Economy and Trade
The largest of the Balkan countries, Romania experienced Communist rule following World War II, although the leadership pursued a foreign policy independent of that of the Soviet Union. The overthrow and execution of President Ceausescu in 1989 nominally ended Communism, although many of the party’s hierarchy remained in government. Overall, Romania has been a slower developer than the other former Communist countries of Eastern Europe. Failure to push ahead sufficiently with reforms meant that the country was not on the list of new European Union members in 2004. However, Romania joined the European Union in January 2007. In February 2008, the European Commission warned Romania over high-level corruption, pointing to the slow pace of investigations into the activities of eight serving or former ministers.
Romania’s fertile arable land, vibrant oil and gas industry, and well-educated workforce (there are more than 50,000 specialists in information technology) have attracted high levels of foreign direct investment (FDI). However, corruption and bureaucracy remain significant barriers to conducting business in the country. Trade is heavily oriented towards the European Union: Italy, Germany, Turkey, France, Hungary, the United Kingdom, and the United States are Romania’s major export markets, while Germany, Italy, Russia, France, Turkey, Austria, the United Kingdom, China, Hungary, and the United States are the main sources of imports.
Economic Policy over 12 Months
In March 2009, Romania began talks with the European Union and the International Monetary Fund (IMF) on a potential rescue package to help finance its double-digit current-account deficit, and shore up investor confidence. Officials are concerned that the central bank’s hard-currency reserves and credit lines to the public sector may not be enough to finance the external deficit. Government officials said that the country needed short-term financing of around €10 billion.
The government had already announced various measures to support the economy. These included: tax relief for companies that reinvest profits (from 2010); capital injections into the state-owned banks, CEC Bank and Eximbank, to spur their lending to small and medium-sized companies; a relaxation of lending conditions for mortgages; higher rewards for replacing old cars (to support the domestic car industry); increases in old-age pensions and subsidies of medical costs for pensioners; suspension of social insurance contributions for employees affected by their company’s temporary shutdown; financial support for professional training; and increases in public investment (mostly targeted at the transport infrastructure).
Inevitably, these measures have had an impact on the public finances. In December 2008, a new coalition administration, formed following inconclusive elections in November 2008, pushed through a crisis budget that slashed the budget deficit to a forecast 2% in 2009, from 5% in 2008, and froze public-sector wage growth. However, the budget was based on anticipated growth of 2.5% in 2009, which by March 2009 appeared extremely optimistic. The rating agency, Standard and Poor’s, which in October 2008 downgraded Romanian debt to junk status, predicted on March 2, 2009 that the budget deficit would reach 6.2%. Budget revenue fell by 8%, year on year, in January 2009 in nominal terms, as the global crisis took its toll on the domestic economy. The budget that President Băsescu signed into law on February 25, 2009 envisaged 18% growth in revenue in 2009.
By March 2009, Romania’s main interest rate stood at 10%, after a quarter-point cut earlier in the year—the first in 18 months. The central bank had been reluctant to cut rates earlier, for fear that this would accelerate the depreciation of the currency. After fluctuating in a relatively tight band of RON3.5–3.7 lei to €1 from 2005 to late 2008, the Romanian national currency fell steeply in December 2008, dropping to a record low of RON4.3 to €1 in January 2009.
Despite the economic problems facing the country, the government insisted, in March 2009, that it would stick to its goal of joining the Eurozone in 2014. In a convergence report sent to Brussels, the government said that it would seek entry into the Exchange Rate Mechanism 2 (ERM-2), which all would-be Eurozone entrants are required to join for a two-year period, in 2012. The government said that the 2012 target for ERM-2 would give the country “time to implement structural reforms that will raise the flexibility of the Romanian economy and its capacity to handle shocks.” However, Standard & Poor’s said that Romania was more likely to join the Eurozone in the second half of the next decade.
