Address of H.E. Adrian Nãstase

Prime Minister of Romania

World Economic Forum, New York

February 2nd, 2002

Ladies and Gentlemen:

The Government of Romania was voted in office by the Parliament of Romania at end December 2000.

  • We have taken upon us the task of managing the proper running of Romanian society at the beginning of the third Millennium, after a period of deep recession, in order to gain the confidence of Romanians at home and to rebuild the credibility of the Government's actions abroad.

  • The Governing Program has five major goals:

· to re-launch growth and restructure the economy;

· to reduce social polarization;

· to restore the authority of the state and of its institutions;

· to cut down on bureaucracy, to fight corruption and crime;

· to consolidate and increase our country's opportunity of joining the European Union and NATO;

After one year of implementing pro-active policies, the main economic indicators show an improved position of Romania:

  • GDP (preliminary) growth was 4.9 percent in 2001, i.e. the highest rate in Central an Eastern Europe;

  • Gross fixed capital formation was up 6 percent;

  • Industrial output grew by 8.4 percent over the previous year,

  • Labor productivity in industry grew by 16,5 percent through

January - November 2001 (compared to the 2000 average),

while real wage earnings stood at 7 percent;

  • The revival of the economy has led to a shrinking of unemployment from over 10 percent at the end 2000 to about 8 percent twelve months later. Part of this is due to the incentives created for small and medium sized companies during 2001.

  • From January to November 2001 exports rose by 11.1 percent

compared to the previous year, with almost three-quarters of

the overall exports going to OECD markets. Pre - September

11, export growth stood at 15%.

One of the most important achievements in the conduct of our macroeconomic policies was curbing the inflation. Consumer price inflation has dropped from 40.7% in 2000 to 30.3% in 2001 and is set to reach 22% for the present year. We have met the inflation target agreed with the IMF, despite the need to increase domestic energy prices, and the carry-over effect of higher food prices from 2000.

On the fiscal side, we closed 2001 with a consolidated budget deficit of 3.5 percent of GDP, i.e. 0.2 percentage points lower than projected at the beginning of the year, and a considerable improvement over the 4.1 percent figure for 2000.

The trend stability of the dollar exchange rate of the domestic currency in nominal terms is a testimony of the smooth functioning of the domestic forex market. In real terms (deflated by consumer prices), the leu has continued its moderate appreciation versus the US dollar, with 5% in both 2000 and 2001. This sustainable real appreciation is both supportive of disinflation and faster real convergence, and - due to high productivity gains - maintains Romania's external competitiveness.

The current account deficit stands under 6 % of the GDP, i.e. within the target, and is largely reflective of higher imports of capital goods due to Romania's strong investment drive, it is also autonomously financed. Official foreign exchange reserves are at a historical high and equal 3.5 months of imports, while the stock of public and public guaranteed debt stands at 28% of GDP (of which only about 8% is domestic). Public foreign debt service going forward into 2006 is moderate and manageable.

Romania's external sovereign issues have done very well. Its latest, a

7-year 600 million Eurobond, has not only won three major awards so far (placing Romania as the best sovereign issuer in Europe, the Middle East and Africa), but has shown a tightening of the spread curve of almost 200 basis points since its launch, thus outperforming higher-rated countries. This not only shows that investors are aware of Romania's improving credit story, but also that - amidst a turbulent period in emerging markets - Romania is increasingly valued for its EU accession progress, and as a safe haven for investment.

Moreover, real domestic and foreign borrowing interest rates have begun converging on a downward trend.

This has not failed to impact Romania's improved improved international perception. Rating agencies have in 2001 acknowledged Romania as a less risky country. Standard & Poor's has upgraded Romania from B-to B and, importantly, has maintained its positive outlook. Moody's has upgraded Romania to B2, with a stable outlook. Fitch IBCA has maintained its B rating, while changing its forecast form stable to positive.

Privatization has advanced further. 121 companies were privatized during 2001 with a capital sock of $ 312 million. Among them, the most important were Banca Agricola (the third largest bank in Romania) to the Austrian group Raiffeisen and the steel mill Sidex to U.K. based Ispat.

According to approved strategies, among the largest deals for privatization in 2002 and 2003, I mention:

  • Banca Comerciala Romana (the largest bank in Central Europe yet to be privatized, and the largest bank in Romania, with around 30% market share),

  • The aluminum smelter ALRO and the profile manufacturer ALPROM,

  • 25 p.c. of the capital stock of companies under the Ministry of Industry, including two power distribution companies, hydro-stations and the gas distributing networks.

There is a renewed commitment to reforming the energy sector, through the unbundling of electricity, gas an oil sectors and the initiation of actions to achieve cost recovery through tariff adjustments and efficiency gains. At the beginning of this year, we raised to 33 p.c. the threshold of market opening for power according to a program of privatizing the whole power distribution by 2004 and power-generating up to 40 p.c. For the hydro sector, we are opened to privatize it by BOT (Build Operate Transfer), BOO (Build Own Operate) or public-private partnership.

