Report No. 4667-RO

RomaniaEconomic Memorandum

March 5, 1984

EMENA CP1

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit:: Leu (Plural Lei)

1. Commercial Rate

March 1, 1978 : Lei 18.00 = US$1.00Lei 1.00 = US$0.06

January 1, 1981 : Lei 15.00 = US$1.00Lei 1.00 = US$0.07

January 1, 1983 : Lei 16.5 = US$1.00

Lei 1.00 = US$0.06

July 1, 1983 - : Lei 17.5 = US$1.00Lei 1.00 = US$0.06

2. Non-commercial Rate

October 1, 1974 : Lei 12.00 = US$1.00Lei 1.00 = US$0.08

February 15, 1981 : Lei 11.00 = US$1.00Lei 1.00 = US$0.09

January 1, 1983 : Lei 12.5 = US$1.00Lei 1.00 = US$0.08

July 1, 1983 : Lei 13.5 = US$1.00

Lei 1.00 = US$0.07

/1 Unified exchange rate for commodity trade introduced.

FISCAL YEARJanuary 1 to December 31

FOR OFFICIAL USE ONLY

PREFACE

This report is based on the findings of an economic mission whichvisited Romania in February/March 1983. The mission consisted of Messrs.Borje Tallroth (mission chief), Petros Aklilu (agriculture), David Caplin(industry), David Pearce (energy), Chandrashekar Pant (investment) andGabriel Siri (modelling and foreign trade). Assistance to the mission'swork in Washington was provided by Mr. Deepak Khanna on data and projections.Arlene Pastor was responsible for document production.

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

ABSTRACT

After three decades of rapid economic growth, Romania encounteredbalance of payments problems in late 1981, which necessitated reschedulingsof its convertible debt obligations both in 1982 and 1983. In response tothe problems, major cuts have been made in imports together with limitationsof domestic demand and the introduction of structural reforms. Significantshifts in policy priorities have also been made. As a reflection of thesemeasures, the current account in convertible currencies has improvedsignificantly in recent years. This report gives an account of the factorswhich led to the financial problems and the measures the Government hastaken in response to them together with an assessment of how these measuresserve Romania's need for longer term adjustment.

I

ROMANIA

COUNTRY ECONOMIC MEMORANDUM

Table of ContentsPage No.

COUNTRY DATA i-ii

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS .... ............... iii-xiv

I. EXTERNAL AND DOMESTIC DEVELOPMENTS. 1

A. The Origin of the Balance of Payments Problems 1B. Measures Taken. 4C. Mission's Views of Future Options 9

II. POLICY REFORMS FOR STRUCTURAL ADJUSTMENT 12

A. The Dimensions of Structural Adjustment 12B. Application of the New Economic and

Financial Measures .13C. The Exchange Rate and Price Reform 17D. Adjustments in Investment Strategy 23E. Energy Policy .29F. Adjustments in Agriculture .36G. Aspects of Structural Adjustments in

Industry .............. I ......... ....... 41H. The Foreign Trade Regime .45

III. MISSION ILLUSTRATIVE SCENARIOS .50

A. Background .50B. Key Variables Affecting Growth .50C. Alternative Growth Scenarios .51

STATISTICAL ANNEX .., .......... ............. 59-98

Statistical IndexStatistical Tables

MAP

I

-1i - Page-I of 2 pages

COUNY DATA,

AREA POPU1ATlQ (1982) DaENSY (1982)237.5 thouand sq km 22.5 million - 95 per square kmL

POPUIArION CHARAEhRISICS (1981) NaUrrxT (1981)Cri4le Birth Rate (per 1,000) 18.0 Calorie intake as % of reqirmits 1-26.0Cnrle Death Rate (per 1,000) 10.4 per Capita protein intale (grans/day) 95.0

EWJCTION (1981) iEAUfH (1981)Adult literay rate (Z) 98 Population per physician 680Primary school enollnent (X) 101 Population per hospital bed 110

( EtR CAPITA IN 1982: US$2630 L

NATICNAL iNa IN 1982 *MUAL RATE OF G H (%, constant pri.ces)ust]n 1976-80 1976 1980 1981 1982

GNP 52,400 7.2 11.2 2.8 2.1 3.2Gross Fxd Inves-tnr 15,230 8.5 8.5 3.1 -7.3 -3.1

moss National Savirgs 16,270 .

.rrent Acccut Balance 1,040 . . . .4Xport of Chods 11,559 . 5.3 14.7 8.5 na. n.a.Import of Goods 9,745 8.8 15.7 0.5 n.a. n.a.

JUI, EWlPIDY1M AND PREXCllV IN 1982

Net Value Added Labor Forae NVAA&oxkerus Un z Mln

Aariculture 9,750 18.6 2.99 3,260hIdstry 27,260 52.0 3.81 7,155Construction 3,610 6.9 0.80 4,510Others 11;780 22.5 3.45 Mn

Total/Avera 52,400 100.0 11.05 4,740

GR FINKZ(xn bill of lei)

1976 1977 1978 1979 1980 1981 1982

Total RePme 254.5 282.0 300.8 339.3 298.0 280.3 277.6current pewitureas 180.4 196.5 198.9 224.7 203.6 179.5 152.2Orrent Surplus 74.1 85.5 101.9 114.6 94.4 100.8 125.4InvesInent Expenditures 69.7 83.9 100.4 112.9 93.1 92.3 105.4Overall Surplus 4.4 1.6 1.5 1.7 1.3 &5 2D.0

/1 lSe per capita QiP estimgte is at 1982 arket prices, calculated by using te same conersiontechmique in the 1982 World Bmk Athe. All other conversim to dollars (inclued tbe estimatefor total GiP) in thim table ae at the averge cowercial aie rate prevailirg durirg theperiod covered.

Mhrch 5, 19843QNA CP1D

0158F

Page 2 of 2 pages

BAtAC OF PANMITS(US$ million)

1976 1980 1981 1982 MHWQ=ISE EXglS, 1982 US9 MlD Z

Exports of (bods, NFS 6,642 12,087 13,492 12,384 Capital os 3,822 33biports of Goods, lM -6,540 -13,730 -13,308 -10,493 Omner Gaoda 1,935 17Resource (kp 102 -1,643 184 1,891 Foodstuffs 866 8Interest Paysents (net) -118 -777 -1,017 -851 Intemediate Goods 2,933 25O.rrent Account -16 -2,420 -{3.3 1,040 Raw Materials 2,003 17

idustrial (1,752) (15)

MILT 8orrng Agricultural (251) (2)Di shsts 742 2,805 2,160 3,230 11,559 100A2Drtizatioc -502 -851 -1,_13 -2,189lIet 240 1,954 1,027 1,041 MalCE 1)ALEST, Dec. 31, 1982 US0n

MLT Iending, net -392 -181 -175 -281 Clnvertible ci¢rerries 9,766

Short-ter Capital, net -124 449 -1,385 -478. Mediun and lo-tenn 7,676Short-tenu 1,159

Errors and Onissiow - - 37 l MP Credit 931

Coenge of Reserves -45 202 -80 -37- i-nease) N vertible currecies 203

Gross Reserves 562 323 4031 449 Ibtal 9,969(end of year)

MT SEVICE RATIO, 1982 1 9Oil and Prodics

Exports 735 1,871 2,032 1,532 All curnmies, gross 16.3bport n717 3,818 3,359 2,462 Comerrible currencies, gross 26.7

1/ Debt service payrents for credits received only; the ratios are based on debt services due after the reachedulirgs in 1982.

March 5, 1984MNA CP1D015w,

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SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

The Origin of the Balance of Payments Problems

i. After three decades of fast economic growth without balance ofpayments problems, Romania encountered financial difficulties in late 1981 andhad to seek rescheduling of its convertible currency obligations. The presentbalance of payments problems have their origin mainly in structural trends andexcessive growth of domestic demand together with the adverse internationalconditions during the 1970s and early 1980s, especially the sharp increases inenergy prices, declining world markets and high interest rates. The pursuitof a growth-oriented economic strategy, with emphasis on the fast developmentof especially heavy, energy-intensive industries, together with the rapidmobilization of domestic resources resulted in growth rates that were veryhigh by international standards. This strategy also resulted in rapidly-increasing demand for energy and other raw materials. Only minor adjustmentswere made in domestic prices. During the 1970s, this brought Romanian prices,especially those for energy, increasingly out of line with rapidly changinginternational prices. The net impact of these factors was a sharp increase inraw materials imports over the 1976-1980 period; crude oil imports, inparticular, increased from 5.1 million tons in 1975 to 16.0 million tons in1980. Due to the recession in Romania's traditional export markets andinsufficient competitiveness of Romanian products, compounded by supplybottlenecks due to delays in implementation of projects, this was only partlyoffset by increasing exports. As a result, Romania's current account inconvertible currencies deteriorated from a deficit of $260 million in 1975 toa deficit of $2,399 million in 1980. In order to achieve high production andinvestment targets despite the increasing current account deficits, Romaniaresorted increasingly to external borrowing.

Measures Taken

ii. To reverse these trends, the Government introduced successivelymore restrictive demand management policies in 1979 and 1980 with emphasis onrestraining investment together with a reform program (the New Economic andFinancial Measures, NEM) with the view to increase the efficiency of theeconomy. In addition to these measures, an exchange rate and price reform wasinitiated in January 1981 with the purpose of simplifying the exchange ratesystem and bringing Romanian prices, especially those for energy, closer toworld market prices. The Government got support in June 1981 for itsstabilization program in the form of a standby arrangement with the IMF in theamount of SDR 1,102.5 million (US$1,356 million). Despite these measures,there was a reduction in confidence by Romania's creditors during the latterpart of 1981, leading to a withdrawal of deposits and a drying up of lines ofcredit. The unexpected sharp net outflow of foreign capital prompted theauthorities to make major cuts in imports together with considerable changesin the plan fcr domestic expenditure, especially investments and efforts toincrease exports. As a result of these developments, the trend toward rapidlyincreasing trade deficits was reversed in 1981 with the trade balance inconvertible currencies showing a surplus of US$204 million in 1981 as againsta deficit of $1,534 million in 1980.

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iii. Despite this significant improvement of the externlal balance andthe support of the standby arrangement with the IMF, sharply increasingpayment arrears at the end of 1981 led the authorities to seek rescheduling ofits debt service obligations. Agreements reached with creditor governments inJuly 1982 and commercial banks in December 1982 provided for rescheduling of80% of 1981 arrears and 1982 dues over 6-1/2 years, including a three-yeargrace period.

iv. The development of the capital account turned out to be much moreunfavorable than expected also in 1982. This, together with a sharp declinein exports to the convertible currency area as a result of decliningcompetitiveness of non-oil exports due to the appreciation of the leu, whichwas pegged to the US dollar, sluggish rmarkets due to the wor]d recession, aswell as the deliberate reduction in non-profitable exports of oil products,led the Government to take additional measures to reduce imports. As aresult, overall imports fell by one-third in 1982, bringing the cumulativefall from 1980 to over 40% ifi value te.rms. In addition, further cutbacks ininvestments were made following the reductions made in 1981, especially of newprojects. In contrast to 1981, when total coinsumption continued to increase,real consumption expenditure was also reduced in 1982 (by sc;iewhat more than1%), mainly reflecting the sharp increases in prices of basic food productsand energy. As a result of these cutbacks, and despite the significant fallin export value, the trade account in convertible currencies mproved to asurplus of $1,515 million in 1982. This, together with a reduction of thedeficit in service transactions due to falling interest payments, resulted ina surplus on the current account in conv-vertible currencies of $655 million in1982.

v. Despite these cutbacks, GNP is reported to have grown by 2.7% in1981 and 3.1% in 1982, surprisingly high rates given the restrictive measurestaken in these years. In 1981, developments in industry together with ratherfavorable export performance contributed positively to the recorded growthrate while agriculture contributed negatively. In 1982 these sectorcontributions shifted significantly wilh agriculture--due to a very goodharvest--contribnting half of the increase in GNP. a significant increase inproduction of final goods for stocks aLso appears to explain part of the GNPgrowth in 1982. Thus, according to available statistics, it alpears that thegeneral impact on the economy in 1981 and 1982 of the sharp -eductions in theavailability of imported material inputs and intermediate goods was much lesspronounced than would be expected a pr:iori. Another striking development isthat the impressive $3 billion improverijent in the convertible current accountover the 1980-1982 period was achieved with relatively small reductions inaggregate demand, especially as regards consumption.

vi. A further improvement of the convertible currency current accountto a surplus of about US$900 million is officially estimated for 1983. Incontrast to the outcome in 1982, the stabilization program for 1983 projectsthat the improvement of the current account will result froe;, an increase inexports that will also provide for some increase in imports of much needed

v

inputs in production. However, very limited access to international creditstogether with large debt repayments forced the Government to seek reschedulingalso of 1983 debts. Agreements about rescheduling of official debt and debtsto commercial banks ($200 and $859 million, respectively) were reached in Mayand June 1983. The agreements provided for rescheduling of 60% of principalrepayments of medium and long-term debts falling due in 1983, the lower shareof debt payments being accepted for rescheduling in 1983 compared to 1982reflecting in part the significant improvement in Romania's repayment capacity.

vii. In the judgment of the mission, it appears that the improvement inthe convertible current account in 1980-1982 was achieved mainly through cutsin imports; this improvement reflects only to a degree effects of structuralpolicy measures. The emphasis on cutbacks in investments, instead ofconsumption, to reduce domestic resource use also appears justified, given theproblems with delays in project implementation and the concerns for thestandard of living of the population. In the judgment of the mission, thesudden withdrawal of foreign credits which began in autumn 1981 did not givethe Government much choice but to rely on defensive measures. However, thescope for further improvements in the external balance via additional cutbacksin imports without significant negative impact on the general activity leveland the growth potential of the economy and further reductions in the standardof living appears to be very limited.

Mission's Views of Future Options

viii. Significant shifts in policy priorities have also been made as aresult of the crisis. During the 1970s, rapid economic growth andindustrialization were priority targets, with external balance given secondaryrank. The Government is now giving external balance and fast debt repaymentabsolute priority. The authorities announced in 1982 its decision to stopforeign borrowings (with the exception mainly for the continued drawing on theIMF standby credit) even if funds were available. The temporary suspension ofnew borrowing from the World Bank in 1982 is part of this broader decision.In the view of the mission, the emphasis now being given to debtrepayment--implying that half of the 1982 external debt should be repaid by1985 and fully repaid by end 1988--is excessive. Given the urgent need forimports of equipment and technology for the restructuring of the economy,Romania should insread seek resumed borrowing from available sources. Thereare indications that this is now the authorities' intention. This would alsoreduce the need for restrictive policies.

ix. In the wake of the balance of payments problems, a blend of centralcontrol and the cessation of borrowing for imports together with theintroduction of incentive schemes in certain areas of the economy have beenused. The mission was informed, for example, that the number of materialbalances in the plan and norms specifying the use of material inputs inproduction is now being increased substantially. The reliance oncentrally-set physical targets was singled out as the factor that made thelast two years' impressive current account improvement possible. Thus, in

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terms of planning of production, the reaction seems to have been directedtowards more central control and less opportunity for enterprise managers tochoose, e.g. product mix within centrally-set value targets. At the sametime, certain reforms now being introduced indicate a preparedness to relymore on incentive schemes in the futurc ksee Section II.B).

Reforms for Structural Adjustment

x. At present, the most important problem for Romania's economicdevelopment is the foreign exchange shortage. To overcome this constraint,Romania has to undertake fundamental structural adjustments in the economy,the most urgent changes being to: (i) reduce high dependency on importedenergy and other raw materials through. development of indigenous resources andhigher efficiency in the use of material inputs in production; (ii) bring thestructure of production into conformity with demand patterns domestically andon the world market, and increase export of industrial products throughimproved international competitiveness and expansion of production capacity;and (iii) improve efficiency in the economy, especially in agriculture whereproduction is well below potential. This will require further priceadjustments in order to bring Romanian prices closer to those on worldmarkets, and changes in the incentive system. In some of these areas, asdiscussed in the report, important measures are being taken by the Romanianauthorities.

xi. Although measures aimed at improving the structural efficiency ofthe economy were initiated before the financial difficulties occurred, theshorter term adjustments to it have, for obvious reasons, relied mainly onrestrictive measures--with emphasis on cuts in imports--together withstretching out of debt service payments through rescheduling of externaldebt. This policy, though successful in terms of impressive improvements ofthe current account, has at the same time carried with it significantsacrifices in the form of major reductions in domestic demand compared toplanned developments. In order to avoid a prolonged continuation ofrestrictive policies, the emphasis should, in the view of the mission,gradually be shifted toward measures aiming at promoting exports, while at thesame time continuing present policies to restrict or reduce th.e importintensity as regards energy and other raw materials. In a short andmedium-term perspective, the objective to further improve the current accountsurplus is generated by the necessity to repay existing external debts;however, in the longer term, as debt service payments go down, freed foreignexchange earning should, in the view of the mission, be used to increaseimports of capital goods and technology needed for the further development ofthe economy.

xii. Generally, the adjustment process that Romania has to undergo overthe medium and long term will imply a transfer of resources from domestic useto the foreign trade sector so that scope for an increase in net exports iscreated. To achieve this, it is necessary to curb growth of domestic resourceuse in order to keep demand for domestic and imported resources within

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available limits, while at the same time bringing about structural changes andstimulating the expansion of the production capacity. This implies thatdomestic use of resources has to increase less rapidly than total production.

xiii. The New Economic and Financial Measures. In response to growingneeds to raise productivity and efficiency of the economy and difficulties inmanaging the economy at central level, the Government initiated in 1979 aprogram for economic reform, the New Economic and Financial Measures (NEM).The program calls for greater economic and financial autonomy for enterprisesand increased reliance on incentive schemes for managers and workers. To thisend, a shift has been made from gross to net production as the majorperformance target. This is likely to eliminate the tendency to use expensiveinputs that were created by the gross production indicator. Also, as part ofthe gradual introduction of the NEM, enterprises now propose investmentprojects for inclusion in the five-year plan. In addition, a marked change inthe sources of investment financing is now being introduced; the role of statebudget financing is to be reduced and enterprises will in the future relyincreasingly on self-generated funds and bank credits to finance theirinvestments. However, still existing restrictions on the right of enterprisesto make investment decisions will, in the mission's opinion, limit the effectson efficiency of increased autonomy as regards investment financing per se.Also, in response to problems to utilize labor resources efficiently, a newremuneration system is now being implemented. This system will link incomesfor workers and managers to individual performance as well as the result ofthe enterprises; enterprises that meet or exceed production targets will beable to pay their workers higher wages than enterprises that do not achievetheir targets. In addition, profit sharing bonuses will be paid to employeesin enterprises that meet their targets with higher than average bonuses beingpayable to employees in export activities, mining and oil extraction units.

xiv. The mission did not undertake a detailed review of recent systemchanges. Also, the mission only had the opportunity to discuss in generalterms the application of the NEM program (including the law on the newremuneration system, which was under preparation at the time of the mission'svisit) with the authorities. The mission, therefore, can not make a moredefinite assesssment about recent changes in the Romanian economic system. Itis not clear to what extent they are actually being implemented in differentsectors and what contribution they will make to the solution of Romania'sstructural problems. Nevertheless, these reforms appear, in the judgment ofthe mission, to be in the right direction. They give enterprisessignificantly increased autonomy in investment, production and marketingdecisions as well as real financial autonomy. This is, in the interpretationof the mission, also the intention in the guidelines in the NEM reform program.

xv. Price and exchange rate reform. A major exchange rate and pricereform with a view to bring the domestic price structure closer to worldmarket prices was initiated at the beginning of 1981. However, as aconsequence of the financial difficulties, the scope of this reform programhas since then been broadened and the measures have been taken much more

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vigorously and also at an accelerated pace compared to what was originallyintended. The earlier system with multiple exchange rates was graduallysimplified during 1981 and 1982 with full unification of the commercialexchange rates achieved by mid-1983. The leu was devalued by about 14% innominal terms during the first part of 1983 in order to improve Romania'sinternational competitiveness. Significant adjustments in domestic prices,especially for energy and basic foodstuffs, have been made as part of therecent stabilization program.

xvi. As a result of the exchange rate and price reform, domestic pricesnow give more accurate information than before about relative resource costsas expressed by world market prices. This should facilitate the choice ofoptimal project technology and thus improve the quality of investmentdecisions. In addition, prices and exchange rates should now give centralplanners and enterprises better indications about Romania's dynamiccomparative advantage and thus lead to a more efficient foreign trade pattern;efficiency in resource allocation in markets for consumer goods is also likelyto increase. Since the price reform has significantly reduced earlier largelosses in especially raw material production, the need for state budgetsubsidies to cover such losses has been more or less eliminated in recentyears. (It is not known to the mission whether the reductions in statesubsidies are being compensated by increased inter-enterprise transfers withinindustries.) However, since prices are still set according to a "cost plus"formula, it is possible for enterprises to pass on cost increases resultingfrom the price adjustments to their customers. This is likely to reduce theimpact of the price reform on resource allocation within the production system.

xvii. In 1982, enterprises were given increased autonomy to decide uponnecessary price adjustments to compensate for cost increases due to exchangerate changes without higher level approval--a process which is beingaccelerated in 1983. While this reform is, in the judgment of the mission, acorrect response to increasing difficulties of ensuring efficient resourceallocation via strict central control over both physical production parametersand prices, it will not eliminate existing problems associated with the ofteninadequate exposure of enterprises to demand constraints. The significantadjustments of prices and exchange rates in recent years have created a basisfor efficient decision making at enterprise level that did not exist earlier.To be fully effective, these adjustments have, in the view of the mission, tobe followed by reforms that increase the scope for decision making atenterprise level (including agricultural farms) and gives enterprisesincreased financial autonomy.

xviii. The signals given through prices in a system of decentralizeddecision-making would, however, only be effective if they are translated intofinancial incentives and disincentives for enterprise management and workers.As of today, prices are set in a way to give full cost coverage for even theleast efficient enterprise in a sector. Although Romanian authorities havestated as an objective that enterprises that make losses should not getfinancial support from the state budget, no enterprise has apparently thus farbeen forced to go bankrupt. Though this practice has its justification in the

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priority given to job security and full employment by the Romanianauthorities, it is in the mission's view, at the same time likely to result ininadequate financial discipline by enterprise managers. This tendency iscompounded by the system of enterprise taxation. At present, all profits inexcess of planned levels are taxed away. This is likely to severely reduceincentives to increase efficiency and profits. An alternative is to leave alarger amount of profits earned to the enterprise and its use not to becontrolled by the state. Favorable prices and efficiency improvement wouldthen lead to higher income which would allow enterprises to pay incentivewages and to invest more. This in turn would stimulate production. Lessfavorable prices, on the other hand, would have the opposite effect. Also,prices should be varied in order to reflect differences in quality. This isalready the case in the foreign trade sector, where the quality of domesticproducts is measured in terms of prices obtained abroad. Also, to the sameend, and provided it does not result in diseconomies of scale, largerenterprises could be broken up into smualler, financially independent unitsproducing for the same market, thus introducing a much needed element ofcompetition in the Romaniarn economy.

xix. Adjustments in investments. Targets which were too high comparedto the economy's ability to implement investment project resulted in delays inproject implementation during the last years of the 1970s. The 1981-1985 planaddressed these problems by proposing a significant reduction of investmentgrowth compared to earlier trends. To the same end, the plan also gavepriority to the completion of projects started during the 1976-1980 period.In response to the need to adjust the economy, the investment program for1981-1985 gave priority to the development of domestic raw materials,especially energy. The developments in 1981-1982 made necessary changes inthe 1981-1985 program with total investments being reduced by 7.3% in 1981 anda further 3.1% in 1982. While investments in energy were more or less ontarget in 1981, major cutr in energy investments compared to the 1981-1985plan targets were made in 1982 with further reductions being planned in 1983.However, investment expenditures for energy projects that actually beganoperations in 1982 rose sharply, following the priority given to completion ofongoing projects. The share of total investments going to agriculture hasincreased significantly in recent years, reflecting the higher attention nowbeing given to the sector. While large cuts in investments in chemicals andmachine-building were made in both 1981 and 1982--with additional cuts beingplanned in 1983--investments in metallurgy have increased as a share ofindustrial investments, reflecting mainly newly begun import substitutionprojects.

xx. The priority given in the 1981-1985 plan to the completion ofongoing projects will bring plan targets more into balance with the economy'sability to actually implement projects and is likely to increase theefficiency in project implementationO. However, there is also a risk that thisstrategy will delay the introduction of new, more economically viablecapacities needed to shift Romania's production structure into morecompetitive activities; indications are that Romania as a consequence of thispolicy, continues to add to capacity--in some cases with technologies that

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were outdated already when the projects were designed--where there is alreadyovercapacity either in the domestic market or on the intended export market.The reduction of investments in new projects in 1981-1983 against the originalprovisions in the 1981-1985 plan reinforces the tendency to delay theadjustment process that may result from the emphasis on completion of ongoingprojects. There is also considerable uncertainty about the possibility ofrealizing the investment targets for the remaining years of the plan period,since these are highly dependent on Romania's ability to soon restore itscreditworthiness; without renewed access to international financing, theinvestment program for future years - especially for new projects - may haveto be cut from presently planned levels, which would again lengthening thetime it will take to adjust the economy to the conditions of the 1980s.Excessive emphasis on fast repayment of existing external debt will have thesame effect.

xxi. The mission did not get requested information about investments atthe project level and is therefore not in a position to make a detailedassessment about Romania's investment program. Nevertheless, while thechanges in the sectoral allocation of investment proposed in the 1981-1985plan (compared to earlier plans) appear to be in the right direction, thequestion whether these changes are consistent with Romania's longer-termeconomic objectives will be explored by the upcoming mission to review theinvestment program. The increased allocations for agriculture seemjustified. Although reductions were made in energy investments in 1982 and1983 compared to the 1981-1985 plan allocations, the steadily increasing sharefor energy in total investments reflects the priority rightly being given tothe development of indigenous energy resources.

xxii. Energy policy. The 1981-1985 plan adopted in June 1981 gavespecial priority to narrowing the energy deficit gap through rapid developmentof domestic energy resources, especially lignite, and measures aimed ateconomizing on energy consumption. However, in response to the severefinancial problems, the program for bringing energy prices closer to worldmarket prices has been accelerated and the original production targets for theenergy sector revised in the 1981-1985 plan. Thus, in mid-1982 the Governmentannounced major upward revisions in the targets for crude oil and natural gasproduction in 1985, while the target for coal/lignite in 1985 wassimultaneously reduced somewhat. The emphasis on energy conservation incontaining the energy deficit was increased significantly at the same time.The overriding objective behind these revisions was to minimize crude oilimports for domestic consumption. To the extent that shortfalls in energyproduction targets cannot be compensated by increases in production of otherenergy sources, present policy is to rely on intensified conservation measuresrather than increased imports.

xxiii. The revised target for crude oil production calls for a productionof 15 million tons in 1985, compared to 11.8 million tons in 1982, which wasonly marginally above the 1980 level. In the judgment of the mission, oilproduction could peak in the mid-1980s, but at a level significantly lowerthan the revised 1985 target and decline thereafter as the effects of

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depletion of existing fields become more pronounced. However, it appearslikely that shortfalls in oil production in the near term at least can largelybe compensated by increased production of natural gas. While measures tosolve earlier problems in lignite production are reported to have resulted ina significant acceleration of production in 1983, doubts still remain, in themission's view, about feasibility of reaching the present target for ligniteproduction in 1985.

xxiv. On the other hand, as a result of energy savings measures taken,domestic consumption of energy has been reduced in recent years. This,together with the measures to develop indigenous energy resources resulted ina decrease in net imports of oil for domestic use from a peak of 7.3 milliontons in 1980 to 4.5 million tons in 1982. It now appears that the shortage inthe overall level of energy supply in the next few years will be lesspronounced, at least up to 1985. However, analysis of the electricitysubsector indicates that the problems in the program for switching powergeneration dependence from hydrocarbons to lignite are likely to result inshortfalls in the planned reduction in the use of oil and gas in producingelectricity; special efforts, therefore, have to be made in order to reach theobjective of reducing imports of oil for domestic use down to zero in 1985 inorder to improve the external balance. Efforts to reduce the need for oilimport through increases in the use of natural gas in power generation couldbe considered as a temporary measure; otherwise, it would conflict with thelonger term objective of preserving natural gas for its premium use asfeedstock in chemical industry. Stepping up natural gas exploration alsoseems a sensible objective in this context. By the end of the 1980s, thesituation can be expected to become more flexible, since nuclear power maythen contribute some base load electricity and hydropower projects that havebeen delayed are likely to come on line at the same time as the growth ratefor energy demand can be assumed to slow down as a consequence of measures tosave energy.

xxv. The authorities were more forthcoming in the discussions aboutRomania's energy program than in the past. This has enabled the mission tocarry out a more in-depth analysis of the sector than was possible before.The mission generally supports the priority given by the Government to thedevelopment of domestic energy resources and to the reduction of energyimports. The increased attention now given to energy savings--instead ofrelying basically only on expansion of energy production, in order to containthe energy deficit--is also a step in the right direction. However, theeconomic justification for specific parts of the energy program--especiallyfor the development of lignite production and small hydropower projects--isstill unclear. There is also uncertainty about the scope for energyconservation, especially in industry. Thus, a comprehensive review of theenergy sector--complemented by special studies of the coal and powersubsectors--is necessary in order to enable the Bank to make a more definiteassessment of Romania's energy program.

