Today, Romania with its population of 22.3 million ranks as one of the poorest countries in Europe with real wages down 40 percent when compared from the end of the Communist era in 1989. During the 1990’s, the national transition to a market economy from command control is proving to be a very painful and difficult process for the people of Romania resulting in lower living standards. The first few years were difficult primarily due to the fact that during the communist era, Romania basically had very little of value to sell to the world market. Former corrupt Romanian leaders pillaged much of the gold from areas of the country rich in precious mineral geology in order to enrich their grandoise lifestyle. Romania for the most part has been held hostage to very weak political and economic fundamentals including a history of high inflation and currency volatility that is no exception. It is only recently that inflation is projected to disinflate to moderate levels, thus providing for somewhat greater stability for the leu.
POLITICS: the current political discussion and dialogue in Romania is that of preparation for potential membership into the European Union (EU) with a targeted date of entry by year 2007. Romania is also ranked dead last among 12 candidates for EU accession in social and economic categories. Pledging a path towards the EU and NATO integration, Western reforms were implemented with former President Tudor but at a painful consequence to the people. As a result, Romanians backed the current government of President Iliescu of the Romanian Party of Social Democracy (PSD) in a national election in December 2000 representing the centre left-left. Iliescu was a former communist and President of Romania from 1990 to 1996.
President Iliescu has strategically moved his party to a centrist position, he supports democracy, although he will not support the entire plate of suggested immediate economic reforms proposed by the IMF and others that are required for EU membership. Instead, Iliescu wishes to integrate Romania into Europe but at his own pace with a less painful economic transition. This vision has extended Romania’s estimated EU entry date under former President Tudor’s plan from year 2005 to 2007 under Iliescu. Romania has had a long history of political and economic crises with bouts of hyperinflation, political turbulence and instability most notably with former communist dictator Nicolae Ceausescu being assassinated along with his wife Elena on Christmas Day in 1989 resulting from years of political corruption.
ECONOMY: Romania had one of the strongest economies in Europe one hundred years ago, third largest at the time. In 1997, the government introduced a comprehensive macroeconomic stabization program including further industry privatizations and a co-ordinated IMF support program in place. The late 1990’s did not adjust well to these reforms. By year 2000, Romania began to experience the blossom of its sacrifices as the economy showed signs of positive growth as wealthy export markets in the European Union helped to bring Romania out of its 3 year technical depression where GDP contracted by a cumulative15 pecent. During the 1990’s, minimal foreign investment into Romania worth less than $4 billion US-dollars. Year 2002 economic growth rebounded for back to back strong years at 4.5 percent reflecting the increasing level of confidence in the Romanian government and economy. Major industries in Romania include natural resources (timber, oil, gold) textiles, metals, machinery and agriculture. Agriculture accounts for 33 percent of the labor force and 20 percent of GDP. In addition, a major feature to this economy is very large black market economy that co-exists with the formal domestic Romanian economy.
Economic Statistics
GDP is measured by market prices is at $38 billion USD, GDP/capita at $1,500 USD (1998). GDP as measured by purchasing power parity would give Romania GDP at $152.7 billion USD (2001) or GDP/capita at $6,800 (2001). Year 2000 GDP growth at 1.5 percent, GDP growth zoomed ahead at 5 percent in 2001. The trade balance is improving although large persistent current account deficits have remained. Looking at the current account deficit: 1998 at crisis levels of 7.5 percent, 1999 at 3.8 percent, 2000 at 4.3 percent, year 2001 at 6.0 percent and 2002 came in at 4.8 percent. Romania’s external debt to GDP position is manageable at 28.6 percent of GDP. For inflation figures, see KNOWLEDGE section below.
Economic Forecast
The outlook is for continued disinflation (falling inflation), declining fiscal deficit, positive GDP growth spurred by new foreign investment monies and an improvement in the current account position. In addition, continued privatization will lead to greater economic gains for Romania as state-owned corporations in the energy sector are planning to be privatized in 2003. In Janauary 2001, the government implemented policies to raise wages with a goal of achieving long term higher living standards similar to the EU although the average monthly wage is still only $150 USD in Romania. Further, one of the biggest foreign investments taking place is the development of Europe’s largest gold mining operation located at Rosia Montana, Romania worth hundreds of millions USD. Canadian mining firm Gabriel Resources is taking the opportunity to extract 300 tons of gold and 1700 tons of silver over 15 years from this mineral deposit. Romania with a well-educated work force has great potential especially in areas of developing its tourism industry.
