tax rates and flat-tax regimes, Romania introduced a flat tax of 16% for both personal income and corporate profits in January 2005. Since 2000 there had been a uniform rate of 19% for value-added tax (VAT). The authorities are resisting pressure to raise the VAT rate to compensate for low revenue intake. Social security contributions are high, despite a series of reductions in recent years, and total 49.5% of gross wages.

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 has been increasing rapidly, although it remains 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 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 EU 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 remains an obstacle to leasing or selling land to active farmers.

Financial and technical assistance continued 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), and the European Bank for Reconstruction and Development (EBRD) all have programs and resident representatives in Romania. U.S. Agency for International Development (USAID) programs were phased out completely in 2008. 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 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 estimated). 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. The global financial crisis and economic downturn in 2008 placed additional strain on Romania's economic growth by curtailing foreign investment and limiting access to credit.

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 rose to 2.5% of GDP, and the 2008 deficit is projected to be 5%, driven by rising spending on infrastructure, public sector wages, and pension increases. The IMF had recommended that Romania strive to keep the 2007 deficit below 2%, dropping to 1% of GDP in 2008. The IMF also advised 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 set an ambitious annual target band of 4% plus/minus 1% for 2007, but outside analysts noted that inflationary pressures were growing and predicted that the rate for the year would slightly exceed the top of this band.

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Page last modified: 25-11-2016 11:59:24 ZULU