A privileged share of EU pre-accession aid

6. In order to help candidate countries meet the accession criteria, the EU has set up three types of pre-accession aid instruments (see Box VI.2). In addition to the existing PHARE programs, two other grant instruments have been established: SAPARD (Structural Adhesion Program for Agriculture and Rural Development) and ISPA (Pre-Adhesion Structural Instrument). Within the framework of the Agenda 2000 (the budgetary envelope allocated by the European Union to the Commission over the period 2000-2006), total disbursements on these instruments are foreseen to amount to €10.5 billion. In a full year, provided that all projected tranches funded through the pre-accession instruments are disbursed, the amount of transfers from the EU to Romania would reach €630 million, or about 2 percent of GDP. It would represent, in 2000,6 percent of government primary spending under the budget, and 25 percent of investment expenditure. By comparison, total EU assistance to the country during 1990-99, amounted to €1.2 billion (Figure VI.1). Of the 10 candidate countries from central and eastern Europe eligible for support under these three financing instruments, Romania ranks second after Poland in terms of volume of annual budgeted allocation, second after Bulgaria on a GDP comparison and fifth, after the Baltic States and Bulgaria, on a per capita comparison (Table VI.2).

EU Pre-Accession Annual Resources in Central and Eastern European Countries (in million of euros)

Citation: IMF Staff Country Reports 2001, 016; 10.5089/9781451832716.002.A006

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EU Pre-Accession Annual Resources in Central and Eastern European Countries (in million of euros)

Citation: IMF Staff Country Reports 2001, 016; 10.5089/9781451832716.002.A006

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EU Pre-Accession Annual Resources in Central and Eastern European Countries (in million of euros)

Citation: IMF Staff Country Reports 2001, 016; 10.5089/9781451832716.002.A006

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Table VI.2.

Annual Distribution of EU Pre-Accession Aid Between Central and Eastern European Countries

Source: EU Commission, Euroslat.Note: This table indicates the program allocations budgeted by the EU Commission in 2000, not the disbursements. For SAPARD and ISPA, a roughly equivalent budget allocation is planned during the period 2000-2006 and for PHARE during the period 2000-2002.

^1/GDP in 1998 at current prices

^2/Central scenario. The EU Commission has projected three scenarios by countries: Romania is to receive an annual allocation between €208 and €270 million.

Table VI.2.

Annual Distribution of EU Pre-Accession Aid Between Central and Eastern European Countries

	Phare				Sapard				ISPA2				Total
	Allocation (in million of Euros)	As percent of total	As percent of GDP1	Per capita (in Euros)	Allocation (in million of Euros)	As percent of total	As percent of GDP1	Per capita (in Euros)	Allocation (in million of Euros)	As percent of total	As percent of GDP1	Per capita (in Euros)	Allocation (in million of Euros)	As percent of total	As percent of GDP1	Per capita (in Euros)
Romania	242	28.7	0.71	10.76	151	40.8	0.44	6.69	239	23.0	0.70	10.62	632	31.4	1.86	28.07
Bulgaria	100	11.9	0.91	12.05	52	14.1	0.47	6.28	104	10.0	0.94	12.52	256	12.7	2.33	30.85
Czech Republic	79	9.4	0.16	7.67	22	6.0	0.04	2.14	70	6.8	0.14	6.81	171	8.5	0.34	16.62
Estonia	24	2.8	0.52	16.00	12	3.3	0.26	8.09	29	2.8	0.62	19.05	65	3.2	1.41	43.14
Hungary	96	11.4	0.23	9.50	38	10.3	0.09	3.77	88	8.5	0.21	8.74	222	11.0	0.52	22.02
Latvia	30	3.6	0.53	12.00	22	5.9	0.38	8.74	47	4.5	0.82	18.70	99	4.9	1.73	39.44
Lithuania	42	5.0	0.44	11.35	30	8.1	0.31	8.06	52	5.0	0.55	14.04	124	6.2	1.30	33.45
Poland	398	47.2	0.28	10.28	169	45.7	0.12	4.36	348	33.5	0.25	8.99	915	45.5	0.65	23.64
Slovakia	49	5.8	0.27	9.07	18	5.0	0.10	3.39	47	4.5	0.26	8.66	114	5.7	0.63	21.12
Slovenia	25	3.0	0.14	12.50	6	1.7	0.04	3.17	16	1.5	0.09	7.79	47	2.3	0.27	23.46
Total	843.0	100.0			369.4	100.0			800.0	77.0			2,012.4	100.0

Source: EU Commission, Euroslat.Note: This table indicates the program allocations budgeted by the EU Commission in 2000, not the disbursements. For SAPARD and ISPA, a roughly equivalent budget allocation is planned during the period 2000-2006 and for PHARE during the period 2000-2002.

^1/GDP in 1998 at current prices

^2/Central scenario. The EU Commission has projected three scenarios by countries: Romania is to receive an annual allocation between €208 and €270 million.

View Table

Table VI.2.