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xxvi. Agricultural reforms. The Government has recently also introducedeconomic and organizational reforms to stimulate agricultural production andproductivity. Major increases in agricultural producer prices coupled withpremiums --differentiated according to product--payable in addition to thecontract price when the actual deliveries exceed the contract deliveries wereintroduced in 1981. Producers' responses to the price reforms are not yetknown. However, to alleviate the foreign exchange shortage, large proportionsof the domestic production of fertilizers, chemicals and farF machinery havebeen exported in the last three years, resulting in low yields, given thesector's potential. Unless the stagnation in fertilizer consumption isreversed, agricultural output delivery response, at least in the short run,may not be significant. Before 1982, state farm units have been operating onannual government budgetary appropriations. Likewise, earned profits havebeen transferred to the national budget after the statutory deductions havebeen made. Starting in 1982, state farms were allowed to retain a higherportion of their net profits and to ccntinue to borrow from the Bank forAgriculture and Food Industry to finance investments. In the cooperativesector, income of farmers is to be tied to individual performance and type ofproductive activity. While these measures would enhance some degree offinancial discipline and generate direct incentives, a critical factor is thelack of farm managers' ability to make investment and production decisionsbased on economic parameters such as prices, interest rates, etc. Reforms toincrease farmers' responsibilities in these areas together with measures toincrease the availability of fertilizers and other inputs have, in the view ofthe mission, the potential of resulting in significant production gains withina short period. Also, while some steps to stimulate production in theindividual sector has been taken in recent years, these reforms should betaken further; specifically, measures to make it possible for producers in theindividual sector to share technical equipment (tractors, etc.) with state andcooperative farms should be considered.

xxvii. Adjustments in industry. The financial problems have alsogenerated changes in the strategy for industrial development in the 1981-1985plan. The mission was informed that the industrialization process willcontinue, but with much more emphasis on the updating of existing structuresto meet the requirements of foreign markets and to reduce the present highenergy and raw materials intensiveness of the production structure.Development of subsectors with a relatively high value added per unit ofoutput was reported to have been accelerated, while growth of low value addedand/or energy and raw material intensive products has been correspondinglyreduced compared to the original targets in the 1981-1985 plan; the productionof energy-intensive commodities is being restricted to essentials.Technologies in existing facilities are being redesigned whenever possible.Measures to increase the availability of material inputs for industry throughthe fast development of domestic raw material resources and recycling ofmetals, etc. have highest priority.

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xxviii. While impressive progress seems to be made in the efforts to reduceraw materials use in existing production facilities and in the recycling ofraw materials, projections provided to the mission indicate that Romania is,in the next few years, planning for significant capacity additions inproduction where markets are likely to remain depressed due to over-capacities. Thus, at least in the subsectors reviewed in some detail by themission, production appears at the margin to be somewhat slow to adjust tochanging economic conditions. Largely, this seems to be the consequence ofthe priority given to the completion of ongoing projects from the 1976-1980plan period, compounded by the cutbacks in new projects due to the financialshortage. The mission did not have in its terms of reference to undertake afull assessment of adjustments being made in the industrial sector.Information from other sources indicate that Romanian industry in theproduction of specific manufacturing goods is well advanced; nevertheless, itappears unlikely that industrial exports can be expanded over the next fewyears at a rate sufficient to allow for a more significant increase in importsof capital goods necessary for the modernization of the economy. A review ofprospects and policies for the industrial sectors, in particular as regardsthe engineering subsector, which the authorities assume will provide asubstantial part of the planned future expansion of industrial exports, is, inthe view of the mission, a priority task in the Bank's future economic andsector work on Romania. A special attention in this review should also be onthe state of technology in different sectors.

xxix. Foreign trade regime. As a result of the exchange rate reforms inrecent years, there is now a unified exchange rate system for all commoditytransactions. International prices are now more directly reflected to usersof imports and producers of exports. This allows exporting enterprises totake advantage of more favorable prices abroad. Furthermore, the system byallowing for bonus payments in case of enterprises exceeding export targetsprovide an important incentive. Conversely, it commits importers to pay thefull price of foreign goods, thereby inducing them to search for lessexpensive domestic alternatives wherever they are available. Second, the newpolicy is also designed to gradually direct Romania's exports towards suchgoods and services where the country is internationally competitive. Third,to the extent that import prices are reflected in domestic production cost,they force local prices in the direction of international price structures.In addition, measures specifically designed to promote exports are also beingimplemented. These include higher bonuses payable to employees in exportactivities.

xxx. The devaluations of the exchange rate in 1983 and the latestdevaluation of 15 percent made on January 1, 1984 (all introduced as part ofthe standby arrangement with the IMF) together with introduction of specialincentives for enterprise managers and workers engaged in export productionwill assist in Romania's efforts to reverse recent trends towards decliningexports of non-oil products. These changes should be supported by measures toincrease non-price competitiveness of Romanian prices, for example reforms tobring Romanian enterprises into more direct contact with foreign markets,

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freedom for export producing enterprises to make choices as regards productmix, measures to ensure the continuous; upgrading of design and qualityimprovements of export products, etc. Measures along these lines are alreadybeing taken. However, these policies should be carried out with much morevigor and within the framework of a cconsistent export strategy.

Mission Illustrative Scenarios

xxxi. Romania's economic development during the remaining part of the1980s will largely be conditioned by the necessity for further improvement ofthe current account balance to meet fuLture external debt repayments--estimatedto be about $1.2-$1.5 billion per year as an average over the next fiveyears. Different ways to achieve this target are open. One option is to relyon policies which give priority to import substitution and fast repayment ofoutstanding external debt, together with direct measures to minimize imports,as the main tools to achieve external balance, eventually combined withincreased reliance on central control over production and investment. Anotheroption is to rely on an outward-oriented strategy emphasizing increase inexports as the main way of achieving external balance with a significant shareof incremental exports being used for increasing imports of capital goodsrather than fast debts repayments. Such a strategy could also incorporateresumed external borrowing on a selective basis to allow for higher imports ofmodern technologies in order to speed up the structural adjustment process andshould be combined with reliance on incentive schemes to allocate resourcesand stimulate efficiency.

:xxii. The policy response to the financial crisis thus far has containedelements of both these strategies. In the view of the mission, the secondstrategy--though difficult to carry out during a period with world marketslikely to grow only at modest rates and fierce competition from othercountries with the same urgent need to improve their external balancesituation--would result in faster restructuring of the economy and carrieswith it the possibility for higher growth rates for production and consumptionin the longer term. It would also facilitate the re-entry to theinternational capital market, should Romania choose to do so. Highamortization payments in 1985 and 1986--when repayments of debt obligationsrescheduled in 1982 and 1983 become due--will result in a very tight foreignexchange situation. According to the mission's calculations, financing in theamount of $500-$600 million above what is generated by the projected currentaccount surplus (together with some trade-related borrowing) will be needed in1985 and 1986 to meet these obligations. While under autarchic policies, thiswould likely necessitate further rescheduling rounds, a more outward-orientedstrategy carries with it, in the judgment of the mission, possibilities toraise the needed foreign exchange via organized international borrowingwithout further rescheduling.

I. EXTERNAL AND DOMESTIC DEVELOPMENTS

1.1 After three decades of fast economic growth without balance ofpayments problems, Romania encountered financial difficulties in late 1981 andhad to seek rescheduling of its convertible currency obligations. Inresponse, the Government made major cuts in imports together with limitationsof demand and the introduction of structural reforms. Significant shifts inpolicy priorities have also been made. As a reflection of these measures, thecurrent account in convertible currencies improved remarkably from a deficitof $2,399 million in 1980 to a surplus of $655 million in 1982. This wasachieved while the economy continued to grow, although at rates significantlylower than those recorded during the 1970s. Despite this improvement of thecurrent account balance, Romania had to seek rescheduling of its convertiblecurrency obligation again in 1983. In the view of the mission, the majorchallenge facing the Government at present is to create conditions for aresumption of higher growth rates, while at the same time meeting futureexternal debt payments. The extent to which these conditions can be met,depends - in the context of the development in the world economy - on theGovernment's success in pursuing its structural adjustment goals.

A. The Origin of the Balance of Payments Problems

1.2 The present balance of payments problems have their origin mainlyin structural trends and excessive growth of domestic demand in Romaniatogether with the adverse international conditions during the 1970s and early1980s, especially the sharp increases in energy prices, declining worldmarkets and high interest rates. Policies in Romania until the end of the1970s continued to give priority to fast economic growth as manifested by theplanned growth rate of 10-112 for national income in the 1976-1980 plan and toemphasize fast expansion of heavy, energy-intensive industries. Theindustrial strategy pursued was also related to pricing policies in Romanianplanning. Following the emphasis on price stability, only minor adjustmentswere made in domestic prices. During the 1970s, this brought Romanian prices,especially those for energy, increasingly out of line with rapidly-changinginternational prices. The pricing system did not succeed in supporting otheradministrative instruments (such as change in norms for the use of inputs inproduction processes, etc.) used in order to adjust the economy to newrealities. There was also resort to heavy short-term external borrowingduring the last years of the 1970s, which made it possible to delay structuraladjustments called for by especially the higher prices for oil imports.

1.3 The pursuit of a growth-oriented economic strategy together withthe rapid mobilization of domestic resources resulted in growth rates thatwere very high by international standards. While, for example, GNP inindustrial countries and developing countries grew by 2.7% and 5.0Z per year,respectively, during the 1973-1979 period, GNP in Romania is estimated to havegrown by 9% annually during the same period. Also, the very fast expansion ofproduction in the chemical, metallurgy, machine-building and other heavyindustries during the latter part of the 1970s resulted in rapidly-increasingdemand for energy and other raw materials, which - due to the fact that thehigher world prices for energy were not passed over to users - was only partlyoffset by increases in energy efficiency. The virtually fixed prices for

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energy and other raw materials together with increasing costs for labor andother inputs led to financially unfavorable results in raw materialproduction; this compounded other problems encountered in the implementationof the plan targets for these sectors. In the case of crude oil, financiallosses and inadequate economic incentives reinforced the tendency towardsdeclining production due to physical/technical factors, leading to a decreasein indigenous crude oil production of about 20% over the 1976-1980 period.

1.4 The net impact of these factors was a sharp increase in rawmaterial imports over the 1976-1980 period; crude oil imports, in particular,increased from 5.1 million tons in 1975 to 16.0 million tons in 1980. This,together with the sharp oil price increases in 1979-1980 resulted in adeterioration of the oil trade balance from a surplus of $138 million in 1975to a deficit of $1,947 million in 1980.

1.5 The negative impact of these changes on Romania's external balancewas compounded by an excess of aggregate demand over aggregate domestic supplydue to very expansionary policies, especially for investment, in 1976-1978.This resulted in more than a doubling in the value of imports of capital goodsover the 1976-1978 period. To reverse this trend, the Government introducedsuccessively more restrictive policies beginning in 1979, with emphasis onrestraining investment together with efforts that resulted in a considerableincrease in exports in 1980 and 1981. However, sharply increasing importprices in 1979-1980 outweighted the real impact of these measures; imports invalue terms, therefore, continued to increase rapidly these years. Over thewhole 1976-1980 period, total imports increased at an annual rate of 22.2% invalue terms and at an estimated 8.7% in real terms.

1.6 The 1976-1980 plan anticipated fast growth in import volume,especially for crude oil. This was to be financed by a rapid expansion ofexports, mainly from the machine-building sector. Due to the recession inRomania's traditional export markets and insufficient competitiveness ofRomanian products--compounded by supply bottlenecks because of delays inimplementation of projects--export targets were only partly realized withtotal exports increasing at an estimated rate of 5.3% per year in real termscompared to a planned increase of 17% per year. These unfavorable realdevelopments were reinforced by adverse terms of trade changes. As a result,Romania's current account in convertible currencies deteriorated from adeficit of $260 million in 1975 to $2,399 million in 1980, the deficit in 1980corresponding to about 5.2% of GNP.

1.7 In order to achieve high production and investment targets, Romaniaresorted increasingly to foreign borrowing in accommodating the deterioratingexternal balance. Net foreign borrowing rose from $183 million in 1976 to$2.4 billion in 1980. Total net borrowing during the 1976-1980 plan periodamounted to $6.2 billion of which $4.3 billion was medium and long-term, and$1.9 billion short-term. These funds were practically all borrowed inconvertible currencies. At the end of 1980, Romania's external debt inconvertible currencies amounted to $9.6 billion (corresponding to about 17% ofGNP), of which $7.0 billion was medium and long-term and $2.1 billionshort-term debt. Compared with other middle-income countries, Romania'sexternal debt in 1980 relative to the size of the economy was not excessive.The debt service ratio in convertible currency was to 24% in 1980.

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1.8 In response to emerging problems of central control over anincreasingly complex economy and with the view to raise productivity andefficiency to maintain high growth rates, the Government introduced in 1979 aprogram for economic reform under the title of the New Economic and FinancialMechanism (NEM). Concrete measures that constitute part of this generalprogram has subsequently been taken in response to needs for reform generatedby the external financial problems (see Section II.B).

1.9 In addition to the above-mentioned measures, the Governmentinitiated in January 1981 an exchange rate and price reform with the purposeof simplifying the exchange rate system and bringing Romanian prices,especially those for energy, closer to world market prices. The Governmentgot support in June 1981 for its stabilization program in the form of astandby arrangement with the IMF in the amount of SDR 1,102.5 million(US$1,356 million), designed to reduce the current account deficit and achieveeconomic balance. As part of the standby program, additional majoradjustments were to be made in the exchange rate system and price structure.

1.10 The structural imbalances that emerged during the latter part ofthe 1970s were addressed also in the 1981-1985 plan approved in July 1981.While proposing continued growth at a rather high rate, 7.2% per year on anational income basis, the plan at the same time called for structural changesin response to the deteriorating external balance; this was manifested aboveall in the significant increase in investment for the development ofindigenous energy resources, mainly lignite, proposed in the plan. The growthrates laid down in the 1981-1985 plan were significantly higher than whatcould be expected to be attainable, given the assumptions made in the standbyprogram.

1.11 Despite the measures introduced by the Government in 1979-1980 andearly 1981 to reverse the trend towards a rapidly deteriorating externalbalance and the support by the IMF standby program, there was a reduction inconfidence by its creditors during the latter part of 1981, leading to awithdrawal of deposits and a drying up of lines of credit. Besides thedeterioration of the trade balance in convertible currencies, this change wassharply aggravated by a much more negative evaluation of Eastern Europeancountries in general as borrowers on international capital market. Thesefactors were compounded by the lack of information about the actual size ofRomania's current account deficit, external debt and measures taken to improvethe situation. The fact that more than a fifth of Romania's debt was shortterm, while at the same time its medium and long-term external debt had arather unfavorable maturity structure with large principal repayments due inthe early 1980s, led creditors to withdraw capital once their confidence inRomania's creditworthiness was reduced. Once begun, withdrawal of creditaccelerated. Instead of an expected net inflow in convertible currencies of$1.7 billion, there was a net outflow of almost $0.6 billion in 1981. As aresult of the abrupt turnaround in the capital account--and despite asimultaneous sharp reduction of the current account deficit mainly as a resultof the drastic import reductions forced upon the Government-- payment arrearsand an acute shortage of international liquidity emerged in late 1981.

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B. Measures Taken

1.12 The acute liquidity shortage since late 1981 has led the Governmentto take much broader and significantly more far-reaching measures than thoseanticipated in the standby program with the IMF and in the 1981-1985 plan.The strategy the Government has followed in response to the crisis basicallyrests on three broad kinds of measures: (i) external debt relief throughrescheduling of convertible currency dues; (ii) cuts in imports together withdemand management policies operating via reductions in the level and structureof planned expenditure. While the reductions in domestic spending has beenmade partly with the view to reduce imports, their purpose has also been tofree production resources to create a capacity for increase in net exports;(iii) structural adjustments to bring net export earnings up to a level enoughto cover future debt payments and to create conditions for resumption ofhigher growth rates in the medium and long-term.

1.13 The 1981 Annual Plan approved in October 1980 assumed nationalincome to grow at 7%, about the same as the average growth rate projected for1981-1985 in the Five-Year Plan but si,gnificantly higher than achievements in1980 (2.8%). Investment was to grow at 9.2% in 1981 compared to an averagerate of 5.2% per year assumed in the 1981-1985 plan. The stabilizationprogram agreed upon with the IMF in June 1981 assumed somewhat lower growthrates for production and a significantly lower increase in domestic resourceuse in 1981 than the Annual Plan, especially for investment.

1.14 The acute foreign exchange shortage due to the unexpected sharp netoutflow of convertible currencies during the latter part of 1981 prompted theauthorities to make considerable adjustments in the plan for domesticexpenditure and foreign trade. Major cuts were made in imports of fuels,other raw materials and capital goods; these measures together with effortstoward import substitution resulted in a 13% reduction of imports from theconvertible area in 1981. In support of theae measures, adjustments were madealso in domestic expenditure with emphasis on cuts in investment, which wasreduced by 7.3% in volume from the 1980 level. Restraints imposed onconsumption limited the increase in real consumption to 2.7% in 1981 asagainst a targeted increase of 3.2% in the standby program. As a result,domestic aggregate expenditure fell by 3% in real terms in 1981. Decliningproduction in agriculture again in 1981--the second consecutive year withfalling production--resulted in difficulties for food supplies which continuedinto 1982, and led the Government to introduce some rationing measures forsugar and cooking oil. Furthermore, the quantity of food purchases waslimited to one month's consumption intended to discourage householdaccumulation. In 1982, the Government also increased retail food prices by anaverage of 35%, thus easing the demand pressure. The combined effect ofproduction shortfalls in 1980 and 1981,, price rises in 1982 and the diversionof agricultural products for exports appear to explain the drop in per capitaconsumption for many food products in 1981 and 1982. It is the mission's viewthat the likely agricultural production in 1983 and the continued demand forforeign exchange to stabilize the economy, make it unlikely that the domesticavailability of high value exportable commodities such as meat and milkproducts would increase significantly over the next few years.

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Table 1: TALGEIS AND DINLELENIION OF 1981 AND 1982 PLIAN AND PElGRA4S(Anrual averae rate of charge, pemxent)

Actual 1981- 1981 19821976- 1985 Arial Stanidby Anral Standby1980 Plan Plan Progran Actual Plan Progran Actual

Airaal rate of charge (%)Gross National Product

(GNP) .. .. .. 6.5 2.7 .. 5.7 3.2National Irrxooe 7.2 7.1 7.0 6.5 2.1 5.5 .. 2.6Industrial Production 9.5 7.6 2/ 8.1 1/ 6.9 1/ 4.0 1/ 5.6 1/ 2.2 1/Agricultural Production 4.8 4.5-5.0 2/ 9.0 1/ 7.8 1/ -2.2 1/ 6.0-7.9 7.3Investmernt 10.9 5.2 9.2 4.1 -7.3 5.0 5.0 -3.1Retail prices 1.4 1.2-1.6 1.1 .. 3.5Real imane 6.2-7.0 3.5 .. .. 2.2 2.7Real waes n.a. 2.9 3.4 .. 1.0 1.5

Corsuption .. .. .. 3.7 2.7 .. 1.4 -1.2Retail sale 8.7 4.8 6.0 .. 4.3 4.6Public services 11.9 12.0 13.2 .. 7.5 11.2

Value (US)

Trade accourt 3/ - - - -1,025 204 - 550 1,525Qirwent account 3/ - - - -1,825 -818 - -450 655

Note: The data given for GNP, cornuption, trade account and currerit accout axe accordirg to MAdefinitions; all other data are accordirig to national definitions.

1/ Net production.2/ Gwss production3/ Cobrrtible curremties.

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1.15 In addition to the drastic cuts in imports supported by theadjustments in domestic expenditure, the Government also took measures topromote exports, which resulted in a growth of exports in convertiblecurrencies of 11% in 1981, a period characterized by stagnation in worldtrade. As a result, the trend towards larger trade deficits was sharplyreversed in 1981. While the stabilization program called for a reduction ofthe convertible trade deficit from $1,534 million in 1980 to $1,025 in 1981,the trade account in 1981 actually showed a surplus of $204 million, the firstsurplus in many years.

1.16 Despite this significant reduction in the current account deficitand the support of the standby arrangement with the IMF, sharply increasingpayment arrears, reaching US$1.1 billion at the end of 1981, led theauthorities to seek rescheduling of 1981 arrears and 1982 convertible currencydues. A debt rescheduling agreement was reached with creditor governments inJuly 1982, which provided that 80% of the interest, principal and arrears onofficial and officially guaranteed medium- and long-term debts due by the endof 1982 and unpaid would be rescheduled over 6-112 years, including a threeyear grace period. A corresponding agreement regarding commercial debts wassigned by Romania and a coordinating group of nine banks in December 1982.The terms of this agreement were similar to those for the public debt, butexcluded interest payments and include,l short-term debt. Due to difficultiesto reach agreements similar to those signed with governments and commercialbanks, final agreements about conditions for settlement of outstanding debtsto suppliers could be reached first in May 1983. In total, t':e reschedulingagreements provided Romania with debt relief of US$2.7 billion out of theprojected US$5.5 billion interest and principal payments due in 1982(including the 1981 arrears).

1.17 Both the Annual Plan and the standby program for 1982 assumed areturn to more favorable trends in the economy after the austere measurestaken in 1981. The Annual Plan assumed national income to grow at 5.5%, lowerthan the 1981-1985 plan target, but significantly higher than achievements in1981. Investments was planned to increase (by 5.9%) in order to support themuch-needed restructuring of the economy after the significant reductionnecessitated by the foreign exchange shortage in 1981. The standby program,on the other hand, while projecting about the same increase in totalproduction as the Annual Plan, assumed significantly lower growth for domesticresource use than what was implied by lhe Annual. Plan. Like the Annual Plan,the standby program gave priority to investment, which was to grow at 5%,while consumption was to increase only moderately. The standby programassumed that the projected developments for total production and domesticabsorption would permit a further improvement of the trade account by about$350 million and a reduction of the current account deficit from $818 millionin 1981 to $450 million in 1982.

1.18 In 1982 the trade surplus in convertible currencies was 1.5 billiondollars; a preliminary official estimate is that the development of thecapital account turned out to be much more unfavorable than expected also in1982. This, together with a sharp decline in exports to the convertiblecurrency area, led the Government to take still more restrictivre measures toreduce imports in 1982. A further reduLction by 3.1% in the volume of

investments was made following the cutbacks made in 1981. In contrast to1981, when total consumption continued to increase, also real consumptionexpenditure was reduced in 1982, mainly through increases in the prices ofbasic food products and energy, which is estimated by the mission to haveresulted in reduced eal wages and incomes. The price adjustments also hadthe purpose of reducing the real value of cash holdings and other liquidassets in the household and enterprise sectors in support of the tightmonetary policies pursued by the Government in 1982. In the foreign tradesector, the introduction of a new policy, permitting importing of crude oil tobe refined for re-export only on the condition it had been proven profitablein convertible currency terms, led to a significant decline in the value ofexports of oil products. Non-oil exports fell by 9% in value in 1982,reflecting a reduction in Romania's competitiveness on major export marketsdue to the appreciation of the leu--which was pegged to the US dollar--by morethan 20% during 1981 and 1982 together with declining export markets due tothe world recession. However, despite the significant fall in export value,measures to reduce imports resulted in an even larger decline in the importbill, so the current convertible account improved by more than $1.1 billion toa surplus of $655 million in 1982. The measures to curb imports includeddrastic reductions in allocations for the use of fuels, mineral raw materials,etc. per unit of output in production process, cutbacks in production inenergy-intensive sectors and substitution of domestically produced rawmaterials, capital and equipment, spare parts, etc. for imported goods. As asresult of these measures, imports of raw and intermediate goods was reduced byabout one-third and capital goods by almost two-thirds in 1982; imports ofcrude oil for domestic use was reduced by about 8% in 1982, following areduction by about 32% in 1981. Overall imports fell by one-third in 1982,bringing the cumulative fall from 1980 to over 40% in value terms.

1.19 Also the trend toward rapidly increasing public expenditure(including transfers) has been broken in recent years), reflecting constraintsnecessitated by the need to reserve a growing share of total production forincreases in net exports as well as system-related reforms. Significantreductions in real public consumption, particularly for defense andadministration have been made. As part of the authorities' intention toincrease the financial autonomy of enterprises, the responsibility forfinancing of investments is gradually being transferred from the state budgetto enterprise-generated funds. The exchange rate and price reform programbegun in 1981 has made possible a sharp reduction in the need for subsidiesfrom the state budget to unprofitable enterprises. Public transfers to thehousehold sector, in contrast, has continued to increase according to previoustrends, to a large degree due to the increases in children's allowances, etc.in 1982 in order to compensate low income groups for part of the priceincreases implemented in that year. Altogether these reforms have resulted ina reduction of total budget expenditure of about one quarter between 1979 and1982 and a reduction from 50% to 35% in the share of budget expenditure in GNP.

1.20 The reductions made in the imports of crude oil and other rawmaterials in 1981 and 1982 together with cutbacks in energy intensiveproduction, reportedly led to over-capacities in the economy in 1982, forexample in the refinery sector and in aluminum production. Despite thesecutbacks in production in specific sectors, drastic reductions in the

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availability of imported material inputs as well as reductions in major demandcomponents, GNP is reported to have grown by 2.7% in 1981 and 3.1% in 1982,surprisingly high rates given the restrictive measures taken in these years.In 1981, developments in industry together with rather favorable exportperformance contributed positively to the recorded growth rate whileagriculture contributed negatively. In 1982 these sector contributionsshifted significantly with agriculture--due to a very good harvest--contributing half of the recorded increase in GNP; a significant increase inproduction of final goods for stocks also appears to explain part of the GNPgrowth in 1982.

1.21 Thus, according to available statistics, it appears that thegeneral impact on the economy in 1981 and 1982 of the sharp reductions in theavailability of imported raw materials and intermediate goods was much lesspronounced than would be expected a priori. Partly, this seems to beexplained by the reduced demand for energy intensive materials such as steel,cement, glass, etc., used in construction activities as a result of thecutbacks in investments, especially for new projects, in these years; this inturn made possible reductions in production, while at the same time meetingmuch of the need for these commodities outside the investment sector. Drawingdown of stocks of raw materials and energy together with the existence of ahigh potential for substantial savings in the use of these materials,especially in industry, also appear to explain how the rather satisfactorygrowth rates could be possible in 1981 and 1982 despite significant cutbacksin the supplies of material inputs. Another striking development is that theimpressive $3 billion improvement in tlie convertible current account over the1980-1982 period was achieved with relatively small reductions in aggregatedemand, especially as regards consumption, which continued to increase up to1981 and was reduced only in 1982 (by a modest 1.2%), though from a low base.

1.22 A further improvement of the convertible currency current accountto a surplus of about US$900 million is officially estimated for 1983. Incontrast to the outcome in 1982, the stabilization program for 1983 projectsthat the improvement of the current account will result from an increase inexports that will also provide for some increase in imports of much neededinputs in production. However, very limited access to international creditstogether with large debt repayments forced the Government to seek reschedulingalso of 1983 debts, despite the expected improvement of the external balance.Agreements with government about rescheduling of official debt ($200 million)and debts to commercial banks ($859 miLlion) were reached in May and June1983, respectively. The agreements provided for rescheduling of 60% ofprincipal repayments of medium and long-term debts falling due in 1983, thelower share of debt payments being accepted for rescheduling in 1983 comparedto 1982 reflecting in part the significant improvement in Romania's repaymentcapacity. Ten percent of the rescheduLed amount is to be paid in 1984 and theremaining part to be repaid over six and a half years including a three yearsgrace period. In contrast to the 1982 rescheduling, short-term debts andsuppliers' credits were not rescheduled in 1983.

1.23 While pursuing restrictive policies as regards domestic expenditureand stretching out external debt payments through rescheduling, the Governmenthas at the same time also initiated structural reforms to increase economicefficiency and to create conditions for a further improvement in external

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balance. One major element in this program is the exchange rate and pricereform initiated at the beginning of 1981 (see para. 1.9 and Section II.C).However, as a consequence of the balance of payments problems, the scope ofthe exchange rate and price reform has since the beginning of 1981 beenbroadened, the measures taken much more vigorously and also acceleratedcompared to what has originally been intended. The earlier system withmultiple exchange rates was significantly simplified in 1981 and 1982; fullunification of the commercial exchange rates was achieved by mid-1983, oneyear earlier than originally agreed with the IMF. The leu was devalued byabout 14% in two steps during the first part of 1983 in order to improveRomania's international competitiveness. Significant adjustments in domesticprices, especially for energy and basic foodstuffs, have also been made inresponse to the crisis. The Government's intention is to continue this policyof bringing domestic prices, especially those for energy, closer to worldmarket prices.

1.24 Another major element in the Government's adjustment program isefforts to increase the efficiency of investments. One aspect of thisstrategy is the marked reduction in the growth rate for investment togetherwith the emphasis on completion of ongoing projects started in 1976-1980 inthe 1981-1985 plan. The authorities expect that these measures will eliminateearlier problems of significant waste and delays in project implementation dueto too many projects being undertaken at the same time. Another aspect is theshifts in the sector structure of investments that were made in the 1981-1985plan in response to emerging external and internal imbalances during the late1970s. This is reflected in the priority given to the development of domesticraw material production, especially of energy, compared with the previousplan. Significant increases in investments in agriculture above original plantargets were made in 1981 and 1982 in order to improve performance within thesector and to provide for reduced dependency on imports of food and foodstuffs.

1.25 In the judgment of the mission, it appears that the improvement inthe convertible current account in 1980-1982 was achieved mainly through cutsin imports; this improvement reflects only to a degree effects of structuralpolicy measures. Also in the view of the mission, the sudden withdrawal offoreign credits began in autumn 1981 did not give the Government much choicebut to rely on defensive measures. The emphasis on cutbacks in investments,instead of consumption, to reduce domestic resource use also appearsjustified, given the problems with delays in project implementation and theconcerns for the standard of living of the population. However, the scope forfurther improvements in the external balance via additional cutbacks inimports without significant negative impact on the general activity level andthe growth potential of the economy and further reductions in the standard ofliving of the population appears to be very limited.

C. Mission's Views of Future Options

1.26 The future development of the Romanian economy both in the shorterand longer-term--including its possibilities to regain soon creditworthinesson the international capital market--depends on policy responses of thepresent situation. This issue concerns adoption of policies within theexisting economic system.

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1.27 During the 1970s, rapid economic growth and industrializationtogether with price stability were priority target, with external balancegiven secondary rank. The Government is now giving external balance and debtrepayment priority in determining economic growth. The authorities decided in1982 to stop foreign borrowing (even if external funds were available) withthe exception of the continued drawing of the standby credit with the IMF andshort term, trade related credits on a limited scale. The temporarysuspension of new borrowing from the World Bank in 1982 is part of thisbroader decision. The authorities have announced their intention to at leasthalve the 1982 external debt by the end of 1985 and to fully repay it by theend of 1988. In line with the new priorities, present policies also emphasizethe need to curb the growth of domestic demand to keep demand for imported andindigenous resources within available limits. Also, in sharp contrast toprevious policies, the intention to bring domestic prices closer to worldmarket prices implies that price increases can be expected to be significantlyhigher over the next few years than the 1-1/2 to 2% recorded during the1976-1980 period. The devaluations of the leu made in January and July 1983,together with the announced shift to more flexible exchange rates in thefuture, signals a change of the policy of 1973-1981, when successive exchangerate appreciations were used to keep international price increases fromaffecting domestic prices in Romania. The short-term difficulties generatedby the balance of payment problems together with the need to shift to an"intensive growth" strategy, which relies mainly on increased efficiency andimproved quality as the main elements in the growth process, has resulted insignificantly higher attention to efficiency-related issues. This ismanifested in the accelerated implementation in recent years of generalreforms in the New Economic Measures (NEM) program initiated in 1979.

1.28 Central control over production and norms for the use of materialinputs in enterprises--supported by import substitution policies--havedemonstrated their effectiveness as instruments for affecting the externalbalance and the efficiency in the use of raw materials. These have in thepast also been successful in producing rapid output growth and in satisfyingthe basic needs of the population. However, there now also exists aproduction structure which does not correspond to evolving demand patternsdomestically and on export markets and also utilizes high amounts of labor andcapital and domestic and imported raw materials per unit of output.Improvement in efficiency would therefore contribute to both higher level ofconsumption and to the achievement of specified growth targets. Qualityimprovements would also be needed in order to make Romania more competitive onthe international markets.

1.29 In this context, accentuation of measures that make managerspersonally responsible for production targets, use of imports, investmentdecisions and the financial performance of the enterprises they are running,together with schemes that link individual efforts and remuneration andincrease the supply of consumption goods, would result in significantproductivity gains within a reasonably short period of time. These would berelatively inexpensive both in terms of sacrificed domestic consumption andforeign exchange. Together with export promotion policies, these would alsoincrease the capacity for imports and expose Romanian enterprises tointernational competitition, thus giving impetus to improved efficiency andquality in meeting world market standards.

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1.30 In the wake of the balance of payments problems, a blend of centralcontrol and curtailment of borrowing for imports together with theintroduction of incentive schemes in certain areas of the economy have beenused. The mission was informed that the number of material balances in theplan, previously at about 200, is now being increased to about 400; thespecification of commodities for export is being increased from about 300 to600; and the number of norms specifying the use of material inputs in theproduction is being increased from about 6000 up to 40,000. The reliance oncentrally-set physical targets was singled out as the factor that made thelast two years' impressive current account improvement possible; it wasemphasized that if the planning of the economy had relied on value indicators,such an improvement would not have occurred. Thus, in terms of planning ofproduction, the reaction thus far seems to be directed towards more centralcontrol and less opportunity for enterprise managers to choose e.g. productmix within centrally set value targets. At the same time, certain reforms nowbeing introduced--for example, the new wage system now under implementation--indicate a preparedness to rely more on incentive schemes in the future (c.f.Section II.B).

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II. POLICY REFORMS FOR STRUCTURAL ADJUSTMENT

A. The Dimensions of Structural Adjustment

2.1 At present, the most important problem for Romania's economicdevelopment is the foreign exchange shortage. As explained in Chapter I, thisderives from a combination of three factors: the energy deficit, insufficientexports--mainly as a result of sluggish world markets--and the need to servicethe foreign debt. To overcome the foreign exchange shortage, Romania has toundertake fundamental structural adjustments in the economy, the most urgentchanges being to: (i) reduce high dependency on imported energy and other rawmaterials through development of indigenous resources and higher efficiency inthe use of material inputs in production; (ii) bring the structure ofproduction into conformity with demand. patterns domestically and on the worldmarket, and increase export of industrial products through improvedinternational competitiveness and expansion of production capacity; and (iii)improve efficiency in the economy, especially in agriculture where productionis well below potential. This will require further price adjustments in orderto bring Romanian prices closer to those on world markets, and major changesin the incentive system. In some of these areas, as discussed, below,important measures are being taken by the Romanian authorities.

2.2 Although measures aimed at improving the structural efficiency ofthe economy were initiated before the financial difficulties occurred, theshorter term adjustments to it have, for obvious reasons, relied mainly onrestrictive measures--with emphasis on cuts in imports--together withstretching out of debt service payments through rescheduling of externaldebt. This policy, though successful in terms of impressive improvements ofthe current account, has at the same time carried with it significantsacrifices in the form of major reductions in domestic demand compared toplanned developments. In order to avoid a prolonged continuation ofrestrictive policies, the emphasis should, in the view of the mission,gradually be shifted toward measures aiming at promoting exports, while at thesame time continuing present policies to restrict or reduce the importintensity as regards energy and other raw materials. In a short andmedium-term perspective, the objective to further improve the current accountsurplus is generated by the necessity to repay existing external debts;however, in the longer term, as debt service payments go down, freed foreignexchange earning should, in the view of the mission, be used to increaseimports of capital goods and technology needed for the further development ofthe economy.

2.3 Generally, the adjustment process that Romania has to undergo overthe medium and long term will imply a transfer of resources from domestic useto the foreign trade sector so that scope for an increase in net exports iscreated. To achieve this, it is necessary to curb growth of domestic resourceuse in order to keep demand for domestic and imported resources withinavailable limits, while at the same time bringing about structural changes andstimulating the expansion of the production capacity. This implies thatdomestic use of resources has to increase less rapidly than total production.This policy has to be supplemented by measures to increase efficiency toensure adequate profitability in foreign trade exports.

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2.4 According to a rough estimate made by the mission, an additionalincrease of the current account surplus from the $655 million recorded in 1982to a sustainable surplus in the range of $1.2-1.5 billion is required in orderto meet projected convertible currency debt repayments over the next fewyears. In the projections the mission has made with the Bank's standards RISMmodel (c.f. Chapter III below), it is assumed that out of the estimatednecessary improvement of the current account (in the range of $600-800million) about $450-600 million could be achieved through increased netexports from industry (including effects of energy conservation programs) and$150-200 million through increased exports/reduced imports of agricultural rawmaterials. This would require investments of $3-4 billion, the actual amountbeing dependent on the sectoral distribution of the increases in exports aswell as the efficiency in the use of resources. An additional significantincrease would be required for the financing of imports of capital equipmentand for the necessary modernization of the production system, unless there issignificant recourse to external borrowing.

B. Application of the New Economic and Financial Measures

2.5 The very fast growth rates recorded until the end of the 1970s weredue mainly to the successful mobilization and transfer of labor fromagriculture to the industrial sector together with the high and rapidlyincreasing investments; only to a lesser degree did these growth rates reflectincreases in general efficiency in the economy. Gradually, at the end of the1970s, a shift towards an "intensive" growth strategy that relies on increasesin efficiency of existing resources as the main source of growth becamenecessary. (This is reflected in the 1981-1985 plan, which assumes that 80%of the planned increase in overall production during the plan period is to beachieved by raising productivity.) Also, difficulties in managing the economyat central level and the increasing need of combining central planning of theeconomy with enterprise self-management necessitated a shift in focus towardmore efficiency-oriented policies. Over the last several years, differentmeasures have been introduced, including the reforms under the title of theNew Economic and Financial Measures (NEM) initiated in 1979 in order to raiseproductivity and efficiency by increasing the incentive of enterprises tofulfill plan targets - . This is to be accomplished by a shift from grossto net production as the major performance target (intended to eliminate thetendency to use expensive inputs that was created by the gross productionindicator), by extending the scope of enterprise autonomy and by sharpeningthe impact of financial rewards for success and penalties for failure forenterprises as well as workers. However, the shift to net production as themain performance indicator-- implemented already in 1979--does not eliminatephysical targets. The application of the NEM assumes that centrally-setphysical targets will be even more important than in the past as an instrumentof controls of enterprises by centrals and ministries. This is also

1/ The main features of the New Economic Measures program were reviewed inthe Bank's Country Economic Memorandum on Romania of Augut 20, 1980.

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demonstrated by the authorities' response to the financial difficulties, whichhas involved increased reliance of central control parallel with theaccelerated introduction of improved incentive schemes for enterprises andworkers, etc. outlined in broad terms in the NEM.

2.6 As part of the gradual introduction of the NEM and the enlargedrole of self-management and self-financing in economic activi-:ies that isvisualized therein, enterprises now propose investment projects for inclusionin the five-year plan; also, a marked change in the sources of financing ofenterprise investments is now being introduced. The role of state budgetfunds is to be reduced and enterprises will have to rely increasingly onretained earnings and bank credit for their investment needs. Each enterpriseis expected to cover its expenses from its own income and to obtain profitsfrom which it pays back in greater part for the cost of fixed and circulatingcapital as well as provide for future investments and material incentives forits workers. (This change in policy is manifested by the decrease in theshare of investment financed from the state budget from 55% in 1970 to 44% in1981. As result of low profits in the enterprise sector which reduced thecapacity for self-financing, this share again rose to about 50% in 1982.However, the authorities regard this as temporary and aim at bringing down thestate-financed share of total investments to about one-third in 1984-1985.)The authorities expect this reform to result in increased financialresponsibility and efficiency within the enterprises, which constitutes animportant step in shifting the enterprises toward price and profit basedoperations.

2.7 Still existing restrictions on the right of enterprises to makeinvestment decisions will, in the mission's opinion, limit the effects onefficiency of increased autonomy as regards investment financing pe se. Itis to be expected that the choice of technology for the projects thatenterprises propose for the plan is made on the basis of the prices that theindividual enterprises are facing. Thus, it is likely that there earlier wasa tendency--given the very low relative prices for energy--to iropose e.g.energy-intensive technology for these projects. This was ass-mMed to becorrected at central level by planners having access to "correct" shadowprices before the project was accepted for inclusion in the plan. As a resultof the implementation of the exchange rate and price reform, domestic pricesnow give more accurate information than before about relative resource costsas expressed by world market prices. This should facilitate the choice ofoptimal project technology, improve the quality of investment decisions andthus support the efforts to restructure the economy. In addition, theadjustments made in prices and exchange rates should give cental planners andenterprises better indications about Romania's dynamic comparative advantagesand thus lead to a more efficient foreign trade pattern (see Section II.Hbelow). The price adjustments made are also likely to result in increasedefficiency in resource allocation in markets for consumer goods.

2.8 While the exchange rate and price reform is likely to have positiveeffects on efficiency in certain areas of the economy, its effects onallocative efficiency within the production system is more uncertain. Sinceprices are still set according to a "cost plus" formula, it is possible for

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enterprises to pass on cost increases resulting from the price adjustments totheir customers. This is likey to reduce the impact on resource allocationwithin the production system.

2.9 The frequent price adjustments made in recent years indicate achange towards flexibility also in price setting in sharp contrast to earlierpolicies, which allowed for major price adjustments only with rather longintervals. While this change in policy will introduce a much-needed elementof flexibility in the economy, it will at the same time also aggravate thedifficulties of ensuring efficient resource allocation via strict centralcontrol over both physical production parameters and prices. The increasedautonomy given to enterprises in 1982 to decide upon necessary priceadjustments to compensate for cost increases due to exchange rate changes--aprocess which is being accelerated in 1983--is, in the judgment of themission, a correct response to these difficulties. However, this reform willnot eliminate existing problems associated with the often inadequate exposureof enterprises to demand constraints. The significant adjustments of pricesand exchange rates in recent years have created a basis for efficient decisionmaking at the enterprise level that did not exist earlier; they also provide abasis for efficient application of the general principles for economic reformlaid down in the NEM package. To be fully effective, these adjustments have,in the view of the mission, to be followed by reforms that increase the scopefor decision making at enterprise level (including agricultural farms) andgive enterprises increased financial autonomy.

2.10 The signals given through prices in a system of decentralizeddecision-making would, however, only be effective if they are translated intofinancial incentives and disincentives for enterprise management and workers.As of today, prices are set in a way to give full cost coverage for even theleast efficient enterprise in a sector. Although Romanian authorities havestated as an objective that enterprises that make losses should not getfinancial support from the state budget, no enterprise has apparently thus farbeen forced to go bankrupt. Though this practice has its justification in thepriority given to job security and full employment by the Romanianauthorities, it is, in the mission's view, at the same time likely to resultin inadequate financial discipline by enterprise managers. This tendency iscompounded by the system of enterprise taxation. At present, there is nofixed percentage share of gross profits that goes to taxes; instead, allprofits in excess of planned levels are taxed away. (It is not known to themission how this system relates to the program for increasing enterpriseself-financing of investments.) Also, the rate for planned profits variesbetween sectors. This system of taxation is, in the judgment of the mission,likely to severely reduce incentives to increase efficiency and profits. Analternative is to leave a larger amount of profits earned to the enterpriseand its use not to be controlled by the state. Favorable prices would thenlead to improvements in efficiency which would allow enterprises to payincentive wages and to invest more. This in turn would stimulate production.Less favorable prices, on the other hand, would have the opposite effect.Also, prices should be varied in order to reflect differences in quality.This is already the case in the foreign trade sector, where the quality ofdomestic products is measured in terms of prices obtained abroad. In domesticmarkets, quality standards could be raised if the state would cease to act as

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purchaser of last resort. Inferior quality products could then no longer besold, causing losses at the enterprise level. Also, to the same end, andprovided it does not result in diseconomies of scale, larger enterprises couldbe broken up into smaller, financially independent units producing for thesame market, thus introducing a much needed element of competition in theRomanian economy.

2.11 The present remuneration system with highly equalized wages/salaries provides little incentives for workers and enterprise managers. Thisis manifested in inadequate discipline as well as other signs of lowefficiency in the utilization of labor, especially in agriculture, oftenobserved by the Romanian authorities. In response to these problems, and aspart of the implementation of the NEM program, a new remuneration system whichlinks incomes to individual performance as well as the performance of theeconomic unit in which employees are working is now under imple-mentation. i-' According to the new "contract" system to be applied fromSeptember 1, 1983, enterprise revenues will be proportional to actualproduction, disregarding planned production targets. (In foreign trade,incomes of enterprises and organizations dealing in foreign trade operationswill be decided by quotas applied to the value of exports and imports and onthe basis of foreign currency earning. (C.f. Section II.H below.) If plantargets are met with a smaller number of employees or if a higher productionis achieved with the same number of personnel as planned, wages will beincreased accordingly without upper ceiling. However, if planned productionor productivity targets are not met, incomes of workers will be reducedaccordingly. According to the law, the share of variable income in totalremunerations will be increased to 25% for the economy as a whole in 1985.Within this system, individual wages/salaries will be set according toindividual productivity as well as overall labor productivity of theenterprise. In addition, beginning September 1, 1983, profit sharing bonusesfrom a special "participation fund"--amounting to 4% of the wage sum for thetotal economy--will be paid to employees in enterprises that meet productiontargets. However, higher bonuses, differentiated in accordance with the shareof export production within overall production, will be paid to enterprisesthat meet export targets; a higher than average bonus remuneration will alsobe payable to employees in mining and oil extraction units. By thus linkingthe income of each individual closer to production, productivity and economicefficiency, the authorities expect workers to get a better material incentivein the fulfillment of plan targets.

2.12 Particular attention has in the past been given to the fulfillmentof five-year plan targets despite changing economic conditions during thecourse of the plan, which has resulted in e.g. overcapacity in some sectors(refining, certain parts of the machine-building industry). The authoritiesare aware of the need for making the economy more adaptive and flexible tochanging conditions on foreign as well as domestic markets. At the macro

1/ "Law on the Basic Principles of Improving the Labor Remuneration Systemand the Distribution of Working Peoples Incomes" approved by GrandNational Assembly on July 2, 1983.

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level, this is illustrated by the decision at the National Party Conference inDecember 1982 not to adopt any special development targets for the remainingpart of the present five-year plan and instead analyze the rate of developmentin relation to concrete situations within the context of the annual plans.Another example is last years' changes in exchange rate and pricing policy,including the recently declared preparedness to pursue a flexible exchangerate policy in the future to ensure an adequate international competitivenessfor Romanian products. Information given to the mission indicates awarenessof the need also for higher flexibility in the future as regards whichcommodities and what quantities should be internationally traded. This isillustrated by the recently introduced policy of basing import of crude oilfor refining and re-export strictly on profitability in hard currency terms.(The same principle will apparently also determine exports of e.g. fertilizersin the future.) While these changes may introduce some much needed elementsof flexibility in the system, the Romanian economy is basically still toorigid to function efficiently integrating with a world economy characterizedby rapidly changing conditions.

2.13 The mission did not undertake a detailed review of recent systemchanges. Also, the mission only had the opportunity to discuss in generalterms the application of the NEM program (including the law on the newremuneration system, which was under preparation at the time of the mission'svisit) with the authorities. The mission, therefore, can not make a moredefinite assessment about recent system changes in the Romanian economy. Itis not clear to what extent they are actually being introduced in differentsectors and what contribution they will make to the solution of Romania'sstructural problems. Nevertheless, these reforms appear, in the judgment ofthe mission, to be in the right direction. They give enterprisessignificantly increased autonomy in investments, production and marketingdecisions as well as full financial autonomy. This is also, in theinterpretation of the mission, the intention in the guidelines in the NEMreform program.

C. The Exchange Rate and Price Reform

2.14 Price stability has traditionally been one of the basic principlesof socialist planning in Romania. This, together with the fact that evenisolated price changes implied that revisions of the whole plan had to bemade, led to a tendency for prices to be fixed for extended periods. A priceequalization fund in combination with a system of subsidies and taxation onimports and exports--resulting in a vast number of (implicit) multipleexchange rates--was used to reconcile rapidly changing general as well asrelative international prices with fixed domestic prices. In principle,payments to/from the price equalization fund were assumed to balance. A"commercial" exchange rate, in principle assumed to represent an equilibriumrate, was used e.g. when transforming world prices into domestic prices forplanning purposes. However, in operations the results were effective exchangerates which, during the late 1970s, on the average were significantly lowerthan the commercial rate both for exports and imports.

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2.15 The described system, together with the drastic international priceincreases, brought Romania's relative prices increasingly out of line with theprice structure in the world market dtLring the course of the 1970s--especiallyfor energy and other raw materials--with concomitant negative effects both onforeign trade and resource allocation in general. The operation of thissystem eliminated the need for Romanian eniterprises and consumers to have toadjust to international changes and reduced incentives to increase efficiencyand quality of products. Especially the possibility of continuing purchasesof crude oil, minerals and other raw materials at prices that were changedlittle since the early 1970s reduced the incentive to economize in the use ofthese inputs; this system also encouraged expansion of production in sectorswhere Romania does not appear to have a comparative advantage. The policythat domestic mineral resources should. be exploited if production costsevaluated at domestic prices were lower than imports valued at world prices,led to the development of lower quality, higher cost deposits. With domesticprices fixed at low levels, this led to financially unfavorable results in theraw material producing sectors, in particular coal, which were covered bybudget subsidies. The rapid increases in the cost for imported raw materials,especially crude oil, made it necessary, during the last years of the 1970s,to make successively larger and larger payments from the budget to financedeficits of the price equalization fund.

2.16 Recognizing the negative ccnsequences of existing policies, theGovernment initiated in January 1981 a. major, integrated exchange rate andprice reform with the purpose of bringing the structure of domestic pricescloser to world market prices. Special emphasis was given to the need fornarrowing the gap between domestic and international prices for oil and oilproducts. From June 1, 1981 onwards, the exchange rate and price reform hasconstituted the major element in the structural adjustment program of thestandby arrangement with the IMF. However, the balance of payments problemsinduced the authorities to broaden the scope of the reforms and to be morevigorous in the measures taken than originally intended. As a result,consumer (retail) prices were increased by 22% during 1981 and 1982, i.e. thefirst two years of the 1981-1985 plan, while the plan assumed a price increaseof 6-8% over the whole plan period. The principles behind this reform programare (i) that prices should accurately reflect real production costs and thus,measure accurately the efficiency of domestic activities as well as foreigntrade; (ii) to ensure profitability for all sectors and enterprises, providedthey are efficient; (iii) to eliminate the need for subsidies from the statebudget; (iv) to ensure the firm application of the principles ofself-management and self-administration (the New Economic Mechanism).

1. The Exchange Rate Reform

2.17 A first step to simplify the exchange rate system was taken at thebeginning of 1981, when the price equalization fund was abolished and thesystem with a large number of exchange rates replaced with 13 specific ratesfor exports and three for imports, allowing on the latter side only crude oil,iron ore and coking coal to be traded at rates below the commercial rate (seeTable 2). The range between the highest and the lowest rate on the exportside was reduced from 18.8 lei per US$ in 1980 to 14 in 1981; the corres-ponding range on the import side was narrowed down from 10 lei per US$ in 1980

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to 5 in 1981. The exchange rate adjustments for crude oil, iron ore andcoking coal--accounting for about 43% of total convertible imports in 1980--were especially large, bringing up the import cost for these commodities by41% on average. According to the reformed system, the exchange rates were tobe kept unchanged during the year. Thus, a direct link betweenduring-the-year changes in world prices and domestic costs for imported goodswas established. The authorities' intention was that this would giveenterprises engaged in foreign trade activities an incentive to adjustpromptly as regards the choice between domestic and foreign markets as well asbetween different foreign markets.

2.18 In order to avoid too profound increases in import costs and thegeneral price level while reforming the exchange rate and the price structure,the authorities decided at the same time to appreciate the commercial exchangerate from 18 lei per US$ to 15 lei per US$. Yet, the adjustments of thespecific exchange rates implied, as an average, an effective depreciation ofthe leu by about 25% in relation to the dollar. However, the appreciation ofthe dollar in relation to other major currencies during 1981 eroded much ofthis effect; as a result, the effective real depreciation of the leu at theend of 1981 amounted to only 7% compared with the year earlier.

2.19 In accordance with the standby program, further major steps toreform the exchange system were taken at the beginning of 1982. The number ofexchange rates to be used on the export side during 1982 was restricted to 8and the range between the highest and lowest rate reduced to 10 lei per US$.On the import side, the specific rates for iron ore and coking coal werebrought up to a level with the commercial rate, leaving only crude oil to betraded below that rate or at 12 lei per US$ during 1982. However, in responseto the crisis and in order to reduce the demand for imports, the authoritiessubsequently decided to bring the rate for imported crude oil up to thecommercial rate from July 1982, thus achieving full unification of theexchange rates on the import side.

2.20 The number of exchange rates and the spread between the rates onthe export side was further reduced to three and 3 lei per US$, respectively,at the beginning of 1983. However, also as a consequence of the crisis, theexchange rate reform was accelerated and full unification of the commercialexchange rates achieved by mid-1983, instead of mid-1984 as originallyplanned. However, the appreciation of individual export exchange ratesvis-a-vis the dollar, compounded by the effects of the appreciation of thedollar vis-a-vis other currencies, reduced during 1982 Romania's internationalcompetitiveness and caused losses of shares in foreign trade markets. Toreverse this trend, the commercial exchange rate was depreciated by about 9%to 16.5 lei per US$ on January 1, 1983; a further depreciation to 17.5 leiper US$ was made by July 1, 1983. These devaluations also indicate asignificant reversal of earlier policies when the general (commercial) as wellas (implicit) individual exchange rates for imports were appreciated, wheneverneeded, in order to keep international price increases outside Romania. Thenon-commercial rate was changed to 12.5 lei per US$ on January 1, 1983 andanother change to 13.5 lei per US$ was made by July 1, 1983, thus leaving thespread between the commercial and non-commercial rates unchanged at 4 lei per

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US$ during 1983. It is not known to the mission to what extent the costincreases resulting from these devaluations will be passed over to domesticproducers and consumers. Also on July 1, 1983, the peg to the US dollar wasdropped in favor of a basket of currencies weighted in accordance

Table 2: EAXSE RATES, 1975 AND 1980-1983(Lei per U.S. dollar)

19831975 1980 1981 1982 Jan. 1 July 1

Nmber of excharge ratesExports 12 18 13 8 3 1Imports 12 15 3 2 1 1

Rarge between highestand lowest rate

Exports: highest 27.78 24.65 22.00 22.00 19.5 17.5lowe st 8.70 5.83 8.00 12.00 16.5 17.5

Iuports: higbest 43.59 17.08 15.00 15.00 16.5 17.5lowst 14.92 7.11 10.00 12.00 /2 16.5 17.5

Aver. e Rate /1Exports 18.84 12.16 14.50 14.77 n.a. 17.5imports 18.28 9.88 12.60 13.70 16.5 17.5Total 18.56 10.90 13.56 14.31 n.a. 17.5

Ccxmercial Rate 20.00 /3 18.00 14 15.00 15.00 16,.5 17.5

Notn-coaercial Rate 14.38 /3 12.00 /4 11.00 /5 11.00 12.5 /6 13.5

Exchange rates for iports OfCrude oil 16.67 7.11 10.00 12.00 /2 16.5 17.5Imn ore 17.57 10.21 14.00 15.00 16.5 17.5Cokirg coal 14.92 9.06 14.00 15.00 16.5 17.5

Note: The rates u.rtil 1981 refers to inplicit e:charge rates defined as tieratios of domestic prices in lei to iworld prices in US dollars. Cstedrates refers to those effective from January 1 each year unlessotherwise specified.

/1 Effective weighted average excharge rate for trade in convertiblecuriemie s.

/2 Raised to 15.00 on July 1, 1982./3 From October 2, 1974.7T From Marh 6, 1978./5 Frrm February 11, 1981.16 From Deceimer 29, 1982.

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with their importance in Romania's trade transactions in convertiblecurrencies. The Government has announced its intention to pursue a moreflexible exchange rate policy in the future; in line with this policy,eventual further steps necessary to establish an adequate internationalcompetitiveness may be taken later in 1983. Also, as part of the successivebroadening of the exchange rate reform, the intention is now to unify thecommercial and the non-commercial exchange rates during 1984 with a first stepto be taken in January 1, 1984.

2. The Price Reform

2.21 Integrated with the exchange rate reform, the authorities initiatedmajor changes in the structure and level of producer prices on January 1, 1981with energy prices on the average being doubled in an effort to both stimulateproduction and rationalize energy use. Concomitantly with these changes,prices of downstream industrial products were revised, resulting in an overallincrease of industrial producer prices of 12.4%. At the same time, producerprices were adjusted by 12% in construction and by 5.6% in transportation.Following an increase in producer prices for agricultural products by 11.1% in1981, a system of differentiated bonuses, related to the quantitativeoverfulfillment of plan targets, was introduced in 1982. These bonusescorrespond to an estimated increase in producer prices by 13.8%. In order toavoid a sudden reduction in the standard of living of the population, onlyminor changes were made in retail prices during 1981. Instead, theauthorities decided to follow up the change in producer prices by graduallyadjusting retail prices, beginning in 1982. Meanwhile, the increased costsfor the enterprise sector, which during 1981 could not be passed over to theconsumers in the form of higher retail prices, were compensated by a reductionin the turnover taxes and a temporary increase in consumer related subsidiesfrom the state budget.

Table 3: PRODUCER AND CONSUMER PRICE CHANGES, 1979-1983 1/(Percent per annum)

1979 1980 1981 1982

Producer Prices 0 0.2 12.2 10.2Industrial 0 0.1 12.4 10.2Agricultural 0 1.4 11.1 13.8

Consumer Prices 2.1 2.3 2.2 16.9

1/ Defined as average prices in current year over averageprices in previous year.

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2.22 The program for bringing domestic relative prices closer to worldmarket prices continued in 1982 with further adjustments in producer pricesand also significant changes in consumer prices. Very large adjustments inenergy producer prices were made on January 1 and July 1 with the deliveryprice for crude oil being increased by about 25% and heavy fuel oil by about80%. The price for natural gas, which in 1981 still stood at 80 lei/1000 m3

when used as feedstock and 250 lei/1000 m3 when used as fuel., was unified at1000 lei/1000 m3 for all users. As a consequence of the increases in theprice for natural gas, electricity tariffs for enterprises were more thandoubled. Large increases were also made in producer prices for coke, ironore, cement and synthetic rubber. Taking into account the adjustment inprices of downstream products, these rneasures resulted in an increase ofindustrial producer prices by about 11% in 1982.

