Overview

Country Context

Romania

2015

Population, million

19.8

GDP, current US$ billion

178.0

GDP per capita, current US$

9004

Poverty rate ($5/day 2005PPP terms)

32.6 (2012)

Life Expectancy at Birth, years

75.1 (2014)

Romania has continued to produce economic growth, despite several governmental and institutional changes over 2014 and 2015. The country’s national priorities are anchored in the EU framework. The 2016 National Reform Program, including the Country Specific Recommendations issued by the European Commission (EC), reconfirmed the roadmap for achieving the Europe 2020 objectives for smart, sustainable, and inclusive growth.

The Romania Partnership Agreement 2014–20 and its corresponding operational programs frame the use of European Structural and Investment Funds for 2014–20 and include a total envelope of €40 billion. Anti-corruption activities have increased and the National Anticorruption Directorate (DNA) registered a record number of cases in 2015. Its credibility was bolstered by the indictment of high-profile figures, including those sitting in office.

Romania still has the highest poverty rates in the EU. The share of Romanians at risk of poverty before social transfers increased from 28.0% in 2012 to 28.5% in 2014. Almost 40% are at risk of poverty and social exclusion.

Recent growth has been led by private consumption and a rebound in investment, which returned to near pre-crisis rates. Consumption recovered on the back of robust wage growth, VAT reduction, declining unemployment, low interest rates, and low commodity prices.  In 2015, investment at 24.7% of GDP was the highest in the EU. Despite recent improvements in the absorption of EU funds, governance and institutional challenges limit Romania’s competitive advantages.   

 

Last Updated: Oct 05, 2016

Strategy

Number of active projects

6

Lending

$1.64 billion

IBRD

6 loans ($1.64 billion)

GEF

1 grant ($5.5 million)

Other TFs

3 grants ($5.2 million)

RAS

10 activities ($19.18 million)

Since joining the International Bank for Reconstruction and Development (IBRD) in 1972, Romania has received $12.77 billion in commitments over 96 projects, covering a broad range of sectors. 

Under the Country Partnership Strategy (CPS) FY 2014–17, the World Bank supports Romania’s efforts to accelerate structural reforms. The Bank engages in Romania through the full range of its instruments: development policy lending, investment lending, Advisory Services and Analytics (ASA), and especially, Reimbursable Advisory Services (RAS). 

Engagement over FY14–17 aims at advancing poverty reduction and promoting shared prosperity through three pillars:

  • creating a 21st-century government; 
  • growth and private sector job creation; and 
  • social inclusion. 

The overarching, long-term objective of the CPS is to support the country’s convergence with the EU through robust, sustainable, and equitable growth and enhanced competitiveness.

Key Engagement

The Romania program utilizes a full array of Bank instruments and consists of a portfolio of six projects and four trust funds, as well as a program of 19 ASA tasks, 10 of which are RAS. The active lending portfolio amounts to $1.64 billion in net commitments ($1.09 billion undisbursed), supplemented by four recipient-executed trust funds of over $10 million ($2.7 million undisbursed). ASAs address themes of major interest, ranging from partnerships for marginalized Roma to improving fiscal effectiveness.

The ongoing 10 RAS are worth over $19 million and support the Roma Education Fund, the Chancellery of the Prime Minister, the Ministry of Education, the National Authority for the Protection of Children’s Rights and Adoption, the National Agency for Public Procurement, Ministry of European Funds, and Ministry of Public Finance. Since 2010, 52 agreements totaling US$83.41 million have been signed. 

Although Romania has significantly reduced macro-fiscal imbalances since the 2008 financial crisis—achieving one of the highest growth rates in the EU in 2015—the remaining challenges for the Government are to sustain growth by removing structural obstacles to the economy and to ensure that the benefits of prosperity reach all citizens, particularly the poor and vulnerable. 

The Bank’s RAS program, launched in 2010, has diagnosed structural bottlenecks to growth and made recommendations for capacity building, many of which were implemented from 2012 to 2015 under the aegis of the Memorandum of Understanding (MoU) supporting the implementation of EU Structural and Cohesion Funds in Romania and the modernization of public administration. The Bank continues to respond to the large and rapid demand for knowledge and advisory services in Romania.

In January 2016, the World Bank and the Government of Romania signed an MoU that provides a framework for continued World Bank support for Romania’s efforts to advance structural reforms, improve public administration, and achieve faster EU convergence. 

After the success of the past five years, the new MoU includes the extension of advisory services to the entire European Structural and Investment Funds 2014–20, including, for the first time in Europe, access to the European Agricultural Fund for Rural Development and the European Maritime and Fishery Fund.

 

Last Updated: Oct 05, 2016

Economy

RECENT ECONOMIC DEVELOPMENTS

Economic growth accelerated to 5.2%[1] in the first half of 2016, the highest since 2008 and the fastest in the EU. Growth was led by private consumption (up 9.4%), which was fueled by expansionary fiscal policy, including a reduction in the standard VAT rate from 24 to 20% in January 2016, and labor market improvements. Investment growth remained solid at 7.3% due to strong private sector activity, especially in construction and information and communications technology (ICT).