POSITIVES: the over the counter stockmarket ‘RASDAQ’ was implemented in year 2002 as it recorded the world’s best performance, rich fertile farmland with current cheap valuable real estate countrywide, no foreign controls in both property and stocks within Romania. In 1998, the government approved modern progressive mining standard laws similar to those found in Australia & Canada. CONCERN: declining population rate and many Romanian’s work abroad, Romania has the highest inflation rate among other EU accession economies. Poverty is a problem, unemployment is high, Romania is home to the highest percentage of Gypsies in the world with an estimated 2 million.
BANKING SYSTEM: troubled banking system with several high profile bank collapses, inherent weakness in the system although the worst has passed. In May 2000, Banca Comercial - Romania’s largest bank became a victim to rumours and experienced a large run on deposits although controlled. During May 2000, Romania’s largest mutual fund ‘Fondul National de Investitis’ collapsed as it failed to meet withdrawal requests triggered by a fraud within the Fund’s management. In March 2002, another Romanian bank collapsed. These financial mishaps were a result of inadequate supervision by a regulatory body. Over the last couple of years, regulations have been implemented amongst the country’s large number of credit cooperatives in order to strengthen this financial segment as weak institutions are being taken over. Industry privatization is also taking place as noticed with the state-owned Banca Agricola to Raiffeisen in 2001 along with the weaker banks being liquidated.
The overall Romanian banking system is gradually strengthening regardless of some difficulties that remain. Tighter controls, more inspections, bank ratings are now implemented throughout Romania to ensure confidence in the financial system. National Bank of Romania, the nation’s central bank has foreign exchange reserves holdings as of January 2002 at $3.5 billion USD and year-end 2002 equivalent to 4.1 months import coverage, well up from year 2001 at $2.3 billion USD. This reserve level provides good protection for the leu. Interest rates have fallen with lower inflation levels. One caveat is recent rapid credit growth much of it in foreign currencies.
REGIONAL: Ukraine, Russia, Serbia
Ukraine neighbouring Romania still has very close military ties to Russia. Romania’s invitation into NATO is strategically important as Romania geographically splits the ‘east’ and ‘west’. Political stability in Serbia and Kosovo are important as the recent Kosovo conflict with NATO blocked vital transportation routes for Romania’s exports on the Danube river.
KNOWLEDGE: history of hyperinflation as inflation is Romania’s weak card. Potential inflation turmoil is Romania’s biggest challenge as failure to contain it will derail EU entrance and collapse the value of the leu further. Romania’s does have a vibrant history of periods of great hyperinflation, most notably in 1945 at the end of World War II where inflation was running at 10,000 percent anually. Inflation from mid 1990’s running at 150 percent, year 1999 at 50 percent, 2000 inflation fell to 40 percent, 2001 down to 34.5 percent, year 2002 falling to 18 percent, 2003 projected to fall to 14 percent and single digits by year 2004. The major caveat for future inflation rates is Romania’s vulnerability to drought impacting agricultural output and the country is also subject to higher world oil prices as a net energy importer. However, Romania does indeed have significant oil reserves at 1.4 billion barrels and has plans to increase output as they are opening up their oil & gas industry to foreign investment and modern Western technology.
CURRENCY: ISO symbol ‘ROL’, Romanian leu, lei (plural). At time of review on February 4, 2003, the leu was trading at 33,190 to 1 US-dollar (‘USD’). Romanian capital controls help to mitigate depreciation, targeted depreciation via a crawling rate although the rate is declining. Exchange regime follows a managed float balancing inflation and external objectives.
CURRENCY HISTORY: historical exchange valuations include December 2002 at 33,468 ROL to 1 USD, January 2002 at 31,890, January 2001 at 25,624, January 2000 at 17,966, August 25, 1999 at 16,147, January 1999 at 10,944, September 1998 at 9,043, January 1998 at 8,223, February 1997 at 7,350, January 1997 at 5,060, 1996 at 3,084, 1995 at 2.033, 1994 at 1,655, 1993 at 760. Of importance, in early 1997 price and exchange rate liberalization resulted in a 50 percent currency collapse of the leu over 2 months. In 1999, large adjustments in the exchange rate have helped to account for the relatively high inflation rate.
CURRENCY FORECAST: declining annual inflation rate, a lowering of the current account deficit and an increase in productivity will further help to slow the depreciation of the leu. If EU membership is successful in year 2007, the leu will be replaced with the Euroland euro as new national currency providing for an inevitable higher standard of living for Romania. Government successes include a lowering of corruption, less red-tape and a more overall pro-business friendly environment will reflect positively on the leu going forward. However, much work and economic structuring is yet to be done in Romania, the medium to long term forecast is favorable. Better days lie ahead for Romania. UPDATED: February 4, 2003
