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Balance of Payments Romania

Essay by   •  May 11, 2011  •  Case Study  •  1,394 Words (6 Pages)  •  2,237 Views

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In order to get a better overview on the evolution of the Balance of Payments situation of Romania in the past few years, we first examined key macroeconomic indicators of the country in the last 10 years (see the following table). As some of them develop steadily we have a closer view on the years where greater deviations occur. (All values indicate the annual growth rates in percents.)

GDP

In 2001, after three years of recession Romania had the highest GDP since 1995. Regardless to a world-wide economic decrease from 2001-2002 Romania could steadily keep it over 4 percent for the next years due to its local building industry, agriculture and consumption. After five years of a steady growth, there was a less spectacular growth in 2005 of 4.2 percent. The reason for this downfall was heavy flooding inside Romania in this year. The next three years saw an acceleration of the economic growth, these were the most succesful years of Romania in terms of growth. The EU membership, the pick up in investments and the easing of domestic demand boosted the economic growth.

In 2009 the impacts of the world-wide financial crisis stopped the good economic performance of Romania and turned the growth rate from 7.1 in 2008 to a -7.2 in 2009. In mid 2008 Romania had even 9.3 percent growth rate and was one of the best developing countries in Europe. The economic crisis was deepened by an internal political crisis and lack of professional measures in time from the part of policy makers. Because of this, while other economies came out of recession, Romania is still waiting for this to happen.

Industrial Output

Between 1950 and 1980 the average annual growth rate in gross industrial production in Romania was 12.3 percent. Since 1993 the growth rate slightly went down but was still close to 10 percent for the following years. After the Russian collapse of 1997 the industrial growth rate of Romania for 1998 was -17 percent. Industrial production picked up after Romania began to recover from its recession in 2000, and in 2001, the industrial growth rate was 8.2 percent.

Although industry continues to be a large sector of the economy (30 percent of GDP in 2000), it is in need of serious modernization and restructuring. Key industries in 2002 included textiles and footwear, light machinery and automobile assembly, construction materials, metallurgy, chemicals, food processing, and petroleum refining.

From 2009 to 2010 there is a huge deviation in the industrial growth rate from 7.1 to -7.0 percent. As a result of the expansion of the global financial crisis that affected the international trade of Romania and reduced the export of goods by about 14 percent.

Inflation

Since 1999 the Central Bank of Romania intervened in the capital markets to prevent the domestic currency from losing further value. With Controlled floating the central bank used the foreign exchange rates to keep the inflation within limits. Thanks to the recovering of the foreign trade sector, an increase of the productivity and favourable development in wages and salaries the exchange rates regained 17 percent from 1999 to 2001 respectively to the Euro. Romania now has reached a stable inflation around 6 percent.

Unemployment

There were two main causes behind the reduction of the unemployment rate since 2000. The first one is the inflow of FDI that created new workplaces and absorbed a certain number of unemployed and the second one is the emigration of the workforce in Western Europe. Italy, Spain, France and Great Britain were the targets of those who left Romania and this had an important effect on the Balance of Payments as well, resulting in an annually private current net transfer of 3-5 billions of Euros.

In the following, we will analyse the situation of the Balance of Payments in the past 5 years, in the light of the above mentioned transitions that took place in the economy.

Balance of payments

Current Account:

Starting with 2005, Romania's Current Account deteriorated, amid the widening trade deficit, due to the fast annual growth rate of imports and the slowdown in the annual increase of exports. Households continued to show a propensity for consumption, which

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