Inflation remains in negative territory, helping the central bank to maintain accommodative conditions. Propped up by strong consumption, rising unit labor costs, and the fading out of the base effect of the 2015 VAT cut for food, annual headline inflation picked up but remained negative at -0.2% in August 2016, helped by the declining import prices. The National Bank of Romania (NBR) kept the policy rate at 1.75% in August. Credit to corporations fell 3.9% in July, while credit to households registered an expansion of 6.0%. However, credit growth to households may be impacted by the adoption of the debt discharge (datio in solutum) law, approved in April.

The labor market strengthened on the back of strong growth and fiscal relaxation. Real wages[2] increased by 13.3% in July 2016, and the employment rate[3] reached 59.8% in the first quarter of 2016, up from 59.1% in the same period of 2015. However, employment growth has been concentrated in high-skilled areas, while the integration of young people and other excluded groups remains a challenge. The unemployment rate fell to 6.1% as of end-July 2016, below the EU average of 8.6%.

Keeping the budget deficit under control remains a priority for the Government. The budget deficit widened modestly to 0.5% of the projected GDP in the first half of 2016 due to lower revenues. Revenues fell by 2%, as improvement in the collection of personal income tax (PIT), corporate income tax (CIT), and social contributions could not compensate for the VAT cuts. Expenditures increased 5.5%, driven by a larger public wage bill, pension hikes, and the doubling of the child allowance. 

ECONOMIC OUTLOOK

The output gap is expected to close and growth to reach 5.1% in 2016. Growth is expected to remain solid in 2017 as additional fiscal relaxation measures will be implemented, including a further VAT cut to 19%, the elimination of the special construction tax, and a reduction in the excise rate for fuel. Acceleration of consumption is also expected to widen the current account deficit. Inflation is projected to stay in negative territory until end-2016.

The NBR projects a gradual increase in inflation toward 2.0% at the end of 2017. In line with the 2016 budget program and the Government’s Medium-Term Fiscal Framework, the consolidated budget deficit is projected to widen toward 3% of GDP in both 2016 and 2017, pushing public debt to 40.3% of GDP in 2017 from 39.8% in 2015.

The decline in revenues may be partly compensated by lower than expected capital spending, due to a lack of sufficient EU funds projects for the period 2014–2020. The Government will need to contain current spending pressures and improve tax efficiency to avoid entering the Excessive Deficit Procedure (EDP).

Continued strong private consumption, aided by a lower VAT and growth in employment and real wages, should boost real incomes and lead to further declines in poverty incidence. The $5.00/day 2005 PPP poverty rate is projected to decline from 27.0% in 2015 to 21.5% in 2018. The planned introduction of a minimum social inclusion income program in 2018 is expected to improve targeting and increase the level of benefits for the most vulnerable.

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[1] Figures are y-o-y unless otherwise specified.

[2] Consumer price index (CPI)-deflated.

[3] 15–64 years old.

 

Last Updated: Oct 05, 2016

Highlighted Project

Building a Modern and Efficient Justice Sector. The World Bank has been supporting Romania for over a decade in its efforts to strengthen the quality, efficiency, and equity of justice services. Building an accountable and transparent judicial system is critical to attracting investments and enhancing economic growth. A modern and accessible justice system is also central to supporting Romania’s convergence with EU standards, addressing corruption, and building an accountable public administration.     

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Oradea Palace of Justice deals with 70,000 cases per year
The Romania Judicial Reform Project has helped improve the transparency and efficiency of the justice system and contributed to the upgrading of court infrastructure and automation in justice sector institutions. The project has also provided technical assistance and capacity building for the main judicial governing bodies in order to introduce international and European standards and help address perceptions of corruption.

The project has assisted the Romanian authorities in revising the civil and criminal codes, preparing impact assessments for four codes, and drafting an insolvency code. The project has supported IT and audio recording systems for court hearings and a Resource Management System for the various institutions of the broader justice system, including the Public Ministry and the National Administration of Penitentiaries. The courts, the Ministry of Justice, the Superior Council of Magistracy, and the National Institute of Magistracy and the National School of Clerks have benefited from an improved design of online and standard training courses and the development of better teaching and management techniques.

The introduction of court user surveys has added an additional dimension of service delivery by helping justice sector professionals look at the functioning of the courts from the perspective of the user. Over the coming years, the World Bank plans to continue to support justice sector reforms in Romania with a focus on increasing the efficiency, access, and transparency of the justice system and giving citizens a greater voice in supporting improvements in the quality of justice services.   

Active Projects - One Pagers (PDF)

 

Last Updated: Oct 05, 2016


LENDING

Romania: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments