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Romania: Economic Situation Extremely Grave As Winter Approaches

Washington, 21 August 1996 (RFE/RL) -- International financial experts are saying privately that Romania has virtually emptied its foreign exchange reserves, has stopped paying its oil import bills, and now faces a winter without adequate fuel to heat homes or keep factories working.

This bleak assessment comes from experts and officials who work closely with Romania and are aware of the country's full economic and financial situation. The experts use terms such as "extremely grave," "extremely serious" and "the country is in shambles" to describe Romania's position.

The Bucharest newspaper "Romania Libera" reported Tuesday that a delegation from the International Monetary Fund (IMF) which visited Romania in June expressed grave concern about the country's slow pace in structural reforms and warned that it faces a liquidity crunch. The IMF report also warned that the growing liquidity shortage was apparent, as Bucharest has lacked the hard currency reserves to cover the cost of oil imports, forcing refineries to cut capacity or shut down.

Sources at the IMF say the newspaper account is accurate, but refuse to discuss the situation. Last June, an IMF spokesman said that the institution would not approve more drawings for Bucharest until it removed restrictions it placed on foreign currency dealing by commercial banks in Romania.

The head of the IMF mission, Poul Mathias Thomsen, said at the end of the delegation's visit that "no progress" had been made in talks with Romanian officials.

One expert welcomed the leaking of the IMF report, saying there is a need for "speaking the truth" so that the people of Romania can "begin to understand what kind of situation their government has put them into."

The crisis was precipitated last November when the government of President Ion Illiescu attempted to artificially freeze the exchange rate of the lei at approximately 3,000 to a U.S. Dollar. The government did this by suddenly withdrawing all the foreign exchange licenses to operate on the inter-bank network from everyone except Romanian state banks. It then directed state banks to keep to the 3,000 lei rate. The purpose, the experts say, was to keep inflation low through the November presidential elections.

The result was predictable, say the experts. Businesses, importers and enterprises which had lei in Romanian bank accounts could not buy dollars, deutschmarks or other hard currencies except on the black market, where rates quickly jumped to over 3,500 lei per dollar. Experts say that black market rate could easily jump to over 4,500 lei to the dollar in coming weeks.

Because Romania has built a large part of its economic restructuring on processing foreign oil through its refineries for export as well as for local use, the importation of oil quickly drained the country of its foreign reserves. Experts say the country has stopped paying its energy bills. In fact, several oil tankers have been sitting offshore in the Black Sea, refusing to unload until previous bills are paid.

The government, in an attempt to get foreign exchange wherever it can, two and a half weeks ago imposed stringent exchange controls on state companies and banks, in effect forcing them to turn over whatever foreign currencies they hold for state use at the artificially low official exchange rate.

A senior official of the National Bank of Romania (NBR) told the AP-Dow Jones news agency on Tuesday, however, that the central bank would not yield to the government's demand. The bank's monetary policy chief, Eugen Radulescu, told the news agency the "government might ask for the reserves, but they won't get them." He said the central bank has around $800 million in currency reserves.

The government says the reserves taken from banks and state companies would be used to pay for oil imports, but Radulescu says the simple solution is to raise domestic energy prices to world levels. However, he said, the government is unlikely to do that until after the November elections.

With its eyes on votes, the government has kept energy prices artificially low, allowing inefficient state industries to consume massive amounts of energy while cutting the supply of fuel available to sell abroad for export earnings.

Experts in Washington say this is "typical, textbook, completely stupid mismanagement by government," attempting to force a country's currency to stay at an artificially high level for political advantage.

"The price the Romanian population will pay for all these mistaken policies is already extremely high and will become even higher in the coming weeks and months," says one expert.

Foreign investors, companies and joint ventures are already feeling the pinch. A number have had to take out loans in other countries to get the needed hard currency to continue to finance current operations within Romania.

The companies providing the real economic growth in Romania have been hardest hit by the situation, forcing many to severely cut back operations while seeking bridge financing outside the country, a very risky move for any company.

The Romanian Petroleum Company (CRP) publicly acknowledged last week that it has secured a $200 million loan from a foreign bank to finance crude oil imports after having already used an $86 million letter of credit to pay off outstanding bills for oil imported by Petrolexportimport S.A., Romania's largest oil trader.

Petrolexportimport has already imported five million tons of oil so far this year and hopes to import another five million tons if it can find the money to pay for it.

Meanwhile, within Romania itself, experts say the economy is beginning to feel the pinch. All kinds of production, including the agricultural harvest this fall, will be hurt by the shortage of fuel.

"Any kind of economic activity that relies on transportation, moving goods or parts from here to there to do whatever jobs, will be dramatically affected," says an expert.

How Romania will find enough fuel to provide adequate heating next winter is a very serious question, the experts say.

What is worse, is that after the election, the government will have to let energy prices rise and then they will go up dramatically, hurting consumers while feeding inflation.

The situation is apt to be so bad by the end of the year, the experts say, that Romania will then have to seek emergency aid from international institutions such as the World Bank and others to pay for critically needed fuel and other supplies.

"It's a huge price for the Romanian people," says one expert.