Annual Distribution of EU Pre-Accession Aid Between Central and Eastern European Countries

	Phare				Sapard				ISPA2				Total
	Allocation (in million of Euros)	As percent of total	As percent of GDP1	Per capita (in Euros)	Allocation (in million of Euros)	As percent of total	As percent of GDP1	Per capita (in Euros)	Allocation (in million of Euros)	As percent of total	As percent of GDP1	Per capita (in Euros)	Allocation (in million of Euros)	As percent of total	As percent of GDP1	Per capita (in Euros)
Romania	242	28.7	0.71	10.76	151	40.8	0.44	6.69	239	23.0	0.70	10.62	632	31.4	1.86	28.07
Bulgaria	100	11.9	0.91	12.05	52	14.1	0.47	6.28	104	10.0	0.94	12.52	256	12.7	2.33	30.85
Czech Republic	79	9.4	0.16	7.67	22	6.0	0.04	2.14	70	6.8	0.14	6.81	171	8.5	0.34	16.62
Estonia	24	2.8	0.52	16.00	12	3.3	0.26	8.09	29	2.8	0.62	19.05	65	3.2	1.41	43.14
Hungary	96	11.4	0.23	9.50	38	10.3	0.09	3.77	88	8.5	0.21	8.74	222	11.0	0.52	22.02
Latvia	30	3.6	0.53	12.00	22	5.9	0.38	8.74	47	4.5	0.82	18.70	99	4.9	1.73	39.44
Lithuania	42	5.0	0.44	11.35	30	8.1	0.31	8.06	52	5.0	0.55	14.04	124	6.2	1.30	33.45
Poland	398	47.2	0.28	10.28	169	45.7	0.12	4.36	348	33.5	0.25	8.99	915	45.5	0.65	23.64
Slovakia	49	5.8	0.27	9.07	18	5.0	0.10	3.39	47	4.5	0.26	8.66	114	5.7	0.63	21.12
Slovenia	25	3.0	0.14	12.50	6	1.7	0.04	3.17	16	1.5	0.09	7.79	47	2.3	0.27	23.46
Total	843.0	100.0			369.4	100.0			800.0	77.0			2,012.4	100.0

Source: EU Commission, Euroslat.Note: This table indicates the program allocations budgeted by the EU Commission in 2000, not the disbursements. For SAPARD and ISPA, a roughly equivalent budget allocation is planned during the period 2000-2006 and for PHARE during the period 2000-2002.

^1/GDP in 1998 at current prices

^2/Central scenario. The EU Commission has projected three scenarios by countries: Romania is to receive an annual allocation between €208 and €270 million.

Priority given to development expenditures

7. In allocating a large volume of its pre-accession resources to Romania, the European Union has taken into consideration the size of the population, the relatively low level of development of the country, and the need for high and sustained economic growth. If Romania is to converge to Western European living standards, the upgrade of the institutional and physical infrastructures needs to be accelerated. EU annual budgeted allocations to Romania during the pre-accession period (2000-2006) are expected to be roughly distributed as follows: PHARE (€240 million); ISPA (€208-270 million); and SAPARD (€150 million). Thus, the share of grants to Romania has been oriented in priority toward development projects—ISPA (transport, water supply and environmental infrastructure), SAPARD (agriculture and rural development), as well as the regional development component of PHARE. The total amount of resources allocated (through PHARE programs) to institution building and the adoption of the acquis is somewhat less significant, though it is likely to increase at a later stage.¹⁰

8. The priorities set by the EU can be illustrated through the GDP composition between Romania and the EU. In 1999, the share of agriculture in GDP was 13.9 percent in Romania, compared with 2.3 percent in the EU. In terms of employment, farmers represent by far the largest share of the active population (40 percent, or ten times the level in the EU). Preparing for integration requires large agricultural support programs to increase efficiency and gradually apply relevant EU standards. Moreover, the weight of the industrial sector represents some 28 percent, and the services and construction sector account for 58 percent of the gross value added (compared with, respectively, 31 percent and 67 percent in the EU). It is for this reason that 29 percent of the budget allocated by the EU to SAPARD for candidate countries is earmarked for Romania (compared with 22-23 percent for PHARE and ISPA). With the exception of Poland, which receives 32 percent, this is three times more funding than any other country receives, and the highest allocation per capita (Baltic states excluded).

9. In addition, to the pre-accession instruments, the EU provides resources to support the implementation of the structural adjustment programs agreed with the World Bank and the macroeconomic stabilization program supported by the International Monetary Fund. From 1990 to 1999, the EU provided Romania with €680 million of macro-financial assistance. In 2000, a tranche of €100 million was granted in June upon approval of the first review of the stand-by arrangement and a second tranche of an equivalent amount is to be disbursed upon approval of the second review of the stand-by arrangement. €100 million was also provided through RICOP,¹¹ a program financing social safety nets in the context of the restructuring (liquidation/privatization) of the public companies. This reflects a large degree of overlap between the accession agenda and measures to strengthen economic management, as well as complementarity between reforms designed to facilitate accession and inevitable structural reforms.