2.23 As part of the authorities' standard of living program, retailprices for many staple food products were unchanged for 20-25 years. As aresult of successive cost increases, prices for many of these products overtime became lower than the corresponding production costs which necessitatedbudget subsidies. Against that background, prices for food products(including cigarettes and alcoholic be!verages) were increased by 35% early in1982, with the prices of meat and other basic products going up by 48-60%.These measures were followed by significant increases also ir. consumer energyprices by mid-1982 with the price for natural gas being almost tripled to 1000lei/1000 m3 together with substantial increases in the prices of all mainoil products. Also household tariffs for electricity were raisedsignificantly. As a result of these adjustments, consumer prices rose onaverage by 16.9% in 1982 compared with 2.2% in 1981.

2.24 The adjustments in consumer energy and food prices made in 1981aimed at achieving a better correlaticn between production costs and marketprices, thereby improving the working of the price mechanism on markets forconsumer products. However, the energy price adjustments also had theadditiornal purpose of reducing domestic consumption and import of petroleumproducts; in contrast, the food price increases were not intended to reduceconsumption and were therefore compensated through higher wages, for mostincome earners, children's allowances and pensions. Altogether, theadjustments made in energy and food prices during 1982 resulted in asignificant reduction of the real income of the population (by about 7.5%).

2.25 Further increases in the price of natural gas by 50% were madeduring 1983. Also, from January 1, 1983, prices of domestic oil have doubledand those of imported oil have increased by 5-7%. Because of the world marketsituation, the authorities did not make additional adjustments in oil andproduct prices in 1983. THe authorities estimate that producer pricesincreased by 6-7% and consumer prices by 5-7% in 1983 as a result of thesemeasures.

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2.26 The exchange rate and price adjustments made thus far havesignificantly reduced the earlier large deviation between Romanian andinternational relative prices, especially as regards energy. The Government'sintention is to reduce further remaining gaps between domestic andinternational energy prices. As a result of steps already taken, domesticprices now give more accurate information than before about relative resourcecosts as expressed by world prices. This provides a basis for an improvementof the planning process and is likely to have important implications forresource allocation as well. (The system and efficiency related aspects ofthe exchange rate and price reform are discussed in Sections II.B and II.H.)The earlier widespread losses, especially in raw material producingenterprises, have been more or less eliminated as a result of the priceresetting; this in turn has made possible a reduction in the subsidies fromthe state budget to the enterprise sector from about 11% of GNP in 1980 to aplanned less than 1% of GNP in 1983. It is not known to the mission whetherthese subsidies have been substituted by financial transfers betweenenterprises within industries.

D. Adjustments in Investment Strategy

2.27 The investment strategy followed in the past has resulted in acapital stock concentrated in heavy, energy- and raw material-intensiveactivities with long gestation periods. In some sectors (steel, oilprocessing, etc.), existing capacities are higher than present and projecteddomestic and international demand. The average age of the capital stock, dueto the very high investment ratio during the 1970s, is very low in aninternational comparison; almost 60% of the total capital stock in the economyas a whole as well as in industry has been built up since 1975 and aboutone-third in the last four years. However, the technologies they incorporateappear not up to today's international standards because these technologieswere not generally available for Romania.

2.28 The central issues facing the authorities when formulating theinvestment program for the 1981-1985 plan were to: (i) reverse the trendtowards declining efficiency in project preparation and implementation duringthe late 1970s; and (ii) increase the efficiency of investment in terms ofallocation of resources between priority activities. The plan addressed theseissues by proposing changes in both the rate of growth and the allocation ofinvestments compared with earlier plans. The guiding principle behind the1981-1985 investment program was to assist in bringing about structural changewith emphasis on improving the external balance. During 1981, the authoritiesmade cuts in investments. This resulted in actual investments that deviatedsignificantly from those intended in the plan. The central issue is whetherthese reductions have positively or adversely affected the attempts to bringabout the structural adjustments as expressed by the priorities made in theinvestment program for the 1981-1985 plan. The Romanian authorities havereached an understanding with the World Bank that this issue is to be taken upin future economic work.

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2.29 The plan addressed the problems in project preparation andimplementation during the 1976-1980 plan period by proposing a significantreduction in the rate of growth of total investment down to 5.2% per year inreal terms in 1981-1985 compared to an actual growth of almost 12% per yearduring the 1976-1980 plan. The restraint in investment growth was imposedbecause of the limits on the capacity to implement projects on the scale aimedat during the previous period. To the same end, the plan also gave priorityto the completion of projects started during the 1976-1980 period. About 95%of all investments during the first year of the plan (1981) were allocated toongoing projects; over the whole plan period, about 70% of total investmentswere for ongoing projects.

2.30 In response to the need to adjust investments to the new prioritiesthat emerged at the end of the 1970s, the 1981-1985 plan proposed shifts inthe sector allocation of investment compared to the previous period; thistendency was especially marked during the latter years of the plan period whennew projects were to be initiated. Priority was given to the development ofdomestic raw materials, especially energy resources; about 17% of totalinvestment in 1981-1985 was to go to the energy sector compared with about 12%in the previous plan; the volume of investment in energy was to be about 85%higher than during the 1976-1980 period. Investments in industry, which hadpriority and increased very fast during the 1970s, was to grow at about thesame rate as total investment in 1981-1985. The structure of themanufacturing sector was to be directed away from emphasis on heavy industryand production of less sophisticated goods, as in the past, towards theproduction of technically more advanced goods; growing attention was to begiven to higher product quality. An increasing share of industrial productionwas to be exported. The plan also emphasized import substitution, especiallyfor investment goods. The plan provided only for an increase of investment inagriculture of about 6% in real terms over the 1976-80 level, corresponding toan annual growth rate of 1.3%. The share of total investment going to theservice sector was reduced significantly compared to the previous plan; thiswould increase the resources available for investment in the sectors thatcould provide a direct basis for exports and/or import substitution.

2.31 The developments in 1981-1983 made necessary changes of theinvestment targets in the 1981-1985 plan. The governnment's response has beenin two broad directions: (i) Measures to restrict domestic demand and importsby reducing the level and changing the structure of investment. The issuefacing the authorities was to distribute these changes that were necessaryfrom a short-term point of view between sectors in a way that minimizednegative impacts on medium and longer-term targets for structural adjustment.(ii) Further efforts to increase investment efficiency by policy reforms,introduction of new technology, redesign of existing technology whereverpossible in ways that utilize scarce resources more efficiently in addition tothe specific and rigid guidelines for project preparation and speeding up ofimplementation that had been introduced earlier.

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Table 4: SE&RAL ALIDCATIXON (F INVESNT, 1976-1980,AND PLANNED INVESDENrS, 1981-1985

Charge in Volume1981-1985 over

1976-1980 1/Actual 1976-1980 Plarmd 1981-1985 (percent)Billion Billion Anrual

Sector lei Percent lei Percent Total Averae

Imlustty(imzl. energy) 459 49 652 54 27.9 5.0of which:

Entrgy 111 12 207 17 86.5 13.3Metalluiy 65 7 63 5 -3.9 -0.7Machine-buildirg 116 13 127 11 9.5 1.8cGhnicals 70 8 114 10 62.8 10.2

Construction 55 6 39 3 -29.1 -6.6Agriculture (incl.

forestry) 128 14 136 2/ 11 6.5 1.3Transport and Tele-

cacmunication 99 11 113 9 14.1 2.7lbusirg 95 10 107 9 1.6 2.4Other services 96 10 85 7 -11.5 -2.4lin-allocated funs - - 68 6 - -

Total 932 100 1200 100 28.8 5 5.2

1/ Investent figures for the 1981-1985 plan period are expressed in 1980prices while the actuals for 1976-1980 are in 1977 prices. However, simecharges in producer prices during 1977-1980 were neglible, price chargeshave been neglected when calculatirg volume charges between the two planperiods. These figures are not directly compaiable with thlse in Table 8whiich are in currert prices and in 1980 prices.

2/ In 1980 prices, the figure is 155 billion lei.

2.32 As a result of the cutbacks in investment, total investmentachieved in 1981 fell short of the plan target by about 11X in real terms;more than half of this reduction was reflected in industrial investment. Alsoinvestments in construction and transport and telecommunications fell short ofplanned targets by significant amounts. While actual investment inagriculture was more or less on target, the target for investments in housing

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was overfulfilled. Despite these changes, the sectoral shares in 1981 did notchange significantly from what was anticipated in the plan. In industry,while achieved investment exceeded planned levels in metallurgy, according tothe 1981-1985 plan, by 12% and investment in energy was on target, investmentin chemical industry was 33% less and in machine-building by 5% less. In sum,while the changes in investment in 1981 at the sectoral level did notmaterially affect sector shares, there was a shift away from chemicals towardsenergy within the industrial sector.

2.33 The annual plans of 1982 and 1983--reflecting the same policy ofrestraining economic activity through limiting resources allocated for theongoing projects and especially new projects--proposed severely reducedinvestment targets for these years against the 1981-1985 plan provisions. Themost salient feature of the revisions in the five-year plan allocations for1982 and 1983 was the reduction in investment targets for industry and thesignificant increase in the investment proposed for agriculture (includingforestry). Thus, in 1982, while investment target in industry, including thehigh-priority energy subsector, was scaled down by more than 17%, the onlysector where the revised plan entailed a significant increase was agriculture;the revised allocation was almost 30% higher than the initial target.Investment in all other sectors was to be reduced. The 1983 allocations forthe total planned investment was reduced by almost 22% in real terms and inindustry by as much as 28%. In contrast, investment in agriculture wasproposed to be increased by about 20%. Unlike the 1982 plan, investment inconstruction and housing was also revised upwards significantly in 1983.Also, while in 1982 the allocations to major industrial categories likeenergy, metallurgy, machine building and chemicals were reduced by the sameproportion, in 1983 more than half of the proposed cutback in industrialinvestment is within energy, while there is some increase in the share ofmetallurgy and machine-building.

2.34 The continued difficulties reductions during 1982 resulted ininvestment reductions beyond those proposed in the annual plan; the cumulativeeffects of these adjustments was a reduction in actual investments by about20% compared to the five-year plan target with the major part of thisreduction explained by cuts in industrial investment (mainly in chemicals andmachine-building). Energy investments were reduced by about one-fifthcompared to the original five-year plan provisions, while investments inagriculture, housing, transportation and other services were increased.

2.35 Measures to streamline investment procedures and to increaseefficiency in investment allocation havre also been initiated during the lastfew years. A new investment law, specifying measures to overcome the problemswith bringing projects on stream was issued in December 1980. The law aims atincreasing investment efficiency by specifying time limits for projectimplementation. If completion is not on schedule the responsible enterprisesare penalized financially. The law also stresses the importance for newinvestments to reduce consumption of energy and other raw materials as well asutilize secondary energy resources and permits imports only if these importscan be supplemented by exports of Romanian products. The mission was informedthat the articles of the law are being seriously implemented and that therehas been a marked reduction in the number of incomplete proiects. However,the problems Romania has experienced in project implementation in recent years

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seem to a large degree to be rooted in the existing complex and lengthydecision-making process. Against that background, it can be questionedwhether the regulations specified in the investment law to overcome theseproblems are the best ones.

2.36 A central element in Romania's strategy to achieve external balanceis increased substitution of imported capital equipment through diversi-fication of domestic industrial production together with improved quality.This is especially pronounced in the field of capital goods for investment.The more immediate effect of this strategy on the external balance is likelyto be positive. Romania will use domestic technology to the extent feasibleand import foreign technology within the limits set by the availability offoreign exchange and through joint ventures. This issue will also be examinedin the upcoming investment review. The solution to this problem seems to liein enhancing the foreign exchange earning capacity through export promotioncombined with measures to reduce the dependency on imported energy rather thanforeign exchange savings through reducing imports in sectors which needsustained infusions of new technologies for their longer-term development.

2.37 The priority given in the 1981-1985 plan to the comDletion ofongoing projects will bring plan targets more into balance with the economy'sability to actually undertake projects and is likely to increase theefficiency of the project implementation process. However, there is also arisk that this strategy will delay the introduction of new, higher technologycapacities needed to shift Romania's production structure into morecompetitive activities. Some of these ongoing projects were generated at atime when expectations about future relative prices were very different fromthose now ruling. Consequently, many of these projects are likely toincorporate technologies, and have a sectoral structure, that gives moreweight to the production of bulky and energy-intensive goods (steel, etc.)than would be regarded as optimal today. Aware of these risks, theauthorities have recently reviewed the ongoing projects in the light of thechanges that have taken place since they were approved for incorporation inthe plan. It was reported to the mission that none of the projects have beencancelled as a result of these reviews, but that a number of projects havebeen successfully redesigned. No concrete examples of such measures weregiven to the mission. However, projections made available to the missionindicate that Romania, as a consequence of the completion of projects startedin the 1976-1980 plan period continues to add to capacity--in some cases withtechnologies that were outdated already when the projects were designed--wherethere is already overcapacity either on the domestic market or on the intendedinternational market (cf. Section II.G below).

2.38 The reduction of investments in new projects in 1981-1983 againstthe original provisions in the 1981-1985 plan--although necessary from a shortterm, stabilization point of view--reinforces the tendency to delay theadjustment process that may result from the emphasis on completion of ongoingprojects. There is also considerable uncertainty about the possibility ofrealizing the investment targets for the remaining years of the plan period,since these are highly dependent on Romania's ability to soon restore itscreditworthiness. Thus, continued shortage of foreign exchange will severelyrestrict the possibilities to import modern capital and technologies for

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Table 5: ADJUSNI1S IN ILVESlM;NIS, 1981-1983(Billion lei, 1977 prices)

1981 1982 1983Invest- lIwest- Adjust- Inyest- Adjust-mert/ Actual mert/ ments in Actual nert/ mnets in5-year Adjust- 5-year Anmual Adjust- 5-year AnualPlan nt Plan Plan mœnts Plan Plan

Industry 114.6 -15.4 124.5 -21.8 -36.6 134.8 -38.0Energy 28.7 iO.1 33.9 -6.3 -6.1 40.2 -19.6Metallurgy 10.6 +1.3 11.1 -1.4 +1.0 12.3 -2.4Machir-buildirg 27.4 -1.7 25.3 -3.2 -8.8 25.3 -6.1Chemicals 21.9 -7.2 25.1 -3.2 -12.5 26.2 -7.4

(bnstruction 9.5 -2.7 7.9 -2.2 -1.1 7.1 +5.4Agriculture & forestry 31.4 -0.6 23.9 +7.2 +1.4 25.5 +5.4Transport & telecan. 22.9 -3.5 23.3 -1.0 +2.2 23.2 -3.0lbusirg 21.0 +1.1 22.4 -2.2 +2.0 21.6 +2.2Other services 21.4 -4.2 17.1 -1.6 +2.5 17.1 -9.1Ibn-allocated furnds - - 14.9 -14.9 -14.9 15.8 -15.8

Total 22D.8 -25.2 234.0 -36.5 -44.5 245.2 -52.9

retrofitting of existing facilities and investments in new projects designedto increase Romania's export capacity and reduce its need for imported energyand other raw materials; without renewed access to international financing,the investment program for future years - especially for new projects - mayhave to be cut from presently planned levels, which would again lengtheningthe time it will take to adjust the economy to the conditions of the 1980s.Excessive emphasis on repayment of existing external debts also reduces thepotential for imports of modern technology and lengthens the structuralajustment process.

2.39 The mission was generally informed that in 1982 and 1983 almost allnew projects were concentrated in three sectors--energy and other rawmaterials, agriculture and foodstuff production and transport andtelecommunications. The mission was also told that in the selection of newprojects, much greater importance was paid to their impact on balance ofpayments--either in terms of reducing imports requirement or in promoting

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export earnings--and the standard of living of the population. However, themission did not get requested information about investments at the projectlevel and is therefore not in a position to make a detailed assessment aboutRomania's investment program. Nevertheless, while the changes in the sectoralallocation of investments proposed in the 1981-1985 plan (compared to earlierplans) appear to be in the right direction, the question whether thesechanges are consistent with Romania's longer-term economic objectives will beexplored by the upcoming mission to review the investment program. Theincreased allocations for agriculture seem justified. Although reductionswere made in energy investments in 1982 and 1983 compared to the 1981-1985plan allocations, the steadily increasing share for energy in totalinvestments reflects the priority rightly being given to the development ofindigenous energy resources. In any case, the impact of investments on theseconstraints will be rather limited during the 1981-1985 period, due to thelarge overhang of ongoing projects. Thus, the much needed changes inRomania's sector structure will be possible only during the latter part of the1980s when new projects, designed according to today's realities, can come onstream. It can be added that in countries which have reached Romania's levelof development, any investment program--however well designed--will, in theshort run, result in only marginal changes in the size and structure of thecapital stock with concomitant impact on production levels and quality.Measures to increase efficiency in the utilization of the existing capitalstock are in the shorter run at least as important as structural changes viainvestments to overcome constraints like those Romania is facing today.However, this would require reforms in the present system of economicmanagement and planning.

E. Energy Policy

2.40 Containment of the energy deficit is of crucial importance forRomania's ability to reduce imports and achieve the necessary furtherimprovement of its external balance. This is illustrated by the fact thatenergy imports largely accounted for the deterioration of the external balancein the 1976-1981 period and their curtailment does much to explain thedramatic improvements recorded in 1981 and 1982. The 1981-1985 plan adoptedin June 1981 gave special priority to narrowing the energy deficit throughrapid development of domestic energy resources and measures aimed ateconomizing on energy consumption. This was to be achieved through: (i)reversing the sharp decline in oil production in 1976-1980 and stabilizing itat 12.6 million tons per year; (ii) a significant increase in the share ofsolid fuels--mainly lignite--in order to displace oil and gas from use inpower generation in the medium and longer term, and with the objective ofminimizing oil imports and retaining limited gas reserves for their premiumuse; and (iii) reducing the energy intensity of the economy through bothindustrial restructuring and an increase in energy efficiency. To this endinvestments in the energy sector in 1981-1985 were to increase by about 85% involume over the 1976-1980 allocations, with the bulk of these funds earmarkedfor the development of the coal/lignite subsector.

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2.41 In response to the severe financial problems, the program forbringing energy prices closer to world market prices has been accelerated andthe original production targets for the energy sector revised in the 1981-1985plan. Thus, in mid-1982 the Government announced that the targets for crudeoil and natural gas production in 1985 had been revised to 1 million tons and39.1 billion cubic meters (b.cu.m.), up from the original provisions of 12.6million tons and 35.4 b.cu.m., respectively; the target for coal/ligniteproduction in 1985 was simultaneously reduced by about 5%. The emphasis onenergy conservation in containing the energy deficit was increasedsignificantly at the same time. The overriding objective behind theserevisions was to minimize crude oil imports for domestic consumption. To theextent that shortfalls in energy production targets cannot be compensated byincreases in production of other energy sources, present policy is to rely onintensified conservation measures rather than increased imports. Noannouncement about changes in targets for the development of other energysubsectors and/or in targets for overall energy consumption and productionwere made. However, in calculating energy balances for 1985, the authoritiesare presently using the original plan provisions.

2.42 Domestic constumption of energy increased from 63.6 million toe in1980 to 64.7 million toe in 1981, and then decreased to 64.4 million toe in1982. This reduction was achieved through energy use restrictions and genuineenergy conservation while the economy continued to grow, although at asignificantly lower rate than in the 1970s. The measures taken to developindigenous energy resources resulted in an increase of domestic energyproduction of 2.6 million toe in 1980-1982. As result of these developments,net imports of energy decreased by 1.8 million toe in these years, mostlyaccounted for by the reduction in crude oil imports for domestic use from apeak of 7.3 million tons in 1980 to 4.8 million tons in 1981 and 4.5 milliontons in 1982. This significant reduction in energy imports was one of themain factors behind the drastic improvement of the overall trade balance in1981 and 1982. The mission was informed that the Government aims at a furtherreduction of net oil imports to 1.5 million tons in 1983 and zero in 1985.

2.43 Refinery capacity in Romania was some 31 million tons in 1981 andincreased to 33 million tons in 1982, a capacity practically twice that neededto meet domestic requirements. Some refineries are relatively old andinefficient, consuming as much as 10-13% of the crude as refinery fuel andgases. This together with a narrowing of refinery margins on internationalpetroleum markets led to a situation where exports became unprofitable. In1982, a new policy was introduced which permits imports of crude oil forrefining for re-export only if such operations are proven profitable in hardcurrency terms. As a result, exports of oil products fell to 6.5 million tonsin 1982 compared to an average level of about 8 milliorn tons per year in1978-1981. For 1983, the Government expects refinery exports to increase to10.5 million tons. This--which, in the mission's judgment, appears toooptimistic, given the present glut on the international market for oilproducts--would result in some increase in capacity utilization in therefinery sector. The Government expects capacity utilization to remain atreasonable high levels in the future, but the flexibility introduced with thenew refinery policy implies that oil product exports can be modifiedsignificantly as market conditions dictate. Unless the margin between

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international crude oil prices and prices for oil products increasessubstantially over the next few years, changes in exports of refined productswill have a limited impact on Romania's external balance.

1. Energy Supply

2.44 The 1981-1985 Plan gave high priority to the reversal of the trendtowards rapidly declining crude oil production during the latter part of the1970s and to its stabilization at a level of 12.6 million tons in 1985compared to an actual production of 11.6 million tons in 1980. The upward

Table 6: PRIMARY ENERGY BAlANES, 1980-1985(Million toe)

Planned1985(Revised)

Actual Estimate Five-Year1980 1981 1982 1983 Plan 1/

Domestic Energy Prodtrtion 51.8 54.1 54.4 57.5 64.3of wlich:

Oil and NGL 11.6 11.8 11.8 12.6 12.6/15.1 *Natural gas 28.0 29.7 30.0 30.7 28.3/31.7 *Coal and lignite 7.6 7.7 8.5 9.4 17.1/16.7 *Hydropower 2.8 2.8 2.8 2.8 3.9Others 1.8 2.1 1.3 1.9 2.4

limports 21.0 18.3 16.6 7.1 20.4of which

Oil 15.4 12.4 10.7 1.5 12.2Natural gas 1.2 1.2 1.2 1.2 2.1(bal 4.3 4.5 4.2 4.3 5.6Eletricity 0.1 0.1 0.3 0.1 0.4

Total Supply/Demani 72.8 72.4 71.0 64.6 84.7

Dmaestic (bnsunption 63.6 64.7 64.4 64.2 79.4

Exports 9.2 7.7 6.6 0.4 5.3

Net Imports 11.8 10.6 10.0 6.7 15.1of which:

Oil 6.4 5.2 4.4 1.5 0.0*

1/ Data for 1985 marked * are revised plan targets as of July 1982; the nunbersgiven for net oil inports in 1983 and 1985 (mariced **) are targets theGovernit now aims at according to infomnation giw-n to the mission); otherfigures for 1985 are original 1981-1985 plan targets.

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revision in mid-1982 of the 1985 target for oil production to 15.1 milliontons is understood to be a temporary measure to overcome anticipated problemsin meeting coal targets and to minimize oil imports. The additional oilproduction is to be achieved mainly through efforts to increase the recoveryfactor in existing fields (from at present 32% on average to 40% in 1985)through enhanced oil recovery (EOR) techniques in about 150 oiL fields and thereopening of about 240 old, unproductive wells. Geological exploration (deepon-shore drilling and off-shore drilling in the Black Sea) has alsc beenintensified but can not be expected to result in increased production by1985. Oil production from existing fields can, in the view of the mission, beexpected to decline to 7.5 million tons in 1985 if current techniques areused. Thus, the above efforts would have to result in an increased productionof 7.6 million tons in order to reach the revised 1985 production target. Inthe judgment of the mission, oil production could peak in the mid-1980s, butat a level significantly lower than the revised 1985 target and declinethereafter as the effects of depletion of existing fields become morepronounced; the original 1981-1985 plan provision for oil production in 1985(12.6 million tons) appear, in the mission's view, to be a more realistictarget.

2.45 Natural gas is currently the most important single source of energyin Romania, accounting for nearly half of total energy consumption. Althoughexisting fields have higher potential, production in 1976-1980 was limited toabout 35 b.cu.m. per year as an average in line with the long-term policy ofpreserving existing reserves for use as feedstock in the chemical industry.However, in order to reduce crude oil imports and save on much-needed foreigncurrency, natural gas production was increased to 36.9 b.cu.m. in 1981 and37.3 b.cu.m. in 1982. A further increase to 38.1 b.cu.m. is planned in 1983.As mentioned above, the Government announced in mid-1982 that the productiontarget for 1985 had been revised to 39.1 b.cu.m., up from the original planprovision of 35.4 b.cu.m.; if achieved, the higher gas production will makepossible a reduction in crude oil imports of about 3 million tons in 1985.Much of the additional natural gas output is expected to be associated gas inlight of the planned increase in crude oil production over the original planprovisions. If shortfalls in the production of oil and associated gas occur,this is assumed to be compensated for by increases in the production ofnon-associated gas. Since the present production level implies a relatively"short life" of Romanian gas reserves, it is, in the mission's view, likelythat a reduction of production will be made as soon as the foreign exchangeconstraint permits.

2.46 A main feature of the 1981-1985 plan was the rapid expansion oflignite production with the objective of displacing oil and gas from the powersector. To this end lignite (including brown coal) production was to expandfrom 27.1 million tons in 1980 to 73.6 million tons in 1985, corresponding toan increased of 7.3 million tons in oil equivalent terms. However, delays ininvestment, difficulties experienced with equipment and shortages of skilledlabor have caused significant shortfalls in the lignite program. In mid-1982,the production target for 1985 was lowered by 5% to 70 million tons togetherwith the concomitant adjustments in the oil and gas productior targets. Thepower stations, which are to be the dominant users of lignite, will generallybe located at or near mines in order to minimize the need for complementaryinvestment in transport facilities.

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2.47 In response to these problems, measures to alleviate productionconstraints experienced in the past are being implemented. While the laborinputs into open-cast mining are low, the overall lignite expansion programhas met with labor supply difficulties. New training centers have been openedand labor is being encouraged to move to new mining areas with new towns beingcreated at Motru and Rovinari. These measures, together with efforts toensure the on-time delivery of equipment from the machine-building industry tothe mines, are reported to have resulted in a significant acceleration oflignite production in 1983. However, even though lignite production isestimated to have increased by 18.6% in 1983, doubts still remain about thefeasibility of reaching the present target for lignite production in 1985.The mission is unclear about the economic viability of the lignite program.

2.48 Major changes in the use of different primary energy sources in thegeneration of electricity are planned during the 1980s. A priority inRomania's energy program is the rapid increase in the use of lignite as fuelto displace oil and gas in the medium and longer-term. The program, ifrealized, would make possible the retirement of old oil (and gas)-fired plantsat a relatively rapid rate, thereby saving an estimated 2.5-3 million tons ofoil, together with an increase in thermal capacity of about 2800 MW during the1981-1985 plan period. The overall aim is to reduce the share of oil and gasin electricity generation from 52% in 1980 to about 28% in 1985 and only 5% in1990; the share of lignite is planned to increase from about 26% in 1980 toabout 44% in 1985; this share is projected to be somewhat lower again in 1990due to the expected use of nuclear power in 1990. However, payment problemswith the suppliers of the Canadian CANDU reactor, which is planned to comprisethe major part of Romania's nuclear power system, and technical difficultieshave resulted in delays in the nuclear power program. The intention is that a3,300 MW plant using CANDU reactors be sited at Cernavoda with an additionalplant of the same kind to be located in Transylvania. A plant of 3,000 MWusing Soviet technology is planned for Moldavi.

2.49 Hydro-electricity is considered of prime importance in Romania. By1990 the plan is to harness about 57% of total capacity or about 23 billionkWh. Large hydropower schemes due for commissioning in the next four yearsinclude the Iron Gates II project to be operative in 1984/85 at 216 MW andRiul Mare-Retezat and Cloptiva, totalling 349 MW; Lower Olt at 265 MW, Buzauat 228 MW, and Bisrta-Poinana Marului at 260 MW are all scheduled forcompletion by 1987 but delays have occurred. In addition, there are a numberof 'mini-hydro' projects, with up to 700 planned by 1985 and a further 800planned for 1985-1990. Their small size is indicated by the expected totalcontribution of somewhat over 100 MW by 1985 and a further 200 MW for 1985-90;the numbers also indicate that the average size of the projects to becompleted by 1985 is significantly less than for those to be completed duringthe later part of the 1980s. Without access to a least cost study for thepower subsector, the mission is not in a position to make an assessment of theeconomic justification for these 'mini-hydro' projects.

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2. Energy Demand

2.50 The ratio of primary energy consumption to GNP in Romania is abouttwice as high as in Western countries in general and also higher than in otherEastern European countries. The high ratio is explained mainly by the highshare of industry in GNP and the energy intensive structure of industrialoutput. Measures taken to save energy resulted in a reduction in the energyratio by about 1% in 1981 and 4% in 1982; since the economy at the same timegrew at somewhat less than 3% per year on average, domestic energy consumptiondecreased by an average of 0.5% per annum between 1980 and 1982.

