Regional Factbooks

Romania's transition to a market economy has been protracted and painful. The legacy of the communist regime, extreme centralization, a high degree of bureaucracy, and no experience of partial reforms such as those undertaken in other Central European economies during the 1980s left Romania with one of the longest paths toward a market economy.

The successive governments which ruled the country between December 1989 and November 1996 avoided serious economic reform, fearing "shock therapy" and its anticipated social costs, mainly the attendant mass lay-offs. Inheriting an economic situation which proved to be much worse than anticipated, the coalition government formed as a result of the November 1996 national elections started its activity by drawing up a comprehensive reform package meant to establish clear and efficient privatization and restructuring procedures, eliminate price control, free the exchange rate, eliminate subsidies, establish a more efficient system of banking, allow bank privatization, introduce a modern tax system, and, most importantly, encourage foreign investment.

The implementation of this reform package, however, has not been up to expectations. The reduction of direct state subsidies, price control, directed lending and trade protection resulted in reactive restructuring and downsizing of the industrial sector. Notwithstanding, a wide variety of "soft budget constraints", such as permitting payment arrears and ineffective bankruptcy procedures, have indirectly subsidized unprofitable behavior while good corporate governance has been undermined by vested interests. An unpredictable investment climate together with bad loan portfolios at banks, lack of labor mobility and a weak tax base inhibited the growth of a new private sector.

Especially slow was the progress in industry restructuring and privatization: at the end of 1999, the state sector still accounted for 70.2 percent of industrial production. Although 5,155 of the 6,300 state firms in existence in 1990 have been privatized, the majority of large state-owned enterprises are still awaiting privatization or liquidation. During 1999 the government successfully privatized the national carmaker Dacia, the railways stock manufacturer Astra Vagoane Arad, the largest Danube shipyard in Galati, and two of five state-owned banks, among other privatizations. IBRD-supported, new privatization and liquidation legislation was approved in May of 1999, and was expected to accelerate the privatization process by removing State Ownership Fund's sole authority on privatization and providing for a greater involvement of the privatization agents. At the end of 1999, the private sector accounted for 61.5 percent of GDP, 93.4 percent of agricultural production, 93.2 percent of domestic retail trade, 71.9 percent of imports, 65.7 percent of exports, 67.6 percent of services, and 31.7 percent of industrial output.
Romania's GDP dropped 3.2 percent in 1999 to 521.73 trillion lei (about $34.0 billion). Industrial output decreased by 8 percent over 1998 levels. The most drastic decreases were registered in steel works (-48.8 percent), oil processing, coal cocking and nuclear fuel treatment (-26 percent), electronic and communication equipment (-25 percent). Increases were recorded for high precision, optics, and fine mechanics (35 percent), ready-made clothes (14 percent), and furniture (11 percent). In the agricultural sector, total output registered an improvement of 5.5 percent, primarily due to favorable weather conditions, larger areas cultivated with some plants, and higher yields. Grain production grew by 1.6 MMT as a result of favorable climatic conditions. Production of other crops was mostly higher compared to 1998. In the livestock sector, as a result of GOR's privatization policy, significant reductions of livestock and poultry inventories were reported, which led to lower levels of meat and poultry output.

Romania's foreign trade registered dramatic disruptions after the 1989 revolution. The decrease in domestic production, the dissolution of the Comecon market, and the costs of observing U.N. sanctions against Iraq and Serbia (two of Romania's traditional trading partners) were the main factors causing a sharp decline in Romanian exports and a significant increase in the country's balance of trade deficit. However, in 1999, exports totaled $8.5 billion (FOB), which represents a 2.4 percent increase versus 1998. The largest shares were textiles and apparel (25.8 percent), iron and steel products (15.4 percent), electric machinery and equipment (11.4 percent), and footwear (8.0 percent).

Romania's economy relies heavily on imports, of which up to 50 percent are raw materials (mainly oil and gas). Romania is also a net importer of minerals, machinery and electrical devices, cotton, and hides. Since 1990, imports of food products and consumer goods have been significant. However, in 1999, imports went down by 12.2 percent versus 1998. CIF imports reached USD 10.4 billion, of which 60.4 percent came from European Union countries, 18.5 percent from Eastern and Central Europe, and 11.8 percent from developing countries. The balance of trade deficit in 1999 was USD 1.1 billion in FOB/FOB prices and USD 1.9 billion in FOB/CIF prices.