Strengthening absorption capacities

10. To absorb the additional volume of EU grants, the Romanian Government needs to take a number of necessary fiscal and institutional measures.

11. On the fiscal front, both ISPA and SAPARD require co-financing, as the support of the European Community cannot exceed 75 percent of the value of the project. In the case of SAPARD, the co-financing element must come from the national, regional (judet) or local budget, while for ISPA the co-financing element may also be provided by international financing institutions and interested commercial banks. The PHARE projects financing investments will also require co-financing from national public funds and the EU contribution will be limited to 75 percent of the public expenditures. The additional direct cost for the budget will amount at a minimum to €100-150 million, equivalent to 0.5-0.7 percent of GDP. In addition, one should take into account the indirect maintenance cost to ensure the functioning of the projects following their implementation.

12. As regards institutional measures, solid and transparent policymaking and administrative capacities needed to be established. The new aid instruments represent a major change since there are three programs with more than twice as much funding, as well as different rules for each instrument. ISPA requires the preparation of strategies for both transportation and the environment, as well as a financing memorandum for each project, rather than a financing memorandum covering an entire program (as is the case under PHARE). SAPARD requires a paying agency to be set up (which on accession will be responsible for the management of the EU’s agricultural fund). Different regional agencies may be needed, as SAPARD support goes to individual farmers. Project management capabilities, financial management structures, and public procurement systems have to be built.

13. Modifications to Romanian national financial control have been adopted in line with the requirement of the pre-accession funds. But the move to ex post financial control will be made by the Commission only when it deems the system fully operational. The Romanian government experiences difficulties in setting up the relevant administration eligible to manage the funds and there will be delays in starting the SAPARD projects. Moreover, many of the possible SAPARD projects that are to be selected rely on the financing through regional (judet) and local budgets, where co-financing possibilities are very limited, in part because of weak financial management. It is therefore likely that disbursements for ISPA and SAPARD will not start before 2001 (at the earliest for the latter).

The Stability Pact projects: An additional volume of resources

14. Romania and Bulgaria are the only two countries that belong both to the group of countries invited to negotiations to EU accession and beneficiary parties of the Stability Pact for South-Eastern Europe. The two countries have been affected by two main political developments in the region. First, the sanctions decided by the UN as of 1994 against the Federal Republic of Yugoslavia through a gradual embargo on goods (and then services) have reduced trade relations with a neighboring country and shrunk economic activity in the border areas. Second, following the start of the war in Kosovo, the destruction of bridges has hindered navigation on the Danube River, thereby freezing the emerging activity of the shipping companies that had been recently privatized. Romania and Bulgaria, therefore, became beneficiary countries of the Stability Pact, which aims at promoting a comprehensive regional development approach to the Balkans. This also meant further resources, mainly in the form of grants, in the context of new funding of programs and projects. The source of these funds comes in the first place from the EU, either through bilateral aid, the budget of the Commission, or its financial arm, the European Investment Bank.¹²

15. In March 2000, donors participating in the Regional Funding Conference for South-Eastern Europe considered a first round of projects and programs for the development of the Balkans. Individual countries and multilateral institutions pledged €2.4 billion of financial support to the Quick Start projects, of which half of the funds were estimated to be in the form of grants. Quick Start projects are expected to begin within a year and are mostly geared to upgrade infrastructure, promote trade, and encourage investment. Romania’s Quick Start program consists of two road infrastructure projects, for an amount of €332 million, or some 30 percent of the total funding of projects.¹³ Its other “near-term projects,” which will be considered subsequently for funding, amount to €770 million or 28 percent of the projected total cost. To date, Romania is the leading beneficiary country of the Stability Pact in terms of volume of aid pledged.¹⁴

Establishing a “functioning market economy”

16. The degree of state ownership in the economy is often a good indicator of whether a market economy is free of distortions and functions properly. The state maintains an important role in the Romanian economy, in particular through its ownership of large companies. The share of the private sector in production has remained constant at about 61 percent of GDP since 1997. In mid-2000, about 60 percent of large companies (in terms of State Ownership Fund (SOF) capital) remained to be privatized. In addition, all utilities remain in state hands, with the exception of ROMTELECOM. The lack of financial discipline of public companies and their high level of arrears has turned into a major distortion for the Romanian market, while hampering the privatization process. Moreover, despite the high degree of estimated private land ownership (about 85 percent), the government also remains a key actor in the land market, mainly as a result of the lack of progress on the issue of restitution of agricultural land and forests and the deficiencies of the land cadastre. The law on the restitution of state arable land and forests was promulgated in January 2000, but implementation remains slow.

17. The existence of fair access to market financing is a second indicator. Progress in this area would require privatization of the banks and strengthening of supervision activities. The privatization process has started in the last two years, with two state-owned banks and the closure of another one. Two commercial banks owned by the government, representing at end-1999, respectively, 29.1 percent and 4.2 percent of the total assets of the banking sector, as well as the savings bank of the country (10.6 percent of the total assets), are still owned by the government. Provided the government remains committed to the process of bank privatization, it should be possible to complete the privatization of the two commercial banks by 2001. The National Bank of Romania has also embarked on a reform to consolidate the supervision of the banking system.