2.51 The significant reductions in the energy ratio recorded in 1981 and1982 were achieved mainly through drastic adjustments in 'norms' for energyuse with the focus on industry, supported by harsh penalties for exceedingthese norms; the cutting-off of electricity and other energy supplies untilthe established quota can be obtained; the use of audits to establish thesenorms and the deviations from them; reductions in public lighting, lighting inshops, hotels, commercial premises and public offices; and restrictions onprivate car travel. Also, direct cutbacks of production in highly energyintensive industries made a contribution to the reductions in the energyratio. Thus, aluminum production was reduced from 234,000 tons in 1981 to208,000 tons in 1982 with a further reduction to 200,000 tons planned for1985; similarly, glass production was cut back from 77 million square metersin 1981 to 67 million square metres in 1982. To some extent, the savingsachieved are also the result of changes in production technology withinexisting facilities, e.g. the switch i-rom wet to dry processes in cementproduction. However, there are few indications that permanent changes in thesectoral structure of the economy have played much of a role in achievingthese reductions in the energy ratio, i.e. the dominant feature of energypolicy has been 'genuine' energy conservation.

2.52 Energy prices have traditionally been low in Romania with energypolicy relying mainly on direct controls to contain domestic consumption.However, use of direct controls such as quotas did not appear to sufficientlycontain the tendency towards low efficiency in the use of energy. In responseto this and with the view to support administrative measures to improve energyefficiency, drastic increases in energy prices both to producers and consumershave been made in recent years. During 1983, the domestic price of crude oilis to be doubled and natural gas prices are to be increased by 50% in twostages (of which 35% during the first half year). However, despite thesesharp price increases, Romanian energy prices in general remain below worldequivalent levels. The producer price of crude oil is currently about 30% ofthe world equivalent price; natural gas, which accounts for almost half oftotal energy consumptioin in Romania, is around 50% of the world equivalentoil price. Gasoline price for producers is now priced more than twice theborder price and diesel oil is within 75% of the international price.

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Table 7: CHANGES IN DOMESTIC ENERGY PRICES IN 1980-1983AND COMPARISON WITH WORLD PRICES

Interna-Change in price level (%) Domestic price tional1980- July 1982- July 1, 1983 priceJuly 1982 July 1983 (Lei) ($) ($)

Gasoline (per ton) 20 0 12,160 694.9 293.0Diesel (per ton) 217 0 3,160 180.6 239.0Heavy fuel oil (per ton) 340 0 1,875 107.1 169.4Crude oil (per ton)Delivery price 285 0 2,000 114.3 211.7Domestic producer price 140 100 520 29.4

Gas (per 1000 mi3 )Used as raw material 1570 ) 35 ) 1,000 ) 57.1 )Used as fuel 400 ) 35 ) 1,500 ) 85.7 ) 145.7

Lignite (per ton) 90 0 264 15.1 -Electricity (average revenue

per kWh) 134 20-25 460 26.3 -

Note: Prices given in the table are delivery prices to producers. Lei pricesas of July 1, 1983 have been converted into dollar by using the presentcommercial exchange rate lei 17.5:US$l (cf. Section II.C above).

3. Mission's Assessment

2.53 The practice of setting prices according to a "cost plus" formulahas made it possible for enterprises producing products for domesticconsumption to pass on higher costs due to increased energy prices in the formof approved higher product prices. This is likely to have reduced the impacton energy demand within the enterprise sector. Enterprises that produce forexport do not have this possibility; thus, the adjustments made in energyprices are likely to result in a more efficient structure of foreign trade.Also, the adjustment made in retail prices for energy are expected to resultin a marked reduction in household demand for energy.

2.54 Mainly due to results achieved through the energy savings efforts,total energy demand in 1985 is likely to be significantly less than assumed inthe revised 1981-1985 plan. Due to this, it therefore now appears, in thejudgment of the mission, that the shortage in the overall level of energysupply in the next few years will be less pronounced, at least up to 1985.However, analysis of the electricity subsector indicates problems in theprogram for switching power generation dependence from hydrocarbons tolignite. The 1985 situation will depend critically on the flexibility assumedin the use of oil and gas. There must be doubts concerning the feasibility ofexpanding lignite production at the required rate. In turn, this implies that

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there is likely to be shortfalls in the planned reduction in the use of oiland gas in producing electricity. Special efforts, therefore, have to be madein order to reach the objective of reducing imports of oil for domestic usedown to zero in 1985 in order to improve the external balance. Efforts toreduce the need for oil import through increases in the use of natural gas inpower generation could be considered as a temporary measure; otherwise itwould conflict with the longer-term objective of preserving natural gas forits premium use as feedstock in chemical industry. Stepping up natural gasexploration also seems a desirable objective in this context. By the end ofthe 1980s, the situation can, in the mission's view, be expected to becomemore flexible, since nuclear power may then contribute some base loadelectricity and power projects that have been delayed are likely to come online at the same time as the growth rate for energy demand can be assumed toslow down as a consequence of measures to save energy.

2.55 The authorities were more forthcoming in the discussions onRomania's energy program than in the past. This has enabled the mission tocarry out a more in-depth analysis of the sector than was possible before. 1/The mission generally supports the priority given by the Government to thedevelopment of domestic energy resources and to the reduction of energyimports. The increased attention now given to energy savings--instead ofrelying basically only on expansion of energy production in order to containthe energy deficit--is also a step in the right direction. However, theeconomic justification for specific parts of the energy program--especiallyfor the development of lignite production and small hydropower projects--isstill unclear. There is, in the mission's view, also uncertainty about thescope for further energy savings, especially in industry.

F. Adjustments in Agriculture

2.56 Romania is endowed with rich soils and favorable ecologicalconditions and has traditionally been a net exporter of agriculturalproducts. Despite the significant gains in the 1970s, Romania's crop yieldscompared to yields attained in Western Europe are still low. Due to a numberof factors--of which recurrent unfavorable weather conditions was one--valueadded in agriculture decreased by about 172 in real terms in 1.979-1981.However, despite record crops in 1982 which resulted in a 7.3% increase inagricultural production, value added in agriculture in 1982 was still 11%below the 1979 level. The compounded effects of production shortfalls,increasing domestic requirement and fast rising imports--of which muchfeedgrains to support the 'Livestock industry--has resulted in a dramaticreduction in net exports of agricultural products since 1977, which was onlypartly reversed by the 1982 bumper harvest.

1/ A more detailed presentation of the mission's findings is given in aspecial report, "Romania's Energy Sector".

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2.57 There are several factors other than unfavorable weather conditionsthat explain why agricultural performance lags far behind the sector'spotential. One important constraint appears to have been the diversion ofchemical fertilizer into exports and limited availability of imported plantprotection chemicals. Another factor is increasing labor shortages,particularly during harvest period. Thirdly, incentives at the farm levelhave not been conducive to raising labor productivity sufficiently fast.Finally, because the pricing system does not reflect scarcity value, surplusesand shortages are often observed for meat and meat products. The Governmenthas recently introduced measures to stimulate production and address some ofthese issues which have implications for agriculture to achieve its potential.

2.58 The investment program for the 1981-1985 agricultural plan calledfor an increase in agricultural investment of 3% per year in 1980 prices (seeTable 8), significantly less than the planned increase in total investment(5.2%) for the same period. The plan signalled major departures from previousplan strategies in two areas: (i) shift in investment priority fromirrigation to drainage, soil erosion control and mechanization; (ii) thecompletion of ongoing projects and intensive utilization of existinginvestments was given high priority. However, in response to the financialcrisis, the agricultural sector has recently received significantly higherattention than earlier as regards its potential for providing a basis both forincreased domestic consumption as well as expansion of exports and reductionof imports. This is reflected by the fact that investments in agriculture in1982 and 1983 were supplemented by 9.0 billion lei each year over the originalfive-year plan target. These increased investments in agriculture were madepossible by investment cutbacks in other sectors. Actual investments in 1981and 1982 were 17% of total investments, compared to 12.9% in the 1981-1985plan. Another shift in policy is the increased attention now being given toirrigation as well as to the intensive development of the livestock sectors.

Table 8: AGRICULTURE SECTOR INVESTMENTS(Million lei, current prices)

1976-1980 1981-1985 1/ 1981 1982 1983Actual Plan Actual Plan

Land Reclamation 30.4 26.5 4.5 4.7 6.3Mechanization 33.9 54.0 11.0 10.3 12.1Livestock 51.3 50.0 11.5 12.2 11.5Crop Production/

Storage 12.1 14.5 7.0 8.0 5.9Other 6.0 3.6 2.0 1.1 1.2

Total 133.7 155.0 36.0 36.3 37.0

1/ In 1980 prices.

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2.59 Employment in agriculture has for a long period continued to droprapidly and faster than the rate of mechanization to compensate for thedeparting labor force. In 1975, about 38% of the total labor force wasengaged in agriculture while this share at present stands at about 29% with anincreasing proportion of elderly male and female workers. A great deal of thelabor outflow from agriculture was dictated by the growing demand for ablebodied workers in other sectors in general and industry in particular. Due tohigh priority accorded to industrialization, the planners called upon theagriculture sector to provide the investible and human resources. As aconsequence of slower rate of mechanization in agriculture, acute laborshortages occur, particularly during the peak harvesting period. While wheatis 100% mechanically harvested, maize is 78%, sugarbeet 63% and less than 40%for potato.

2.60 The current sizes of the agricultural population. estimated at about3.0 million would have been more than adequate to meet the sector's laborrequirement if the rate of mechanization had kept pace with the rate of laboroutflow. Given the recent financial difLiculties plaguing the economy, it isvery unlikely that the projected 2.5 million agricultural population in 1985would be realized.

2.61 In addition to increase in investment allocations, the Governmenthas recently also introduced economic and organizational reforms to stimulateagricultural production and productivity. Between 1960 and 1981 agriculturalprices were only raised twice, in 1963 and 1973. In 1981, agricultural priceswere raised by 12% on average coupled with premium payments ranging from 1.5%of the contract price for tobacco to 43-72% for sugarbeet. These premiums arepayable in addition to the contract price, when the actual deliveries exceedthe contract deliveries to the state. Despite the recent upward pricerevisions, relative crop prices in Romania are still not in line withinternational prices, indicating heavy taxation of Romania's agriculturerelative to world prices. However, since agricultural units in Romania arealso paying heavily subsidized prices, the net taxation burden is substan-tially reduced. A significant element in the price reform package, however,is the elimination of two tier pricing systems for cooperatives and statefarms. In the past, cooperatives paid higher input prices and received higheroutput prices and vice versa for state farms. Under the new pricing systemboth state and cooperatives farms operate under a uniform set of input andoutput prices. Furthermore, individual producers are also e5ligible to benefitfrom the recent revised pricing. Both contract prices and the premiums issuedin 1982 were again revised in 1983, applicable to individual producers only.This measure was taken to divert sales from the peasant markets to statedeliveries. Nevertheless, prices in lhe informal markets are stillsignificantly higher than the contraci: prices, including the premiums.

2.62 Producers' response to the price reforms are not known yet. In acooperative farm visited by the mission, it was indicated that the deliverytargets were exceeded and revenues increased markedly. At the national level,it is estimated that about 15 billion lei would be paid out in the form ofpremiums. For the production units to surpass their delivery targets twoalternative conditions must be met: either crop yields must be increased orthe production units could reduce their on-farm consumption and reserves and

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deliver larger quantities to the state. In either event, unless thefertilizer consumption stagnation of the last three years is reversed, theoutput delivery response, at least in the short run, may not be significant.Therefore, while higher farmgate prices are necessary conditions forstimulating agricultural production, it is by no means a sufficient condition.

2.63 An integral part of the New Economic Measures program is thegradual increase in the financial and managerial autonomy of enterprises.Thus far, state farms have been operating on annual government budgetaryappropriation. Likewise, earned profits have been transferred to the nationalbudget after the statutory deductions have been made. Starting in 1982, statefarms were allowed to retain a higher portion of their net profits and tocontinue to borrow from the Bank for Agriculture and Food Industry (BAFI),particularly to finance investments. In the cooperative sector, all income offarmers is to be tied to individual performance and type of productiveactivity. Different norms have been established for activities in livestockand crop farms against which workers' contribution would be evaluated. Whilstthese measures would enhance some degree of financial discipline and generatedirect incentives, a critical factor is the lack of farm managers' ability tomake investment and production decisions based on economic instruments such asprices, interest rates, taxes, etc.

2.64 While the additional investment allocation made and the economicand organizational reforms introduced recently reflect Government's genuinecommitment to develop the sector, other adjustment measures taken have reduceddomestic availability of exportable items and imported goods. Romanianagriculture relies heavily on imported plant protection inputs and competeswith the export market for fertilizer and farm machinery. The progress madein bringing the financial crisis under control is essentially due to thecutbacks in imports. The direct impact on agriculture is felt largely on cropyield due to insufficient application of plant protection chemicals.Moreover, fuel allocation to the agriculture sector was also reduced,affecting mechanical works. In response, agricultural units introduced fuelconservation measures in machinery services. By accomplishing two to threefurnctions (e.g. soil preparation/herbicide and fertilizer application) in oneoperation compared to the sequential operation in the past, utilization offarm machinery and energy efficiency has been improved significantly.According to information obtained from a state farm visited by the mission,fuel consumption has declined up to 20% due to improved operational efficiencyof agricultural machinery.

2.65 Romania has ample domestic production to meet agriculture'srequirements of fertilizers, chemicals and farm machinery. However, becausethe Government attaches a high priority to direct foreign exchange earningsthrough the exports of these inputs, large proportion of the domesticproduction is diverted for exports. Thus, during the 1976-1980 plan period,an average of 48% of domestic fertilizer production was made available foragriculture and 52% diverted for exports; consequently, at the end of the planperiod, actual fertilizer consumption was only 41% of the planned target.Similarly, only one-third of the tractors produced domestically were sold tothe agriculture sector. However, the problem is more one of inadequateavailability of small size tractors and those suited to hilly terrain rather

40 -

than total availability of tractors. The combined shortfalls of fertlizers,and some kind of farm machinery and plant protection material result in lowcrop yields, given the sector's potential. The issue for the economicplanners is to determine the magnitude of production and foreign exchangeforegone as result of curtailing supply of inputs to the agriculture sector.Given the current ratio of crop yields and fertilizer application in statefarms and cooperatives, it appears that incremental quantities of fertilizersretained for domestic use would give higher marginal returns if allocated tocooperatives than to state farms.

2.66 The existing grain distribution network is also a major bottleneckin post harvest operations in Romania. Lack of suitably located and properon-farm and transfer storage facilitiess cause an estimated annual loss of 20%of total grain production, equivalent to the average incremental productionfor a period of three to four years. The Government's strategy for grainproduction puts heavy emphasis on increasing production by raising crop yieldsand expanding arable areas. An optional strategy to increase production wouldbe by minimizing the post harvest losses. In the mission's judgment, theincremental investment requirements per unit of output conserved in the latterstrategy would be substantially lower than the incremental investment cost toproduce on newly reclaimed land. The storage problems and related postharvest management constraints are gradually being recognized by planners.However, this recognition is not yet reflected in the investment program forthe sector.

2.67 The formal planning process in agriculture begins with guidelinesissued by the State Planning Committee and the Ministry for Agriculture andFood Industry. On this basis the agricultural units draw up tentative plansfor production, investments, etc., which are then submitted to the judetsagricultural bodies. After being reviewed at district level., these proposalsare then submitted to the central bodies where further adjustments, ifnecessary, are made. The draft plan made at the central level is thereaftersubmitted to the Government. After being approved by the Great NationalAssembly, the plan targets become compulsory; the plan is then submitted tothe districts and agricultural units. Recently, agroindustrial councils wereestablished with the purpose of coordinating groups of state and cooperativefarms as regards mechanization, provision of fertilizers, transfer of laborbetween different agricultural units during certain periods, products,investment decisions that affect several units, etc. In the view of themission, consideration should be given to organizational changes, such as moreresponsibility for farm managers as regards production and investmentdecisions and reduction of the number of layers of organizations between thecentral and farm level, that provide for higher returns in agriculturalproduction. Often the production unit manager's cropping pattern alternativesare also subject to input constraints such as limitations orn the provision offertilizers, chemicals, farm machinery and labor, partly because such inputsare being exported to alleviate the foreign exchange shortage

2.68 An issue fundamental to the planning and management system isrelated to the role of individual producers. Although individual producerscultivate only 12.5 of arable land, their contribution in the livestocksubsector is significant. In 1981 the individual sector accounted for 39% of

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cattle, 29% of pigs, 48% of sheep and 42% of poultry; similarly, about 60% offruits and potatoes is produced in the individual sector. Given theirproduction potential, the issue for the individual sector is the limitedaccess to inputs and technical services. In recent years the Government hasgiven grazing rights in some areas to individual producers on state-ownedlands. While this is a step in the right direction, actions to stimulateproduction in the individual sector, a set of specific measures includingsharing of technological inputs with state and cooperative farms should beconsidered.

2.69 Romania has also been investing heavily in major infrastructureprojects in the agriculture sector. A high share of these investments havebeen in irrigation and drainage projects--to a large degree with World Bankinvolvement--in order to mitigate the impact on agricultural output of erraticweather conditions. A national program to increase available land foragricultural production was adopted on July 1, 1983. In particular, theprogram emphasized measures to make up for arrears in the implementation of he1981-1985 plan targets for investments in irrigation projects together with anupward revision of these targets.

2.70 Investment selection among competing projects in agriculture isoften dictated by the subsector's need rather than judged on the basis ofrelative returns to the investment. For example, given the under-utilizationof existing agricultural investments in land reclamation and livestock, itwould be more economical to raise the productivity of existing investmentseither through provision of inputs and/or modernization rather than installingnew capacities. The recent financial crisis has also forced economic plannersto consider such alternatives.

G. Aspects of Structural Adjustments in Industry

2.71 Almost 85% of Romania's exports are produced by industrialenterprises; thus, even if other sectors can make important contributions toease the foreign exchange constraint, any major increase in exports has tocome from the industrial sector; in addition, industry has a central role inproviding the necessary goods for the further improvement of the livingstandard in Romania. However, indications are that Romania's exports ofmanufactured goods during the latter part of the 1970s increased only at abouthalf of the rate of world manufacturing exports. Factors that influencedindustrial exports to the convertible currency area were: (i) the emphasis onindustrial diversification and self-sufficiency, especially for producer goodsdiminished the advantage resulting from specialization in products where thecountry is relatively competitive; (ii) insufficient level of labor andcapital productivity; (iii) relatively high intensity in the use of rawmaterials and energy in some industrial branches; (iv) supply limits due tolong periods of project implementation; (v) inadequate product quality tofully meet the requirements of the international market; (vi) delays intechnological updating in some cases where industrial technical designs hadbeen purchased from abroad.

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2.72 In response to these problems, the 1981-1985 plan envisagedimportant modifications in industrial strategy: producer goods were no longerexpected to grow at a faster rate than consumer goods; increasing emphasis wasgiven to "intensive growth", emphasizing increased efficiency as the majorsource of growth in production and favoring products with high value added andlow material input requirements; improving product quality is a major concernin the plan. Special efforts are to be made to significantly reduce energyconsumption and to recycle as much as possible materials, equipment and spareparts. Overall industrial production was to grow at 7.6% per annum, which isabout equal to the growth achieved in 1979 and 1980. Above average productiongains was planned for passenger cars, ship building, machine tools, plastics,artificial fibers, fine chemicals, pharmaceuticals, automation equipment,electronics, fine mechanics, electric appliances, furniture and clothing.Energy intensive products such as cement, aluminum and some chemical productswere assumed to increase a little or even to be cut back.

2.73 The cutbacks in imports of material inputs made in response to thereduced availability of external resources limited the rate of growth ofindustrial output in 1981 and, especia:lly, 1982 with production of industrialgoods reportedly increasing by 1.8% in 1981 and 1.1% in 1982D significantlyless than plan targets. The problems caused by these supply limitations werecompounded mainly by sluggish export markets due to the internationalrecession. In addition to these short--term adjustments necessitated by theforeign exchange shortages in 1981 and 1982, changes have also been made inthe strategy for industrial development in the 1981-1985 plan. The missionwas informed that the industrialization process will continue, but with muchmore emphasis on the updating of existing structures to meet the requirementsof foreign markets and to reduce the present high energy intensiveness of theproduction structure. Development of subsectors with a relativrely high valueadded per unit of output was reported to have been accelerated, while growthof low value added and/or energy intensive products has been correspondinglyreduced compared to the original targets in the 1981-1985 plan. Theproduction of energy intensive commodities is being restricted to essentials.Also, restrictions will apply to goods which are heavy material consumers andwhich do not have a high added value component and/or have a large importcontent. As examples, aluminum production (present capacity 240,000 tons peryear) will be 220,000 tons in 1983; calcium carbide production will be 218,000tons in 1983 compared to a capacity of 380,000 tons per year; and cementproduction (capacity 16.5 million tons per year) will be in 1983 at the 1980level of 15 million tons. Production has been reduced in industries usingmetallic copper, with a consequent cutback in output of electric motors,transformers and other electrical equipment. The production of electroniccomponents has been reduced, particularly of those items which require a highimport component. Technologies in existing facilities are being redesignedwhenever possible. One example is again the cement industry, in which wetprocess plants have been either converted to dry process technology--which isless energy intensive--or temporarily taken out of production.

2.74 The authorities projects an improvement in international markets forindustrial goods, which they expect to make possible in 1984 and 1985 growthrates closer to those laid down in the 1981-1985 plan. The mission was alsoinformed that targets for industrial development in future annual plans will

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be drawn up with more attention to the production and market possibilities;this would introduce a much needed element of flexibility in Romanianplanning. The longer term development for the above-mentioned productswill--in addition to future international demand conditions--also depend cnwhat degree material inputs can be supplied from local sources. To this end,the implementation of targets for increased efficiency in the use of materialinputs in the 1981-1985 plan is getting highest attention; part of thisprogram consists of measures to increase recycling of raw materials,especially of ferrous and non-ferrous metals. Investment in domestic rawmaterial production also has priority in present policies to secure adequatesupply of material inputs. The mission was informed that as a result of thesemeasures, local supply of metallurgical coke is to rise from 51% of total usein 1981 to a planned 76% in 1983; zinc supplies from local sources from 70% oftotal consumption in 1981 to 89% in 1983; it is also planned that 92% ofsynthetic rubber requirements will be supplied from local sources in 1983compared to 87% in 1981. There has been an increase in the supply of coalfrom local sources. As a result of accelerated efforts for many commodities,the authorities expect that through the use of recycled raw materials, theshare of these resources in total input needs in 1983 to be significantlyhigher than planned for 1985 according to the 1981-1985 plan. As an example,53% of total use of copper in 1983 is expected to be recycled as compared to aplanned share of 41% for 1985 in the five-year plan. Similar advances in theuse of recycled materials in 1983 are expected for ferrous materials, lead andwaste paper. While these shifts are impressive and in line with Romania'sstructural adjustment needs, their economic viability--estimated at worldmarket prices--is, in the mission's view, uncertain in some cases.

2.75 Of the major industrial subsectors, only chemicals and metallurgywere reviewed in some detail by the mission; the mission received very littleinformation about the important machine-building sector, which apparently isplanned to play a lending role in exports in future years.

2.76 The overall value of chemical production is scheduled to rise by 17%in 1983 and to increase at an annual rate of 10.8% as an average during1982-1985. Information received on various subsectors of the chemicalindustry show surprisingly small addition to production capacity from 1980onwards. It is unclear whether this is due to deliberate postponement orcancellation of projects in the original five-year plan or delays incompleting the implementation of projects already underway in the 1976-1980period. Of some ten major chemical projects commissioned in 1981, only twoare for basic commodity chemicals--the Bacau urea plant and the Giurgiuchlorine/caustic soda plant. All other projects commissioned are downstreamunits producing products with higher added value and include plants to producedetergents, insecticides, melamine, photo-sensitive products, solvents andspecialized polymers. However, projections made available to the mission showthat significant capacity increases are planned for the production of certainbasic petrochemicals, such as the polyethylenes, polypropylene, andpolystyrene in the 1983-85 period. (Although these increases are atconsiderably lower levels than was planned before the revisions incorporatedin the 1981-1985 plan.) The technology employed in these projects dates fromthe late 1960s and early 1970s; during the mission it was learned that someupdating has been made to the original designs. Detailed material consumption

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data (given to the Bank's Chemical Subsector Review in 1979) for severalpetrochemical projects then in the planning stage showed high unit materialsand energy consumption by international standards; plant capacities (in anindustry which exhibits large econmies of scale) were smaller than the worldtrend from 1974-79. Projected production data for 1983-85 shows that nosignificant changes in the capacity of individual units have apparently beenmade. Thus, as far as raw materials and utilities costs and capital changesare concerned, these new plants are likely to be at a disadvantage comparedwith Western European and Middle East plants.

2.77 Most of the incremental capacities for these basic petrochemicalsare dedicated to export sales. Given the massive overcapacity that existstoday--and is likely to remain for a considerable time--it can be doubted ifthere will be demand enough to absorb the planned increases in productior.Similar considerations apply to fertilizer production and export, particularlynitrogen. Present overcapacity in the world nitrogen fertilizer industry isexpected to last into the second half of the 1980s and prices are likely toremain depressed for some years to come. Yet Romania is apparently nowplanning to export a larger tonnage of nitrogenous fertilizer in 1985 than wasplanned for 1985 in 1979. The planned export may represent more than 10% ofthe world gross imports of nitrogenous fertilizer in 1985. Given today's lowfertilizer prices it is questionable if such large quantities could beexported at economic prices.

2.78 The 1980-82 period was marked by stabilization of production of rawsteel at about 13 million tons (98% of capacity), while pig iron productiondeclined from 9 million tons in 1980 to 8.6 million tons in 1982, partlybecause of the weak international market for steel products. Pig ironproduction is now limited to meeting the domestic requirements of steel andpig iron parts production and some furnaces with smaller capacity has beentaken out of production. A number of production facilities were commissionedin 1981, all of which were carry-overs from the 1976-1980 plan; no furthercapacity additions were made in 1982. Several new projects were initiated in1981/82, most scheduled for completion in 1984 or later. A major emphasis ison increasing coke production; it is estimated that these capacity additionswill result in annual savings of imports of about $270 million. Among theenergy and raw materials saving measures already being implemented are:increased scrap utilization, heat recovery from stack gases and cooling water,vacuum degassing, and dry cooling of coke, with increased utilization ofby-product steam. New technologies aimed at reducing specific consumption ofcoke by up to 10% are being introduced.

2.79 The mission understands it is the intention of the Romanianauthorities to stabilize the level of steel production and to improve theeconomics of operation through reduction in operating costs while improvingquality and diversifying the product mix. However, the plan figures given tothe mission still call for an increase of production of raw steel from the1982 and 1983 level of 13 million tons to 14.2 million tons in 1984 and 15.5million tons in 1985. Since no information was obtained relating to steelconsuming subsectors, it is not known where this increased output is to beabsorbed, either domestically or in export markets. The short and medium termoutlook for the world steel industry is depressed and it does not seem likelythat this increased output could be economically exported.

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2.80 In sum, while impressive progress is apparently being made in theefforts to reduce raw material use in existing production facilities and inthe recyling of raw materials, projections provided to the mission indicatethat Romania is, in the next few years, planning for significant capacityadditions in production where markets are likely to remain depressed due toovercapacities. Thus, in the subsectors reviewed in some detail by themission, production appears at the margin to be somewhat slow to adjust tochanging economic conditions. Largely this seems to be the consequence of thepriority given to the completion of ongoing projects from the 1976-1980 planperiod compounded by cutbacks in new projects due to the financial shortage.The mission did not have in its terms of reference to undertake a fullassessment of adjustments being made in the industrial sector; understandinghas now been reached with the Romanian authorities for the Bank to reviewselected subsectors in industry. Information from other sources indicate thatRomanian industry in the production of specific manufacturing goods is welladvanced; nevertheless, it appears unlikely that industrial exports can beexpanded over the next few years at a rate sufficient to allow for a moresignificant increase in imports of capital goods necessary for themodernization of the economy.

H. The Foreign Trade Regime

2.81 As was explained above (Sections IA and I.B), developments in theforeign trade sector were the main factor both in the series of events thatled to the financial difficulties in 1981 as well as in the significantimprovement in external balance in 1981 and 1982. Romania's ability to returnto higher rates of economic growth than those recorded during the last fewyears depend both on the possibilities for further improvements of the currentaccount and how this would be achieved. As noted above, the improvement inthe external balance in 1981 and 1982 was achieved mainly through large cutsin imports (seen Table 9 below). The scope for further reductions in importswithin the present economic structure and way of economic management has nowbeen more or less exhausted; thus, the achievement of the pivotal goal offurther improving the external balance and returning to higher growth rates infuture years, will be limited by the capacity to rapidly expand exports to theconvertible currency area.

2.82 Foreign trade is one of the sectors where a major policy change hasbeen initiated. As explained in Section II.C, the exchange rate system hasbeen gradually modified over the last few years; since July, 1983, there is aunified exchange rate system for all commercial transactions (except a specialtourist rate). As a result of this reform, international prices are now moredirectly reflected to users of imports and producers of exports. This islikely to have three important effects. First, it allows exportingenterprises to take advantage of more favorable prices abroad. Furthermore,the system, by allowing for bonus payments in case of enterprises exceedingexport targets, provides an important export incentive. Conversely, itcommits importers to pay the full price of foreign goods, thereby inducingthem to search for less expensive domestic alternatives wherever they areavailable. Second, the new policy is designed to gradually direct Romania'sexports towards such goods and services where the country is internationallycompetitive. Third, to the extent that import prices are reflected in

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domestic production cost, they force local prices in the direction ofinternational price structures. A case in point is energy prices (see SectionII.E above). The devaluations of the exchange rates during the first part of1983 followed by further adjustments as needed in line with the announcedintention to pursue a more flexible exchange rate policy in the future shouldassist in the Government's program for establishing an adequate internationalcompetitiveness in the future.

