The Romanian leu (RON) is the official currency of Romania and has been in circulation since 2005 when it replaced the previous Romanian leu (ROL). With Romania being an emerging market economy and a member of the European Union, the leu plays an important role both domestically and internationally. This article provides a comprehensive overview of the Romanian currency, exploring its history, use, denominations, exchange rates, policies, and outlook.

History of the Romanian Leu

Romania’s modern currency has origins dating back to the late 19th century, though the leu was not adopted as the official name until 1867 during the reign of Prince Carol I. The first version of the leu was pegged to the French franc for stability.

Early 20th Century Changes

In the early 20th century, Romania went through various currency reforms and redenominations as the country dealt with economic and political turmoil. This included switching to a gold standard, pegging to the British pound, and printing excessive banknotes leading to hyperinflation. By 1947, the exchange rate had plunged to 20,000 old lei to 1 U.S. dollar.

The Second Leu

To control this hyperinflation, a redenomination took place in 1947 with 1 new leu equivalent to 20,000 old lei. This second leu remained stable until the 1980s, when Ceausescu’s policies again led to a debilitating inflation rate over 200%.

The Third Leu

After the Romanian Revolution of 1989 overthrew the communist regime, currency reforms were again needed to transition to a market economy. The third leu was introduced in 2005 at a rate of 10,000 old lei to 1 new leu. This repriced the currency for the free market and aligned Romania closer to Eurozone standards in preparation for EU accession.

Denominations and Coins

The leu is divided into 100 subunits called bani (singular: ban). Banknote and coin denominations currently in circulation are:

  • Banknotes – 1, 5, 10, 50, 100, 200, 500 lei
  • Coins – 1, 5, 10, 50 bani

The 1 ban coin was withdrawn in 2007 when it became virtually worthless, though bani are still used in accounting and for pricing.

Security Features

Modern leu banknotes contain several security features to deter counterfeiting. These include holograms, security thread, microtext, UV ink, raised print, and a transparent window. Watermarks depicting Romanian rulers are also visible when held up to the light.

Monetary Policy and Exchange Rates

Monetary policy and management of the leu are overseen by Romania’s central bank, Banca Naţională a României (BNR). Their primary objectives are to ensure price stability and supervise the banking sector.

Floating Exchange Rate

The leu utilizes a free-floating exchange rate where its value is determined on the foreign exchange market based on supply and demand. The central bank intervenes at times to control volatility and prevent fluctuations that could impact the economy.

Exchange Rate History

Over the past two decades, the leu’s exchange rate to the euro has declined, reflecting Romania’s period of rapid economic growth. In 2005 at the redenomination, 1 euro equalled 3.6 lei. By 2023, it reached 5 lei to the euro, a depreciation of over 30%.

Inflation Targeting Policies

To align its monetary policies with the EU, Romania adopted an inflation targeting framework in 2005. This sets a target band of 1-3% core inflation that the BNR aims to maintain through interest rates and other policy tools.

Uses of the Leu in Romania’s Economy

As the national currency, the leu is used throughout the Romanian economy by consumers, businesses, banks, and the government. Here are some of its primary uses:

Pricing and Retail Payments

The leu’s key role is as a medium of exchange for purchases of consumer goods and services. Most everyday transactions at supermarkets, restaurants, shops, transportation, utilities, and more are priced and paid in lei. This includes high value purchases like real estate and autos.

Wages and Salaries

Wages and salaries across all sectors are denominated and paid to employees in lei, including minimum wage. Payment in foreign currency is restricted. This provides income stability for households.

Banking Reserves and Lending

Banks hold reserves of lei to meet liquidity needs and use the currency for lending to individuals and businesses. Everything from mortgages to commercial loans are issued in lei.

Government Revenue and Spending

Taxes, fees, and other government revenue are collected in lei. Public sector employees, programs, and state organizations are also funded through the national budget in the domestic currency.

Settlement of Domestic Debts

Payment of debts and contractual obligations within Romania must be made in lei. This applies to all institutions, companies, and individuals.

International Use of the Leu

The leu is not commonly used or accepted outside of Romania. Some limited exceptions include:

  • Exchanging at borders for travel to/from Romania.
  • Remittances from Romanian diaspora abroad to families in Romania.
  • Certain businesses near borders or with international operations accepting lei from Romanian customers or partners along with other currencies.
  • Exchange bureaus and banks outside Romania trading the leu as a foreign currency.
  • International bank transfers or wire payments denominated in lei.

But in most situations abroad, other globally accepted currencies like dollars, euros, or pounds are used instead.

Outlook and Forecasts

With Romania enjoying strong GDP growth and financial integration with the EU single market, the leu remains on solid footing. However, some potential impacts in the short and long-term outlook include:

Adopting the Euro

Romania is not yet part of the Eurozone but has set a target adoption date of 2024. This would replace the leu with the euro as legal tender. Challenges to meet economic convergence criteria still remain.

Inflationary Pressures

Inflation has been rising above the central bank’s target in the short-term due to global conditions including the war in Ukraine. Interest rate hikes may be used to control price growth if it persists at elevated levels.

Financial and Debt Crisis Exposure

Contagion risk from financial crises in the EU or globally could lead to volatility and depreciation pressure on the leu, though Romania’s economy has proven resilient. Managing public and external debt levels remains a priority.

Central Bank Policies

The BNR aims to balance competing objectives of inflation control, exchange rate stability, and supporting economic growth through prudent interest rate and monetary policy actions influencing the leu.

Technical Innovation

Adoption of instant payment systems, cryptocurrencies, and other fintech could impact demand for traditional currency but the leu is expected to remain dominant for legal tender.

In conclusion, Romania’s leu provides monetary stability and convenience for the economy while the central bank works to balance growth and inflation goals. As a non-euro emerging market currency, it retains risks from global shocks but has underlying resilience. Movement towards euro adoption and further EU integration will be the next milestones shaping the leu’s outlook. With prudent policies, it is poised to continue serving Romania’s currency needs for the foreseeable future.