18. Transparency in the market—namely whether the government is able to regulate the market in order to ensure fair competition—is another indicator of whether the economy functions properly. Admittedly, some share of the Romanian economy is unregulated, with the emergence of a parallel economy that has developed rapidly in recent years. According to various studies that have been carried out to assess its size, the parallel economy could represent between 20 percent and 40 percent of Romanian GDP, reflecting some of the weaknesses of the transition process.¹⁵ As regards competition rules, the European Commission stated in its progress report in 1998 that “Romania’s Competition Law is largely in line with EU legislation,’” but called for “efforts toward full and effective application of the legislation.” The same remarks apply to state aid and public procurement, as the new law that entered into force in 2000 transposes most of the acquis communautaire, A related issue is the ability to protect intellectual property rights. Under the Europe Agreement, Romania made the commitment to provide by 2000 a level of protection of intellectual property rights similar to that in the EU. The government acknowledges that effective enforcement remains a challenge and intends to allocate additional resources allocated to this purpose.

19. A fourth indicator is the degree of price liberalization, where progress has been positive so far. The prices of most goods are freely set, with the notable exception of gas prices and utilities, which account for about 11 percent of the total consumer price index basket. Controlled prices have been periodically adjusted, though not always with the same frequency in the last 12 months.

20. Finally, a legal environment conducive to business activities is a key aspect. In the context of the acceleration of structural reforms, the authorities introduced a number of important legislative changes, including modifications to the company law and the bankruptcy law, and to the legal regime for leasing operations, as well as new laws on secured transactions. In general, though, the weaknesses of the legal and judicial framework continue to hinder the development of economic activity and encourage the emergence of a parallel economy.

21. Against this background, notwithstanding considerable progress in stabilization and structural reform over the past two years, the Commission noted in October 1999 that “Romania cannot be considered to be a functioning market economy,” and conditioned a revision of this assessment on many legal and institutional changes and achievement of macroeconomic stability.

Consolidating trade and foreign investment, and liberalizing capital flows

22. Trade is among the areas where Romania is most integrated with the EU. Much progress has been made toward the liberalization of the sector and the reduction of tariff barriers. The composition of external trade and its geographical structure have gradually shifted, thereby providing the conditions for a smooth transition to the EU single market. As regards the latter, Romania is driven by the implementation of the Europe Agreement, a free-trade agreement that requires the elimination of remaining tariffs on nonagricultural imports from the EU by 2002 (see Box VI.3) and gradual reciprocal tariff reductions for agricultural products. Meeting this commitment will not be unduly difficult, as tariffs on industrial products are relatively low, with an average most favored nation rate at 16 percent (well below the upper limits defined jointly with the WTO of some 35 percent) and a preferential rate of 7 percent on average for imports from the European Union (see Table VI.3).¹⁶ The phasing out by 2002 is likely nevertheless to lead to more intense competition on the domestic market, as the tariff elimination was back-loaded for sensitive products such as footwear, and textile and clothing products. On agricultural products, the liberalization of tariffs has been substantial in recent years, since Romania applied up to 1997 the limits applicable for the most favored nation (MFN) tariff rates agreed with WTO—an average bound rate of 134.1 percent—and brought it down to 33.9 percent. However, there is no significant preferential tariff applied so far to the European Union and the cost of tariff elimination on agricultural goods might be more significant for Romania. The two parties are committed through the Europe Agreement to move gradually toward (asymmetric) concessions and tariff reduction.¹⁷ Romania is also committed to eliminate most tariff barriers with EFTA and CEFTA countries. As regards the latter group, tariffs on industrial products are virtually down to zero and on agricultural products, at some 23 percent. Finally, the issue of application of the EU third-countries tariff to non-EU countries with which Romania is committed in trade arrangements (Moldova, Black Sea countries) will need to be settled. As regards temporary measures, Romania ended the practice, which had intensified in 1995-96, of tariff reductions subject to quotas. All remaining quantitative restrictions on exports have been eliminated and replaced with automatic licensing for statistical purposes. In addition, no anti-dumping, countervailing, or safeguard measures have been taken under the WTO Agreements. The import surcharge, which was introduced in 1998 at 6 percent, is gradually being phased out and is expected to be eliminated by January 1, 2001. The new Customs Code of 1997 unified the regime for importers and exporters in a single framework. It converges with the EU’s Customs Code, as the principles of customs valuation are largely the same. Comparison values were used until 1998 for products subject to excise taxes, but were replaced in 1999 with a data base of prices.

Table VI.3.

Romania: Average Tariffs in 1999

(In percent)

Source: World Trade Organization (WTO).

^1/Upper limit set with WTO.

Table VI.3.

