Romania
Economic Overview
Romania made impressive economic progress in 2004, demonstrating strong GDP growth, curbing inflation and lowering unemployment. On the negative side, strong consumer demand fueled a growing current account deficit as Romania’s trade deficit rose as a result of surging imports.
In 2004, the country saw positive developments in key macroeconomic indicators. GDP growth reached 8.3 %, marking its best performance in the transition period, thus surpassing by 3.1 % the GDP growth rate for the year 2003 and by 2.8 % the original objective. The official unemployment rate dropped to 6.2 %, down from 7.4 % a year earlier.
This was primarily due to expansion in the manufacturing, construction, agriculture, and retail industries. Also, continuing labour migration abroad represented a major factor in maintaining the lower local unemployment rate. Inflation rate fell by 4.8 % to 9.3 percent. Fiscal adjustment continued, with consolidated general government deficit narrowing to 1.1 percent of the GDP, compared to 2.3 percent of the GDP in the year of 2003.Unemployment rates receded to 6.2 % at the end of 2004 as compared to 7.4 % at the end of 2003.
Furthermore, in 2004 Romania for the first time succeeded in posting annual inflation below 10 %, with the inflation rate being 9.3 %.
Romanian exports reached a record level of over USD 20 bln., which represented a 33.8% increase in comparison with 2003. The export performance was all the more impressive, given the fact that the Romanian national currency appreciated both against the USD (by 10.8%) and against the EUR (by 3.5%), with this phenomenon hindering exports and encouraging imports. Italy (21.4%), Germany (15%), France (8.5%), Turkey (7%), and the UK (6.6%) remained the main export countries for Romanian goods. At the same time, exports to the EU in general rose by 7.2 %, with the EU enlarged market accounting for 72.9 % of the total Romanian export. Romanian exports to the US went up by 7.3 %, reaching USD 668.5 mln. It represented 2.8 % of the total Romanian export for 2004, as compared to 3.5 % in 2003.
On the other hand, the imports record high of over USD 30 bln. was caused mainly by the relative absence of domestic supply that, along with more favourable financing terms, boosted non-government credit by 38 %. Machinery and equipment ranked first among Romanian imports with a 23.8 % share, representing a 35 % increase as compared to the year 2003. Other top imports were textiles, fuels and minerals, basic metals, and chemicals. Romanian imports continued to arrive mostly from Italy, Germany, France, and Russia. As to imports from EU and non-EU countries, they were distributed in a ratio of 64.9 % to 35.1 %. US imports to Romania augmented significantly by 67.1 % as compared to the year 2003, reaching USD 933 mln. in 2004. Goods comprised 2.9 percent of the total Romanian imports, their share growing from 2.3 % at the end of 2003.
Overall, the growth rate of exports in 2004 accelerated to 21.3 %, while imports soared by 24 %, thus widening the current account deficit.
The 2004 current account deficit rose by 57.8 %, reaching USD 5.458 bln, or 7.5% of the GDP. This came as a result of the increase in the goods and services deficit by 56 %, and of the income deficit by 25.2 %. Other factors that intertwined with the above-mentioned, thus worsening the current account deficit, were the 23.6 % drop in the international transportation surpluse and the 13.8 % deterioration of the international tourism deficit. The International Monetary Fund viewed the current account deficit of nearly 7.5 % of the GDP as a matter of concern.
At the end of December 2004, foreign investments jumped by 47% as compared to 2003, reaching USD 249.5 mln. The inflow of foreign direct investments more than doubled reaching 7.1% of the GDP mainly due to the completion of several major privatisations.
In compliance with the proclaimed governmental economic policy, in 2004, the State Asset Resolution Authority (AVAS) sold 62 medium and large companies in which the state was a majority shareholder. In addition to these transactions, AVAS also privatised minority stakes in 85 companies, resulting in revenue for AVAS amounting to USD 381.2 mln. The largest of those sales was the one of the Romanian national oil company, Petrom, to Austria’s OMV.
As regards Romania’s relations with the IMF, after the successful completion of the stand-by arrangement in 2003, the IMF Executive Board approved in July 2004 the conclusion of a 24-month Stand-By Precautionary Agreement for the amount of SDR 250 million (around USD 367 million). The first review of Romania’s economic performance, as provided in the new arrangement, was finalized in the IMF Executive Board Meeting on 22 September 2004.
The positive trends in the Romanian economy during the first ten months of 2005, though slowed down due to the heavy floods and the governmental crisis that took place.
In the first half of 2005, GDP growth eased to 4.9%. Household consumption continued to grow, reaching 11.2%. Inflation slightly decreased to 8.9% in the first eight months of the year, but crawled up again afterwards.
Further, a growth in the services sector was recorded. However, in the first half of the year growth slowed down in constructions to 3.9% as compared to 9% in 2004, as well as in industrial production down to 3.6%. The serious decline in agricultural production by 7.1% took place as a result of heavy floods.
The decline in unemployment over the course of 2004 continued in the second quarter of 2005, with unemployment rate dropping to 5.5% in July 2005, compared to 6.3% one year earlier. Additionally, statistics for July 2005 indicated that employment was 2.5% higher than one year earlier. Net nominal wages in July 2005 were 24.1% higher than one year before, while real wages grew by 13.6% compared to July 2004.
For the first seven months of 2005, the trade deficit widened further from that at the end of 2004 following the slight slow down of export growth to 15.2%, while import growth remained strong at 21.8% of the GDP. During the first seven months of 2005, the current account deficit remained below its level of 7.5% of the GDP recorded in 2004, but, yet, it was about 56% higher than in 2004 in absolute terms due to the more negative balance of goods and services.
Foreign direct investments for the first seven months of 2005 returned to the more moderate level of about 4% of the GDP.