The World Bank in Romania

Country Context

The Romanian economy contracted by 3.9 percent in 2020, reflecting a better-than-expected fourth quarter performance of -1.4 percent year-on-year. The fiscal deficit surged to 9.8 percent of projected GDP at the end of 2020 on the back of COVID-19-related expenditures and lower revenues due to the economic downturn and tax relief. The impact of the stimulus pursued at the European Union (EU) level will play a critical role in the recovery, given the limited fiscal space. Poverty is anticipated to increase in the short term as the protracted impacts of COVID-19 affect domestic income sources and remittances.  

The World Bank classified Romania as a high-income country for the first time, based on 2019 data (per capita income of $12,630). This is an important development for investment rating decisions and for accession negotiations to the Organisation for Economic Co-operation and Development. 

The Bucharest Stock Exchange (BVB) officially became an emerging market as of September 21, 2020, when the first two Romanian companies were included in the FTSE Global Equity Index Series (GEIS). The two Romanian companies to be included in the FTSE Global All Cap Index and three other indexes are lender Banca Transilvania (TLV) and energy producer Nuclearelectrica (SNN). 

Last Updated: Apr 05, 2021

Strategy

Under the Country Partnership Framework (CPF) for FY19-23, the World Bank supports Romania’s efforts to accelerate structural reforms and convergence with the EU. The Bank uses the full range of instruments for financial and technical assistance.

In the past year, the Bank has worked to adapt to the changes brought by the COVID-19 pandemic and restructured the existing portfolio. The Health Sector Reform Project was reorganized to help authorities procure emergency supplies and equipment.

Also, the Romania Secondary Education (ROSE) Project was restructured to deliver equipment and materials to 1,100 high schools and to provide over 60,000 vulnerable students with access to online education. The ongoing Performance and Learning Review will provide small adjustments to the CPF to reflect the current challenges of the COVID-19 outbreak.   

Key Engagement

International Bank for Reconstruction and Development

Engagement over FY19-23 has the overarching goal of strengthening Romania’s institutions, advancing poverty reduction, and promoting shared prosperity through three pillars:

• Equal opportunities for all
• Private sector growth and competitiveness
• Resilience to shocks

The Romania program consists of nine lending projects and 59 Advisory Services and Analytics (ASA) tasks, out of which there are: 

• 42 tasks corresponding to 34 Reimbursable Advisory Services (RAS) agreements that are signed and under implementation 
• five RAS agreements under preparation 
• four non-RAS ASA (Bank budget-funded)
• seven non-RAS ASA (EU-funded Trust Funds) 
• 1 EU-funded Trust Fund under preparation   

The active lending portfolio of the International Bank for Reconstruction and Development (IBRD) amounts to $1.98 billion and covers such sectors as: education, health, disaster risk management, justice, and the environment.

The health program has been expanded and now includes the Health Sector Reform Project and the Health Program for Results (Health PforR). The Health PforR of €500 million will help the Government increase the coverage of primary health care for underserved populations and improve the efficiency of health spending by addressing underlying institutional challenges.

The RAS program - one of the largest in the World Bank at $114.12 million - is focused on priority areas for Romania’s EU convergence, such as improved strategic planning and budgeting, evidence-based policy making, protection of the vulnerable, disaster risk management, human development, and strengthened capacity for monitoring and evaluation. It also features engagements supporting a number of municipalities, including Bucharest, Brasov, and Cluj, as well as other subnational authorities, to enhance their capacity for planning and prioritizing investments and urban regeneration. 

The ASA program includes technical assistance projects financed directly by the European Commission through a Trust Fund framework in areas, such as: early school leaving, social inclusion of the Roma minority, business development/entrepreneurship, civil service reform, and flood risk management.

International Finance Corporation

The International Finance Corporation’s (IFC) committed own account portfolio in Romania ranks second in the Europe and Central Asia region after Turkey. Since the start of operations in Romania in 1991, IFC has invested approximately $3.5 billion, including over $700 million in mobilization, in over 112 projects.  

As of February 28, 2021, IFC's committed portfolio in Romania was $735.41 million, of which 64 percent represented investments in financial institutions (banks, non-bank financial institutions) and the remaining 36 percent investments in the real sector. The outstanding portfolio is US$691.5 million. In FY20, IFC’s commitments in Romania totaled $334 million, including mobilization. 

Last Updated: Apr 05, 2021

Recent Economic Developments

The Romanian economy contracted by 3.9 percent in 2020. Trade and services decreased by 4.7 percent, while certain sectors, such as tourism and hospitality, remained heavily affected. Industry contracted by 9.3 percent, reflecting weakened external demand and supply chain disruptions. The biggest contraction was seen in agriculture, linked to persistent droughts affecting crops. The unemployment rate reached 5.5 percent in July 2020 before edging down to 5.3 percent in December. 

Rapid household assessments of the impact of the COVID-19 pandemic showed a substantial rise in the share of the population at risk of poverty in April 2020, which gradually declined until January 2021, as temporarily inactive workers returned to work. Poverty levels at the start of 2021, however, remain elevated, linked to the combination of the sharp agricultural contraction and the persistence of the pandemic. 

The Government provided a fiscal stimulus of 4.4 percent of GDP in 2020 in response to the COVID-19 crisis. In the first COVID wave, poor and vulnerable households were less supported by the fiscal response measures, which extended more directly to those in formal employment structures; subsequent programs for daily wage and seasonal workers extended protections to typically more vulnerable segments. 

Economic Outlook 

The economy is projected to grow at around 4.3 percent in 2021. The strength of the recovery will depend on the success of the COVID-19 vaccine rollout and the policy response to the health crisis, as well as on developments in the EU. In view of the limited fiscal space, the impact of the EU-level stimulus will play a crucial role in the economic recovery. Romania is expected to receive €79.9 billion from the EU by 2027 under the Multiannual Financial Framework 2021–2027 (€49.5 billion) and the economic recovery plan (€30.4 billion). 

A substantial reduction of the fiscal deficit in 2021 is improbable, as the Government will have to support the economic recovery process. Over the medium term, the deficit will follow a downward trajectory but is likely to remain above 3 percent throughout the projection period. The widening fiscal deficit would push public debt to 62.2 percent in 2023 from 37.3 percent in 2019. However, public debt remains one of the lowest in the EU. 

Poverty is projected to remain elevated due to the triple-hit in incomes facing poorer segments of the population in the form of the persistent pandemic, the poor agricultural year, and declining remittance incomes. 

Last Updated: Apr 05, 2021