Romania: Average Tariffs in 1999

(In percent)

Origin		Agricultural Products	Other Products	All Products
Most Favored Nation
Statutory1		134.1	16.2	16.2
Applied		33.9	16.2	19.8
Preferential
European Union		31.6	7.0	12.0
Turkey		32.5	7.1	12.2
EFTA		32.2	6.1	11.4
CEFTA
	Bulgaria	22.7	0.9	5.3
	Czech Republic	22.8	0.0	4.6
	Poland	22.6	0.6	5.0
	Slovak Republic	22.8	0.0	4.6
	Slovenia	24.6	0.5	5.3
	Hungary	22.8	0.9	5.3

Source: World Trade Organization (WTO).

^1/Upper limit set with WTO.

View Table

Table VI.3.

Romania: Average Tariffs in 1999

(In percent)

Origin		Agricultural Products	Other Products	All Products
Most Favored Nation
Statutory1		134.1	16.2	16.2
Applied		33.9	16.2	19.8
Preferential
European Union		31.6	7.0	12.0
Turkey		32.5	7.1	12.2
EFTA		32.2	6.1	11.4
CEFTA
	Bulgaria	22.7	0.9	5.3
	Czech Republic	22.8	0.0	4.6
	Poland	22.6	0.6	5.0
	Slovak Republic	22.8	0.0	4.6
	Slovenia	24.6	0.5	5.3
	Hungary	22.8	0.9	5.3

Source: World Trade Organization (WTO).

^1/Upper limit set with WTO.

23. In line with EU requirements, excise taxes are levied on alcoholic beverages, tobacco products, and petroleum products (as well as a general category of other products). Although excise duties were increased in December 1999, their level remains low in relation to EU levels. The government is wary that relatively high levels of duties and taxes could contribute to smuggling and customs fraud. Also, the strengthening of border controls is perceived as complicating customs procedures, often described as complex, cumbersome or time-consuming. As regards VAT, Romania has applied a uniform VAT rate of 19 percent since January 2000 (see Chapter II).

24. An indicator of Romania’s preparedness for EU accession is the level of its commercial integration with the EU, reflecting, as the Commission states it, the “capacity to cope with competitive pressure and market forces within the Union.” Romania’s commercial relations with the EU became predominant beginning in 1995 (see Table VI.4). The share of exports to EU countries in the total Romanian exports increased from 33.9 percent in 1990 to 65.5 percent in 1999. The same trend was registered for Romanian imports from EU countries, whose share in total Romanian imports was 55.1 percent in 1999, compared with 21.8 percent in 1990. Among the candidate countries in 1999 (including Turkey, Cyprus, and Malta), Romania was both the sixth largest destination for exports and the sixth largest source of imports. On a per capita basis, however, EU trade with Romania is the lowest among candidate countries and the trade balance has, since 1993, been positive for the EU.¹⁸

Table VI.4.

Composition of Romanian External Trade with the European Union, 1990-99

Source: National Commission for Statistics.

Table VI.4.

Composition of Romanian External Trade with the European Union, 1990-99

			1990	1991	1992	1993	1994	1995	1996	1997	1998	1999
Exports to EU (FOB)			(In percent of total)
		Total	100	100	100	100	100	100	100	100	100	100
	1	Agricultural products	5.6	7.0	7.2	5.4	4.3	3.7	3.5	3.3	2.7	3.8
	2	Mineral and chemical products	36.2	27.5	16.7	14.4	11.3	8.0	8.0	5.2	4.0	2.5
	3	Textiles	12.5	12.7	18.2	31.0	33.1	31.2	33.4	36.0	36.4	36.1
	4	Footwear and related products	1.7	2.7	2.9	6.4	9.5	9.3	10.3	11.0	11.1	11.8
	5	Common metals	11.2	12.2	13.4	10.4	11.5	17.0	14.8	16.5	15.8	12.1
	6	Electric equipment	9.7	6.5	7.4	6.5	7.6	7.8	8.7	8.6	10.2	12.1
	7	Other	23.0	31.5	34.2	25.8	22.7	22.9	21.2	19.3	19.8	21.7
Memorandum items:
		Value of trade (in million of US$)	5,775	4,266	4,363	4,892	6,151	7,910	8,084	8,431	8,302	8,503
		Share of CEFTA in total exports (in percent)	9.1	5.4	3.8	3.4	4.5	3.5	3.6	4.1	5.4	7.0
		Share of EU in total exports (in percent)	33.9	36.9	35.2	41.4	48.2	54.1	56.5	56.6	64.5	65.5
			(In percent of total)
Imports from EU (CIF)
		Total	100	100	100	100	100	100	100	100	100	100
	1	Agricultural products	22.4	27.0	17.4	15.2	13.1	8.7	7.5	7.6	6.6	7.2
	2	Mineral and chemical products	24.5	26.6	17.3	13.9	12.0	13.7	14.2	13.1	11.7	11.6
	3	Textiles	3.4	3.1	15.2	17.2	20.2	19.6	19.3	22.8	23.1	26.6
	4	Footwear and related products	0.4	1.1	1.1	1.0	1.5	1.7	1.8	2.2	2.3	2.6
	5	Common metals	7.9	5.8	5.5	4.8	5.2	5.7	6.5	5.8	5.9	6.1
	6	Electric equipment	23.5	24.6	21.9	27.2	32.0	28.8	29.3	27.6	27.0	26.4
	7	Other	17.7	11.8	21.6	20.7	15.9	21.8	21.3	20.9	23.4	19.6
Memorandum items:
		Value of trade (in million of US$)	9,202	5,793	6,260	6,522	7,109	10,278	11,435	11,280	11,838	11,392
		Share of CEFTA in total imports (in percent)	12.0	7.5	5.1	4.1	4.1	4.9	4.7	5.7	9.2	8.1
		Share of EU in total imports (in percent)	21.8	28.7	41.3	45.3	48.2	50.5	52.3	52.5	57.7	55.1