Romania's current foreign trade policy aims at the country's integration into Western markets. Romania is an associate member of the European Union (EU) and the Central European Free Trade Association (CEFTA), and opened EU accession negotiations in December 1999.

Trade relations with the United States have been strengthened by the U.S. - Romanian trade agreement (1993), the bilateral investment treaty (1994), and the August 1996 granting of unconditional MFN treatment. In 1999, the United States ranked seventh in Romanian imports (after Italy, Germany, Russia, France, U.K. and Hungary) and seventh in Romanian exports (after Italy, Germany, France, Turkey, U.K. and Holland). U.S. exports to Romania went down by 27.4 percent versus 1998, totaling USD 362.4 million. They were led by machinery ($59.8 million), electrical machinery ($20.8 million), special classification articles ($16.9 million), vehicles ($15.1 million), and mineral fuel ($13.8 million). U.S. imports from Romania decreased by 0.8 percent, reaching USD 316.9 million. They were led by iron and steel products ($78.6 million), woven apparel ($47.0 million), machinery ($44.9 million), mineral fuel ($42.3 million), and knit apparel ($39.5 million).

Principal Growth Sectors

Information Technology - The IT sector is growing rapidly in Romania. Because of the strength of its education system, especially in technical faculties, Romania has a large pool of highly skilled labor in engineering and electronics manufacturing, as well as an impressive number of software developers. Romania's density of software graduates per thousand inhabitants is significantly greater than the rate in the USA, five times that in Russia, and nearly seven times India's rate. Of the country's more than 200 software development companies, over 100 are already exporting their services to EU and North American markets.

Romania's technology sector presents excellent opportunities for investment and trade between Romania and the U.S. In the fields of software development, engineering and electronics manufacturing (CAD, CAM) there are opportunities to generate high-quality products at very competitive prices due to the low cost of local work force. The cost of skilled IT professionals in Romania is around one-third that in the US, while the cost of basic IT labor could be found as low as one-eighth of the U.S. cost. Several well-known U.S. companies have already invested in local hardware manufacturing (Solectron), engineering design (Harza Engineering), as well as in educational, research, and software development programs with universities and other institutions (Hewlett Packard, IBM, Motorola, Oracle, Cisco, Lucent Technologies, Microsoft). Lockheed Martin, General Electric, Raytheon, Sun Microsystems, and Marconi also consider cooperation with Romanian IT companies. The number of U.S. companies that have used or are interested in using Romania as a source of offshore software programs for industrial applications is increasing. Bilateral projects develop at a fast pace, a fact illustrated by such examples as the opening in Bucharest, in June 2000 alone, of the Motorola Digital Signal Processing Center (which will develop application software for leading wireless and telecommunications solutions), of a Lucent Technologies Training-Demo Center, of the AuctionWatch.com Romania office (an engineering development center working on new web-based applications), and of a Cisco Networking Academy laboratory. With due support from the Romanian government and adequate advertising in the United States, the Romanian IT sector could safely be expected to become a very important provider of offshore software to U.S. users.

Agriculture - With 10 million hectares of arable land, good fruit-growing and viticulture, and excellent conditions for animal production, farming is a source of substantial wealth for Romania. Although the agricultural sector has the potential to meet domestic demand for food and generate surpluses for export, its development has been, over the last ten years, negatively impacted by structural and managerial problems, as well as by the lack of attractive credits. To encourage faster growth and modernization of the sector, GOR decided to complete its privatization by selling the assets of all state farms (totaling about 1.5 million hectares). This process was started in May 2000 and is scheduled to be completed by the end of 2001. Interested U.S. companies have the opportunity to invest in this important sector through the acquisition of some of the state farms slated for privatization .