  • Together with the World Bank we prepare the privatization of the largest oil company in Central and Eastern Europe: PETROM, with onshore and offshore activities and with a presence not only in Romania, but also in Central Asia.

For the year 2002 and 2003 the Government is committed to adopt measures to consolidate the revival of the economy, but at the same time to push restructuring and privatization ahead, as well as progressing in accession negotiations with the European Union.

The Government has already approved a set of policy actions aimed at reducing bureaucracy and creating a friendlier environment for the business community.

The baseline scenario provides for a GDP growth between 4.2 to 5.0 p.c. over the next two years, with a continuous decline of inflation rate from a projected 22 p.c. in 2002 to a single digit level by 2004 - 2005.

The economic program for this year provides a 9.7-p.c. real growth of investment and a further containment of the fiscal deficit to 3.0 p.c. of the GDP.

We continue to benefit from the IMF and the World Bank's support during the period; a new 18-month IMF stand-by agreement was concluded in October 2001, while a PSAL II program, covering reform in the financial sector, social protection, business environment, privatization and the energy sector has been negotiated with the World Bank and is pending board approval.

It is also worthwhile to stress that the more we advance in the negotiations with the European Union, the deeper and broader becomes the compliance of the Romanian economy and its regulation to those of the EU members. Romania has concluded 9 chapters and opened 17 of the 31 needed for the successful conclusion of EU accession negotiations, and is aiming to substantially speed up the negotiation process by closing most chapters during 2002.

Ladies and Gentlemen:

Addressing corruption is one of the main policy goals.

Last December we revised the banking legislation and brought it in line with the latest rules approved by the Basle Committee, strengthening, among others, the supervision function of the central bank. This February we will thoroughly amend laws on capital and securities' market. We have enforced transparency of public procurement and privatization in compliance with EU rules.

This January the Government has set a National Anti-corruption Office of the Prosecutor (meant to conduct resolute action under one umbrella), in order to ensure a coordinated action against such practices.

The legal system began a process of self-evaluation and to remove from its structure those that involve a corruption risk. Hence, 25 investigation warrants and 5 advisory notes to pursue trial were issued, 4 magistrates were brought to justice.

  • Approval of the action plan to reduce bureaucracy and speed up registration procedures. After the "one stop shop" for company registration, we prepare a similar unique shop for foreign investments. The draft bill is now in the process of approval by relevant ministries.

  • Revised VAT and profit tax bills are in the Parliament providing more transparent and universal procedures, as well as speedier return of VAT for entitled operations, together with simplified procedures, reduction of tax brackets, and lowering of taxation.

  • Guarantees of the Finance Ministry were taken over by the Assets Resolution Authority. Accordingly, past due credits will be traded on the market in full transparency.

  • Ministers and their deputies are prohibited to hold positions on the boards of companies.

  • E-commerce has become compulsory for public procurement of goods, except where agreements with international financing institutions provide different rules.

With the same preoccupation, we will amend this year the bankruptcy law. This will make easier and smoother the procedures for the exit from the market.

Certainly, we are looking to further improvements in the business environment, for which we keep a close cooperation with the Foreign Investors' Council in Romania and the AmCham (the American Chamber of Commerce in Romania).

The Governments has already approved a set of policy actions aimed at reducing bureaucracy creating a friendlier environment for the business community.

Advances in strengthening the business environment are worth mentioning. These refer to the simplification and systematization of legislation, improved regulation and supervision, including in the broader financial sector, and actions taken aimed at establishing a level playing field for investors.

To improve the market conditions, the Government has enacted in 2001 two sets of measures:

  • encouraging SMEs,

  • providing incentives to investments over $ 1 million.

The SMEs benefit of: wavering of custom duties for imported machinery, lower taxation on profits, and preferential treatment for open bidding of assets sold by state owned companies. As a result of those incentives, 20,000 new SMEs were created during 2001.

For larger investors, the incentives provide for wavering of custom duties, deferred VAT payment, tax allowance for fresh investments and accelerated depreciation. Since mid 2001, 58 significant investments with a total of about half million Dollar filed for facilities in chemistry, pharmaceuticals, natural gas, communication and IT.

The stock of FDI in Romania rose to $ 7.2 billion at end October 2001. Year 2001 preliminary figures show estimated FDI flows of about US$1.2 billion, together with portfolio flows of about US$ 600 million.

Supplementary facilities are given to IT industry, as well as to industrial parks. Starting this year, we decided to convert most of facilities previously used by the defense industry to industrial parks. No need to mention that labor in those areas is among the most skillful.

2002 will be for Romania also the year when large infrastructure projects will start: highways, power generating and distribution, together with increased market openness for fixed land telephony.

For our part, the economic governance will be flexible, pro-active and results-oriented. We have a clear goal: to create a vibrant, competitive and knowledge based economy, capable of meeting the aspirations of our citizens and challenges of global competition.

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