RESTRICTEDWORLD TRADE
ORGANIZATIONWT/BOP/S/8
18 January 1999
(99-0144)
Committee on Balance of Payment Restrictions
CONSULTATIONS WITH ROMANIA
Background Paper by the Secretariat
1. This paper has been prepared in accordance with paragraph 12 of the Understanding on the
Balance-of-Payments Provisions of the GATT 1994.
2. On 10 October 1998, Romania introduced, via an  Emergency Ordinance, a temporary import
surcharge, to be eliminated by 31 December 2000,  levied at 6 per cent for balance-of-payments
purposes.1  The Ordinance was approved by the Parliament (Law No. 244) on 22 December 1998.  A
few products were added to the list of exemptions.  On 1 January 1999 the rate of surcharge waslowered to 4 per cent. While the surcharge applies to imports from all sources, the surcharge is waived
on a number of different categories of imports. These include imports considered essential, (i.e. oil,
gas, electricity, medicine),  imports by public institutions financed by foreign loans, goods exempt
from duties, those that contribute to improving the balance-of-payments, imports for export
production and temporary imports for inward processing.
I. TRADE AND EXCHANGE SYSTEM
A. 
TRADE RÉGIME
3.  Since 1990, Romania has liberalized its trade régime, dismantling the state monopoly,
licensing and quantitative restrictions.  Under GATT 1994, Romania bound all of its tariffs.  In 1997,
under a stabilization program, producer and retail prices of controlled goods were liberalized and
remaining export bans and quotas on agricultural products eliminated. Between 1996 and 1997, the
average customs duty was reduced from 42 per cent to 20 per cent.  Romania has agreed to eliminatetariffs on information technology products by 2000.  As of 1 January 1998, all remaining quantitative
restrictions on exports were eliminated.
4. Romania's Association Agreement with the European Union, providing for the creation of a
free-trade area by 2002, came into force in February 1995; Romania applied for membership shortly
thereafter. Romania has signed free trade agreements with a number of other trading partners,including EFTA, Turkey, and Moldova and in 1997 became a member of CEFTA. Romania has been
a signatory to the Global System of Trade Preferences (GSTP) since 1989 and to the Protocol
Relating to Trade Negotiations Among Developing Countries (Protocol of 16) since 1978.
5. Foreign investment policy is quite liberal; foreign access is restricted only in the insurance
sector. Repatriation of earnings on both direct and  portfolio investment is guaranteed. There arevirtually no restrictions on capital inflows, although outflows by residents require prior approval.
B. E
XCHANGE RATE RÉGIME
6. In tandem with its gradual transformation from a planned to a market economy, the exchange
rate régime has been freed. Foreign exchange surrender requirements were eliminated in 1992 and an
                                                     
1 WT/BOP/N/41, 16 November 1998.WT/BOP/S/8
Page 2
interbank foreign exchange market introduced in 1994. In March 1996, in response to inflationary
pressures, the central bank imposed currency controls, revoking foreign exchange licenses of dealer
banks.  The licenses were reinstated in February 1997, the last remaining restrictions on current
account transactions removed and the functioning of the foreign exchange market restored. Romania
accepted the obligations of the IMF's Article VIII, Sections 2, 3 and 4 on 25 March 1998.
II. MACROECONOMIC DEVELOPMENTS
7. After four consecutive years of growth, real GDP fell by 6.6. per cent in 1997, inflation rose
to over 150 per cent and  gross fixed investment and real wages fell sharply (Table I).  Industrial
output, accounting  for 35 per cent of GDP,  fell by16.9 per cent in the first ten months of 1998 and
GDP is expected to have declined by 5.5 per cent for the year.
Table I    Main Economic Indicators (1996-1998)
1996 1997 1998 (estimated)
(Percentage growth)
Real GDP 3.9 -6.6 -5.5
Private consumption 11.1 -5.6 -3.8
Gross domestic
investment-3.5 -14.3 0.6
Real wages 12.1 -22.2 3.0
Consumer prices 38.8 154.8 59
Unemployment rate
(per cent)6.3 8.8 9
(Per cent of GDP)
General Government
Balance-4.0 -3.6 -3.9
Current Account -7.4 -6.2 -6.6
1996 1997 1998 (estimated)
Exports (US$ billion) 8.1 8.4 8.2
Imports fob (US$ billion) 10.6 10.4 10.8
External debt 23.7 26.8 23.2
Debt service 4.5 7.4 7.4
Gross reserves
 (US$ billion)2.1 3.8 3.0
Lei per US$ (end of period) 3,750 7,985 10,951
REER (end of period) 101 119 111
Source:  IMF and Romanian authoritiesWT/BOP/S/8
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8. Since transition began, the pace of restructuring has been more gradual than in many other
transition economies. In spite of repeated stabilization programs, in 1994 and again in 1997,
macroeconomic policy has been  inconsistent and failure to restructure industry is preventing a return
to sustainable economic growth. Vested interests and lack of political will have stalled the process of
privatization and closure of unprofitable state enterprises.  These are absorbing huge resources,
contributing to the large budget deficit and preventing the emergence of a dynamic private sector; theprivate sector contributes some 60 per cent to GDP . Non-performing loans beset a large part of the
portfolios of the four state-owned banks, which in turn account for 70 per cent of  domestic banking
activity.
9. Accommodating monetary policy in response to demands for an overvalued currency. and in
the face of deteriorating finances, has been a major source of macroeconomic instability. Until
recently, monetary and exchange rate policy was geared to providing credits at subsidized interest
rates and quasi-fiscal subsidies to enterprises in the agriculture and energy-intensive sectors and to therefinancing of commercial banks.  Subsidized lending reduced the scope for manoeuvre of monetary
policy and slowed the development of policy instruments such as open market operations.
