Romania: On the way to Recovery through Prudent Macroeconomic Management

Challenge

Romania made a quick recovery after the 2008–09 global financial crisis, thanks to an aggressive fiscal austerity program and prudent macroeconomic management. The crisis prompted long-needed reforms, with support from international financial institutions (IFIs) in health (hospital rationalization and improved drug procurement), education (correcting skills mismatches, improving ICT education, and introducing a loan scheme for tertiary education), the financial sector, public financial management, public administration, social insurance (improving public pensions), and social assistance programs (improved targeting).

Romania’s projections as of January 2013 estimate a real GDP growth rate around 0.6 percent in 2012, with growth rising to 1.6 percent in 2013. Its unemployment rate has remained at around 7.2 percent since 2009. At end-2011, inflation fell to 3.1 percent, compared to 7.9 percent one year earlier. Challenges to maintaining growth include reducing the state’s role in the economy (reforming the inefficient state-owned enterprises), maintaining political stability, coping with uncertainty in the Eurozone and exports markets, and increasing the absorption of EU funds.

In the medium term, Romania must achieve steady economic growth and improve living standards while meeting fiscal targets, and continue structural reforms and the modernization of public administration.

Sustainable long-term growth entails that Romania adopt measures that ensure compliance with fiscal targets while clearing arrears and improving the quality of spending and strengthening tax collections; make progress on the structural reform agenda, with a focus on promoting private sector investment in the energy and transport sectors; and ensure continued financial sector stability through improved regulation and fewer nonperforming loans.

Solution

Supported by the agreements with the International Monetary Fund (IMF), the European Commission (EC), and the World Bank, internal and external imbalances have been substantially reduced, and the fiscal deficit gradually declined to an expected 2.2 percent of GDP in 2012, through a combination of expenditure cuts and tax increases. Continued firm policy implementation and the maintenance of fiscal, monetary, and financial sector buffers, in the context of the IFI agreements, will safeguard against risks to macroeconomic stability. The Bank is supporting improved service delivery in the social sectors through traditional investment loans and results-based financing in the health sector. In the medium term, Romania also needs to advance the unfinished structural reforms agenda, increase the efficiency of public administration and the performance of the energy and transport sectors, and focus on the absorption of EU funds. This is currently being addressed through the ongoing lending portfolio and, as of 2012, the increasing reimbursable advisory services program.

Results

• A Development Policy Loan (DPL) series in 2009–11, within the framework of an IMF and EC reform agenda, included support to a new pensions system, new public pay system, budget reforms, health expenditure efficiency reform, rationalization of the social assistance system, and reforms to consolidate the financial sector;
  
  
• Progress on public sector reform is on track. The World Bank carried out functional reviews of 12 public institutions in 2011 that provide operational recommendations. The government translated these into action plans, some of which are now being implemented with the support of World Bank teams financed with EU funds;

• in growth and competitiveness, Bank support is less advanced, but important achievements include: 
  • improved governance and resilience in the financial sector; 
  • a shift to per student financing in education; 
  • access and use of information and communications technologies in 255 rural communities; 
  • hazards mitigation: 
    • the Emergency Management Information System was rolled out in 48 locations, a public awareness and education program was designed, and a catastrophe insurance program was set up; 
    • seismic retrofitting of over 80 public buildings has been completed, 2.8 million people benefit from the project’s accomplishments; 
      
    • 266,000 people and 68,000 households are protected against floods in 10 vulnerable areas; 
    • almost 100 km of national roads and over 110 km of county roads have been protected, as well as schools, churches, and daycare centers; and 
    • mining accident risks to human and aquatic ecosystem health throughout Romania and other parts of the Tisza and Danube basins were reduced by remediation works in six sites; 
  • iberalization of the energy market; and 
  • meeting the EU environmental directives;

• in social and spatial inclusion: 
  • reforms contributed to improved targeting (through programs such as the Guaranteed Minimum Income) and efficiency in social spending; 
  • in 130 poor Roma settlements, over 137,000 inhabitants now have access to sanitation, water supply, roads, and electricity;
  • in 19 selected Roma communities, 900 children are part of inclusive early education, being formally prepared for school attendance; 
  • public pensions were strengthened in terms of fiscal viability, integrity, and equity; 
  • over 370 hospitals were decentralized, hospital infrastructure is becoming more fiscally sustainable and geared toward efficiency and quality, and a hospital classification system became operational; 

Bank Group Contribution

In November 2012, Romania had the second largest portfolio in Europe and Central Asia (ECA), with an undisbursed commitment of US$2.089 billion under nine active lending operations. A larger part (86 percent) is committed under two innovative new operations: the Deferred Drawdown Option (DDO) DPL of US$1.333 billion and the Results-Based Social Assistance System Modernization Project of US$0.497 billion. Grant financing includes a US$5.5 million Global Environment Facility (GEF) project for pollution control, a Prototype Carbon Fund for reducing greenhouse gases, a US$1.715 million Japanese grant (Policy and Human Resources Development [PHRD] fund) providing technical assistance (TA) to the government for Improved Policy Making and Institutional Framework for People with Disability, and a US$0.43 million Institutional Development Fund (IDF) grant for monitoring and evaluating policy making.

