Romania Economy Facts

by ebizdir · Published January 30, 2023 · Updated February 22, 2023

Economical overview

Romania has good economic conditions in the form of its own energy resources, fertile land and many industries. Still, it is one of the poorest EU member states. The reason for this lies in serious financial distress under the communist regime until 1989 and in continued widespread corruption at all levels of society.

Severe economic failures during the communist dictatorship made Romania ill-equipped to transition into a functioning market economy. During the 1990s, the country’s gross domestic product (GDP) declined almost every year by several percent. A number of proposals for economic reform were submitted by the International Monetary Fund (IMF), but the implementation was half-hearted or completely unsuccessful, partly because people with a past communist regime slowed down the transition. Attempts to reduce subsidies on goods and services led to popular protests. The government continued to support loss-making state companies, which resulted in large deficits in the state budget. The state therefore printed more money, which caused inflation to rise to over 250 percent in 1993.

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After a strong devaluation, the currency became more stable and exports increased. The positive development was broken when the government sharply increased government spending ahead of the 1996 elections. This led to a conflict with the IMF which interrupted the cooperation.

The economy continued to recover during the remainder of the 1990s, despite the fact that a new center-right government was trying to join the IMF with faster privatizations and freer pricing. Wages, private consumption and investments decreased while inflation and unemployment rose. The government’s inability to handle the economy led to the IMF breaking cooperation again in 1999.

Abbreviationfinder.org: Check this abbreviation website to find three letter ISO codes for all countries in the world, including ROM which represents the country of Romania. Check findjobdescriptions to learn more about Romania.

The economy is turning upwards

Only during the international boom after the turn of the millennium did the economy begin to show growth. Exports to the EU increased, and the prospect of obtaining EU subsidies for a rising membership allowed Parliament to support a four-year economic stabilization plan.

Once again, a program for structural change was set up together with the IMF. That meant great austerity. Nearly one-fourth of the state’s industries lost their jobs between 2001 and 2003. The government’s subsidies to the companies were reduced and energy prices were raised to become more market-based. The government slowed down the rapid increase in public sector wages and lowered high pension benefits.

At the same time, several foreign banks began to establish themselves in the Romanian market, including through the acquisition of Romanian banks. Now it became easier for households and businesses to take out loans, which meant that consumption increased rapidly and the country experienced a number of years of “buying party”.

In 2003, the IMF approved the Romania’s attempt to decontaminate the economy, and after several critical reports, the European Commission declared in 2004 that the country had a functioning market economy. But it was not until the year that Romania’s GDP again reached the 1989 level.

Risk of overheating

When Romania became a liberal government in 2004, the progressive tax was replaced by a “flat” tax of 16 percent from January 1, 2005. This simplified the tax system but reduced the state’s tax revenue. However, consumption continued to increase, as did imports.

Privatization was accelerated, especially in the banking sector. By the end of 2006, the state had sold most of its holdings in a wide range of industries, most of them to multinational large corporations. Remaining state ownership was a significant part of the energy and transport sectors.

The World Bank appointed Romania as the world’s second best “reform country” in 2005-2006, but the rapid changes also brought disadvantages. Exchanges with goods and services abroad (current account balance) were in deficit due to increased indebtedness and high consumption. The budget deficit also increased sharply when taxes were lowered while wages and pensions were increased.

The country’s economy was considered at risk of overheating in 2008, and the central bank was forced during the summer to raise the policy rate to over 10 percent to dampen inflation, which was just over 8 percent. GDP growth averaged 6 percent during the period 2000-2008.

Financial crossover

In October 2008, the international financial crisis erupted, which for Romania meant a financial crossover. After five years of continuous growth, consumption declined and the economy shrank. Romania was hit by recession (economic decline). The mid-right government that took office in November was started by negotiating a crisis loan of almost EUR 20 billion from the IMF, the EU, the World Bank and the European Development Bank (EBRD) to cover the budget deficit and strengthen the foreign exchange reserve.

However, the loan came with stringent requirements for new measures to make better use of financial resources and reduce government spending. The government’s decision in 2010 to reduce wages in the public sector by 25 percent and pensions by 15 percent met with huge protests and concluded that the Constitutional Court rejected the pension reduction. Instead, the government increased VAT from 19 to 24 percent.

In the ongoing efforts to strengthen public finances, the government decided to raise the retirement age, reduce the number of sickness pensions and create a European ministry to streamline the management of EU funds. It also sought to strengthen tax collection and push away the informal sector, including through increased fines for those who employ “black” labor.

Romania began to emerge from the recession in 2011 thanks to increased industrial production, increased exports and a record harvest. But the Romanians kept their money tight, and the low consumption caused GDP to fall again soon. The prolonged recession had made Romania more vulnerable to the euro crisis than most other countries in the region. The protests against the hard times caused the government to resign in February 2012.

Quick recovery

From 2013, the economy turned again, mainly due to increased exports. The Social Democrat-dominated government that took control at the end of 2012 continued with the structural reforms demanded by the IMF, while at the same time trying to negotiate lower demands for reduced budget deficits. During the year a kind of national audit was established. Tax cuts were implemented for the poorest households and on some foods. Real wages rose, while inflation fell. In 2014, domestic purchasing power also increased, while the farmers’ crops were good. The Romanian economy was now one of the fastest growing in the EU.

In 2015, the fight against corruption intensified. The transitional government of technocrats who took charge at the end of the year also invested in a series of tax cuts to increase domestic purchasing power, which was now the strongest engine of growth. Among other things, VAT was reduced from 24 to 20 percent. For the same reason, both wages and pensions were increased. Growth remained strong and in 2015 Romania paid for the last of the IMF loans from the crisis years.

In 2016, the government announced that it had abandoned its target of switching from the domestic currency leu to the euro in 2019. The main reason was that the country’s GDP was still only 55 percent of the EU average. However, the government stressed that the ultimate goal was to connect Romania to the euro cooperation.

However, corruption and economic crime continue to pose a serious obstacle to Romania’s development. Money laundering, tax evasion and other illegal business activities are common, which causes the state to lose huge sums in the form of missing tax revenue. Lack of communication and low educational level are other challenges for economic development.