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Romania: Inflation Could Soar To 100 Percent Says EBRD

London, 16 April 1997 (RFE/RL) -- A report by the European Bank for Reconstruction and Development (EBRD) says Romania's gross domestic product is likely to fall two percent this year while, according to the government's own estimate, inflation could soar to 100 percent.

The report, released at the EBRD's sixth annual meeting in London, focuses on Romania's mixed economic performance since it began its reforms in 1990.

The report says last year saw a deterioration in the economy after a promising performance in 1995, when GDP growth reached 7.1 percent while inflation fell from triple digits to a record low of 28 percent.

The report says 1996 saw an easing in both fiscal and monetary policy which led to tense relations with the International Monetary Fund.

The country's GDP grew at a slower rate -- by about 4.1 percent -- while annual inflation took off again to reach about 57 percent (compared with the initial target agreed with the IMF of 20 percent).

Price rises were fuelled mainly by an ongoing depreciation of the currency, the leu; by continued subsidies to agriculture; and a pre-election spending boom by the former government.

At the end of 1996 the budget deficit had reached 5.7 percent of GDP against the 2.2 percent that Romania had agreed with the IMF.

In its election manifesto the multi-party Democratic Convention, which emerged as the largest coalition in November, 1996, elections, promised a "Contract with Romania" which would boost living standards and pensions. It also pledged tough action to bring the country's finances into shape, and a major restructuring of industry, much of which remains overmanned and uncompetitive.

But, on taking power, the government said the economy was worse than the outgoing government had admitted, necessitating postponement of the Contract and implementation of tough austerity measures.

The first of these was a sharp increase in the price of certain fuels which came into effect at the end of December, 1996.

The government has admitted that its austerity measures would probably delay GDP growth until 1998, creating a one to two percent decline in GDP over 1997, but with growth resuming by year-end.

The report says in 1997 the government is set to boost reform while at the same time improving the balance of payments (although for the year, a deficit of $4 billion is anticipated.) It faces the problem of higher social payments as a result of the austerity package.

Its other priorities include: tax cuts, a full-scale restructuring of industry, accelerated privatization, curbs on subsidies to agriculture and energy, and action to end high-level corruption.

In the monetary field, the new government has defined four key priorities: calming inflationary pressures, improving the functioning of the foreign exchange market, consolidating currency reserves, and enhancing Romania's international monetary credibility.

But the authorities have warned that the increase in energy prices is expected to boost inflationary pressure in the short-term. This and the increase in unemployment that is expected to result from industrial restructuring "will significantly increase hardship for the population." The report says unemployment will be 11 percent in 1997.

To ease this, the government has announced specially-targeted social assistance which is expected to account for 10 percent of GDP.

Externally, the government wants to continue the improvement of Romania's balance of payments. The year 1996 saw an improvement over 1995 owing to the over-valued leu and foreign exchange restrictions. By year-end imports fell three percent while exports fell 3.2 percent.

Romania has pursued privatisation on three fronts: through management-employee buy-outs; through direct sales to strategic investors; and through the Mass Privatization Program (MPP).

The reports says the MPP amounted to an ambitious but finally successful sale of shares in about 3,900 small and medium-sized enterprises to the Romanian population through a voucher system.

The report says that large-scale privatisation of the agricultural sector has advanced under guidelines laid down in 1991, according to which 4.9 million Romanians are entitled to reclaim small plots from state holdings, up to 10 hectares of land per family. More than 90 percent of the new landowners have received "temporary property certificates."

One of the most important privatisations over 1997 will be the national telephone operator, Romtelecom.

Romania freed half of the prices in the consumer goods basket in November, 1990. In 1993, consumer subsidies were phased out, and by mid-1995, only three percent of consumer goods and services were centrally administered. By late 1996, only oil and energy prices, and the prices of a few agricultural goods, were subject to state control.

The report says: "Romania, under communism the most centralised of the centrally planned economies, has come a long way..."