Food processing and packaging - The sector has been one of the first to be tapped by foreign companies, which have formed a large number of joint ventures with local Romanian enterprises. Large U.S. companies such as Coca-Cola, Pepsi Co., Kraft Jacobs Suchard, Procter & Gamble, McDonald's, Pizza Hut, Dunkin Donuts are already present in the market. Favorable conditions for growth in this sector are expected to also encourage the rapid development of the food packaging industry.

Oil and Gas - In 1999, Romania produced 6.2 million tons of crude oil and 13.8 billion cubic meters of natural gas. To supplement domestic production, about 4.3 million tons of crude and 3.2 billion cubic meters of gas were imported. Growth in these sectors over the next years will be stimulated by EBRD/World Bank projects aimed at increasing oil and gas production via the introduction of new equipment and new production methods. Western Atlas and M.I. Drilling have already contributed importantly to an increase in oil production. In addition, exploration activities and geological surveys currently conducted by foreign companies may lead to discoveries of new oil and natural gas reserves. The National Agency for Mineral Resources actively promotes the concession of oil and gas research areas.

Oil Drilling Equipment - Romania used to be one of the top three oil drilling equipment manufacturers worldwide in the late 1980s. Although the current output is much smaller, Romania's oil drilling facilities are starting to recover from the steep drop in demand that plagued them during the 1991-95 period. Their connections in the NIS and Arab countries may lead to new export contracts. The opening of the Caspian oil and gas route might trigger an important revival of this industry.

Real Estate Development - As the number of institutional grade office buildings is limited, during 1999 investors focused on large industrial facilities available through privatization. Many of these properties are well located and present a great potential for further industrial or retail development. The commercial and the industrial markets suffer of lack of quality supply to meet the existing demand and of lack of developers willing to take risks and invest in a new market. Those few properties which have been developed have proven to be successful, with high returns, rapid growth of invested capital, rental payments indexed to stable foreign currencies and occupancy by the highest quality international tenants. Another active segment of the investment market is represented by small to medium size properties with prices in the range of 1-2 million USD. These properties are used mostly as offices by medium size international companies and can offer returns between 18 percent and 22 percent. As of December 1999, the total stock of institution grade premises in Bucharest totaled only 180,000 sqm of true Class A&B office accommodation and 35,000 sqm of new-build warehouses of industrial premises. The total market capitalization is estimated at USD 270 million for modern office properties and USD 17,5 million for warehouse properties. Projections indicate annual returns from a possible low of 14 percent, for large projects with long term leases and quality tenants, to 18-22 percent for smaller buildings with shorter lease terms and medium size companies as tenants. During 2000 the Romanian market is expected to witness the first major investment/sales transaction and investors to show more interest in this market as the country risk is decreasing and the other Eastern-European markets are already using yields below 10 percent per annum.

Services - Although the service sector has undergone rapid change since 1990, it is far below Western standards. The greatest potential for development is offered by hotel and restaurant services, tourist services, and leisure activities. Other areas which require upgrading are banking/insurance, leasing, legal and financial consulting, and advertising and media development. Some progress has already been made, with several large Western companies specializing in consulting, legal services, accounting, auditing, and advertising offering their services in Romania.

Government Role in the Economy

The government has an essential role to play in the creation of a framework for the structural and systemic changes needed to foster economic reform. Currently, industry privatization and restructuring, which are the major elements of reform, get special attention.

The rapid completion of the privatization program has become a necessity. New economic reform legislation has recently been passed by the Parliament, amending the Privatization Law, the Bankruptcy Law, the Commercial Company Law, the Leasing Law, the Secured Transaction Law, the Insurance Law, Banking Bankruptcy Law, the Statute-Law of the National Bank of Romania, the Eximbank Law, etc.

Romania has recently revised its tax system to bring it closer to EU models and more in line with the recommendations of the World Bank and IMF. This resulted in significant changes to the business and investment environment. Currently, the corporate income tax is 25 percent (down from 38 percent) and the value added tax (VAT) is 19 percent (down from 22 percent). An investment tax credit of 10 percent was introduced for machinery and equipment only, and a lower tax rate of 10 percent was set on reinvested profits. VAT exemption is provided for exported goods and a corporate profit tax rate of 5 percent for export-derived profits. Imported raw materials destined exclusively for the manufacturing of finished products exported within 45 days from importation are also eligible for VAT exemption.