Source: National Commission for Statistics.

View Table

Table VI.4.

Composition of Romanian External Trade with the European Union, 1990-99

			1990	1991	1992	1993	1994	1995	1996	1997	1998	1999
Exports to EU (FOB)			(In percent of total)
		Total	100	100	100	100	100	100	100	100	100	100
	1	Agricultural products	5.6	7.0	7.2	5.4	4.3	3.7	3.5	3.3	2.7	3.8
	2	Mineral and chemical products	36.2	27.5	16.7	14.4	11.3	8.0	8.0	5.2	4.0	2.5
	3	Textiles	12.5	12.7	18.2	31.0	33.1	31.2	33.4	36.0	36.4	36.1
	4	Footwear and related products	1.7	2.7	2.9	6.4	9.5	9.3	10.3	11.0	11.1	11.8
	5	Common metals	11.2	12.2	13.4	10.4	11.5	17.0	14.8	16.5	15.8	12.1
	6	Electric equipment	9.7	6.5	7.4	6.5	7.6	7.8	8.7	8.6	10.2	12.1
	7	Other	23.0	31.5	34.2	25.8	22.7	22.9	21.2	19.3	19.8	21.7
Memorandum items:
		Value of trade (in million of US$)	5,775	4,266	4,363	4,892	6,151	7,910	8,084	8,431	8,302	8,503
		Share of CEFTA in total exports (in percent)	9.1	5.4	3.8	3.4	4.5	3.5	3.6	4.1	5.4	7.0
		Share of EU in total exports (in percent)	33.9	36.9	35.2	41.4	48.2	54.1	56.5	56.6	64.5	65.5
			(In percent of total)
Imports from EU (CIF)
		Total	100	100	100	100	100	100	100	100	100	100
	1	Agricultural products	22.4	27.0	17.4	15.2	13.1	8.7	7.5	7.6	6.6	7.2
	2	Mineral and chemical products	24.5	26.6	17.3	13.9	12.0	13.7	14.2	13.1	11.7	11.6
	3	Textiles	3.4	3.1	15.2	17.2	20.2	19.6	19.3	22.8	23.1	26.6
	4	Footwear and related products	0.4	1.1	1.1	1.0	1.5	1.7	1.8	2.2	2.3	2.6
	5	Common metals	7.9	5.8	5.5	4.8	5.2	5.7	6.5	5.8	5.9	6.1
	6	Electric equipment	23.5	24.6	21.9	27.2	32.0	28.8	29.3	27.6	27.0	26.4
	7	Other	17.7	11.8	21.6	20.7	15.9	21.8	21.3	20.9	23.4	19.6
Memorandum items:
		Value of trade (in million of US$)	9,202	5,793	6,260	6,522	7,109	10,278	11,435	11,280	11,838	11,392
		Share of CEFTA in total imports (in percent)	12.0	7.5	5.1	4.1	4.1	4.9	4.7	5.7	9.2	8.1
		Share of EU in total imports (in percent)	21.8	28.7	41.3	45.3	48.2	50.5	52.3	52.5	57.7	55.1

Source: National Commission for Statistics.

25. The analysis of Romania’s trade with the EU from 1990 to 1999 illustrates the important structural changes in the country’s economy. Export activities have shifted from capital- and energy-intensive industries to labor-intensive manufactured goods with a low value added. There has been, therefore, a substantial decline in exports of mineral and chemical products, a surge of exports of textiles, footwear, and wood products, and an increasing reliance on imports of raw materials for these industries from the EU (fabrics, hides, skins, etc.). In central and eastern Europe, Romania is the largest exporter of clothing products to the EU.

26. As regards foreign direct investment, the investment regime is broadly liberal. All investors, domestic and foreign, benefit from a general guarantee against nationalization and expropriation. In principle, there is equality between foreign and domestic investors in establishing a Romanian company and foreign direct investments are free (except for the oil exploitation and insurance sectors), as are investments in real estate for business purposes.¹⁹ Notwithstanding these provisions, foreign direct investment played only a minor role in Romania’s transition between 1989 and 1996 (a total of US$1.7 billion), with levels becoming more significant only in 1997 (US$1.3 billion) and 1998 (US$2 billion) and below US$1 billion in 1999. The relatively low level of foreign direct investment to date has been an obstacle to the modernization of the capital base and creation of jobs in the private sector. The status of Romania as an EU candidate should enhance its attractiveness to foreign investors.

