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Text File | 1994-05-02 | 18KB | 353 lines

<text> <title> Romania: Economic Policy </title> <article> <hdr> Economic Policy and Trade Practices: Romania </hdr> <body> 1. General Policy Framework Since the fall of the Ceausescu regime in December 1989, Romanian trade policies have been substantially liberalized, although the demand for U.S. exports has been mitigated by the lack of hard currency. A new bilateral trade agreement to include, inter alia, restoration of Romania's Most Favored Nation (MFN) status, was initialed on October 28, 1991. A U.S. decision on when to submit the new agreement to Congress for approval will be made in light of further progress toward democratic pluralism, especially the holding of free and fair elections. The Romanian economy is in the midst of a prolonged downturn brought about by a painful restructuring from a centrally planned to a market economy, the collapse of the Council for Mutual Economic Assistance (COMECON) socialist trading bloc, and a severe energy shock. Real Gross Domestic Product (GDP) fell 7.9 percent in 1990 and another 5 percent in 1991. Salaries have failed to keep pace with inflation (estimated at more than 150 percent for 1991), resulting in a sharp decline in real wages and growing impatience among workers. Unemployment at the close of 1991 probably exceeded 10 percent, and the number of underemployed was even higher, reflecting a 17 percent drop in industrial output caused by shortages of imported raw materials, diminished markets for Romanian exports, and cautious monetary policies. While some government officials foresee a resumption of economic growth (led by the agricultural sector) in 18 to 24 months, available economic indicators so far indicate at best a modest slowing in the rate of decline. However, substantial progress has been made in preparing the legal framework for major reforms in banking and finance, land use and ownership, foreign investment, taxation, and privatization of industry. The government moved to a unified foreign exchange rate in November 1991, a major step toward full convertibility of the Romanian leu. Financial and technical assistance has begun to flow in from abroad, marking the beginning of Romania's reintegration into the world economy after a long period of political isolation. The International Monetary Fund, World Bank, and European Bank for Reconstruction and Development are active in Romania. As a result of fiscal reforms already implemented, adherence to International Monetary Fund (IMF) fiscal targets, and an unanticipated inflation-fed revenue windfall during the first half, the central government posted a relatively modest deficit for 1991. Subsidies for energy imports constituted a major share of the deficit. These will be substantially reduced with massive domestic fuel price adjustments adopted in mid-November. Taxes on salaries and retail turnover provide three-fourths of revenues. Exports are not taxed, and tax incentives exist for foreign investors. Romania is a member of the GATT and has sought to accommodate General Agreement on Tariffs and Trade (GATT) membership obligations in its new trade and tax laws. The Romanian economy operates mainly on a cash basis, and commercial banking is still in the early stages of development. Monetary policies can be characterized as cautious to restrictive. Tools used by the government to control the money supply include an arbitrary ceiling on credits, adjustment of the discount rate, and the volume of bills. Subsidies have been reduced drastically, and only a handful of basic commodities remain subject to price controls. A stock market is expected to open sometime in 1992. 2. Exchange Rate Policies As a result of a series of devaluations of the Romanian leu dating from February 1990, Western imports have become increasingly costly. While the monetary value of imports has risen, the volume of imports has declined. Under the dual exchange rate in effect at the end of October 1991, approximately 60 percent of imports were financed at the official exchange rate of Romanian lei (RL) 60 to United States dollar (US$1). This rate was used for such transactions as energy imports and capital repatriation. All other transactions were conducted at an inter-bank auction rate, which at the end of October 1991 was approximately RL 300 to US$1. An IMF standby arrangement calls for the creation of a unified exchange rate. Government authorities postponed a planned unification scheduled to go into effect September 27, 1991, when labor unrest forced the fall of the previous government. The present transition government made exchange rate unification one of its top priorities, and put it into effect on November 11. The initial united exchange rate was 180 lei to the dollar. 3. Structural Policies The transition to a market economy has required new laws in virtually every field: commercial code, privatization, copyright, trademark, patent, banking, labor, foreign investment, tax and social security. Laws reforming most sectors have been drafted and many have been promulgated. Most important have been the two laws to privatize 6,000 state-owned enterprises. In the first stage, most state enterprises were reorganized into commercial firms with greater autonomy to make commercial decisions. In 1992 the government should start to offer these firms for sale to Romanian and foreign interests. The tax system is being overhauled as well. At present there is a tax on salaries, not income, and a profit tax. Several unique exemptions and incentives have been built into the laws. As a result, firms may be better off splitting into smaller subsidiary units to avoid the progressive, multi-bracketed profit tax. Individuals will be inclined to earn more non-salary income to avoid the progressive personal income tax. A value added tax system is to be introduced in 1992 or 1993. Customs duties have been simplified, and the rate reduced to a maximum of 30 percent. Several gaps exist in the legal framework for reform as Parliament also addresses a new constitution and political reform. Despite years of isolation under Communist rule, Romanian ministry staffs are knowledgeable about international standards and norms for laws. 4. Debt Management Policies In an effort to reduce foreign influence, Ceausescu directed the liquidation of all foreign debt via accelerated payments and forced exports. As a consequence, by April 1989, the country's debt was virtually zero. After December 1989, foreign borrowing was resumed and by the end of the third quarter of 1991 amounted to approximately $3.2 billion. Since May 1991, an IMF standby agreement has been in place designed to correct price distortions, ensure balance of payments viability, and stop the fall in GDP. The Fund pledged $500 million in Balance of Payments (BOP) assistance plus up to an additional $450 in contingency and compensatory assistance. Group of 24 (G-24) countries have pledged $727 million in balance of payments/stabilization support, a third of which had been disbursed at the end of the third quarter. The World Bank so far has approved loans totaling $330 million for emergency imports, technical assistance, and health care system support. Commercial lending to Romania has been small, and no instances of bank credit rescheduling are known to the Embassy. Roughly 80 percent of Romania's export earnings are used to finance energy imports. 5. Significant Barriers to U.S. Exports Traditionally defined trade and investment barriers are not a significant problem in Romania. Romania has no laws that directly prejudice foreign trade or business operations. However, the transitional nature of the reform process has created (or retained from the Ceausescu era) an environment not always conducive to foreign trade and investment. Chief concerns include: Diffic