Under current law, the State Ownership Fund no longer has sole authority to sell shares and assets in state-owned Romanian commercial companies. Recent amendments to the privatization law allow the government body that has authority over the company (the SOF, the relevant ministry, or the local administration) to privatize it. The government authority can hire an agent to handle the project from restructuring to final privatization, and 62 companies out of the most important ones have been offered for sale by this method, under World Bank's supervision. Sales of shares take one of the following forms: public offering on the Bucharest Stock Exchange or RASDAQ, negotiation, auction, depositary receipts issued by investment banks on the international capital markets (GDR, ADR, EDR) or a combination of these methods. Public institutions may, at their discretion, agree to accept payment over time for shares being sold. When a company sells real assets, payment over time is permitted only for Romanian citizens and SMEs.

New legislation allowed the Ministry of Finance to take direct control from the SOF of highly indebted companies through a "debt for equity swap". A first pool of six companies was privatized over the OTC market under this mechanism. Also, based on an emergency ordinance issued in December 1999, the Ministry of Agriculture took over 644 agricultural companies from the State Ownership Fund.

For the near future, the most important privatization deals will include two banks (Agricultural Bank and Romanian Commercial Bank), 12 public utilities, and five national companies.

A structural reform plan drafted by the Romanian Government in 1999 together with the World Bank aimed at reducing the losses in the economy by 30 percent. The restructuring of the mining sector alone resulted in a reported cut of losses by 32.69 percent. According to official statistics, the State Ownership Fund also over-performed, cutting losses in the industries under its umbrella by 36.36 percent in 1999. However, the failure to address problems of some of the largest loss makers outside the group targeted by the World Bank and the GOR's decision to extend new direct support to the companies slated for restructuring have resulted in continued growth in losses in those industries. In short, despite progress in some areas, there has been no change in the pattern of continuing accumulation of arrears.

A new EU-inspired law on state aid came into effect in January 2000, aiming to regulate and keep under control state aid in any form (as either direct state subsidies, debt rescheduling schemes, or discount prices). However, implementation has been slow and preferential debt rescheduling by the Ministry of Finance and Ministry of Labor have resulted in major distortions on the market. Furthermore, state aid schemes continue to be non-transparent.

The main emphasis in the privatization/restructuring process is on attracting foreign investors. Legislation to facilitate the access of foreign capital on the Romanian market is included in the GOR's reform package.

When privatization is completed and the basic elements of a market economy are in place, the government's role in the economy will diminish. In the meantime, GOR plays an extremely important part in the economy.

Balance of Payments Situation

Romania's consolidated budget for 2000 anticipates receipts of USD 11,615.8 million and expenses of USD 13,393 million. The deficit for 2000 has been set at USD 1,777.2 million.
More than two thirds of revenues come from indirect taxes, whereas direct taxes are less than 20 percent. For the first time this year, local budgets have a wider range of revenue sources, including 40 percent of the revenues from the income tax. Also new for the GOR, all expenditures in the budget were linked to specific revenue sources.

Romania's current account for 1999 showed a deficit of USD 1.3 billion, down from USD 3.0 billion in 1998. Current account deficits are financed largely via loans and grants from international financial institutions (IFIs) and bilateral donors. At the beginning of 2000, Romania's most important IFI creditors were the World Bank ($1,693.6 million), the EU ($121.1 million), the IMF ($447.0 million), and the EBRD ($766.1 million). Main foreign government creditors included Germany ($360.7 million), Canada ($196.1 million), Italy ($47.2 million), Japan ($108.4 million), and the United States ($42.8 million). U.S. credits consisted mostly of loans granted by USDA (with GSM having a large share) and loans through the U.S. Eximbank.

At the end of February 2000, Romania's medium and long-term external debt amounted to USD 7.9 billion, while the short-term debt amounted to USD 381.7 million. At the end of March 2000, the National Bank's foreign exchange reserves stood at USD 1,605.5 million ($2,539.7 million, gold and SDRs included) and the commercial banks' reserves had fallen to USD 1,107.1 million. At the same time, Romania registered USD 441.3 million short-term commercial claims against foreign countries, plus claims worth USD 3 billion from economic transactions prior to December 1989.