10. High and erratic inflation has plagued Romania, rising to 300 per cent in 1993 to be cut to 28
per cent by 1995 as a result of austerity policies and tight monetary conditions. The rate of inflation
accelerated in 1996 in the run up to elections and was  compounded by the initial impact of the freeingof consumer goods and services (accounting for 17 per cent of the consumption basket) in 1997.
11. The new government adopted a stabilization program in 1997, reducing the fiscal deficit, in
spite of a substantial rise in social protection spending, and halting the practice of directed credits.
Transparency was enhanced by itemizing subsidies and transfers to economic activities "on budget" In
1998, fiscal policy has been relaxed and a targeted budget deficit of 3.6 per cent was exceeded.Although expenditure has been cut by 2 per cent of GDP (cuts have been notably in reform-related
areas.) in a revised budget, tax revenues are also estimated to be lower by 1.5 per cent of GDP and
interest payments on public debt larger in 1998, given its financing at market rates. Obstacles to a
more balanced fiscal position include numerous exemptions, especially on indirect taxes, and
relatively ineffective tax collection.  On the other hand, the new Government has recently adoptedstrong measures aimed at closing unprofitable state-owned enterprises and accelerating the
privatization process.
12. By using the exchange rate, under a managed float, as an external anchor for price stability,
the monetary authorities have kept interest rates hi gh and the leu appreciating in real terms. This has
allowed inflation to decline steadily since the beginning of 1998;  for the year an annual  rate of 42per cent is targeted, a considerable improvement over 1997. The challenge for the authorities is to
manage to reduce inflation without exerting upward pressure on the exchange rate. Given the
widening current account deficit, projected at 8 per cent of GDP for 1998, the authorities are now
targeting a faster  nominal, and hence real, depreciation of the leu.
III. EXTERNAL SECTOR DEVELOPMENTS
13. Throughout the transition process, imports have exceeded exports by a small margin and the
current account has been in deficit. Since 1994, however, it has risen from US$0.5 billion toUS$2.1 billion, primarily mirroring the growing merchandise trade deficit, and is widening further in
1998 as a result of interest payments on foreign debt, stagnating exports and accelerating imports. The
fall in exports can be partly attributed to the fall in world commodity prices, affecting the value of
energy- based products and a decline in exports generally to the regions experiencing financial
turmoil. The capital account is also in deficit; al though foreign direct investment inflows tripled in
1997, in response to the promise of stabilization, they have since fallen off as has foreign borrowing,
the latter reflecting also a decline in assistance from multilateral institutions.
14. Romania entered the transition period with practically no foreign indebtedness. But external
debt has increased sharply from 3.0 per cent of GDP in 1990 to 26.8 per cent in 1997. Out of theWT/BOP/S/8
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US$9.3 billion outstanding as of the end of 1997, more than the value of annual exports of goods,
US$0.9 billion is short-term (as a percentage of exports of foods and services); of
US$8.4  million medium-long-term debt, US$4.4 billion is due to official creditors.  The debt service
ratio rose from 0.8 per cent in 1990 to 26.2 per cent in 1997. The term structure of foreign debt is such
that the bulk of repayments are due in the next two years; in 1999, US$2.4 billion in principal
repayments fall due. Gross foreign exchange reserves of the banking system, US$3.8 billion(representing 4.4 months of imports of goods and services) at the end of 1997, have fallen slightly.
15. Since 1990, merchandise trade as a share of GDP has risen from 22 to 54 per cent.  Exports
for 1997 amounted to US$8.4 billion and imports US$10.4 billion. Main exports are in low value
added, labour-intensive industries; in 1997, textiles and footwear accounted for 30 per cent of exports,
base metals 18 per cent.  Imports consist of machinery and equipment and fuels. (Chart I)
Chart I
Composition of Trade, 1997
 Exports
Food and 
agricultural 
products
7%Other
16.9%
Transport 
equipment
5.3%
Machinery and 
equipment
8.7%
Base materials 
and manufactures
18.5%Footwear
6.4%Textiles and 
clothing
23%Chemicals
6.6%Minerals
7.6%Imports
Other
20.3%
Transport 
equipment
3.4%
Machinery and 
equipment
23% Base metals 
and 
manufactures
5.9%Footwear
1.4%Textiles and 
clothing
13.9%Chemicals
8.3%Minerals
21.3%Food and 
agricultural 
products
2.5%
Total: US$million 8,429 Total: US$million 11,275WT/BOP/S/8
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16. Russia and former CMEA countries account for a far smaller share of Romania's external
trade than they once did.  Romania's major trading partner today is the European Union, 57.1 per cent
of exports and 51.7 per cent of imports in 1997.  Within the Single Market,  Germany and Italy are the
main markets for Romania. In spite of a downturn in trade with other partners, (exports to developingcountries and Russia and Ukraine dropped significantly in the last year) trade with the EU continued
to rise in 1998. Since 1997, Romania's exports have been free of customs duties under the Association
Agreement. The United States, where Romania receives GSP treatment,  is a growing market for
Romania's exports, accounting for nearly 4 per cent in 1997, approximately the same share absorbed
by CEFTA countries. (Chart II)
Chart II
Direction of Trade, 1997
__________Exports
EU15
56.5%Germany
16.8%
CEFTA
4.0%
Hungary  2.2%
Russia  3.0%
Turkey   4.2%
United States
3.8%
Other
28.5%Other EU15
19.7%Italy
20.0%Imports
EU15
52.3%Germany
16.4%CEFTA
4.8%
South Korea
5.2%
Russia  12.0%
Turkey  1.9%
United States
4.1%
Other
19.7%Other EU15
20.1%Italy
15.8%
Total:  US$8,429 million Total:  US$11,275 million