These internal developments were accompanied by positive external reactions. In March Standard & Poor’s raised its credit ratings for Romania. In July the World Bank announced the impending completion of its two-year private sector structural adjustment loan (PSAL-1) aid program, which is worth $300 million and is designed to accelerate the privatization of state enterprises and reform of the financial sector (particularly banks). The completion of the program was dependent on the sale of Banca Agricola, the country’s fifth largest bank, which was completed in April after long delays. Negotiations for a PSAL-2 program are due to be finalized in September, with the privatization of Casa de Economii si Consemnatiuni, the dominant institution in the retail deposit market and the only fully state-guaranteed bank, viewed as one of its likely priorities.

However, the International Monetary Fund’s (IMF) failure to reach a new accord with Romania after its standby credit expired in February indicates that serious concerns remain over economic performance and government strategy. According to the IMF:

Nastase appears keen to finalize a new standby agreement with the IMF by the fall.

The government’s ability to implement structural reforms is weakened by domestic suspicion of foreign takeovers of state industrial holdings. This suspicion is illustrated by the recent crisis over the fate of the country’s third largest steel mill, Combinatul Siderurgic Resita, which was bought last year by the U.S. firm Noble Ventures. Since the sale, relations between the new owners and the workers have deteriorated. Workers concerned about layoffs and claiming a failure to modernize the plant grew increasingly restive, and Privatization Minister Ovidiu Musatescu announced that judicial proceedings were being launched to annul the contract with Noble Ventures. But fears that the failure of the Resita privatization might affect negotiations with Ispat, the Anglo-Indian steel manufacturer negotiating to buy Sidex, Romania’s largest state industry, proved groundless. Sidex loses around $25 million a year and has $9 million in debt, making it a heavy drain on the budget.

Romanians’ purchasing power is now less than half of what it was under communism. At the end of 2000, 45 percent of the population (up from 22 percent in 1996) lived below the poverty line. Opposition to further austerity measures is now high. Nastase argues that economic restructuring needs to take into account these social realities and that the budget deficit needs to be at least 3.5 percent of GDP for the time being, to stem the potential for industrial unrest to completely derail reforms. The government has sought to calm public opinion by encouraging criminal investigations of former privatization chiefs accused of having profited from sell-offs before 2001 and by setting up a national agency to combat poverty.

Given current economic circumstances, Bucharest cannot afford to frighten off foreign investors. But some domestic investors have little interest in a long-term foreign presence and want to produce low value added goods at low cost, with comparatively few benefits for the wider economy. Moreover, a few investors have been accused of stripping assets and indiscriminately firing workers.

In sum, economic indicators are healthier than they have been since the mid-1990s, but the disposal of ailing state enterprises poses serious dilemmas for the government. EU and IMF structural reform recommendations are anathema to much of the population and many supporters of the Social Democratic Party. In the current social context, reconciling these conflicts is an enormous political challenge.