During the year 2000, Romania has and will continue to receive financial assistance from IFIs. Under the World Bank's current Agriculture Structural Adjustment Loan (ASAL), Romania has received USD 200 million and is scheduled to receive two other tranches (July and December 2000) totaling USD 150 million, on condition the GOR manages to privatize all state-owned farms (total area: 250,000 ha) by the end of the year. Out of the World Bank's Private Sector Structural Adjustment Loan (PSAL1 - USD 300 million) Romania has received USD 150 million. As regards the IMF, its board has approved the extension of its stand-by agreement with Romania until February 28, 2001. The first tranche of the USD 535 million stand-by loan ($116 million) was disbursed in June 2000, while the others will be disbursed in August and November 2000, and in February 2001. The importance of the extension of the stand-by agreement lies mainly in the fact that it sends a positive signal to foreign institutional investors, gives the green light to disbursements under ASAL, PSAL1, and EU's BOP support, and encourages reasonable interest rates on private international capital market placements.

Romania has sought to diversify its sources of external financing. As of mid-1999, it had received two loans from the international private credit market: a USD 108 million club loan (provided by about 13 foreign banks) and a USD 63 million loan supplied by another club loan, instead of the IMF-required USD 450 million as bail-in. Unfortunately, Romania's most recent international country risk ratings do not make it easy for the country to borrow from the private international credit market. These ratings have been the same since 1999, although Romania succeeded that year in avoiding default and increasing forex reserves. Romania's current international credit ratings are B- for long-term foreign debt, BB- for long-term domestic debt, and B for short-term foreign debt (Fitch IBCA); B3 for long-term bonds and Ca1 for long-term bank deposits (Moody's), and B-/C for foreign currency debt (Standard & Poors).

Adequacy of the Infrastructure System

Transportation - Due to its strategic location at the crossroads of Europe and Asia, Romania has the potential to become one of the busiest transportation areas in Central and Southern Europe. Improving the condition of the country's road network, restructuring railways, and upgrading the seaport of Constanta have become imperative.

Romania has a network of public roads totaling 153 thousand kilometers, of which 14.7 thousand are national roads which carry 65 percent of the total road traffic, 27 thousand are county roads, and the rest local roads. Only 113 kilometers are motorways, and only 4.5 thousand kilometers are classified as European-class roads. This is an inadequate road network under the current conditions, when total traffic on main Romanian roads has increased by about 60 percent and international traffic by about 300 percent. To improve the condition of the road network, Romania has obtained loans from multilateral lending institutions for the following major projects in this sector:

- Road rehabilitation ($180 million). The project provides for the rehabilitation of 1053 km. of national roads, is funded by the World Bank, EBRD and the European Investment Bank, and is almost completed;
- Border crossing upgrading ($10.5 million funded by EU-Phare). Six main border-crossing points will be modernized to ensure adequate flow of international road traffic;
- Road safety ($10.5 million). This includes signaling and marking of 5,000 km. of roads designated as European.

Additional infrastructure projects have been discussed with the World Bank, EBRD, and EU-PHARE for motorway extension and building a bridge over the Danube.
The Romanian government supports the redesigning of the Fourth Pan-European corridor crossing Romanian territory from West to East and including into the Seventh Pan-European corridor the Danube-Black Sea canal. Objectives for the next ten years include the complete rehabilitation of 4,500 km of European class roads with funding supplied through international loans coupled with foreign grants and local funding, the modernization of 10,000 km of national roads (valued at $270 million) with government and municipalities' funding, and the resumption of the motorway building program (especially Corridor 4C, from the port of Constanta to the Western border, and the links with Corridor 9, Bucharest-Giurgiu and Bucharest-Siret).

