The Romanian Government borrowed heavily from the West in the 1970s to build a substantial state-owned industrial base. Following the 1979 oil price shock and a debt rescheduling in 1981, Ceausescu decreed that Romania would no longer be subject to foreign creditors. By the end of 1989, Romania had paid off a foreign debt of about $10.5 billion through an unprecedented effort that wreaked havoc on the economy and living standards. Vital imports were slashed and food and fuel strictly rationed, while the government exported everything it could to earn hard currency. With investment slashed, Romaniaís infrastructure fell behind that of even its historically poorer Balkan neighbors.

Since the fall of the Ceausescu regime in 1989, successive governments have sought to build a Western-style market economy. The pace of restructuring has been slow, but by 1994 the legal basis for a market economy was largely in place. After the 1996 elections, the coalition government attempted to eliminate consumer subsidies, float prices, liberalize exchange rates, and put in place a tight monetary policy. The Parliament enacted laws permitting foreign entities incorporated in Romania to purchase land. Foreign capital investment in Romania has been increasing, but remains significantly less in per capita terms than in most other transition economy countries in East and Central Europe.

In November 2001, the government negotiated an 18-month standby agreement with the International Monetary Fund (IMF) for a total amount of $431 million. The IMF board approved Romaniaís completion of the standby agreement in October 2003, Romaniaís first successfully concluded agreement since the 1989 revolution. The IMF acknowledged that sound macro-economic policies and progress in structural reform contributed to continuing disinflation and economic growth, and credited the government with implementing prudent budgetary measures toward reaching IMF directed targets. High tax arrears, largely on the part of state owned firms, hinder government programming. However, significant levels of public and private sector corruption also impede economic growth and undercut public trust in new democratic institutions.

The IMF Executive Board approved in July 2004 a 24-month Stand-By Precautionary Arrangement for an amount equivalent to $367 million. The new program aims at strengthening the external current account balance, further reducing inflation, sustaining continued GDP growth, and preparing the economy for EU accession. The current program emphasizes continued prudent macroeconomic policies and progress with wide-ranging structural reforms. Key stabilization policies include a reduction in the general government budget deficit, a strengthening of the finances of state-owned enterprises through energy price adjustments and wage restraint, and measures to contain credit growth. Prioritization of expenditure will help finance investment in infrastructure. With the passage of a number of new and amended laws, the authorities have started an overhaul of the judicial system, which will contribute to improving the business climate, strengthening the judicial system's independence, and improve the capacity to address the problem of corruption. In September 2004, the IMF completed the first review under the standby agreement. The review confirmed that macroeconomic developments were in line with the program. In June 2005, the IMF conducted a review of the Romanian economy, focusing on the need for a tight, consolidated budget deficit for 2005, given the governmentís January 1 introduction of a flat income tax and a profit tax cut. Other top priorities of this IMF review were ensuring control of inflation and managing the current account deficit.

Privatization of industry was first pursued with the transfer in 1992 of 30% of the shares of some 6,000 state-owned enterprises to five private ownership funds, in which each adult citizen received certificates of ownership. The remaining 70% ownership of the enterprises was transferred to a state ownership fund. With the assistance of the World Bank, European Union (EU), and IMF, Romania succeeded in privatizing most industrial state-owned enterprises, including some large state-owned energy companies. Among the most important privatizations of 2004 were: national oil company Petrom to Austrian OMV; electric energy distribution companies Electrica Banat and Dobrogea to Italian Enel. Energy privatization helped Romania receive the ìfunctioning market economyî stamp from the EU in October 2004.

Despite delays in privatizing certain companies, the overall balance of the economy has shifted decisively. Even in 2002, the private sector produced about 69% of GDP, accounted for approximately 55% of assets, and employed approximately 55% of the work force. The private sector accounted for 69.1% of Romaniaís GDP in 2003, of which were 68.7% in services, 79.0% in industry, 93.2% in construction, and 98.7% in agriculture. 70.4% of banking capital is now in private hands; this will rise over 90% after the BCR and CEC privatization is completed. By 2004, Romaniaís private sector employed over 72% of Romaniaís total workforce.