Romania’s Bank-financed analytic and advisory activities (AAA) Portfolio for FY2013–14 includes a Country Economic Memorandum; a Citizens Scorecard; the EU2020 Policies for Productivity, Employment, and Skills Enhancement; the Insolvency and Creditor Rights Report; and work on capacity building for the Asset Recovery Office. The Reimbursable Advisory Services (RAS) portfolio in Romania is now the largest in the Bank. Financed with EU funds, it aims to modernize public administration and help strengthen Romania’s capacity to absorb EU funds. The active portfolio consists of 19 RAS as of mid-FY13 in agriculture, education, public finance, transport, competition, justice, public investments, and regional development. Ten more are expected to be signed this year.

The International Finance Corporation (IFC) has invested US$1.37 billion in 52 projects, supporting roughly US$3.3 billion in investments since starting operations in Romania in 1990.

The Multilateral Investment Guarantee Agency (MIGA) has guaranteed 13 projects in Romania; at end-FY10, the agency’s gross exposure was about US$102 million.

Partners

The International Bank for Reconstruction and Development (IBRD) has maintained close partnerships with other donors, especially the EC and the IMF. This trilateral cooperation has aided the efforts made by the Romanian government to promote economic recovery, sustainable growth, public administration reform, and living standards similar to the rest of the EU countries. However, World Bank support has been successful primarily because of the close cooperation between the Bank and the Romanian government. Constructive coordination between the EC and the government led to a memorandum of understanding signed by the government and the Bank to modernize public administration and strengthen Romania’s capacity to increase EU funds absorption. The Bank’s work is highly relevant, as it provides input to the Government of Romania with a view to preparing for the next EU financing period. Other important partners include the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD), particularly on transport- and infrastructure-related projects.  

Moving Forward

IBRD will continue to help Romania promote sustainable growth with a focus on medium-term solutions, including to (i) achieve EU convergence, (ii) weather the impact of the crisis and a possible euro-contagion, and (iii) maintain medium-term macro stability.

IBRD will continue this support through a mix of investment lending and TA, to complement EU funds and help increase the absorption of EU Structural Funds. The IMF/EU/Bank program and the DDO DPL will help cushion the Romanian economy against shocks.

The Bank’s approach through the Country Partnership Strategy (CPS) (2009–13) is designed to support public administration reform and more sustainable growth in Romania to prevent further crises. Functional reviews of 12 ministries helped the government identify specific reforms to build stronger public administration. The macro-stabilization process was complemented by improvements in targeting social assistance (SA) toward lowest-income households, the disabled, and families with children. At mid-point, the Bank began helping the government implement public reforms through the Modernization of Administration Program and the enhancement of EU funds absorption, carrying out projects in the social sectors and tax administration, supporting its external issuance program through a DDO, advancing the discussion on growth via a series of growth policy notes, and promoting private sector development with the IFC. Through this work, the Bank hopes to help Romania’s people reap the full benefits of EU membership and enjoy a quality of life similar to its EU neighbors.

Beneficiaries

 “It used to take me three hours. I now get them all washed in thirty minutes and then I can go home and be with the kids,” says 22 year-old Simona Persida Negru, a Roma mother of three. The water fountain was built after people in Valea Corbului asked their local municipality to install a pipe that directs clean spring water into a rough trough at the village crossroads.

Many Roma children start first grade without knowing Romanian, thereby hindering their education. Preschool Romanian classes, begun in 2010, are already effective, according to local first grade teachers. “They say that since we started our bilingual class, they can talk to kids, and that was unheard of before,” says Elena Stan, a teacher in Sarulesti.

“The building is reinforced to withstand a quake measuring 8 on the Richter scale,” says Liviu Cismasu, who oversees the work to reinforce Bucharest city hall. This structure and many others in Romania, 40 in all, have been protected thanks to the Bank-supported Hazard Risk Management and Emergency Preparedness project.

“The World Bank has been one of the major pillars that helped maintain economic stability in Romania,” said Sebastian Vladescu, former Minister of Finance in 2010.  “The Bank is a knowing and fair dialogue partner, one that came with tangible solutions for each of our governments. Together we have a clearly established purpose: to turn goals into measurable growth in Romania.”