Romanian railways rank seventh in Europe in freight tonnage with about 40 billion kilometer-tons transported yearly. In 1999, the Romanian National Railway Company (SNCFR) owned 11,365 kilometers of track (of which 45 percent is electrified), about 130,000 freight cars, 6,400 passenger coaches, and 3,200 electric/diesel locomotives. It employed about 103,000 people. SNCFR has recently launched an ambitious rehabilitation program providing for the refurbishing of 1,500 coaches, upgrading of 5,000 freight cars, modernization of 1,600 locomotives, and procurement of track maintenance and data processing equipment, as well as needed spare parts. Railway modernization projects, which also include the extension of the Bucharest subway network, enjoy the support of the World Bank, EBRD, and EU-PHARE.

Telecommunications - Romania's telecommunications system has been deregulated, expanded, and modernized to a great extent during the last ten years. Public operators have been granted autonomy and are scheduled to be fully privatized; private operators have proliferated in mobile cellular telephony, CATV, radio/TV broadcasting, data transmission, and VSAT communications; the market for terminals has been completely liberalized; and companies involved in telecommunications equipment manufacturing, installation, and maintenance have been opened to free competition and privatization. Basic telephony services are still the monopoly of the national operator Romtelecom, but as of January 2003 they will be liberalized. In the meantime, special licenses can be granted, via tenders, to private suppliers of basic telecommunications services in rural regions. Romtelecom was partially privatized in late 1998, when OTE, the Greek national operator, bought 35 percent of its shares. The other large public operator, Radiocom, is scheduled to be partially privatized by end-2000.

As part of Romania's telecommunications modernization program, Romtelecom channeled priority investment towards the digitalization of its network. At end-1999 it had a total of 4.4 million lines, of which 35 percent were digital. The average telephone density reached 17 percent (30 percent in urban areas, but only 4 percent in rural areas, where some 2,000 villages still have no telephone service at all). Romtelecom's projects for the year 2000 include further digitalization of the network: the launching of the SS7 signaling system and of ISDN, which will support a faster growth of data transmission systems and the integration of voice, data, and image transmission; the implementation of a national voice mail system; and the expansion of the intelligent payphone network.

Mobile communications have developed dramatically in Romania over the last three years. Currently, there are four providers of cell telephony, with a total of over 2 million subscribers: Telemobil (LEMS 450 MHz), Mobifon (GSM 900 MHz), Mobilrom (GSM 900 MHz), and Cosmorom (DCS 1800 MHz).

Internet penetration in Romania is currently small (1.5% of population, i.e. about 350,000 users), but the growth rate of the sector is significant (5-6% per month). There are over 150 ISPs. Computer literacy and good English language skills of the population, the existence of a widespread cable TV network (about 3 million subscribers) and the very good penetration (about 9%) of mobile telephony (as a basis for mobile Internet) are factors which will support increased Internet access. Factors negatively impacting Internet and e-commerce development include the insufficient number of PCs (only about 700,000 for a population of 22 million, but growing at an annual rate of 30%), limited use of credit cards, and high fees charged by Romtelecom for the use of its lines. An Internet user pays $1/hour to the ISP and $4/hour to Romtelecom. The substitute for Romtelecom's phone lines is coax cable. Cable TV companies have networks in all cities and in many rural areas. Romania Cable System (RCS) and United Pan-European Communications (UPC) own the largest cable TV networks, and together have about 1 million subscribers. UPC has announced its intention of offering TV, telephone and Internet over its network. Internet users are concentrated in the larger cities (Bucharest, Cluj, Timisoara, Iasi). Home users rely mostly on modems; institutions (schools, universities, foundations, etc.) are generally connected via dedicated lines; and business companies use both cable and dial-up connections.

There are at least five portals in Romanian providing listings of links by categories and search engines. Some of them provide news content as well as e-commerce B2C offers. In most cases, the contents and the search engines are of poor quality. The use of credit cards in Romania is in its initial stages. While the number of stores that accept payment by credit card increases, the customers are not yet well educated regarding their use. Banks lack the infrastructure necessary for clearing payments by Internet. The Romanian Development Bank-Societe Generale has announced that by the end of 2000 it will have 200,000 card users; other major banks may have similar numbers of credit card users.

Large local advertising companies do not offer Internet advertising to customers. There is at least one small company that offers advertising space on domestic sites, but the demand for its services is still limited. At least five local dailies have web editions, but none is real-time.

Demographics & Economic Situation

Source: Factbook.net