Under the IMFís guidance, the consolidated budget deficit has dropped significantly from earlier levels. In 1999, the budget deficit represented 4.0% of GDP; 3.7% in 2000; 3.5% in 2001; 2.6% in 2002; 2.4% in 2003; and 1.2% in 2004. At the end of the first three months of 2005, the consolidated budget posted a surplus of 0.13% of GDP. Domestic arrears--resulting mostly from state-owned enterprises not paying pension and health insurance contributions and utility bills--rose to around 40% of GDP in 2002, but after some large scale debt forgiveness, currently stand at about 28% of GDP. Public sector expenditures have been more tightly controlled and limited.

The return of collectivized farmland to its cultivators, one of the first initiatives of the post-December 1989 revolution government, resulted in a short-term decrease in agricultural production. Some four million small parcels representing 80% of the arable surface were returned to original owners or their heirs. Many of the recipients were elderly or city dwellers, and the slow progress of granting formal land titles was an obstacle to leasing or selling land to active farmers.

Unemployment was officially 6.2% of the active labor force at the end of December 2004 and 5.7% at the end of April 2005, although these figures do not capture high levels of under-employment or temporary emigration.

In the 1990s, inflation was one of Romaniaís most serious economic problems. Retail price inflation, which monthly averaged 12.1% in 1993 (the equivalent of 256% annually), declined to 28% annually in 1995. However, inflation picked up again in 1996 and 1997 due to excessive government spending in late 1996, and price and exchange rate liberalization in early 1997. Inflation in 1999 hovered around 54%, but dropped in 2000 to 40.7%, and 33.7% by the end of 2001. After a diminished 2002 inflation rate of 17.8%, the inflation rate further dropped to 14.1% in 2003 and 9.3% in 2004. The government target for 2004 was 9%, and Romanian authorities consider they met it. Romaniaís first time single-digit annual inflation rate was largely assisted by the Romanian leiís appreciation. The official target for 2005 is 7%.

Financial and technical assistance continue to flow in from the U.S., European Union, other industrial nations, and international financial institutions facilitating Romania's reintegration into the world economy. The International Monetary Fund (IMF), World Bank (IBRD), the European Bank for Reconstruction and Development (EBRD), and the U.S. Agency for International Development (USAID) all have programs and resident representatives in Romania. Romaniaís foreign direct investment (FDI) is domestically tracked by the National Trade Registry, which at the end of 2004 pegged FDI at $13.57 billion, of which an estimated 6.8% was U.S. direct investment (1.21% of 2004 GDP). U.S. direct investment was 7.8% in 2001 and 8.9% in 2002 (2.4% of 2002 GDP). As of the end of December 2004, Romania had attracted $13.7 billion in foreign direct investment, of which $888.4 million (6.5%) was U.S. direct investment.

Romania was the largest U.S. trading partner in Eastern Europe until Ceausescu's 1988 renunciation of Most Favored Nation (MFN or non-discriminatory) trading status resulted in high U.S. tariffs on Romanian products. Congress approved restoration of MFN status effective November 8, 1993, as part of a new Bilateral Trade Agreement. Tariffs on most Romanian products dropped to zero in February 1994, with the inclusion of Romania in the Generalized System of Preferences (GSP). Major Romanian exports to the U.S. include shoes, clothing, steel, and chemicals. Romania signed an Association Agreement with the EU in 1992 and a free trade agreement with the European Free Trade Association (EFTA) in 1993, codifying Romania's access to European markets and creating the basic framework for further economic integration. At its Helsinki Summit in December 1999, the European Union (EU) invited Romania to formally begin accession negotiations. In December 2004, the EU Commission concluded pre-accession negotiations with Romania. In April 2005, the EU signed an accession treaty with Romania and its neighbor, Bulgaria, with the goal of welcoming them as new members in January 2007. However, the EU has warned that Romaniaís accession by that date is not guaranteed; the EU has imposed a ìsuper safeguard clause,î enabling it to postpone Romaniaís accession to 2008, should Romania be unable to make substantial progress on corruption, competition, and judiciary issues.