The World Bank in Romania

Country Context

The World Bank classified Romania as a high-income country for the first time, based on 2019 data (per capita income of $12,610). However, the pandemic-triggered crisis pulled the country back into the upper-middle-income group. In the medium to long term, Romania needs to address its structural constraints, including persistent twin deficits and high inequalities, as well as weak growth fundamentals stemming from low productivity and problems with both the quantity and quality of labor, due mainly to shortcomings in the quality and inclusiveness of education and shortages in critical skills.

Romania’s economy contracted by 3.9 percent in 2020, one of the lowest contractions in the European Union (EU), and recovered strongly at 6.5 percent in the first half of 2021. The fiscal deficit surged to 9.2 percent of GDP at the end of 2020 and will remain high in 2021. Given Romania’s limited fiscal space, maximal absorption of the EU Multiannual Financial Framework and Next Generation EU funds will be crucial to a sustainable recovery.

Last Updated: Oct 13, 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. The Performance and Learning Review provided small adjustments to the CPF to reflect the challenges of the COVID-19 outbreak.  

In the past year, the Bank has worked to adapt to the changes brought by the pandemic and restructured selected operations. The portfolio was also expanded to include an additional financing in health as well as a new operation aimed at supporting long-term investment in school infrastructure; building the foundations for future investments while mobilizing EU resources and local budget funds; and improving the capacity of institutions to manage disaster and climate risks.

Key Engagement

Engagement over FY19–23 has the overarching goals of strengthening Romania’s institutions, advancing poverty reduction, and promoting shared prosperity by supporting:

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

International Bank for Reconstruction and Development (IBRD)

The active lending portfolio of IBRD consists of 10 projects ($2.28 billion) covering education, health, disaster risk management, justice, and the environment.  

The Advisory Services and Analytics include 33 Reimbursable Advisory Service (RAS) agreements under implementation, one Bank-funded analytical work, and eight Trust-Funded tasks. 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. The technical assistance financed by the European Commission through Trust Funds covers: early school leaving, social inclusion of the Roma minority, entrepreneurship, civil service reform, and flood risk management.

International Finance Corporation (IFC)

The IFC-committed own account portfolio in Romania ranks first in the newly created Europe region. Since the start of operations in Romania in 1991, IFC has invested approximately $3.7 billion, including over $700 million in mobilization, in over 120 projects.

As of August 31, 2021, IFC’s committed portfolio in Romania was US$1,037 million, of which 60 percent represented investments in financial institutions (banks, non-bank financial institutions) and the remaining 40 percent investments in the real sector. The outstanding portfolio is $889 million. In FY21, IFC’s commitments in Romania totaled $429 million, including mobilization.

Last Updated: Oct 13, 2021

Recent Economic Developments

The Romanian economy grew by 6.5 percent in the first half of 2021 on the back of better-than-expected second-quarter performance at 13.0 percent year-on-year (y-o-y). Private consumption recovered strongly in the first half of the year (up 5.2 percent y-o-y), led by robust demand for durable and household goods. Increased business and consumer confidence also supported higher investment (up 11.9 percent y-o-y). New industrial orders recovered strongly, supporting industry’s rebound (up 10.4 percent y-o-y), and the information and communications technology sector (up 14.1 percent y-o-y) benefited from increased remote work needs. Strong economic recovery and labor supply constraints reduced unemployment to 5.2 percent in June 2021 from as high as 5.9 percent in January.

Poverty is anticipated to have declined in 2021 yet remains above the pre-crisis level. Results from the recent round of the World Bank’s Rapid Household Assessment show a lessening impact of the crisis on Romanian households, as temporarily inactive workers returned to work and household income partially recovered.

The fiscal deficit reached 9.2 percent of GDP at the end of 2020, driven to a lesser degree than in other EU countries by the COVID-19 fiscal stimulus. The Government responded to the COVID-19 crisis by providing a fiscal stimulus of 4.4 percent of GDP in 2020 and 1.2 percent of GDP in  the first half of 2021.

Economic Outlook 

The economy is projected to rebound to 7.3 percent in 2021 on the back of the recovery in domestic demand, and growth will settle at roughly its potential (4 percent) over the medium term. The strength of the recovery will depend on tackling the low vaccination rate, which reflects high vaccine hesitancy, the evolution of the Delta variant, and the policy response to the health crisis. Given Romania’s limited fiscal space, maximal absorption of the EU Multiannual Financial Framework and Next Generation EU funds will be crucial to a sustainable recovery.

The economic rebound is expected to gradually reduce poverty, which is projected to decline over the medium term. However, the triple hit in income in 2020 - the persistent pandemic, a prolonged drought, and declining remittance incomes -could mean a longer recovery process for some vulnerable population groups compared to others in the coming years.  

The fiscal deficit will remain high in 2021 at an estimated 7.4 percent of GDP, and risks are tilted to the upside. Renewed attention should be given to fiscal consolidation to avoid an unsustainable increase in public debt over the medium term.

Last Updated: Oct 13, 2021