The World Bank in Romania

Country Context

Romania has achieved impressive growth and prosperity over the past two decades. However, the shocks induced by the COVID-19 pandemic and the war in Ukraine have exposed structural vulnerabilities in the economy. These include persistent poverty and disparities in economic opportunity across regions and between urban and rural areas, structural rigidities in the product and labor markets, weaknesses in fiscal policy and significant institutional constraints hindering the efficient use of resources.

Romania’s economy recovered at 5.9 percent in 2021 and performed better than expected in the first half of 2022, growing at 5.8 percent, despite a significant pick-up in inflation and increased uncertainty due to the war in Ukraine. The fiscal deficit remained elevated in 2021 at 7.1 percent and could edge close to 7 percent in 2022 as fiscal pressures persist. Given Romania’s limited fiscal space, maximal absorption of the EU Multiannual Financial Framework and Next Generation EU funds will be crucial for a sustainable recovery.

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 at advancing poverty reduction and promoting shared prosperity through three pillars: (i) Equal opportunities for all; (ii) Private sector growth and competitiveness; and (iii) Resilience to shocks.

The Performance and Learning Review provided small adjustments to the CPF to reflect the challenges of the COVID-19 outbreak and also reconfirmed the strategic framework for engagement. A Systematic Country Diagnostic is in preparation to inform the future CPF beyond FY23.

The Bank engages in Romania through the full range of its instruments: investment lending, development policy lending, Advisory Services and Analytics (ASA), Trust fund related work and Reimbursable Advisory Services (RAS).

Key Engagement

IBRD

The Romania program utilizes the full array of Bank instruments and consists of 10 projects (US$2.28 billion) and 52 Advisory Services and Analytics (ASA), out of which 8 are EU-funded trust funds (US$5.66 million), and another 39 tasks correspond to 33 Reimbursable Advisory Services (RAS) agreements in implementation (US$116.49 million), 3 RAS, and 1 EU-funded trust fund are activities under preparation, and 1 Bank-financed ASA.

The RAS program supports: improved strategic planning and budgeting, evidence-based policy making, protection of the vulnerable, disaster risk management, urban regeneration, human development, and strengthened capacity for monitoring and evaluation and an increasing set of activities supporting the capacity strengthening of the Government in implementing the National Resilience and Recovery Plan for reforms (pensions, public wage, social assistance, education, water, central government functions). The technical assistance financed by the European Commission through Trust Funds covers early school leaving, civil service reform, and flood risk management.

International Finance Corporation

As of September 30, 2022, the outstanding portfolio stands at US$1.24 billion, of which 60 percent represents investments in financial institutions, and 40 percent in the real sector. Since the start of operations in Romania in 1991, IFC has invested approximately US$4 billion, including over US$750 million in over 120 projects.

In FY22, IFC’s commitments totaled US$458 million, while the pipeline for FY23 is also strong. In the financial sector, IFC remains strategically engaged to support the development of capital markets and on-lending to SMEs through leasing companies and banks. In the real sector, IFC will continue to explore new investment opportunities in agribusiness and development of supporting value chains, manufacturing, business real estate, to strengthen productivity, regional growth, increase FDI and competitiveness and enhance sustainability practices across sectors.

IFC is strongly committed to help attract additional private investment in infrastructure-related operations. Upon demand, IFC is ready to help strengthen sustainable energy and connectivity infrastructure and will continue to explore new PPP opportunities in the health care system at both municipal and national levels.

Recent Economic Developments

The Romanian economy performed better than expected, growing at 5.8 percent in the first half of 2022. Growth was supported by strong private consumption (up 7.5 percent y-o-y) in response to the phasing-out of COVID-19 restrictions, higher wages, and lower unemployment. Investment showed signs of recovery (up 2.2 percent y-o-y), boosted by new construction works. Robust private consumption and the terms of trade shock led to a widening goods trade deficit. On the supply side, growth was led by the ICT sector (up 23.9 percent y-o-y), which benefited from businesses adopting digital technologies.

Inflation accelerated to 15.3 percent in August 2022, led by soaring electricity, gas, and central heating prices (up 36.3 percent). Inflationary pressures prompted the National Bank of Romania to gradually increase the monetary policy rate to 5.5 percent in early August 2022. Rising food and energy prices are disproportionally affecting the poor and vulnerable households despite the capping of gas and electricity prices, until September 2023, for households with lower average monthly consumption.

The fiscal deficit decreased to 2.4 percent of GDP in the first eight months of 2022, but fiscal pressures remain significant as recurrent expenditure and energy subsidies could swell the deficit this year.

Economic Outlook

Romania’s growth will remain strong in 2022, with risks tilted to the downside. A global slowdown and a possible recession in the main trading partners could impact Romania’s growth in 2023. Growth prospects hinge on several factors, including new COVID-19 flare-ups, the dynamics of inflation, especially related to energy and food prices, and the war in Ukraine and its impact on the European economy, in which Romania is strongly integrated. Romania’s capacity to absorb the EU funds will be critical to a sustainable, green, and inclusive recovery process.

The economic rebound is expected to gradually reduce poverty. Poverty is projected to decline to the pre-crisis level by 2024. A protracted war in Ukraine may significantly weaken growth and lead to an increase in poverty in the short run.

Over the medium term, fiscal deficits will remain elevated. The sizable EU funds should help alleviate some of the fiscal pressures resulting from the war and heightened energy and food prices. The fiscal consolidation efforts remain critical and should address the large structural deficit, which requires reforms to strengthen revenue mobilization and increase spending efficiency.

Last Updated: Oct 12, 2022