27. Turning to foreign exchange regulations, Romania enjoys full convertibility of current account transactions (Romania accepted the Article VIII obligations in March 1998). However, there are still in practice some constraints on capital account transactions: Romania applies an authorization procedure for most outward capital transactions as well as short-term capital inflows.²⁰ In choosing to limit short-term capital inflows, the government wants to prevent instability in the foreign exchange market. In July 1999, to prepare for integration to the European capital market, the National Bank of Romania approved a three-stage liberalization program, to be completed by the date of accession. The first stage envisaged would encompass the liberalization of capital inflows, excluding short-term operations (such as transactions with money market instruments, securities issued or guaranteed by public entities, and the placement of deposits in lei by nonresidents), and the second stage would include the liberalization of capital outflows. The timetable for the two stages is not yet finalized; it is understood that when Romania joins the EU, it will need to have completed the third stage by opening its capital account fully.

Joining EMU: Implications for Romania

28. The European Commission now considers the participation in EMU an integral part of the acquis while the EU member countries have decided that no more opt-out clauses from-EMU will be granted to candidate countries. As 2007 is the date set by the Romanian Government to join the EU, the question of the implications of the accession to the EMU is therefore not premature. But a clear distinction should be made between compulsory participation in the EMU and the adoption of the euro as a single currency. In its 1999 Composite paper on progress toward enlargement, the Commission stated that “new-Member States are not expected to adopt the single currency immediately upon accession, even though they will be taking part in EMU”. Upon accession, the newcomers will have the status of Member States with a derogation under the rights and obligation, specified under article 122 of the Amsterdam Treaty, of a country which takes part in EMU but which still uses its national currency. With an insufficient degree of real economic convergence and financial integration, newcomers may be confronted with asymmetric shocks with respect to the euro area. Priority should therefore be given to consolidate the well functioning of markets as well as to macroeconomic stability in order to reach a high degree of sustainable convergence. As noted by the Commission, “there is a risk that candidate countries will rigidly orient their policies towards compliance with the Maastricht convergence criteria in an effort to adopt the euro at the earliest possible opportunity.”

Maastricht criteria

34. The Commission noted in 1999 that “attempts at too early adoption of the euro (i.e. before these economies have reached a high degree of sustainable convergence) could be highly damaging for the candidate and ought to be discouraged.” In this regard, it would seem too early to assess Romania’s macroeconomic convergence through the Maastricht criteria. Sustainable nominal convergence is more likely to be judged when Romania will have demonstrated its capacity to successfully operate within the single market and liberalized capital movements, as was the case with existing member countries.

35. Looking ahead, Romania’s performance gap in terms of the Maastricht criteria as compared to most other candidate countries may, however, raise difficulties for the EU (Table VI.5). Romania’s inflation rate is not only much above the EU average, but at the highest average level among the applicant countries since the transition process has started. The inflation rate reached an annual average of 123 percent in the period 1991-99, and has never declined below 30 percent, a threshold that will remain unchanged in 2000. Romania’s fiscal policy may appear rather tight and in line with the target set by the Maastricht criteria, with the average general consolidated budget balance reaching a deficit of slightly above 3 percent of GDP since the start of the transition period, but this measure does not reflect large quasi-fiscal costs related to public companies’ debts. In the years ahead, fiscal balances will be burdened by the cost of the bank restructuring and the much delayed restructuring of the public sector, with considerable hidden debts in the form of arrears. Interest rates, which have been among the highest of the group of candidate countries in recent years, are likely to remain high until Romania’s inflation converges to EU levels. It should be noted that a long-term interest rate indicator is lacking; ten-year bonds still do not exist and the longest maturity in Romania is currently the two-year treasury note, reflecting the overall lack of confidence in government paper, of the short term structure of bank deposits in an inflationary context, and the shallowness of the capital market. Romania meets consistently only the convergence criteria related to the level of the government debt to GDP, a ratio close to zero in 1990, which rose to some 30 percent of GDP in 1999, less than half the EU average, and is largely contracted on short- and medium-term maturities.

Table VI.5.

Maastricht Criteria: Convergence Indicators

Sources: EBRD IMF; and World Bank.

^1/Average for 1993-96.

^2/Average for 1994-96.

^3/Lending interest rates, year average; except for the EU (government bond yield).

Table VI.5.

