The World Bank in Romania

Country Context

Romania has made impressive strides in enhancing its economic performance and prosperity over the past two decades, supporting convergence in living standards with the European Union (EU). However, several constraints, including weak institutions, shortages of skilled workforce, poor connectivity, low resilience to natural hazards, and the effects of climate change, hold Romania back from making growth more inclusive and more sustainable economically and environmentally.

The Romanian economy decelerated to 1.7% in the first half of 2023, despite resilient private consumption and investment aided by EU funds. Growth will moderate in 2023, in alignment with EU’s weakened economic activity, but rebound in the medium term. Fiscal and current account deficit pressures will remain elevated, necessitating structural reforms. Poverty reduction is set to decelerate due to high food and energy costs, partly offset by government support. Tackling energy poverty is key to poverty alleviation and social inclusion.

Last Updated: Oct 09, 2023

Strategy

Through the Country Partnership Framework (CPF) for FY19-23, the World Bank supports Romania’s efforts to accelerate structural reforms and convergence with the EU through robust, sustainable, and equitable growth and enhanced competitiveness.

Engagement over FY19–23 has an overarching goal of strengthening Romania’s institutions and aims to advance poverty reduction and promote shared prosperity through three pillars:

1. Equal opportunities for all
2. Private sector growth and competitiveness
3. Resilience to shocks

The World Bank has initiated the preparation of a new CPF for FY24-28 for the engagement in Romania. This CPF will focus on contributing to country’s convergence with EU peers, through improved human capital outcomes, enhanced environment for more and better jobs, increased resilience and accelerated green transition, while enhancing institutions to serve all people and businesses as a cross-cutting theme. The CPF will be finalized in FY24, and consultations are underway through November 2023. 

Key Engagement

International Bank for Reconstruction and Development (IBRD)

The Romania program utilizes the full array of the World Bank instruments and consists of 14 projects ($3.75 billion) and 38 Advisory Services and Analytics (ASA), out of which three are EU-funded trust funds ($2.75 million), one EU-funded trust fund under preparation, 30 Reimbursable Advisory Services (RAS) agreements in implementation ($123.64 million), one RAS activity under preparation, and three World Bank-financed ASA.

The RAS program complements the overall country program in Romania and supports enhancing institutional capacity in the areas of governance, public administration, strengthened capacity for monitoring and evaluation, public procurement, flood risk management, agriculture, justice reform, and an increasing set of activities supporting the capacity strengthening of the Government of Romania in implementing the National Resilience and Recovery Plan for reforms (improved strategic planning and budgeting, pensions, tax framework, public wage, social assistance, education, water, central government functions, digitalization). The technical assistance financed by the European Commission through trust funds covers early school leaving, energy sector regulatory framework, market development and energy efficiency, public procurement, access to education for displaced Ukrainian children and access to assistance services for Ukrainian refugees.  

International Finance Corporation (IFC)

The IFC envisages boosting productivity growth by: (i) facilitating higher value-added investments and innovation, including in agribusiness, (ii) promoting access to finance and deepening the capital market, and (iii) improving access to quality social services and affordable housing. Bridging the productivity gap requires: (i) improving regional trade logistics and (ii) addressing the infrastructure and digital gap. Innovative solutions for green growth will be supported by: (i) scaling up of clean energy and decarbonization, (ii) smart-city infrastructure, including waste, water, and circular economy, and (iii) green and climate-linked financial instruments. The program will be supported by advisory services for PPPs and M&A as well as green transactions.

Last Updated: Oct 09, 2023

Recent Economic Developments

Romania’s economic growth decelerated to 1.7% YoY in H1, 2023. Private consumption remained the main driver of growth benefiting from higher wages and muted unemployment. Investment was boosted by increased public investment supported by EU funds. Temporary factors notably dampened growth, with inventory changes contributing negatively to GDP dynamics. Despite weakening export volumes, trade and current account deficits narrowed, supported by higher services surplus and modest import compression. On the supply side, although construction was the main driver of growth, its momentum waned, reflecting a slowdown in both residential and non-residential constructions. Industry continued to contract due to elevated production costs, especially in energy-intensive sectors.

Annual inflation slowed to 9.4% in July from 12.2% in March, driven by lower energy costs. Following 575 basis points of hikes from October 2021, the National Bank of Romania has maintained its policy interest rate at 7% since January 2023. Private sector credit growth decelerated to 6.4% YoY in June 2023 from 17.5% in June 2022, reflecting a slowdown in loans to households (0.1% YoY).

Economic Outlook

Growth is projected to decelerate in 2023, but firm over the medium-term, supported by private consumption and EU funds aided investment. The outlook depends on multiple factors, including the extent and duration of Russia's invasion of Ukraine and its repercussions on the European economy, alongside fluctuations in global prices and domestic inflation. Romania’s capacity to efficiently absorb  EU funds will be critical for a sustainable, green, and inclusive recovery, aiding private investment amid higher interest rates and uncertainty. The sizable funds and associated structural reforms will also be critical in supporting a sustainable reduction of the fiscal deficit over the medium term, particularly aimed at reducing inefficient expenditures and strengthening revenue mobilization. Strengthened lifelong skills formation and private capital mobilization will be pivotal in boosting potential growth.

Due to the growth slowdown, 2024 may see slower poverty reduction. However, the poverty trajectory will hinge on the duration of the war in Ukraine and its impacts on food and energy prices, as well as the approach to tackle the fiscal deficit while protecting the more vulnerable. The government's role in mitigating energy cost effects through targeted support is vital.

Last Updated: Oct 09, 2023