Economic Performance over 12 Months
Romania has enjoyed very rapid levels of economic growth in recent years. It expanded by 7.1% in 2008, following growth of 6% in the previous year. However, this rapid growth has created imbalances—in particular, a large current account deficit, amounting to an estimated 12% of GDP in 2008, which has left the country vulnerable to the global financial crisis.
Indeed, Romania’s economic growth sank to just 2.9% on an annual basis in the fourth quarter of 2008, as the global crisis depressed consumption and industrial output. Consumption, the main driver of Romania’s buoyant expansion of recent years, fell by 2.8% year on year in the final three months of 2008, after growing by 13.8% in the third quarter, as consumers and companies struggled to finance spending. Industrial production slumped by 7.7%, depressed by tumbling demand from the Eurozone, forcing many manufacturers to halt production temporarily and lay off workers.
Independent economists now expect the Romanian economy to expand by less than 1% in 2009, with many pointing to a likely contraction. A Reuters poll conducted in February found that most economists expected the economy to shrink in the first quarter of 2009.
Despite the rapid economic slowdown, inflation has accelerated in 2009, climbing to 6.8% on an annual basis in January, up from 6.4% in the previous month. The figure was four times higher than the EU average of 1.2%, and the third-highest annual inflation rate among EU member states. Curbing inflation is a key requirement for Romania if it is to switch its currency to the euro. The central bank had anticipated that inflation would fall in 2009, reflecting declining prices for oil and other commodities. However, the depreciation of the lei appears to have offset the impact of falling commodity prices.
The government anticipates that FDI will fall to €4.7 billion in 2009, down by nearly half on the level seen in 2008. However, the central bank forecast in March 2009 that the current account deficit would improve in 2009, narrowing to around 8% of GDP, from 12% in the previous year, as the economic slowdown cuts the country’s appetite for imports.
Support for Inward Investment and Imports
The government encourages foreign investment. In 2004, the government established the Agency for Foreign Investment (ARIS), and took other measures to advertise Romania as an attractive investment destination, and to improve aspects of the business climate. These include strengthening the tax administration, enhancing transparency, and creating legal means to resolve contract disputes quickly. Romania’s accession to the European Union in 2007 has also helped to improve the investment environment. However, judicial and legislative unpredictability remain significant problems. For more information on support for investors and the incentives available to investors, see the website of the Agency for Foreign Investment.
Romania operates an open economy, requiring no special conditions for access for importers or operation on the part of foreign companies. Since January 1, 2007, Romania has applied the common EU tariff system. Tariffs are particularly high for items such as cigarettes. Decisions regarding quotas or customs suspensions to be applied to goods imported into Romania are currently taken at the European Community level. Information on the EU’s trade policies can be found on its website.
The government made significant changes to Romanian tax legislation at the end of 2008, and in early 2009. The measures were aimed at offsetting the impact of the global financial crisis on Romania. Changes include exempting capital gains realized by companies and individuals in 2009 from share trading on the Romanian Stock Exchange. From January 1, 2009, the government abolished taxation on interest derived from deposits and other saving instruments (previously, interest on term deposits was taxable at 16%). It also introduced a tax exemption in respect of dividends reinvested for the purpose of maintaining or increasing employee numbers. The exemption also applies to dividends reinvested in the share capital of another legal entity.
In 2008 the authorities announced that IT programmers would continue to be exempt from income tax in 2009, in order to encourage the development of the IT industry.
GDP growth: 7.1% (2008, government figures)
GDP per capita: US$12,500 (2008, est.)
CPI: 9.9% (2008 average, Eurostat)
Key interest rate: 10% (March 2009)
Exchange rate versus dollar: lei per US dollar—2.5 (2008, est.)
Unemployment: 4.9% (January 2009, government figures)
FDI: US$72.82 billion (2008, est.)
Current-account deficit/surplus −US$28.03 billion (2008, est.)
Population: 22,246,862 (July 2008, est.)
Source: CIA World Factbook except where stated