Maastricht Criteria: Convergence Indicators

					Government Budget Balance
	Consumer Price Index				As Percentage of GDP				Government Debt to GDP ratio				Long Term Interest Rates3
	Average				Average				Average				Average
	1992-96	1997	1998	1999	1992-96	1997	1998	1999	1992-96	1997	1998	1999	1992-96	1997	1998	1999
EU	…	1.7	1.3	1.1	–4.9	–2.6	–2.0	–1.2	69.7	74.0	73.4	72.2	8.0 2/	6.0	4.7	4.7
Romania	134.8	154.8	59.1	45.8	–2.7	–4.6	–5.0	–3.5	21.7	27.8	28.0	34.5	58.9 1/	60.4	63.7	55.2
Bulgaria	88.8	1,061.6	18.7	2.6	–6.3	–2.1	0.9	–0.9	106.4	97.0	80.8	…	74.0	84.0	13.3	12.8
Czech Republic	12.0	8.4	10.7	2.1	–1.4	–1.7	–2.0	–3.3	12.7 1/	10.0	10.8	12.4	13.1 1/	13.2	12.8	8.7
Estonia	253.1	10.6	8.2	3.3	–0.6 1/	2.2	–0.3	–4.7	8.1	8.9	12.4	…	22.1	19.8	16.7	8.7
Hungary	23.2	18.3	14.4	10.3	–6.8	–6.6	–5.6	–5.6	82.8	63.9	60.6	…	29.2	21.8	19.3	16.3
Latvia	86.1	8.4	4.6	2.4	–3.4 3/	0.3	0.8	–4.2	9.1	8.9	12.4	…	50.6 1/	15.3	14.3	14.2
Poland	32.5	15.9	11.7	7.3	–3.2	–3.1	–3.2	–3.3	56.6 2/	46.9	42.8	…	33.3	25.0	24.5	17.0
Slovak Republic	12.4	6.1	6.7	10.6	–4.1	–5.2	–5.0	–3.6	32.1 1/	46.0	48.6	…	14.9 1/	18.7	21.2	21.1
Slovenia	46.1	9.1	8.6	6.6	0.0	–1.7	1.4	–0.9	…	…	…	…	65.7	20.0	16.1	12.4

Sources: EBRD IMF; and World Bank.

^1/Average for 1993-96.

^2/Average for 1994-96.

^3/Lending interest rates, year average; except for the EU (government bond yield).

View Table

Table VI.5.

Maastricht Criteria: Convergence Indicators

					Government Budget Balance
	Consumer Price Index				As Percentage of GDP				Government Debt to GDP ratio				Long Term Interest Rates3
	Average				Average				Average				Average
	1992-96	1997	1998	1999	1992-96	1997	1998	1999	1992-96	1997	1998	1999	1992-96	1997	1998	1999
EU	…	1.7	1.3	1.1	–4.9	–2.6	–2.0	–1.2	69.7	74.0	73.4	72.2	8.0 2/	6.0	4.7	4.7
Romania	134.8	154.8	59.1	45.8	–2.7	–4.6	–5.0	–3.5	21.7	27.8	28.0	34.5	58.9 1/	60.4	63.7	55.2
Bulgaria	88.8	1,061.6	18.7	2.6	–6.3	–2.1	0.9	–0.9	106.4	97.0	80.8	…	74.0	84.0	13.3	12.8
Czech Republic	12.0	8.4	10.7	2.1	–1.4	–1.7	–2.0	–3.3	12.7 1/	10.0	10.8	12.4	13.1 1/	13.2	12.8	8.7
Estonia	253.1	10.6	8.2	3.3	–0.6 1/	2.2	–0.3	–4.7	8.1	8.9	12.4	…	22.1	19.8	16.7	8.7
Hungary	23.2	18.3	14.4	10.3	–6.8	–6.6	–5.6	–5.6	82.8	63.9	60.6	…	29.2	21.8	19.3	16.3
Latvia	86.1	8.4	4.6	2.4	–3.4 3/	0.3	0.8	–4.2	9.1	8.9	12.4	…	50.6 1/	15.3	14.3	14.2
Poland	32.5	15.9	11.7	7.3	–3.2	–3.1	–3.2	–3.3	56.6 2/	46.9	42.8	…	33.3	25.0	24.5	17.0
Slovak Republic	12.4	6.1	6.7	10.6	–4.1	–5.2	–5.0	–3.6	32.1 1/	46.0	48.6	…	14.9 1/	18.7	21.2	21.1
Slovenia	46.1	9.1	8.6	6.6	0.0	–1.7	1.4	–0.9	…	…	…	…	65.7	20.0	16.1	12.4

Sources: EBRD IMF; and World Bank.

^1/Average for 1993-96.

^2/Average for 1994-96.

^3/Lending interest rates, year average; except for the EU (government bond yield).

36. In meeting one convergence criterion out of four and experiencing a recurrent instability of its nominal and real exchange rates, the question of Romania’s convergence to the macroeconomic parameters of the EU member countries is rhetorical in the short and medium run, though it remains a benchmark in a longer horizon. The main conclusion of this chapter is that stabilization is a prerequisite and macroeconomic stability needs to be achieved to build up a macro-performance record that will convince EU member countries about the sustainability of the convergence track. This will require tight fiscal and monetary policies that will need to be reconciled with development and public investment needs. To this end, Romania will benefit from a substantial share of the resources made available by the EU during the pre-accession period. It will be important to promptly use, and efficiently absorb, the EU pre-accession transfers to upgrade the country’s infrastructure and to set the conditions to boost the economic growth indispensable to real convergence.