|Romania Table of Contents
The Role of Banking in a Centrally Planned Economy
The banking system was nationalized soon after the installation of the communist regime and replicated the system that had evolved in the Soviet Union. Although organizational reforms were instituted in the course of the following four decades, the basic mission of banking and its relationship to the rest of the economy remained unchanged.
The role of banking in the Stalinist economic model differs markedly from that in a market economy. Banks are state owned and operated and are primarily an instrument of economic control. They do not compete for customers; rather, customers are assigned to them. Nor are they in business to make a profit, because in the absence of money and capital markets, there is no mechanism to assign an accurate price for credit and thereby earn a fair profit.
Economic reforms in the late 1970s assigned greater responsibility to the banks for policing the economy to ensure that enterprises were operating and developing in compliance with the national plan. The banks accomplished this mission by monitoring enterprises' operations and assessing financial penalties for inefficient use of resources. As one of the three principal sources of money to finance operations and investments--the others being state budget allocations and profits retained by enterprises from the sale of commodities--banks exercised considerable influence over all economic units.
The banking system in 1989 consisted of the National Bank of the Socialist Republic of Romania (known as the National Bank), the Investment Bank, the Bank for Agriculture and Food Industry, the Romanian Foreign Trade Bank, and the Savings and Consignation Bank. In addition, a centralized Hard Currency Fund was set up in January 1988 to supervise all transactions involving hard currencies and to control the use of hard-currency earnings to finance imports. The new body included representatives of the National Bank, the Foreign Trade Bank, the Ministry of Finance, and the Ministry of Foreign Trade.
Established in 1880, the National Bank was the heart of the banking system. It issued the national currency, set exchange rates, monitored the flow of money, managed budgetary cash resources, coordinated short-term credit and discount activities, and participated in the formulation of annual and five-year credit and cash plans in cooperation with the State Planning Committee and the Ministry of Finance. All industrial, transportation, and domestic trade enterprises maintained accounts in the National Bank. The bank also controlled the production, processing, and use of precious metals and gems and had exclusive authority to purchase from individuals items made of precious metals or stones and items of artistic, historic, or documentary value.
The Investment Bank, established in 1948, was the conduit by which investment resources--including state budget allocations-- were directed to individual state, cooperative, consumercooperative , and other public organizations except for foodindustry and agricultural enterprises. With hundreds of affiliates throughout the country, the Investment Bank adjudicated loan applications from enterprises and granted long-term investment credit after verifying that the money would finance projects consistent with the national economic plan. The bank reviewed technical and economic investment criteria and evaluated the feasibility of proposed investment projects on the basis of accepted standards. In theory, it approved only investment projects that satisfied all legal requirements regarding need, suitability, and adherence to prescribed norms; had an adequate raw materials base and assured sales outlets; and served to improve the economic performance of the organization undertaking the project. The bank also granted short-term credit to construction enterprises and to geological prospecting and exploration organizations. The Investment Bank was responsible for calculating capital depreciation allowances to be paid by the central government to the accounts of individual enterprises.
The Bank for Agriculture and Food Industry was created in May 1971 by expanding the functions and changing the name of the Agricultural Bank established three years earlier. The bank provided investment and operating credits for food-industry enterprises, state and cooperative farms, and private farmers and financed the distribution of agricultural products within the country.
The Savings and Consignation Bank, originally called the Savings and Loan Bank, held the savings and current accounts of individual citizens. The bank mobilized the cash resources of the population for investment through obligatory periodic transfers of deposited funds to the National Bank.
The Romanian Foreign Trade Bank was established in July 1968. In 1987 its deposits totalled nearly 168 billion lei. The bank collaborated with the Ministry of Finance to obtain and manage foreign credit, and it handled transactions in both foreign currencies and lei for import and export services and tourism. Through strict control of hard-currency allocations, the bank encouraged the substitution of domestic products for imports.
In 1972 eight French banks joined the Foreign Trade Bank in setting up the Paris-based Banque Franco-Roumaine, which had a founding capital of 20 million francs. Later that year, the AngloRomanian Bank with a founding capital of US$7 million was established in London. And in 1976, the Frankfurt-Bucharest Bank AG, with a founding capital of DM20 million was set up in Frankfurt.
The state banks alone possessed the legal authority to proffer credit, the essential function of which was to ensure the fulfillment of the goals set forth in the national plan. Unlike subsidies from the state budget, credits had to be repaid--with a small interest charge--according to a fixed timetable. Initially, the banks set interest rates at levels high enough merely to cover expenses, because it was not the function of interest to reflect the market value of money. But on January 1, 1975, a graduated scale of rates went into effect, whereby planned credits ranged from 0.5 to 5 percent; special loans to enable enterprises to meet their payment schedule ranged from 4 to 7 percent; and the rate for overdue loans went as high as 12 percent. Punitive surcharges were levied for delays in bringing investment projects into operation (2 percent) or for failing to free up unused machinery and equipment within six months (6 percent). Plant-modernization loans carried an interest charge of only 1 percent but were limited to 5 million lei per project and had to be repaid within four years.
In 1989 the official unit of currency, the leu (pl., lei), which consists of 100 bani, was valued at about 14.5 lei per US$1. In 1954 the government set the gold parity of the leu at 148.1 milligrams (where it remained as of 1989) and on this basis determined the official rate of conversion to Western currencies. But because Romania's centrally planned economy set prices independently of international economic forces, the official exchange rate quickly became divorced from reality. Thus, like the currencies of other Comecon states, the leu became a so-called "soft" currency--one that can not be used outside the country of issue.
In addition to being a soft currency, the leu had no unitary exchange rate consistently applied for all transactions. Bucharest used a bewildering range of conversion rates in order to pursue various economic objectives, such as fostering exports and tourism. Although the International Monetary Fund (IMF), which had loaned hundreds of millions of dollars to Romania in the 1970s, insisted that the policy of multiple exchange rates be discontinued, at least thirteen different rates were still in use in 1982--one rate for imports and twelve for export transactions. According to World Bank analysts in the late 1980s, however, it appeared that a unified commercial exchange rate for the leu was Bucharest's goal. A separate, bonus exchange rate continued to be offered to tourists. Both the commercial and noncommercial rates tended to remain in effect for long periods without the daily fluctuations that characterize hard currencies.
The state retained a monopoly on foreign exchange. Private citizens could not hold foreign currencies or securities or have bank balances abroad without official permission, nor could they import or export Romanian banknotes. They were forbidden to own or trade in gold, to export jewelry or diamonds, and to engage in foreign merchandise trade. All proceeds earned by foreign trade organizations were surrendered to the Foreign Trade Bank. All hard currency earnings were consolidated in the Hard Currency Fund, set up in 1988 to prevent foreign trade organizations, ministries, and enterprises from making unofficial hard currency transactions.
On the black market, which thrived throughout the postwar era, especially during the austere 1980s, barter was more effective than the official currency in procuring the most highly sought goods and services. Kent brand cigarettes emerged as the most universally accepted unofficial medium of exchange, a status they could attain because of the state's prohibition against private ownership of hard currencies. The street value of one carton of Kents in 1988 was approximately US$100. In the countryside, agricultural products became the de facto currency.
More about the Economy of Romania.
Source: U.S. Library of Congress