Chapter 4: Romania

(continued)

4.2 Introduction

Political Situation

In November 1996, the political landscape in Romania changed significantly as a result of the Parliamentary election victory of the main opposition party, the Romanian Democratic Convention (CDR). The CDR now leads a coalition government, which also includes the Social Democratic Union (USD) and The Hungarian Democratic Union of Romania (UDMR). The elections also brought in a new president, who is the leader of the CDR.

Since then, the new government has announced a strong stabilization and liberalization program involving a reduction of the fiscal deficit, the liberalization of the foreign exchange market, accelerated structural reforms and support for European and Euro-Atlantic integration. Although the French government adamantly supported Romania's initiative to be included in the first round of NATO enlargement, Romania was not invited to join.

Despite continued economic troubles at the end of 1996, the democratic changes and the newly launched government program against corruption brought the sympathy of the international community and the opportunity for the new administration to bring about radical and rapid reform. In January 1997, international bodies such as the IMF, the World Bank, the EBRD and the European Commission expressed strong support for Romania's reform program.

Economic Situation

After years of an economic uncertainty, Romania seems ready to begin a solid economic recovery. Inflation decreased from 137 percent in 1994 to about 30 percent in 1995 and 1996. Unemployment decreased from almost 11 percent in 1994 to 8.5 percent in 1996. However, GDP growth slowed from 6.9 percent in 1995 to 4.5 percent in 1996. One of the biggest problems of the Romanian economy is that relatively little progress has been made in restructuring the country's heavy industries, which are not profitable and are a major financial burden for the government.

TABLE 4.1: KEY ECONOMIC INDICATORS
	1994	1995	1996*	1997*

GDP growth (%)	4.0	6.9	4.5	5.0
Inflation (%)	137	32	30	30
Unemployment (%)	10.9	8.9	8.5	7.5
Exports (bln USD)	6.15	7.52	7.80	8.20
Imports (bln USD)	7.11	9.41	9.00	9.10
Budget balance (% of GDP)	-1.8	-3.5	-3.0	-4.0
Gross debt (bln USD)	3.4	4.8	5.4	n/a
forecast Source:* Business Central Europe, The Annual Report, 1996

The privatization of state-owned companies has been particularly slow, although the "Acceleration of Privatization" law approved by the Parliament in March 1995 is supposed to speed up large-scale and medium-scale privatization in the coming years. Nonetheless, unemployment is expected to rise due to the privatization efforts. Other major obstacles to business development in Romania are continually high taxes, a lack of clear market rules and information, and to some extent, corruption.

The present government has set a number of other goals as part of its plan to rebuild the economy. These goals include liberalizing imports and reducing import duties; promoting exports; lowering energy prices; reforming the financial markets, including privatization of state-owned banks; reforming the agricultural sector; promoting small and medium-sized enterprises; developing infrastructure; and creating a legal and tax framework that is favorable to investors. A reduction in taxes is also foreseen. Implementation of these reforms should benefit the environmental market.

REC * PUBLICATIONS * EMERGING ENVIRONMENTAL MARKET 2 * ROMANIA