2.83 At present there are a number of constraints that limit theexpansion of exports to the convertible currency area. Product quality issometimes inadequate and not intenationally competitive. Partly, this is aquestion of technology and design; moreover, quality is often not adequatelyrewarded within the context of existing incentive system. There are alsoproblems with production and market constraints, compounded by sluggish worldmarket growth.

Table 9: DEVELOPMENT OF EXPORTS AND IMPORTS, 1975-1982(Millions of US dollars, current prices)

1975 1980 1981 1982

Convertible CurrenciesExports 2,839 6,503 7,216 6,235Imports 2,950 8,037 7,012 4,710Trade balance -111 -1,534 204 1,525

Non-Convertible CurrenciesExports 2,502 4,521 5,151 5,324Imports 2,392 4,648 5,252 5,035Trade balance 110 -127 -63 289

Total tradeExports 5,341 11,024 12,367 11,559Imports 5,342 12,685 12,264 9,745Trade balance -1 -1,661 103 1,814

2.84 Besides the exchange rate and price reform dicussed above, measuresspecifically designed to promote exports, especially to western markets, havebeer. taken recently; these measures also constitute part of the implementationof the NEM reform program (c.f. Sectioni II.B above) in the area of foreigntrade. The new measures are intended to strengthen the link in foreign tradeoperations between wages and other incomes, on the one hand and, on the other,the fulfillment of the plan targets for export production. In this context,special incentives and premia has been introduced for enterprises producingfor export and their personnel when thes production target is fulfilled andexceeded. Enterprises producing for export are also entitled to higherrevenues and profits than those producing for the domestic market;furthermore, they also have the right to create a special fund for the

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promotion of exports. Up to 10% of annual profits in excess of total plannedprofits will be paid into a fund for staff participation in the profits of theenterprise. Each production enterprise will also have a foreign currencyfund, consisting of up to 2% of the amount of additional receipts obtained byexceeding the export plan, for organizing excursions abroad for its staff. Anew pay system has been applied since September 1, 1983 for the personnel offoreign trade enterprises and commercial and service agencies. The centralfeature of the new system consists of a direct linkage between wages andperformance; wages cease to be planned and minimum wages are no longerguaranteed. As an example, if the plan for exports is exceeded by 20%, thenthe workers will achieve 20% in bonuses on top of the planned wage income. Ifon the other hand plan targets are not reached, wage payments under the newsystem will be reduced correspondingly. The quota destined for the wage fundis at least 20% higher for exports than it is for imports and at least 10%higher for trading on convertible currency markets than on the other markets.The mission was informed that workers in many enterprises saw their incomesreduced in 1982--in some foreign trade enterprises by up to 25%--due tounderfulfillment of export plans. Producing enterprises are now alsopermitted to retain 80% of export incomes above planned levels to be used forimport of raw materials, etc. needed in production. The authorities expectthese measures to result in greater concern for fulfilling export targets bymanagers and workers in export producing companies. Since these measures havebeen introduced recently, they have not yet proven their potential forstemming the downward trend in convertible currency exports.

2.85 Apart from these important changes, the mission understands that theinstitutional and policy framework within which foreign trade is to beconducted will remain unaltered although its effectiveness is to bestrengthened. Thus, specialized foreign trade enterprises will continue to beprimarily responsible for marketing operations. They are to study foreignmarkets, seek out export opportunities, advertise domestic products abroad,and negotiate export and import contracts. Increasing emphasis will be givento training foreign trade officers in modern marketing techniques. Closercooperation will be sought with producing enterprises so as to convey morequickly information on international prices, quality requirements, designchanges, etc. More attention is also to be given to effective service andmaintenance of Romanian products sold abroad. When negotiating importcontracts foreign trade enterprises are increasingly being required to secure"countertrade", i.e. matching export orders for Romanian firms. The foreigntrade enterprises now work on a strict commission basis. In cases where thesefees do not reach planned levels, higher level authorities will intervene andtake organizational measures to improve performance (in addition to salaryreductions). In principle, these enterprises may even be closed. However,the mission was informed that since the measures taken where there has beenshortfalls in exports (ship building, production of the Dacia car, petroleumproducts) have resulted in improved performance, no foreign trade enterprisehas yet actually been closed.

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2.86 During the 1970s Romania extended its links with non-Socialistcountries, particularly with developing countries, and its trade inconvertible currencies grew rapidly. As as result, convertible exports andimports accounted for about 60% of total trade in 1980. While trade inconvertible currencies declined strongly in 1982, trade in non-convertiblecurrencies remained at roughly the same level in nominal terms; consequently,for the first time since 1975, imports in non-convertible currencies weregreater than those in convertible currencies. Romania's official policy is tomaintain a balanced trade between the two currency accounts. To the extentthis can be achieved depend crucially on Romania's ability to improve itscompetitiveness and exports to the convertible currency area.

2.87 In the past, Romania has been successful in exporting to theconvertible currency areas certain types of machinery and transport equipment(e.g. locomotives and railroadcars, ships and tractors). Total exports ofmachinery and transport equipment in 1981 were $1.6 billion or 23% of totalexports. However, exports decreased substantially in 1982 because of therecession in convertible currency markets together with declining marketshares due to loss of international competitiveness as a result of theappreciation of the leu. Romania plans to orient its future export effortstowards increases in production of more specialized and sophisticated goodswith a higher degree of value added content were Romania's future comparativeadvantage is thought to lie. Emphasis will be placed on promoting exports ofgoods such as drilling equipment, machinery for mechanizing production in thefields of mining and construction, precision mnachine tools, and specialsteels. There are also plans to increase exports of drugs, paints andcolorants, and synthetic rubber.

2.88 These efforts to increase exports in some lines of production and,in some cases, to shift from the status of an importer to that of an exporteris, in the mission's view, likely to encounter serious difficulties in meetingthe technological and quality standards of international markets ofindustrialized countries and projections could fall far short ofexpectations. At the same time, the Government has found it necessary tolimit or even cut back production of certain industrial export productsbecause of their high energy intensity or because of their presently lowprices in international markets. Aluminum is a prime example. Exports ofaluminum ingots and rollings was reduced from $137 million in 1980 to $46million in 1982 in current values. Targets have also been reduced for exportssuch as steel rollings, cement, glass products, plastics (with the exceptionof synthetic fibers), mineral coal, and prefabricated reinforced concretecomponents. These adjustments should bring Romania's foreign trade structuremore in line with its comparative advantages.

2.89 Romania is also planning to increase production and net exports ofagricultural products. Official policy is to foment a rapid increase in cropyields and agricultural production by furthering a higher degree ofmechanization, making fertilizer and other inputs more available to farmersand offering farmers the incentive of larger domestic raw materials and energyresources. Great emphasis is also being placed on recycling of importedgoods, where in some cases ambitious targets have already been met. In thecase of energy, the Government expects these policies to result in elimination

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of the need for import of oil for domestic consumption by 1985, compared toactual imports of 7.3 million tons in 1980 and 4.4 million tons in 1982.Another central element in the Government's stabilization program is increasedsubstitution of imported capital equipment for domestically producedmachinery, equipment, etc. for investment purposes. While emphasizing thenecessity to recourse to this policy in the present situation, the authoritiesat the same time recognize the need to increase the import of foreigntechnology and equipment in the longer term in order to be able to restructurethe economy and increase export capacity and international competitiveness.

2.90 The devaluations of the exchange rate in 1983 and the latestdevaluation of 15 percent made on January 1, 1984 (all introduced as part ofthe standby arrangement with the IMF) together with the introduction ofspecial incentives for enterprise managers and workers engaged in exportproduction will assist in Romania's efforts to reverse recent trends towardsdeclining exports of non-oil products. These changes should be supported bymeasures to increase non-price competitiveness of Romanian products, forexample, reforms to bring Romanian enterprises into more direct contact withforeign markets, freedom for export producing enterprises to make choices asregards product mix, measures to ensure the continuous upgrading of design andquality improvements of export products, etc. Measures along these lines weretaken in November 1983 when programs were adopted concerning the improvementof the technical and qualitative level of Romanian export products togetherwith measures to increase labor productivity. However, these policies shouldbe carried out with much more vigor and within the framework of a consistentexport strategy.

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III. MISSION ILLUSTRATIVE SCENARIOS

A. Background

3.1 Romania's economic development during the remaining part of the1980s will largely be conditioned by the necessity for further improvement ofthe current account balance to meet future external debt obligations(including interests) in convertible currencies--estimated to about $2 billionper year as an average over the next five years--and to finance imports ofcapital equipment needed for the restructuring of the economy., Thesignificant improvements of the current account balance during 1981 and 1982was achieved mainly through major cuts; in imports together with reductions inconsumption and investment. To avoid the negative effects that will followfrom excessive reliance of deflationary measures, emphasis of policies aimingat the further improvement of the exte!rnal balance has, in the mission'sopinion, to be shifted towards use of measures that have the potential ofincreasing Romania's international competitiveness and export over the mediumand longer-term. This would require measures to enhance economic efficiencyas well and fundamental restructuring of the economy. However, Romania'sadjustment to new economic realities has to take place during a period withworld markets likely to grow only at modest rates, fierce competition fromother countries with the same urgent need to improve their external balancesituation, only limited access to external borrowing and continued high realinterest rates on outstanding external debt. This shortage of foreignexchange will severely limit the policy options open in the futurerestructuring of the economy. These difficulties are compounded by the needto shift from the extensive growth strategy--relying mainly on mobilization oflow productive labor resources and high investment rates--followed in the pasttowards an intensive growth path that relies primarily on increase inefficiency of existing resources as the source of growth. The possibilitiesto improve the efficiency of the economy is closely related to which changesin the system of economic management are made over the next few years.

B. Key Variables Affecting Growth

3.2 During the 1980s, the population in working ages (16-64) is expectedto grow by about 1% per year. This represents a substantial accelerationcompared with the actual increase during the 1975-1980 period, when populationin the corresponding age group increased by only 0.3% per year. Provided thatparticipation rates remain about the same as during the late 1970s, thedemographic trends would make possible a significant increase in the growth oflabor force and production potential during the 1980s. However, these trendsare likely to be offset by new patterns in the sectoral allocation of labor;during the 1960s and 1970s, a large part of Romania's fast growth wasexplained by massive transfer of labor out of low productive agriculture intoindustry and other more productive sectors. Agriculture is now facing laborconstraints; moreover, the majority of agricultural workers are nowmiddle-aged and older women who are not suited for employment elsewhere.Therefore, the possibilities to draw on labor reserves in agriculture has nowbeen more or less exhausted and future growth will to a large extent bedetermined by the possibilities to increase the productivity of labor withinthe sectors where it is presently employed.

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3.3 The measures taken in 1981 and 1982 to restrict domestic absorptionin response to the financial shortages were largely directed towardsinvestment. As a result, the investment ratio has declined from the peakvalue of 35% of GNP recorded in 1979 to about 30% in 1982; the net additionsto the capital stock from each year's investment can be estimated to havefallen by 2-3% as a consequence of these measures. The reduction ininvestments have resulted primarily from cutbacks in allocations for newprojects in the 1981-1985 plan. These cutbacks in investments, especiallythose for new projects, will slow down the process of structural adjustmentthat Romanian has to go through.

3.4 Given the financial constraints and the concomitant limitations touse investment reallocation and sectoral restructuring to achieve moresignificant effects on the external balance over the next few years, thepotential for further improvements in the external balance without excessiveuse of restrictive measures will to a large extent be conditioned by thepossibilities to increase the efficiency in the use of existing resources.This, in turn, would require significant reforms in the present system ofeconomic management and organization.

3.5 The policy response to the balance of payments problems, thus far,seems to be a blend of more central control and introduction of incentiveschemes in some areas of the economy (c.f. para. 1.31 above). A central issuein the analysis of the prospects for the Romanian economy is whether theproblems will result in a retreat into greater centralization or if it willbring forth more fundamental changes towards decentralization and increasedreliance on incentive schemes to allocate resources between different economicactivities. No more definite judgment as regards direction of future changesin the present system of economic management can be made now. For purposes ofillustration, two extremes as regards policy changes are used in the scenariospresented below.

C. Alternative Growth Scenarios

3.6 In order to illustrate options, the mission has undertaken ananalysis in the form of two scenarios, illustrating development perspectivesfor the remaining part of the 1980s. The World Bank's standard RMSM model,adjusted to the specific characteristics of the Romanian economy, has beenused in these scenarios to illustrate the interplay between the foreign tradesector and external (net) borrowing policies, on one hand, and the developmentof the domestic sectors, on the other. The scenarios presented in thischapter are to be interpreted neither as forecasts of most probabledevelopment nor as plans for the most desirable. They are simply an attemptto present consistent analyses, within a uniform framework, of theconsequences of different assumptions about the future. The results areperhaps best described as conditional forecasts, the fundamental conditionsbeing embodied in the structure of the model and the assumptions abouteconomic strategies.

3.7 Because of the projected significant debt service payments onoutstanding convertible external debt, the further improvement of the externalbalance is assumed to be the foremost target for economic policies in Romania

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until the late 1980s. This requires that both consumption and investmentshave to increase much more slowly than they did in the past. However, at thesame time structural changes and improved incentive schemes have to beintroduced to improve the efficiency in the utilization of existing resourcesand to stimulate the growth of GNP without increasing excessively the need forimported raw materials. Such a strategy would over time reduce the need ofrestrictive measures and would instead rely on structural changes in order toincrease net exports.

3.8 Besides the priority given to the further improvement of theexternal balance, the fast development of domestic energy and other rawmaterial resources and energy conservation, both scenarios assume improvedeconomic efficiency and resumed economic growth as central goals for economicpolicies during the 1980s. Both scenarios also assume that a continuousreduction in Romania's relative prices vis-a-vis world market prices isnecessary to gain market shares for Romanian exports and to achieve thetargetted improvement in external balance. (This implies that the demandelasticity on foreign markets for Romanian export products is assumed to behigher than 1.)

3.9 Scenario I, an "inward-oriented" development strategy assumes, inaddition to the common goals outlined above, that fast repayment of existingexternal debt will have priority over other policy targets. Likewise, no newborrowing to finance import of capital goods and new technologies is assumed.Prices are assumed to have little impact in the allocation of resources andthe enterprises' influence in the price formation process will be limited.These measures are assumed to result in gradually declining growth rates forlabor and capital productivity over the decade; this tendency is assumed to bepartly neutralized by increases in the investment ratio (which implies reducedpotential for higher consumption) during the latter part of the 1980s.Policies to widen the range of goods being produced domestically and directmeasures to minimize imports are assumed to be the main tools to achieveexternal balance; thus, measures to fu;rther diversify the industry in order tomake possible increased substitution oif imported capital equipment bydomestically supplied investment goods will have a central role. This isassumed to neutralize the high potential import need associated with therelatively high investment-ratio in this scenario. The reliance ondomestically-produced capital goods is assumed to reinforce the negativeimpact on the rate of technological progress following from theabove-mentioned policy measures. Romaniia's foreign trade is assumed to besuccessively more and more oriented towards the non-convertible area duringthe course of the 1980s.

3.10 Scenario II, an "outward-oriented" development strategy, incontrast, assumes that Romania after significant repayments of outstandingexternal debts up to the mid-1980s, will resume net foreign borrowing duringthe latter part of the decade in order to be able to achieve higher growthrates. However, borrowing will be on a limited scale in order to keep debtservice ratio within 10-15% as an average up to 1990. As a result, imports ofcapital goods and foreign technologies will grow at a higher rate. This isassumed to have a positive impact on the rate of technological progress and

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economic growth. In the foreign trade area, emphasis is placed on efforts toincrease exports to the convertible currency area, as a means of achievingexternal balance instead of relying mainly on restrictive measures to achievethis goal. It is assumed here that the target for increasing exports can bemost effectively achieved by giving prices and incentive schemes forenterprise managers and workers an important role in the allocation ofresources. A substantial share of the higher export growth rates that thisstrategy will result in, is assumed to be used for increasing imports ratherthan debt repayments during the second half of the 1980s. The more outwardoriented foreign trade policy assumed in Scenario II is supposed to have apositive impact also in the quality of Romanian products on both domestic andexport markets. Consumption is projected to have to grow at a relatively fastrate in order to accommodate the higher growth of real incomes resulting fromthe incentive schemes assumed to be used in this scenario. The strategyfollowed in this scenario is assumed to result in higher growth rates forproductivity and GDP than in Scenario I, especially during the latter part ofthe 1980s. The faster rate of structural adjustment and the efficiency-oriented policies in this scenario is assumed to result also in higher energyefficiency.

3.11 The results of the projections are summarized in Tables 10-13below. Under the assumptions made, GDP growth 1983-1985 will be limited to2.6% per year in Scenario I and 3.0% in Scenario II, compared to an annualgrowth of 4.8% as an average in 1977-1982. The need to cover high debtservice payments requires that the consumption standard can be allowed toincrease only at very modest rates until the mid-1980s compared withdevelopments during the 1970s. Investment is assumed to grow at about 4% peryear in 1983-1985 in Scenario I and 3% per year in Scenario II after thesignificant cutbacks in 1981 and 1982; the somewhat higher growth rate forinvestments in Scenario I is assumed to be needed to compensate for thenegative impact on the targetted GDP growth rate following from relatively lowcapital efficiency and high ICORs. Rather high increases in imports of rawmaterials and intermediate goods are assumed to be required in both scenariosin order to provide necessary production inputs after the depletion of stocksin 1981 and 1982, despite relatively low growth rates for both industrialoutput and GDP; as a result, total imports is projected to grow by about 10%per year in 1983-1985 in both scenarios. Exports are assumed to grow atsomewhat lower rates - about 7-1/2% per year in both scenarios. Since importsare growing from a much lower basis than exports after the significantcutbacks in 1981 and 1982, the higher growth rate for imports is consistentwith a further improvement in the current account in both scenarios.

3.12 During the latter part of the 1980s, the differences between thetwo scenarios is assumed to be more pronounced with GDP assumed to grow atabout 1.5 percentage points higher per year in Scenario II than inScenario I. Capacity growth is assumed to be relatively high in Scenario IIdue to higher rate of capital formation and import of foreign technology--financed by resumed external borrowing--as well as higher labor and capitalefficiency related to changes in the system of planning and management.Relative high income increases related to the introduction of incentiveschemes, bonuses, etc. are assumed to result in high growth for totalconsumption in Scenario II. In Scenario I, in contrast, consumption growth

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would have to be restricted due both to the more constrained external financesituation following from the priority given to fast debt repayment and theneed to allocate an increasing share of available resources for investment inorder to compensate for relatively lowv capital productivity. The emphasis onincentive schemes and other system reforms and imports of foreign technologyin Scenerio II is assumed to result in improved international competitivenessand relatively high export growth; this, together with resumed externalborrowing, would also allow for higher import growth than in Scenario I.

3.13 Table 11 summarizes recent trends in Romania's foreign trade andthe mission's projections until 1990. For the purpose of comparison, recentexport growth rates for developing countries and corresponding World Bankprojections are also incorporated in the table. Due to inadequatecompetitiveness in terms of product quality, marketing techniques, etc.,Romania's export of manufactured goods is assumed to continue to increase atsignificantly lower rates than exports of the corresponding commodities fromdeveloping countries, despite the pursuit of a consequent pclicy to reducerelative prices of export products in order to gain market shares. Trade inoil products is assumed to grow at fast rates in both scenarios following anassumed more favorable relation between prices for imported crude oil andprices received for exported oil products.

Table 10: DEVELOPMENT FOR KEY ECONOMIC VARIABLES, 1976-1980(Annual Rate of Change in Volume)

SCENARIO I SCENARIO II"Inward-oriented "Outward-oriented

Actual stratedy" stratedy"1977- 1983- 1986- 1983- 1986-1982 1985 1990 1985 1990

Total production (GNP) 4.8 2.6 3.0 3.0 4.3of which:Agriculture -0.6 1.7 2.5 2.0 3.5Industry 6.5 3.5 3.8 3.8 5.3Other 4.0 1.0 1.0 1.7 2.1

Consumption 4.1 2.6 2.7 3.3 4.3Investment 0.2 3.9 4.8 3.1 5.5

Exports GNFS1', total 7.7 4.5 7.7 5.6of which:

Convertible currencies 8.5 3.6 8.6 4.8

Imports GNFS1', total 9.8 5.2 9.8 6.3of which:Convertible currencies 11.3 4.7 11.4 6.6

1/ Goods and non-factor services.

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Table 11: FOREIGN TRADE PROQECrIONS, 1982-90 a/(Average rate of arnnal growth in real terms)

Roinanian Trade ExportsProjections -Developing Countries

Actual Scenario I Scenario II Actual Projections b/1975- 1982- 1985- 1982- 1985- 1975- 1982- 1985-1980 1985 1990 1985 1990 1980 1985 1995

Convertible Currency

Total GoodsExports 4.0 8.7 3.6 8.8 4.6 5.0 4.3 6.7BIports 8.7 11.2 4.8 11.2 6.6

of which:

Manufactured GoodsExports 4.7c/ 3.6 3.9 3.8 5.7 10.7 6.6 12.0Imports O.7c/ 10.7 4.8 10.0 7.5 4

Oil and Oil ProductsExports 2.5 23.3 3.2 23.3 3.2 -0.7 3.7 2.8Imports 26.5 10.2 5.4 10.2 7.9

Non-(bnvertible Currency

Exports GNFS 7.3 6.3 6.0 6.3 7.0 7 1 L/Imports GNFS 8.9 7.7 6.3 7.7 7.0 6.64/

Thtal IYadeExports CNFS 5.3 7.7 4.5 7.7 5.6Inports GNFS 8.8 9.8 5.3 9.9 6.3

a/ Based on information provided by the Ronnian goverrment and Bank estimates.b/ World Developnent Report 1983. Projections for exports of middle-inccme,

oil-inporting countries are 4.7% for 1982-85 and 8.8% for 1985-95.c/ Includes all non-oil convertible currency imports.d/ Non-market industrial econonies, 1970-80.

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Table 12: (X)NVERTIBLE CIRRFNCY BAIANCE OF PAVI PRQIECTIoN1S(US$ Millions, current prices)

Scenario I Scenario TI1983- 1986- 1988- 1983- 1986- 1988-

1982 1985 1987 1990 1985 1987 1990

Exports G&S 6815 8920 11575 15220 8940 11815 16040Inports G&S 6160 7960 10385 14170 7980 10730 15295Current Account

Balance 665 960 1190 1050 960 1085 745

MLT Disbursements 3369 340 55 25 340 980 1070MLT Anortizations -2436 -780 -740 -250 -780 -790 -00Net Short-tern

financing -277 -320 0 0 -320 100 100Other financing (net) -436 145 550 0 145 0 0Net IMF 301 120 -275 -130 120 -275 -130

Change in reserves -1180 -50 -50 -430 -50 -300 -600addition)

3.14 The assumptions made for the growth of exports and imports wouldresult in a current account surplus of $1 billion as an average during the1983-1985 period in both scenarios. Medium and long-term disbursements--mainly from the IMF and disbursements on existing World Bank commitments--isassumed to average about $350 million and amortization of outstanding debt toamount to about $800 million in both scenarios during the same period. Forthe years 1986 and 1987, a further improvement of the current account surplusto about $1.1-1.2 billion as an average is projected in the two scenarios.However, in Scenario I, external capital inflow is projected to dropdrastically to only about $50 million on the average these years, whileamortization payments will stay high as repayments of principal on debtsrescheduled in 1982 and 1983 become due. Partly the situation is assumed tobe met by making allowance for reductions in the reserve ratio to a very lowlevels. In addition, external financing of about $500-600 million will berequired in 1985 and 1986; in Scenario I, it is assumed that this will beachieved in the form of rescheduling of debts dues in these years. Under theassumptions made in Scenario I, all outstanding debts (except World Bankloans) will be paid off by 1988. This is expected to result in a significantimprovement of the financial situation during the last two years of thedecade; with the current account surplus averaging about $1 billion a year,the projected reduction of amortization payments to only $250 million per yearin 1989 and 1990 will result in a potential for rebuilding reserves and/orincreasing imports in these years. Scenario II, in contrast, assumes that

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Romania will be able to raise about $1.0-1.1 billion per year during thelatter part of the 1980s in borrowing from international capital markets withdebt service ratio averaging about 12% in these years, thus--again in contrastto Scenario I--being able to meet debt repayments also in the strained timesin 1985 and 1986 without further rescheduling. This would also offset aprojected reduction of the current account surplus to about $750 million bythe end of the decade and make it possible for Romania both to meetamortizations amounting to about $600-800 as well as build up internationalreserves during the 1986-1990 period.

Table 13: DEBT SEICE PAYMTS IN ODNVEMIF CURENCIES, 1982-1990(US$ millions)

Actual Projected1982 1983 1984 1985 1986 1987 1988 1988 1990

Scenario I

Total 3243 2458 2088 2294 2030 1804 1275 389 247Principal 2436 1680 L348 1646 1514 1442 1060 281 165

of which:Tbrld Bark (net) -340 -42 21 79 110 120 130 150 157

Interest 807 778 740 648 516 362 215 108 83Exports GSS 6815 8065 8834 9883 10955 12197 13616 15237 16805Debt Service Ratio (x) 26.7 1/ 30.5 23.6 23.2 18.5 14.8 9.4 2.6 1.5

Scenario II

Tbtal 3243 2458 2088 2294 2030 2084 1903 1339 1405Principal 2436 1680 1348 1646 1514 1642 1523 1007 1091

of which:World Bank (net) -340 -42 21 79 110 120 130 150 157

Interest 807 778 740 648 516 442 380 332 314Exports G&S 6815 8066 8836 9913 11105 12525 14166 16049 17916Debt Service Ratio (%) 26.7 1/ 30.5 23.6 23.1 18.3 16.6 13.4 8.3 7.8

1/ Debt service ratio after rescheduling.

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STATISTICAL ANNEX

I

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SAISTICAL IXE

STANDARD TABLES /1

1. Mational Accounts Suumoary (Billion Lei at current prices)3. Balance of Payments (Millions of US$ at current prices)

I. IOPUIATION AND EUPYMENT

1.1 Population, 1975-19821.2 Demographic Irndicators, 1975-19821.3 labor Force, 1975-19821.4 Labor Force Structure, by Sector, 1975, 1980-19821.5 Iniustrial mnployment, by Subsector, 1975, 1980-19821.6 Labor Fcrce Structure, by Educational Level, 1975, 1980-19821.7 Average bnthly Wage, Net of Tax, by Sector, 1975-1982

U. NMONAL AXDLNS

2.1 C)P by Origin, 1975-19822.2 (DP by Expenditure, 1975-19822.3 Gross Fixed Capital Fonmation by Econxnic Sector, 1975-1982

III. BALAN OF PAENIS AN) DRADE

3.1 Balance of Payments, 1975-19823.2 Balance of Payments, Convertible COrrenxy, 1975-19823.3 Commodity Ccnposition of Exports, 1975-19823.4 Ccmmodity Canposition of Imports, 1975-19823.5 Exports by Major Trading Partners, 1975-19823.6 Imports by Major Trading Partners, 1975-19823.7 Service Receipts and Payments, 1976-19823.8 Implicit Exchange Rates for Selected Products of Convertible Ourrency

Trade, 1975-1982

IV. EKrEWAL DEBT

4.1 External Debt Outstanding, 1978-19824.2 Projected Service Payments on Convertible Exteral Debt

V. RIBLIC FINAN21E AND INVESTMENr

5.1 State Budget Revenues and Expenditures, 1975-19825.2 Finarnial Sources of Investmnts, 1976-19815.3 Credit and Deposit Interest Rates, 1975, 1980 and 1983

/1 The standard National Accounts Sumnary table in constant prices has notbeen prepared due to lack of deflators.

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VI. AGRIWLTURAL STIISlICS

6.1 Production of Principal Agricultural Goods, 1975-19826.2 Principal Ildicators for Agricultural Mechanization, 1975-19826.3 Livestock, 1976-19826.4 Average Yield of Main Agricultural Products, 1975-19826.5 Ecports and Imports of Agricultural Products and Foodstuffs, 1975-19826.6 Exports and Tiports of Main Agricultural Products, 1978-1982

VII. INDUSIR

7.1 Gross Industrial Production, by' Subsector, 1975-19827.2 Industrial Investnent, by Subsector, 1975-19827.3 Production, Consumption, Exports adl Imports of Oil aid Oil Products,

1975-1982

VIII. PRICES

8.1 Retail Price Indices of the Socialist Sector, 1971-19828.2 &nergy Prices, 1980-1983

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Table 1: NATI(NAL AXIJNTS SNMARY(Billion lei, current prices)

1975 1976 1977 1978 1979 1980 1981 1982

GIss Dansic Product 1/ 437.0 490.9 512.9 552.1 598.6 619.9 642.2 746.6Adjustmert 0 1.4 -8.5 -1. 1 -7. 7 -5. 7 1.4 3.4

Besoume Gap (+-X) 3.7 -2.0 3.2 10.0 15.9 18.0 -2.5 -27.1Inports (g+nfs) n.a. 130.1 137.9 157.6 140.4 149.7 180.0 150.4Exports (g+nfs) n.a. 132.1 134.7 147.6 12/4.5 131.7 182.5 177.5

Total Expenxlitures 1/ 440.7 490.3 507.6 561.0 606.8 632.2 641.1 723.2

Cbnstuption 2/ 264.1 287.2 303.5 336.3 370.0 396.9 424.0 487.4

Inxestment 176.6 203.1 204.1 224.7 236.8 235.3 217.1 236.2Fixed Inxestmert 145.8 153.9 171.2 198.5 206.8 212.8 209.3 216.3Chares in Stocks 30.8 49.2 32.9 26.2 30.0 22.5 7.8 19.9

Domestic Savirg 172.9 203.7 209.4 215.8 228.6 223.0 218.2 259.9Net Factor Incans n.a. -2.3 -2.4 -2.8 -4.4 -6.5 -13.8 -12.20Lwrertt Transfers 0 0 0 0 0 0 0 0

National Savirg n.a. 201.4 207.0 213.0 224.2 214.5 204.4 245.9

Average Echarge RatesLei per USt 18.55 19.89 18.31 16.91 12.29 10.90 13.56 14.33Lei per SDR 24.283 23.09 23.35 22.987 23.256 23.428 17.687 16.56

1/ Total expenditures and resource gap do not add up to WDP due to foreign currerry evaluation for exportand inport.

