The World Bank in Romania

Country Context

Romania has made impressive strides in raising its economic performance and prosperity over the past two decades. However, the COVID-19 pandemic and Russia’s invasion of Ukraine have tested the resilience of the Romanian economy and exacerbated its structural vulnerabilities, especially in terms of poverty and disparities in economic opportunity, persistently large gender gaps in labor force participation and employment, widening fiscal and current account deficits, and significant institutional constraints hindering the efficient use of resources.  

Romania’s economic growth was robust in 2022 at 4.8 percent, driven by strong private consumption and a pick-up in investment. Economic prospects are moderated by the spillovers from the war in Ukraine, and risks are tilted to the downside. Fiscal and current account deficits will remain elevated. Poverty reduction is expected to slow down as a result of inflationary pressures, mainly from food and energy, though some of the impact is mitigated by government support measures.   

Last Updated: Apr 11, 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: (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 reconfirmed the strategic framework for engagement.  A Systematic Country Diagnostic has been prepared and finalized in March 2023 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 12 projects (US$2.9 billion) and 49 Advisory Services and Analytics (ASA), out of which 7 are EU-funded trust funds (US$5.67 million), 36 Reimbursable Advisory Services (RAS) agreements in implementation (US$132.08 million), 2 RAS activities under preparation, and 4 Bank-financed ASA.

The RAS program complements the overall country program in Romania and supports enhancing institutional capacity in the areas of governance, evidence-based policy making, public procurement, strengthened capacity for monitoring and evaluation, protection of the vulnerable, disaster risk management, urban regeneration, justice reform, and an increasing set of activities supporting the capacity strengthening of the Government in implementing the National Resilience and Recovery Plan for reforms (improved strategic planning and budgeting, pensions, 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, civil service reform, flood risk management, energy sector regulatory framework, access to education for Ukrainian displaced children and access to assistance services for Ukrainian refugees.  

A Romania Country Climate and Development Report (CCDR) is being drafted and is scheduled to be delivered by June 2023.

International Finance Corporation

Since 1991, IFC has supported private sector development in Romania with approximately US$4.6 billion. IFC has accelerated the delivery of its program in the last five years registering a total of US$1.9 billion with a record year in FY22 of US$458 million. As of March 2023, IFC’s program in FY23 stood at US$217.9 million and total committed exposure reached US$1.5 billion (64% in FIG, 35% in MAS and 1% in CDF).  

Under the ongoing FY19-23 CPF, IFC will continue to support private sector development in Romania applying strong selectivity by prioritizing interventions that catalyze private investments or mobilize other funding and contribute to regional or global public goods to increase development impact on the poor and most vulnerable.  

A New CPF preparation was initiated in December 2022 with Board approval anticipated in December 2023. Ahead of the new CPF, IFC will prepare an IFC 3.0 Country Strategy for Romania. IFC’s new strategy will reflect the outcomes of the recent SCD and CPSD analytics, while aiming to respond to the implications of the ongoing war in Ukraine and the post-COVID19 global dynamics. 

Last Updated: Apr 11, 2023

Recent Economic Developments

Romania’s economy performed better than expected in 2022, expanding by 4.8 percent. Growth was driven by strong private consumption (up 5.5 percent year-over-year) benefiting from the phasing-out of pandemic restrictions, higher wages, and muted unemployment. However, consumer spending gradually weakened in the second half of the year as higher prices squeezed disposable income. Investment, up 9.2 percent y-o-y, was mainly boosted by new construction works and, to a smaller extent, by machinery and equipment. Strong private consumption and terms of trade shocks led to a significant widening of the goods trade deficit. On the supply side, growth was led by Information and Communications Technology (up 20.1 percent y-o-y), which benefited from businesses adopting digital technologies. 

Annual inflation accelerated to 16.4 percent in December 2022, led by soaring electricity, gas, and central heating prices (up 39.7 percent), while food prices were up by 22.1 percent. Inflationary pressures prompted the National Bank of Romania to gradually increase the policy rate to 7 percent in early January 2023. Private sector credit growth decelerated to 12.1 percent y-o-y in December 2022, from 14.8 percent y-o-y in December 2021, reflecting the slowdown in loans to households.

Economic Outlook

Growth is projected to decelerate in 2023. The outlook hinges on several factors, including the extent to which spillovers from the war in Ukraine impact the European economy in which Romania is highly integrated; persistent core inflation, and additional volatility in energy and food prices. De-anchoring of inflation expectations could prolong the monetary tightening cycle leading to increased financing costs weighing down investment. 

Romania’s capacity to efficiently absorb EU funds will be critical for a sustainable, green, and inclusive recovery. The sizable funds, and associated structural reforms, should also partially mitigate the impact of higher interest rates and uncertainty on private investment and alleviate some of the fiscal pressures resulting from heightened energy and food prices. However, fiscal pressures will remain significant and require renewed attention to fiscal consolidation.  

Poverty is expected to continue declining slowly depending on whether food and energy prices remain elevated for longer and if the mitigation measures helping families with low incomes to absorb rising food and gas prices are effective. Declining remittance incomes could also mean a longer recovery process for vulnerable population segments in the coming years. A protracted war in Ukraine may weaken growth prospects in the medium term.   

Last Updated: Apr 11, 2023