2/ No brealaown in private and public cormaption is available.

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Table 3: BAIANE CF PANENTS(Millions of US$, crrent prices)

1975 1976 1977 1978 1979 1980 1981 1982

EXOIrS (g+nfs) n.a. 6642 7357 8728 10133 12087 13462 12384Mrchandise (FOB) 5341 6134 6859 8022 9303 11024 12367 11559Non-factor services n.a. 508 498 706 830 1063 1095 825

DIPORTS (g+nfs) n.a. 6540 7529 9319 11428 13730 13278 10493Mercharniise (ELB) 5342 6087 7002 8628 10519 12685 12264 9745No-factor services n.a. 453 527 691 909 1045 1014 748

RESURCE BAIANE n.a. 102 -172 -591 -1295 -1643 184 1891

Net Factor Irraine n.a. -118 -132 -168 -358 -777 -1017 -851Factor Receipts n.a. 37 50 56 77 73 113 119Factor Payments n.a. 155 182 224 435 850 1130 970

Net Current Transfers - - - - - - - -

Transfer ReceiptsTransfer Paymnts - - - - - - -

iURT' &AIANZE -135 -16 -304 -759 -1653 -2420 -833 1040

N&LT CAPITAL INLOWDirect InvestAit - - - - - - -

official Grant Aid - - - - - - - -

Net M&LT Lans 437 240 299 588 1256 1954 1027 1041Disbursemnts 817 742 861 1174 2065 2805 2160 3230Repayits 380 502 562 586 809 851 1133 2189

Other NLT (net) -149 -392 -358 -346 -309 -181 -175 -281

Net Credit froml F 48 181 38 -20 -8 52 290 301Disbursements 48 181 85 49 55 158 406 346Repayneits - - 47 69 63 106 116 45

Net Short-term Capital -266 -124 -73 580 821 449 -1385 -478Capital Flaos NEI 1/ 44 163 101 103 129 -14 10 -56

Errors and Cnissions 9 - - 13 -68 n.a. 37

Ca1age in Reserves 2/ -8 -45 306 -121 -149 202 -80 1143(-indicates ircrease

1/ Include SDR alncAtion and payit agremits aId 1C.2/ Includes foreign exh and S)R boldings.

- 65 -

Thble 1.1: POULATION, 19751982(Thuxnds)

Year Total Male Female Urban Rural

1975 21245 ]D460 10785 9182 12063

1976 21446 10565 10881 9404 12042

1977 21658 10678 10980 10362 11295

1978 21855 10778 11077 10626 11228

1979 22048 10875 11173 10734 11315

1980 22201 10953 11248 11015 11186

1981 22353 11030 11323 11194 11159

1982 22478 11092 11386 11576 10902

Suie: Statistical Yearbook and data supplied by the omanian authorities.

- 66 -

Table 1.2: DEMOGRAPIC ]NDICAMRS, 1975-1982

Rate of tge StructureBirth Death Natural Urder 16 16-64 Above 64

Year Rate Rate Increase years years years(Per 1,000 inba1bitants) Percert

1975 19.7 9.3 10.4 26.8 63.6 9.6

1976 19.5 9.6 9.9 26.8 63.4 9.8

1977 19.6 9.6 10.0 27.0 63.0 10.0

1978 19.1 9.7 9.4 27.3 62.5 10.2

1979 18.6 9.9 8.7 27.6 62.2 10.2

1983 18.0 10.4 7.6 27.9 61.8 10.3

1981 17.0 10.0 7.0 28.2 61.7 10.1

1982 15.3 10.0 5.3 28-4 61.7 9.9

Sounze: Statistical Yearbook and data supplied by Raoanian authorities.

- 67 -

Table 1.3: IA13R FORCE, 1975-1982(Thdusands)

EcoamicallyPopulation of Workirg Age / Actiwe Participation

Year Total Male Fenale Population Rat e_ rotal) (Total)

1975 13518 6667 6851 10151 75.1

1976 13593 6712 6881 10227 75.2

1977 13640 6744 6896 10264 75.2

1978 13666 6765 6901 10290 75.3

1979 13706 6789 6917 10320 75.3

1980 13728 6807 6921 10350 75.4

198L 13792 6843 6949 10376 75.2

1982 13865 6882 6983 10428 75.2

1985 n.a. n.a. n.a. 11050 n.a.

Souxre: Statistical Yearbook anxd data supplied by Roxmanian authorities.1/ Age gtoups 16-64.

-. 68 -

Table 1.4: LA1)R O)RCE SIRUCTUEE, BY SE1R, 1975, 1980-1982(Thousands)

1975 1980 1981 1982

Occjied Population 10150.8 10350.0 10375.5 10428.1of which:

Industry 3109.7 3678.7 3748.6 3810.9

Cbnstruction 825.5 857.6 797.8 803.3

Agriculture 3837.4 3048.1 3002.8 2986.1

Fosestry 26.5 39.5 36.2 36.4

Transportation 431.8 629.8 658.2 650.7

TelecDiminication 68.7 79.9 82.9 82.3

Retail Trade 558.7 619.9 619.6 615.3

biicipality 348.7 390.9 397.6 407.3

Education, culture, art 408.6 430.5 435.5 428.7

Sientific, research, tech.develpmert 77.3 98.3 106.5 115.5

1ealth, Social assistaxce 267.3 281.7 285.8 290.0

Amiiiuistration 67.6 64.8 6&.5 62.3

Oter branches 123.0 130.4 139.5 139.3

Source: Statistical Yearbook and data sWplied by Rommaian authorities.

- 69 -

Table 1.5; ]H)USJRTAL EKPLOlMT BY SUBSE1R 1/, 1975, 1980-1982(lbousands)

1975 1980 1981 1982

Total 2802.1 3329.2 3397.1 3469.5

Elect. & themnal power 41.9 44.4 45.5 48.1

Fuel 101.5 124.5 124.0 127.5

Fermous metallurgy 96.6 130.7 140.6 140.1

NDn-ferrus metalluxy 73.7 79.3 81.0 78.9

Ergineerirg arnd metalworkirg 912.2 1186.0 1212.1 1247.4

Chnicals 191.8 224.5 232.5 246.4

Construction materials 121.5 130.9 127.1 125.5

lumber & wood processirg, 348.6 352.4 356.1 364.3pulp and paper

Textiles 317.1 386.5 402.3 412.1

Glothirg 179.6 203.0 201.8 205.3

Leather, fur & footwear 102.7 119.9 125.6 130.0

Food processirg 215.0 228.0 219.0 216.2

Other 99.9 119.1 129.5 127.7

Souxre: Statistical Yearbook and data stpplied by the Rmianian autborities.1/ State and cooperative erterprises; iri:ludirg private sector.

- 7C -

Table 1.6: IABOR FORCE SIUMBU1E, BY EDUGATICNL LE¶.L 1/, 1975, 1980-1982(ThMusards)

1975 1980 1981 1982

Total Persomel 6201 7340 7435 7553

Workers 4994 5869 5974 6027

Skilled 3790 4861 n.a. n.a.Ibn-skilled 1204 980 n.a. n.a.

Tehnical + adninistratiw 1063 1294 n.a. n.a.staff of which:

Higber educ-ation 398 526 n.a. n.a.Seordary eduration 688 768 n.a. n.a.

Other categories of staff forwhich spa ialized studiesare not required 22D 235 n.a. n.a.

Source: Data supplied b the Rxmanian authorities.1/ Excludirg enploynert in agricultural ccxperatiwes and private sector.

- 71 -

Table 1.7: AVERAGE MhNTELY WAGES, NET OF TAX, BY SCDDR, 1975-1982

tLei)

1975 1976 1977 1978 1979 1980 1981 1982

Industry 1602 1694 1815 2019 2118 2307 2342 2540

Agriculture 1531 1688 1868 1994 2060 2160 2286 2454

Forestry 1387 1533 1545 1713 1822 1954 2041 2088

Cbnstruction 1838 1907 2081 2274 2346 2494 2658 2880

Transport 1640 1815 1864 2144 2208 2267 2472 2665

Telecommunications 1338 1527 1551 1775 1820 2011 2038 2217

Trade 1364 1526 1559 1704 1835 1863 2023 2157

l'kmicipal Services 1408 1543 1609 1789 1867 1916 2067 2272

Education, Culture & Art 1570 1722 1773 1923 2084 2138 2320 2492

Scierce and Research 1767 1905 2013 2261 2316 2420 2573 2719

Public Health 1441 1614 1673 1826 1958 2009 2190 2347

Total 1595 1712 1818 2011 2108 2238 2340 2525

Source Statistical Yearbook and data supplied by the Romanian autborities.

- 7'2 -

Table 2.1: GDP BY ORIGIN, 1975-1982(Billion lei, current prices)

1975 1976 1977 1978 1979 1980 1981 1982

Curmit Prices

GDP 437.0 490.9 512.9 552.1 598.6 619.9 642.2 746.6

Irxnustry 235.6 260.4 265.1 288.5 312.8 322.4 324.6 375.2

Agriculture & Forestty 63.7 80.3 75.0 76.1 80.9 80.1 91.8 132.4

Cbnstruction 30.4 32.2 49.1 51.2 51.8 48.8 48.0 48.7

TranWort & Comunication 25.4 26.5 30.0 33.6 35.4 44.3 45.4 49.5

Trade 24.4 28.0 29.2 31.4 34.7 36.3 38.2 39.4

Other 57.5 63.5 64.5 71.3 83.0 88.0 94.1 101.4

CbnOtart (1977) Prices

G]DP 428.3 477.1 512.9 553.9 590.7 610.2 626.5 646.7

Industry - - 272.3 299.4 314.0 331.2 362.3 373.5

Agriculture & Forestry - - 77.9 81.5 74.3 64.4 69.7 75.5

(bnstruction - - 51.1 51.7 48.8 53.5 52.2 52.4

Other - - 111.6 150.7 165.8 138.6 142.3 145.4

SDurce: Ecornnic Mexrmidum 1983 and data suplied by the Ranian authDrities.

- 73 -

Table 2.2: GDP BY EXTfMITUE, 1975-1982(Billion lei, curment prices)

1975 1976 1977 1978 1979 1980 1981 1982

Qirent prices

GDP 437.0 490.9 512.9 552.1 598.6 619.9 642.2 746.6

(bnsuaption 264.1 287.2 303.5 336.3 370.0 396.9 424.0 487.4

Grnss Dorcstic FixedInestmernt 145.8 153.9 171.2 198.5 206.8 212.8 209.3 216.3

Charges in Stocks 30.8 49.2 32.9 26.2 30.0 22.5 7.8 19.9

Net Exports /1 -3.7 0.6 5.3 -6.9 -8.2 -12.3 1.1 23.0

(bnstart (1977) Prices

GDP 428.3 477.1 512.9 553.9 590.7 610.2 626.5 646.5

(bnsuaption 259.5 282.9 303.5 331.4 356.2 367.8 374.8 370.3

Goss Domestic FixelInescert 341.3 153.0 171.3 198.4 206.5 212.9 196.8 190.7

harges in Stocks 25.5 43.4 32.9 38.6 30.1 22.7 7.3 15.0

Net Exports /1 2.0 -2.2 5.2 -14.5 -2.7 7.7 47.6 70.5

SDume: Economic Meaoaraium 1983./A Goods and non-factor services. Iludes errors arxi omissiom.

7 74 -

Table 2.3: GIOSS FXED CAPITAL FORMATION BY EXNMIIC SEL1R, 1975-1982(illion lei)

1L977 coirpamble prices (wmnt prices1975 1976 1977 1978 1979 1980 1981 1982

Total 139674 151567 169260 196294 204368 210451 207954 216354

Iriustry 66125 69350 80673 97164 104321 107058 105490 101545Producer goods 56339 58578 68874 84071 90594 89880 89717 88447Cbnsumer goods 9786 10772 11799 13093 13727 17178 15773 13104

Corstnction 6343 9194 10747 12738 12745 9652 7218 8312

Agriculture 18940 21236 23855 26540 26024 27244 32090 32818

Forestry 558 632 650 762 809 764 731 869

Transport 13475 14433 15797 18228 18496 23606 19332 25569

Telecamxnications 1291 1589 1728 1680 1881 1680 1299 1414

Trale 5233 5974 5381 5421 4591 4567 4866 5701

Municipal services, bousirg, andother non-=ductive services 20419 21974 22903 26462 28470 28391 30822 33405

Hbusirg only 16085 16108 16475 19333 21398 21930 23451 26206

Eduzation, culture ard arts 2963 3029 2973 2881 2524 2761 1977 2048Education 2578 2534 2440 2348 2070 2239 1609 1553Culture and arts 385 495 533 533 4.54 522 368 495

Sciemre and sriertific services 869 959 1162 1200 1122 L349 1239 1135Public health, social assistane

and physical culture 1523 1375 1450 1251 962 1050 1091 1286

Ad3ministration 971 1375 1650 1449 1403 1218 1117 1440

Other bram1es 954 447 291 518 1020 1111 682 812

Sourre: Statistical Yearbook and data stpplied by the BPznanian autborities.

- 75 -

Table 3.1: BAIANE (CF BAY2iTIS, 1975-1982(Million US dollars)

1975 1976 1977 1978 1979 1980 1981 1982

Goods and servicesCmnmdity trade

Exports (f.o.b.) 5341 6134 6859 8022 9303 11024 12367 11559Imports (f.o.b.) -5342 -6087 -7002 -8628 -10519 -12685 -12264 -9745

Trade balarre -1 47 -143 -606 -1216 -1661 +103 +1814

ServicesServices, net -134 -63 -161 -153 -437 -759 -936 -774

Curernt acount -135 -16 -304 -759 -1653 -2420 -833 1040

C.TitalEediun & lorg-termboriowirg, net 437 240 299 588 1256 1954 1027 1041

Credits rezeivd 817 742 861 1174 2065 2805 2160 3230 2/Repaymerts -380 -502 -562 -586 -809 -851 -1133 -2189 2/

Mdium & lorg-tennlendirg, net -149 -392 -358 -346 -309 -181 -175 -281

Crelits extended -192 475 485 483 486 382 441 238Repaymetts 67 -63 -127 -137 -177 -201 -266 -519

Short-tern capital, net -266 -124 -73 580 821 449 -1385 -478SDR allocation - - - - 33 33 32 -12

Use of ME ctedit 48 181 38 -20 -6 52 290 301Paymert agreemets & IBEC 44 163 101 103 96 -47 -22 -44

Errors and omissions 9 - - 13 -68 - n.a. 37

Charge in reserves 1/ -8 -45 306 -121 -149 2)2 -60 -37

Soume: EFcorxiic Memrandum and data provided bXr the Ranaian authorities.1/ I udies foreign excharge and SDR holdirgs.2/ Irxrludirg mscbiduled debt repaywets.

- 76 -

Table 3.2: BAIANuE CF BUY3IS, (XCaVERnII CUE£Y, 1975-1982(Million US dollars)

1975 1976 1977 1978 1979 1980 1981 1982

Goods and servicesComnodity trade

Exports (f.o.b.) 2839 3403 3700 4040 5363 6503 7216 6235Inports (f.o.b.) -2950 -3327 -3783 -4632 -6518 -037 -7012 -4710

Trade Balane -111 76 -83 -592 -1155 -1534 204 1525

ServicesServices, net -149 -137 -190 -187 -513 -865 -1022 -870

Ormrert Account -260 -61 -273 -779 -1668 -2399 -818 655

CapitalYediun & lorg-tennborrowirg, net 440 258 282 585 1251 192D 1001 1052

Credits rexeived 810 740 843 1167 2050 2747 2107 3203Repaynmts -370 -482 -561 -582 -799 -897 -1106 -2151

Medium & lor-teimlendijg, net -55 -237 -191 -201 -186 -110 -105 -150

Credits extended -78 -259 -247 -299 -287 -214 -246 -293Reaymerts 23 22 56 98 101 104 141 143

Short-temn ceital, net -147 -89 -153 549 813 344 -1466 -277SDR allocation - - - - 33 33 32 -12Use of IF Credit 48 181 38 20 -8 52 290 301Paymert greemeits & IEfC - - - - - - - -

Errors axxn oissions 24 - - -1 -76 - n.a. 35

Qiarge in reserws 1/ -12 -45 306 -121 -159 199 -77

Soume: Econamic Memorardum and data prvvided by the RPnian authorities.1/ Ir.ludes foreign exchage and SDR holdirgs.2/ Ir.cluding mescbduled debt repaimnts.

- 77 -

Table 3.3: CaXIDr3Y tO)SITICN OF EXKPO1IS, 1975-1982(Million US dollars, f.o.b.)

1975 1976 1977 1978 1979 1980 1981 1982

Total Exports 5341 6134 6881 8056 9724 11209 12610 11559

Mdhinery & Equiprint 1352 1576 1851 2288 2548 2791 3657 3822

Fuels, Minerals & Itals 1191 1479 1431 1805 2840 3307 3507 2785

beumlicals, Fertilizers& Rubber 577 509 593 741 864 1087 1185 1143

Biilding ?Uterials 155 184 206 209 224 246 252 258

Vegetable & AnimalRaw Iterials _/ 336 399 385 459 486 538 567 499

Paw 1-hterials forFood Productiao 304 386 406 371 243 471 441 251

Other Foodstuffs 566 595 860 781 934 953 1021 866

Industrial ConsunerGoods 860 1006 1149 1402 1585 1816 1980 1935

Source: Eonic 1M9mandLm, 1983.1/ Includes live animals.

- 78 -

Table 3.4: O YDDrY 0MSrrION OF M SPORIS, 1975-1982(Million US dollars, f.o.b.)

1975 1976 1977 1978 1979 1980 1981 1982

Total Imports 5342 6087 7022' 8640 10915 12818 12457 9745

Mchinery & Eqipuent 1854 1936 2577 3205 3504 3140 2940 2596

Fuels, Minerals & Metals 2041 2495 2627 3257 4737 6447 6054 4913

Chennicals, Fertilizers& Rubber 347 414 435 5790 731 821 772 570

Building Materials 59 73 77 104 120 128 100 88

Vegetable & AnimalRaw Materials 1/ 454 450 541 579 677 744 860 587

Raw Materials forFood Production 267 390 344 415 491 743 822 313

Other Fbodstuffs 117 122 147 181 284 410 473 272

industrial ConsunerGoods 203 207 274 320 371 385 436 406

Smuie: EcornoriLc 1amorandum, 1983.1/ lIcludes live animals.

.f

- 79 -

Table 3.5: EXPORTS BY MAXR TRADIS PAR1ERN, 1975-1982(Million lei, current prices) 1/

Cbuntry 1975 1976 1977 1978 1979 1980 1981 1982

Total Exports 26546.9 30504.5 34684.0 36821.3 43466.6 50962.9 167702.3 151836.7C2fSA Tbtal 2/ 10145.6 11592.9 14499.0 15064.3 15571.4 18971.6 50320.4 48534.2US5R 5278.9 5558.6 6686.8 6469.1 7365.4 9968.7 30284.7 25803.1Germuy, DR 1339.6 2079.5 2570.3 2731.6 2544.8 2970.9 6979.9 6925.8Czechoslavakia 1162.1 1368.8 1883.6 2062.4 1944.5 1842.6 3766.6 4649.3Hangary 872.7 994.5 1151.4 1278.3 1542.3 1481.0 3418.9 3655.9Poland 1012.3 1156.0 1424.6 1833.4 1439.2 1778.9 3556.8 4999.5Bulgaria 480.0 435.5 782.3 689.5 735.2 929.5 2313.5 2500.6

Other Socialist CountriesTotal 2067.7 2399.4 2313.6 3090.3 3787.2 3848.5 10705.5 10911.2China l094.0 1236.8 1188.7 1707.1 2487.1 2236.7 5975.3 6452.7Yugoslavia 676.0 856.8 898.1 932.9 820.2 721.1 2002.2 1467.1Others 3/ 297.7 305.8 226.8 450.3 479.9 890.7 2728.0 2991.4

Developed Market EcoraniesTotal 8225.0 9406.5 9623.6 11041.5 14362.7 16294.7 50296.5 43961.0Gernany, F`R 2192.3 2623.9 2547.8 2931.6 4020.0 4343.0 12073.0 12056.8United States 485.5 944.1 1368.3 1726.7 2118.9 1857.1 8192.3 4930.8Italy 1123.6 1001.6 1050.9 1208.3 1775.5 2936.6 5599.7 5212.3Nietherlands 594.6 781.2 748.9 819.0 1403.3 1597.0 3980.0 2678.3Frame 747.9 890.9 867.4 941.9 1314.8 1549.9 6234.6 4715.5United Kirgdcn 624.2 745.3 660.2 890.7 977.0 763.9 3526.5 2899.2Aistria 597.9 685.6 637.9 690.2 741.6 731.5 3370.1 2640.39witzerland 712.2 510.7 563.2 613.7 558.1 933.4 3037.9 5699.0Others 1146.8 1223.2 1179.0 1219.4 1452.5 1582.3 4282.4 3128.8

Developirg CountriesTotal 6108.6 7105.7 8247.8 7625.2 9745.3 11848.1 56379.9 48430.3Algeria 178.6 205.8 416.0 290.7 437.1 339.6 776.3 1574.7Egypt 367.2 346.5 402.4 593.0 984.6 1190.8 4392.0 3147.1Greece 416.9 681.0 535.7 613.7 801.2 1144.3 4270.7 3307.6Iran 811.2 928.1 1053.6 818.6 578.7 1086.8 6215.0 6730.9Iraq 325.1 156.5 82.8 147.8 290.3 855.6 14596.5 12315.9Lebanon 384.0 342.9 539.0 560.5 699.3 888.0 3177.0 2164.7Ilya 582.0 565.8 664.0 707.5 509.7 499.7 3676.1 2200.5Syria 305.9 776.9 1123.7 819.5 789.4 806.6 1906.6 797.5%rkey 227.5 519.7 439.4 516.1 997.7 1233.4 4248.6 1991.0Others 2510.2 2582.5 2991.2 2557.8 3657.3 3803.3 13121.1 14200.4

Soume: Statistical Yearbook.1/ 1975-1980 lei valuta; 1981 and 1982 lei.2/ l=cluding Albania, C-iba, Vietnam and Mrgolia.3/ includirg Albnia, Cuba, Vietnmn, People's Republic of Korea and Mbrgolia.

- 80 -

1&ble 3.6: 1 Y BY MAUR PADIN PARIFRS, 1975-1982(Million lei, current prices) V/

(buntry 1975 1976 1977 1978 1979 1980 1981 1982

Total limports 26548.5 30293.9 34879.4 40618.9 48792.0 59006.2 164670.8 124850.6CWA Ibtal 2/ 9766.8 12005.9 14490.6 14947.3 16496.1 18L13.9 51578.0 46177.9Bulgaria 543.1 653.9 1046.1 922.8 988.6 1084.1 2792.8 2651.8Czechoslovakia 1284.6 1316.2 1730.0 1964.5 2128.1 1929.3 4303.0 4522.2Germany, DR 1569.4 2174.2 2535.3 2825.2 3112.2 2634.1 6905.3 7592.4Higary 730.8 981.9 1143.8 1205.0 1516.5 1561.4 3334.2 3203.0Poland 1060.3 1574.6 138D.8 1509.0 1586.3 1682.8 4284.7 5217.5USSR 4578.6 5305.1 6654.6 6520.8 7164.4 9222.2 29958.0 22991.0

Other Socialist CountriesTotal 1791.7 1761.2 2071.9 2784.9 3366.3 4201.5 9576.9 8251.9China 1070.4 1003.6 1357.7 1893.5 2233.8 2796.6 5936.9 5127.2Yugoslavia 533.8 545.9 492.6 636.1 707.6 926.5 1915.0 1833.3Others 3/ 187.5 211.7 221.6 255.3 424.9 478.4 1725.0 1291.4

Developed Market EconmiesTotal 10762.3 10516.1 12318.3 14659.3 16588.4 17484.2 50064.9 26170.9Austria 894.9 940.2 984.2 1159.8 1286.3 1197.0 2882.8 2009.5Frarre 941.3 1266.0 1188.2 1479.5 1773.7 1473.3 7133.7 2121.7Gernmy, FR 2846.8 2020.5 2653.4 3299.8 4322.1 3782.3 9376.3 6079.7Italy 1149.8 954.8 83L.6 1137.0 1364.0 1232.2 3362.1 2036.6Japan 835.4 680.7 1253.9 1207.9 907.4 946.1 2913.3 1631.4Netherlands 424.5 485.6 512.7 705.2 662.6 868.5 1807.9 1150.7Switzerland 1356.3 828.8 1388.6 1138.6 588.5 488.8 1585.5 1243.6United KiTgdcm 879.2 823.3 984.8 947.8 865.4 1112.1 3921.0 3340.1Uhited States 688.6 1375.4 1427.4 2161.9 2930.3 4365.4 12840.7 3830.8Others 745.5 1140.8 1093.5 1421.8 1888.1 2018.5 4241.6 2726.8

Developing (hntriesTotal 4227.7 6010.7 5998.6 8227.4 12341.2 19206.6 53451.0 44249.9EFypt 359.4 140.5 86.6 120.7 285.4 963.5 1665.4 3151.5Greece 213.4 226.9 239.1 657.0 274.5 392.4 1295.7 1152.0Iran 890.9 1506.1 1466.4 1083.1 1616.7 3086.9 11655.3 11107.0Iraq 34.8 855.6 1036.7 1963.6 4150.9 4300.6 5462.3 4645.9Libya 351.3 707.6 452.6 1148.8 1315.0 1860.1 5395.9 4311.4Others 2377.9 2574.0 2717.2 3254.2 4698.7 8603.1 27976.4 19882.0

Source: Statistical Yearbook and data supplied by the Pom9ian authorities.1/ 1975-1980; 1981 and 1982 lei.2/ lding Albania, Qiba, Vietnam and Mxolia.3/ Icludirg Albania, Cuba, Vietnan, People's Republic of Korea and MorKolia.

- 81 -

l'ble 3.7: SE^ICE RECIPTS AND PAYME;NI, 1976-1982(Million US dollars, current prices)

1976 1977 1978 1979 1980 1981 1982

lon-factor services, net 55 -29 15 -79 18 81 77

1eceipts, total 508 498 706 830 1063 1095 825Tourian 167 161 247 303 324 303 203Transportation and

telecarmunications 203 245 336 367 444 523 447Other services 138 92 123 160 295 269 175

Pay nents, total -453 -5 27 -691 -909 -1045 1014 -748lburism -4 -34 6 -63 74 -73 -67 -84Ttansportation and

Telecomiunications -306 -3 58 -471 -744 -892 -881 -603Od-er services -93 -135 -157 -91 -80 -66 -61

Interest on debt, net -118 -132 -168 -358 -777 -1017 -851

leceipts 37 50 56 77 73 113 119Paynents -155 -182 -224 -435 -850 -1130 -970

¶btal services, net -63 -161 -153 -437 -759 -936 -774

Source: Data supplied by Paanian authorities.

- 82 -

Table 3.8: IMPLICIT EKCHANEE RATES FOR SnLECED PRODUCTS OF ClNVEREINIR CURIENCY TRADE, 1975-1982(Lei per US dollar)

1975 1976 1977 1978 1979 1980 1981 1982

Exports 18.84 19.93 18.51 17.26 12.74 12.16 14.50 14.77

MBat 24.65 20.97 19.93 18.80 17.65 17.56 17.00 15.00Wheat 9.34 11.8B 19.48 15.44 12.93 - 12.00 15.00Edible oil - - - 11.03 10.04 12.70 11.00 12.00Cement 16.10 16.94 13.62 11.32 9.04 9.67 12.00 12.00Diesel oil - - - 7.39 5.86 5.83 11.00 12.00Gasoline 13.47 11.33 10.59 8.52 6.88 6.79 11.00 12.00Chemical fertilizer N 46% 8.70 17.64 18.24 15.02 12.77 9.43 10.50 12.00Processed PVC 25.44 22.0'S 20.77 19.91 19.14 17.88 16.50 16.50Textiles, iEn's ready-to-wear suits 27.36 27.89 27.18 26.85 25.12 24.65 22.00 22.00leather footwear 27.11 26.77 26.16 26.00 21.36 17.76 16.00 16.00H!diunm, thick steel sheets 20.28 22.30 18.69 14.91 13.23 12.43 15.00 15.00Equipment ard installations for drillirgexploitation 11.62 7.73 8.59 7.37 5.48 5.44 8.00 12.00

Equipfent for the chemical inmustry - - - 12.71 9.14 13.05 15.00 15.00Pipes for constnrction & installations - - - 17.08 14.17 12.88 15.00 15.00Tractors 19.86 20.54 21.078 20.83 19.75 19.20 18.50 18.00Trucks - - - 22.02 20.07 19.10 18.00 18.00Railroad cars - - - 17.03 17.00 18.22 18.00 17.00Furniture 27.78 26.95 23.70 19.85 18.29 17.89 17.50 17.50Alumidm (block) - - - 14.14 9.88 9.09 11.50 13.00

1 lImports 18.28 19.86 18.12 16.60 11.92 9.88 12.60 13.75

Citrus fruits 30.61 28.33 25.50 23.30 18.15 16.32 15.00 15.00Cocoa 17.86 22.15 22.66 17.16 16.44 17.08 15.00 15.00&ii*ur 17.44 21.92 21.10 18.09 17.20 16.15 15.00 15.00Iron ore 17.57 19.72 19.08 16.48 11.97 10.21 14.00 15.00Crude oil 16.67 15.29 13.98 12.70 8.24 7.11 10.00 12.00Cokirg coal 14.92 14.84 14.88 10.09 9.39 9.06 14.00 15.00Ntural nibber 35.44 26.4() 22.14 16.37 14.36 13.15 15.00 15.00Raw hides 25.78 21.07 20.18 16.05 15.50 12.97 15.00 15.00Wood veners, tropica plywood 23.26 27.48 22.69 21.52 19.09 15.85 15.00 15.00Raw cotton 19.28 19.71 19.74 16.46 16.15 14.23 15.00 15.00Copper 43.59 44.13 20.39 18.60 18.69 16.20 15.00 15.00Zirx - - - 23.06 19.17 15.74 15.00 15.00Bauwite - - - 12.83 12.14 10.82 15.00 15.00Alutimm sheets (rolled) 17.94 22.15 21.05 18.03 17.86 15.16 15.00 15.00Finished rolled netal of steel - - - 14.67 14.24 11.10 15.00 15.00

Source. Econonic Memoranrkm 1983.

- 83 -

Thble 4.1: EXITERNAL 1DBT OUTSrANDIN, 1978-1982(Million US dollars, end of period)

1978 1979 1980 1981 1982

Prirnipal outstandirg 5170 7342 9810 10546 9969

GCnvertible 5074 7173 9557 10160 9766

nediun and lorg-tenm 3838 5085 7005 7694 7676Short-term 903 1765 2124 643 1159Arrears -- - - 1143

Sibtotal 4741 6850 9129 9480 8835

Fund Credit 333 323 428 680 931

Nm-ccxvertible 96 169 253 386 203

Soun:e; Data supplied by the Rcmanian authorities.

- 84 -

Table 4.2: PRPJ&ED E1ICE PAYI!NS (CN CaQERIU EMEML IEBT /1(As of Deceber 31, 1982, million US dollars)

1983 1984 1985 1986 1987 1988 anllater

Total 3434 1769 2192 1841 1502 2328

Principal 2544 1039 1582 1391 1182 2028

Interest 890 730 610 450 320 300

Source: Data supplied by Pnanian authorities.1/ Ir-luies srDrt-term debt. De data givien in the table inciriues effects on future

debt service of the reschedulings of 1981 and 1982 debt obligations but excludeseffects of the 1983 rescheduling agreements.

- 85 -

lable 5.1: SATME BUDGET REVENME AND EEEND1TIS, 1975-1982(Billion lei, current prices)

1975 1976 1977 1978 1979 1980 1981 1982

Revenue, Ibtal 238.6 254.5 282.0 300.8 339.3 298.0 280.3 277.6Turnover Tax 42.1 45.0 32.5 34.4 35.7 39.4 34.9 65.3Ftgularization TIx 7.2 5.9 - - - - -Profit Paynents of State

Eiterprises & StateEcon. Org. 45.5 54.9 115.9 129.7 145.4 152.0 141.0 107.0

Other Profit PRyxentsof State TJnits 53.1 48.1 54.8 52.7 75.0 21.4 20.8 18.7

Production Asset Tax 38.6 42.8Duties & Taxes fran

the Population 1/ 20.2 23.8 27.4 33.1 35.4 38.1 40.9 44.7State Social Insurance 17.2 21.6 24.9 28.2 30.0 32.3 34.7 37.6Other 14.6 17.8 26.5 22.7 17.8 14.7 8.0 4.4

Expenditures, TItal 236.2 250.2 280.4 299.3 337.6 296.8 271.8 257.6Financing of theNational Ecoanmy 155.8 165.7 191.1 205.3 241.2 185.1 162.1 149.0

- bwestnmet - 69.7 83.9 100.4 112.9 105.2 92.3 105.4- Operating Expendi-tures & Subsidies 2/ - 96.0 107.2 101.3 128.3 79.9 69.9 43.6

Financing of Socio-Cultural Activities 50.9 55.3 58.5 62.6 65.6 71.0 74.4 82.5

National Defense 9.7 10.6 11.0 11.7 11.8 10.4 10.5 11.3Administration andJlstice 2.7 3.0 3.0 3.2 3.4 3.4 3.7 3.8

Other 17.0 15.6 16.8 126.5 15.7 26.9 21.2 11.1

Reserve Funds - - - - - - -

Souive; Data provided by Romnian authorities.

1/ Includes taxes on agricultural cooperation, taxes on wages and other dutiesand taxes from the population.

2/ Other expenditures for national econoy finarcing.

- 86 -

Thble 5.2: FIWIIAL SOURCES OF INVESIMENIS, 1976-1981(Million lei, current prices)

1976 1977 1978 1979 1980 1981

Investnent in the State Sector 136.0 154.4 179.3 192.3 198.3 n.a.Inrestment in the Obop. £ctor 6.8 7.0 8.0 8.6 9.3 n.a.investment in the Socialist

Sector (1+2) 142.8 161.4 187.3 200.9 207.3 202.8Investments by the popu.lation 8.8 7.9 9.0 3.5 3.2 5.7

Total Investments (3+4) 151.6 169.3 196.3 204.4 210.5 208.5

Centralized State Eldrs 132.5 152.3 177.5 191.8 197.6 193.2of which:

State Budget 69.7 83.9 104.0 112.9 105.2 93.0Depreciation Rid 44.7 38.3 42.3 47.0 52.0 56.9Retained profits of

enterprises 16.4 23.7 17.5 18.4 17.3 23.9Bank Credit 4.4 10.8 9.1 19.1 13.7DBRD (0.7 1.5 2.1 4.0 4.0 5.7Other Basources - 0.5 0.5 0.4 -

Nor-centralized State Furxls 2.6 1.2 1.0 - - -

bOperative Funds 7.2 7.5 8.4 8.7 9.3 9.1Self-finanirg by the population 8.8 7.9 9.0 3.5 3.2 5.7(bntributions of the population 0.5 0.4 0.4 0.4 0.4 0.5

Total Finamirg (6+7+8+9+10) 151.6 169.3 196.3 204.4 210.5 208.5

Souice: IDta provided by Rnemian authorities.

- 87 -

Table 5.3: CEEIXT AND DE)OSET INrEREST RAffS, 1975, 1980, 1983(In percert, effective from January 1 each year)

Normal credits Overdue credits1975 1980 1983 1975 1980 1983

Credits for producrtionand working capital

Industry, transportation, services,technical and material supply,foreign trade 5.0 5.0 8.0 12.0 12.0 12.0

Agriculture 2.0-4.0 2.0-4.0 5.0 12.0 12.0 12.0 1/Construction 2.0 2.0 5.0 12.0 12.0 12.0Domestic trade 3.0 3.0 6.0 10.0 10.0 10.0

Inawstmrt credits

To economic units 2.0-4.0 2.0-4.0 5.0 8.0 8.0 8.0For lack of planned resources 8.0 8.0 8.0 12.0 12.0 12.0To the population for dwellirgs 2.0-8.0 2.0-8.0 5.0-8.0 8.0-12.0 8.0-12.0 8.0-12.0

Credits extended by theNational Bank to Specialized Banks L5 1.5 3.0 - - -

Itterest rates on deposits

Current accoiat 15 1.5 3.0Deposits in accounts for more

than one year - - 5.0Deposits of the population 2.0-5.0 2.0-5.0 3.0-6.0Deposits of savirgs bank in

National Bank 4.75 4.75 5.75Deposits in foreign currenry 2.0-5.0 2.0-5.0 2.0-5.0

Note: The interest rates for credits extended by the barks for replenishmert of the paymentcapacity are 1-2% higher than interest rates for normal credits.

1/ 9% in agricultural cooperatives.

- 88 -

Table 6.1: 1ZfICO (IF PRINJ1I,L ACGICULIUEL 0CDS, 1975-1982(Thousarix tons)

1975 1976 1977 1978 1979 1980 1981 1982

Grains - total 15266 19791 18614 18974 19337 20200 19945 22335of which:

Wieat and rye 4912 6773 6513 6300 4716 6467 5345 6505Maize 9241 11583 10114 10208 12425 11153 11892 12620Barley 952 1231 1859 2307 2044 2466 2571 3052

Sugar beet 4905 6911 6246 5845 6109 5562 5441 6647

Sunf iowr 728 799 807 816 888 817 810 847

Soya 213 213 191 230 383 448 268 361

Flaxc ard hemp 247 327 248 299 239 271 186 187

Fbtatoes 2716 4788 4207 4465 4562 4135 4447 5006

Vegetables 2392 3472 3104 3518 3376 3439 3888 4732

Fruit 1101 1350 14-55 1316 1806 1418 1349 2043

Grapes 1182 1536 1459 1321 1486 1313 1755 2192

Meat (Liweight) 2012 2157 2286 2308 2538 2437 2427 2223

Cow's milk ('000 hl) 40990 44821 48775 50863 51388 49773 45729 42777

Wool 31532 32020 34699 35937 37325 37376 35961 38596

Eggs (millions) 5412 6153 6299 6650 7085 6727 7017 7155

Soure: Statistical Yearbook and Econmic 2Meranxui

- 89 -

Table 6.2: PRITIPATL NDICATRS FOR AG(ICLLTUAL MNEEA LZTI(IN, 1975-198 2

1975 1976 1977 1978 1979 1980 1981 1982

Total Pernel 126383 131540 133147 137119 192115 208518 219385 168955

In%estments, total (million lei) 3185 3629 4137 4794 5558 7841 10082 8926

Ninbers of Machires:

Agric. tractors 88461 91448 100531 101580 137521 140074 148134 151401

Tractor drawn ploughs 76706 77036 82792 82455 107404 102606 104584 110759

Mechanical cultivators 27769 28733 29724 30542 39937 39994 41907 39791

'Cmiral fertilizer spreaders 8691 7803 9110 8372 14647 14999 11876 13209

Mechanical sprayers and dusters 11316 12632 14483 14799 21917 22714 24628 26256

Tractor-drawn grain combines 17337 14244 14633 14411 13820 4137 1578 ...

Maize carbines 1513 1430 1204 1168 1425 918 277 ...

Self-propelled combines 11927 17056 21131 24341 34443 38975 43923 38323

Fertilizers ('000 tons) 929 1105 1025 1111 1217 1114 1083 1077

Soure: Statistical Yearbook and data provided by the Pznanian authorities.

Note: Data for 1981 and 1982 given to the mission is not consistert with correpondirg figures in tieStatistical Yearbook ari Eicounic Mne aium.

- 90 -

Table 6.3; LIVESITXW, 1976-1982(End of Year)

1976 1977 1978 1979 198D 1981 1982

Cattle Thousands 6.126 6.351 6.306 6.551 6.513 6.485 6.303Pigs " 8.813 10.193 9.744 10.337 10.899 11.542 12.464Sheep " 13.865 14.331 14.463 15.612 15.820 15.865 17.288Poultry "i 78.726 91.503 89.019 99.725 95.417 97.800 109.244

Percentage share of total, by owners

Cattle 100 100 100 100 100 100 100State units and cooperatives 57 57 58 59 60 61 61Private sec tor 43 43 42 41 40 39 39

Pigs 100 100 100 100 100 100 100State units and cooperatives 73 67 67 73 76 72 71Private sector 27 33 33 27 24 28 29

Sheep 100 100 100 100 100 100 100State units and cooperatives 54 56 58 58 58 57 52Private sector 46 44 42 42 42 43 48

Poultry 100 100 100 100 100 100 100State units and cooperatives 53 48 56 54 57 57 58Private sector 47 52 44 46 43 43 42

Source: Economic Meirandiu 1983.

- 91 -

Mble 6.4: AVERAGE YIELD CF MAIN A(GICULTURAL PRiiaSS, 1975-1982

1975 1976 1977 1978 1979 1980 1981 1982

Wheat andl rye Ig/ha 2.059 2.788 2.820 2.710 2.203 2.837 2.496 2.970

Maize kg/ha 2.781 3.414 3.038 3.208 3.717 3.390 3.506 4.229

Surflower l/ha 1.425 1.534 1.572 1.595 1.711 1.609 1.602 1.709

Sugar beet kg/ha 19.864 29.442 24.537 23.467 23.615 23.397 19.271 24.741

Grapes lg/ha 3.894 5.072 4.957 4.509 5.623 4.918 6.703 8.472

Lbws Milk Liter/caita 1.636 1.779 1.93) 1.968 1.961 1.901 1.777 1.700

Eggs Pieces/caita 139 147 147 155 159 160 159 161

wool kg/capita 2.3 2.4 2.5 2.6 2.6 2.6 2.6 2.6

Source: Econonic Memorarndun 1983.

- 92 -

Table 6.5: EXIURES AND IMEUS CF AGRICtLLTUAL PRMUIfS AND RXDSIUFFS, 1975-1982(Volum! terms)

1975 1976 1977 1978 1979 1980 1981 1982

ExportsMeat anl meat prodtxts thousan tons 165 165 194 158 225 191 206 136Cereals 1.164 1.633 2.052 1.853 629 1.720 1.595 1.147Cheese 6 8 8 11 8 9 4 5Fzesh vegetables 151 176 198 193 185 193 169 140Camed vegetables I 49 59 92 67 61 72 71 64.Fresh fruits 50 31 104 77 39 43 46 45Canned fruits 59 65 101 93 90 83 83 72Eggs millions 40 553 582 391 433 269 286 147Animal grease tlousard tons 21 29 38 43 30 19 47 15Edible oil 141 87 158 131 146 84 82 107Wine 84 71 87 91 90 103 83 85

InportS

Fodder 353 243 293 220 341 382 651 170Fish and fish products " 30 31 22 25 24 36 26 24Rice 62 58 38 62 67 57 56 62Cocoa 13 14 12 14 14 12 11 6Citric fruits 71 81 83 86 88 96 94 96Sugar " 19 119 205 - 135 183 194 105

Souxce: Econxmic Memorandun 1983.

- 93 -

labie 6.68 D0O9 AND IMPORTS OF IMAIN AGRICULTURAL PRODUCTS-/. 1978-1982(Thousands of US dollars)

1978 1979 1980 1981 1982Socialist Ibn-Soc. Socialist Non-Soc. SocialiSt Non-Soc. Socialist Non-Soc. Secilist Ibn-tec.countries countries countries countries countries countries countries cokntries countries countries

ExportsCere4ls (seeds excluded). 22,257 238,277 19,485 74,015 23,385 316,879 19,396 309,292 21,368 171,525Neat and meat products 16,179 210,669 16,678 333,634 14,778 304,227 16,871 181,871 14,396 192,300Cheose - 14,250 - 11,941 - 15,097 - 7,195 ' - 6,964Fresh vegetables 66,159 14,272 66,235 17,330 80,840 21,898 81,048 13,902 72.925 10,499Canned vegetables 14,129 9,198 18,450 11,981 26,756 11,569 31,708 6,142 30,630 6,008Fresh fruits 17,523 14,156 4,413 14,081 11,536 11,29 12,061 9,376 13,221 4,715Grapes 21,698 384 16,159 491 27,91S 730 16,571 440 34,994 389Canned fruits 40.961 9,510 43,875 6,435 48,155 6,010 55,5345 4,829 347,918 3,208

sUe - 16,810 - 18,879 - 13,829 - 18,694 - 8,400Animal edible grease 2,781 24,144 9,164 10,325 12,127 2,646 2,429 98,600 1,152 26,917Edible oil 1,030 81,192 2,717 102,612 11 49,261 2,509 50,892 - 54.693Wine (vermouth and cho-

pagne *xcludedO 112,074 6,356 115,849 8,465 121,870 12,101 92,277 12,170 114,270 9,203Other alcoholic drinks

(concentrated est ofgrapes excluded) 2S,619 185 17,S22 281 30,932 324 26,007 t8t 27,848 264

ImportsConcentrated fodder - 43,222 - 111,474 - 124,062 - 245,042 - 117,556Fish and fisb productn 10.083 1,112 10,829 671 11,277 3,567 6,892 4,237 7,353 62Ntice 28,305 - 29,213 - 21,986 - 3,291 19,655 9,558 14,120Cocoa 8.161 45,905 6,449 46,737 49,965 4,227 - 19,967 7,891 10,336Citric fruits - 22,643 - 29,429 - 36,625 - 36,306 - 28.008Olives - 10,541 - 13,627 - 16,153 - 15,567 - 13,327Edible oil 1,847 255 2,493 410 1,844 11.343 2,068 8,022 --

Row and refined augr - 33,684 8,254 22,304 89,359 80,974 59,877 48,942

_/ Date for eocialist countries are in non-convertible currencies only; data for noa-socialist countries are in convertible as well es in non-convrtiblecurrzecias.

- 94 -

Table 7.1: (G)SS INDUST[AL PEUDIXIIC BY SUB-SDMR, 1975-1982(Billion lei)

1975 1976 1977 1978 1979 1980 1981 1982(In 1963 prices) (In curent prices)

Total 586.9 660.6 753.8 817.2 883.7 936.1 909.0 1M09.1

Poducer Goods 424.3 478.9 545.8 603.1 651.3 697.4 665.4 77LO

Consumer Goods 162.6 181.7 208.0 214.1 232.4 238.7 243.6 238.1

Electricity and trieimal power 15.8 17.2 13.6 14.7 15.0 16.5 23.3 28.3

Fuel C21.4 23.1 39.2 40.9 41.5 41.9 81.7 82.7

Fer us metallurgy 46.3 51.5 58.0 62.9 68.0 69.6 68.9 82.7

Non-ferrous metallurgy 16.1 17.2 26.4 27.8 28.3 30.3 36.9 40.4

Machine bldg and metal piocessirg 190.0 220.0 237.4 269.7 300.5 329.7 275.6 299.7

Chemicals 66.5 77.3 67.8 75.2 76.9 81.5 88.5 96.9

Cbnstrurtion materials 18.1 20.5 24.2 28.6 30.9 31.8 31.0 34.3

bIaier and wod processirg 34.6 36.3 46.0 47.4 50.4 51.4 48.5 55.5

Textiles 39.7 46.2 62.6 67.0 73.3 76.4 67.9 78.7

Clothirg 29.8 33.0 27.1 28.6 30.9 33.4 33.3 31.3

leather, fur and footwear 11.4 12.6 15.8 17.2 18.6 20.6 19.4 22.2

Food processirg 76.9 83.9 111.6 111.9 120.2 120.2 101.3 120.1

Others 20.3 21.8 24.1 25.3 29.2 32.8 32.7 36.3

Soutrce Statistical Yearbook aind data provided by the Romian authorities.

- 95 -

Table 7.2: INDUSTXL INVESIMENi BY SUBSECIOR, 1975-1982(Million lei)

1977 Prices Current Prices1975 1976 1977 1978 1979 1980 1981 1982

Total 66125 69350 80673 97164 104321 107058 105480 101545

Producer goods 56339 58578 68874 84071 90594 89880 89717 88441

Consuner goods 9786 10772 11799 13093 13727 17170 15773 13104

Electricity and thermal powr 9217 9696 9660 10389 11030 11578 14280 18487

Fuel 9330 10167 10276 12215 12176 14088 16327 18849

Ferrous netallurgy 7445 7439 8138 10976 11876 12477 10089 8700

N-ferrous metallurgy 1962 2548 2707 2994 2772 2640 2475 2813

mddne building and netalprocessing 12549 14334 19384 24002 27543 30909 27346 21373

Cemicals 9744 8891 12514 15576 18372 14963 15554 13002

Construction materials 3005 3225 2966 4282 4691 4493 3521 2877

Iimber and wood processirg,paper and pulp 3274 2773 3231 3926 3663 3157 3152 3346

Textiles 2236 2352 3039 3496 3460 4279 3497 2440

Clothirg 349 249 325 393 322 275 246 340

Leather, fur and footwear 281 270 340 494 354 311 305 290

Food processing 4409 4799 4864 4891 4831 4728 5833 6822

Glass, china, faicerre 281 323 615 683 883 711 497 391

MLnirg of norr-ferrousprodhcts 379 327 346 608 613 432 554 272

Otiers 1664 1957 2273 2239 1735 2017 1814 1543

Source: Statistical Yearbook and data provided by the Rcmania authorities.

- 96 -

Table 7.3: PICDUXTIDN, CXNS[ICN, EIWKES AND Ibf0XS (F OIL AND OIL PEXUCTS, 1975-1982

CnOie Oil Refined ProductsDomsEtic smotic

Pro- Wbnrsp- Pro- (bRi -duction /1 lnqort tion duction Export tion lXo,t img!i Balame

( lloisand tons ) ( us$ illions)

1975 14945 5085 20030 19791 6176 13615 538.5 400.1 138.4

1976 15052 8475 23527 23039 7842 15197 735.2 717.1 18.1

1977 15002 8844 23846 23328 6742 16586 688.1 875.4 -187.3

1978 14061 12937 26998 25534 7559 17975 746.0 1218.8 -472.8

1979 12663 14298 26961 26666 7396 19270 1744.0 2051.0 -307.0

198) 11865 15961 27826 27071 8754 18222 1871.0 3818.0 -1947.0

1981 11971 12678 24649 24521 8124 16533 2032.0 3539.0 -1327.0

1982 12110 10924 23034 21900 6527 15373 15320 Z62.0 -930.0

Smne: Data pwvided by the Ramnian authorities.

/1 lludes a small awuxt of by-pwducts from natural 8as wells.

- 97 -

Able 8.1: IETAIL PRICE IDI(S CF THE SOCIAL SECTDR, 1971-1982(Index 1970 = 100)

All Itans kdex of selecteod itensPeFiertge Fuel Clothingannual ani and

Index charge Food ligfting footwear Bert Otber

1971 100.6 0.6 101.5 100.0 99.8 100.0 99.8

1972 100.6 .. 102.1 100.0 99.8 100.0 99.3

1973 101.3 0.7 103.3 100.2 99.8 100.0 99.8

1974 102.4 1.1 105.1 100.2 99.6 100.0 101.0

1975 102.6 0.2 105.5 110.9 100.0 108.3 100.0

1976 103.2 0.6 106.1 120.8 100.0 111.1 100.1

1977 103.8 0.6 107.1 121.3 100.5 112.2 100.6

1978 105.5 1.7 108.1 122.0 100.9 114.9 103.9

1979 107.6 2.1 109.0 137.8 100.8 116.6 107.4

198D 109.9 2.3 111.0 187.4 101.2 117.9 108.0

1981 112.1 2.2 112.9 187.4 102.8 120.7 111.1

1982 131.2 16.9 151.1 232.2 105.4 121.9 119.6

- 98 -

Table 8.2; MOM PRICES, 1980-1983

Produer Prices - Retail Prices1980 1981 1982 1983 1980 1981 1982 1983

Jan 1 July 1 (expected) Jan 1 July I (expected)

LPG 120 1200 2000 2300 2300 2000 2000 2000 2800 2800(lei/to)

Gasolir 7.5 7.5 7.5 9.0 9.0 7.5 7.5 7.5 9.0 9.0 1/(lei/litre)

Diesel 0.85 2.1 2.1 2.7 2.7 4.0 4.0 4.0 7.0 7.0

H&avy fuel oil 415 1000 1000 1825 1825(leillitra)

Light fuel oil 650 1433 1433 1890 1890 1500 150 1500 2150 2150(le/a4)

Cnrde oil (lei/tm)Deliver prie 520 1581 1600 2000 n.-.- - - -_ _

iestir prodwer price 512 544 545- 1100 - - - - - -1qorted oil - 2650 3000 3420 n.e.- - - - - -

Gas (lei/OOO 3 )Raw wterizl 60 o 7Fuel 20D 250 5 31000 1500 3 350/600 3 350/600 1000/15003 10i0/1500 1000/1500

ri±e 139 202 225 264 264 240 240 240 375 264(lei/ton)

Electricity 320 320 560 750 90D-938 - - 500i770 500/770 650/1000

Sou mm audthoriies.

1/ Guaolie C.C.98. Gaoline C.O. 90 was raised from 6.80 to 8.00 lei/litre.1/ Raised to 750 lei/1000 m3 October 1, 1982.

I,.

*~~~~~~~~~~~~~~~~~~~~~~~~

I

I

IBRD 15971R1

io2 res^>apeaoeeripemledb 22 2 24 26° 28 JULY 1983

U nU. S. S. R. ToChernfovrs,v _ SOCIALIST REPUBLIC OF ROMANIA

-48, ahlauiscinvirah@llFlilAfn6clapi * * * * \+ vBANK-ASSISTED PROJECTS

More ~~~~~~~~~ ~~~~~~~~~~PROJECTS: EXISTING FEATU.RES:

Irrigation/ Primary Roadstsolo Mc" S ~~~~~~~~~~~~~Agriculture - Railways

Industriol * Airports

H HU NGARY^g ROMANIA Zt ,;;/ Power Stations ±, Ports

I 0 ~~~~~~~~~~~~~~~~~~~~~~~Transmission Lines --- ~ Rivers

S Srjl2s-ations Judet Capitols

<'~* YUGOSLAVIA >_,_ t < 9 I II _To r7bovo / 1 ModovHighways International BoundariesELEVATIN

\ Cnols BULGARIA- *U000 m ters3d _ote Seo5 [s , t / 9s \ 24- 26 2: 300 000

irgu M re, 10~~~~~~~~~~~~~~ 500

ol ~~~~~~~~~~~~~~~~~~~~~~~~~~~~A d ~~~~~~~~~~~~~~~~~~~~~~~~~~ ~ISCALT, ra

F~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~YEAR

PROJECT ~~~~APPROVED46' ull 8 . Fintih~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~e, ~~~~~~1974

+ oatc~ar-. Spq~,Ql Steel19752 Torrent Therrnnl Power 1975

.2Grurgiu Rorrr,resti 1rrrgati.n 1975Sodone-Co,ebie Agri,oltorel Credit 1975

~~~~~~ F~~~~~~~~~loort Recb,ery 1976R,ul More Reteont Hydropower 1976

8 R.ono-Vectero5n Irrigattonr and

v\', ~ ~~~~~~~~~~~~~~~~~~~~~~ ~ ~ ~~~~~~~~~~~~~~~~~~~~~~~Aqr,cnltore Deneloprrnept 1976

Brolla 7f\ llorrrita-C.InIea Irrigation 1977ucea Brenno Beatring 1977~

* Bocirerest Glass Fiber 1977

Tb 8:~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~~ Ci,rpol,i,9- M.scel Polyesrer i977

P.9 Prodoction end Processing Planr' 19769WVrioora Irrigation 1978

ti ~~~~~~~~~~~~~~~~~~~~~~10 Tires Proiect 1978* Poot Earthq.ake Construction

S.". in ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Assistance* 1978

Crorone Cherrrco 1979

YUGOSL 2 11~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I Romeo Se-1lss Pipe 1979

__________________________________________ Second Torcenr Thermal Poorer 1979~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Se.n Tuce, henna P,,, 97

POLAND ~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Second Lioenrn-kC 1979

Croiov ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~12 Most.steo and Cal,rtutn Irrtgotin

-i's U S. S. R ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~ onStgnto and Drainage 1979

CZECHOSLOVAKIA__ Third Linesteclr,C 1980

~~~s. *-~~~~~~~A\ * B I~~~~~~~~~~~ c 4 Sow 13 DanO~~~~~~~~~~~~~~~~~~~e - Slock See Canel 1980~~~~~1 Dnue B~kS. Cna 18

AUSTRIA * 4~14Cowdrli Irrigaotion 1980

AusrelA~~~~~~~~~~~~~~~~~~~~~r~~~~~~.rt / Orcherdna 1980~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Ock,s-19

HUNGARYj P 1 cr not Power IV 1981

ROMANIA Locotlon Specrf,c L nestock Va 1981~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Z017in ,0'tI 1 "takIV 18

15BBSP Irrigetion 1981

Bochorost r~~~~~~~~~~~~~~~~~~~ 16 Tito-Corecel Irrigotron 1981~~~~~~~~~~~~~~~~Pa,t ,~tltd 6 i-C,a. Iriaio 18Prmc+ oml d Land Transport 1982

17 Maldd-e Agricolturcl Credit 1982

YUGOSLAVIA ~~~~~~~~~~~~~~~~~~~~ ~~~~~B U LGA RIA To Gob-,.m Enhanced Oil Recnoery 1982

- in) 8J~~~~~BLGARIA 30

.11' ~~~~~~~~2,4 26' ,'-

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