World Bank Continues Support for Romania’s Reforms With EUR 1 Billion Loan

An International Bank for Reconstruction and Development (IBRD) Deferred Drawdown Option Development Policy Loan (DPL DDO) of EUR 1 billion was approved in mid-June to support the Government of Romania’s commitments under the European Union (EU) Fiscal Compact.

The Compact—the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union—was signed by all EU member states except the Czech Republic and the United Kingdom in March 2012. It requires member states to enforce strict spending and tax requirements to prevent future debt crises.

The treaty also requires national budgets to be balanced or in surplus, that budgetary structural deficits not exceed 0.5 percent of GDP, and that government debt remain below 60% of GDP. Romania, which has lower debt, can reach a structural deficit of 1% of GDP.

Under the Deferred Drawdown Option of the Bank loan, the EUR 1 billion is not drawn immediately by Romania, but rather is available as a fiscal buffer to be called upon if it becomes necessary, and will remain available for the next three years provided Romania follows its macroeconomic and reform programs.

“Romania has made good progress in stabilizing the macro-economic and fiscal framework and putting the country on a growth path, despite the challenging economic environment throughout Europe today,” said Philippe Le Houérou, World Bank Vice President for Europe and Central Asia. “We commend the new government on continuing the path of stability and confidence through structural reforms, and modernization of the public administration. The Bank is looking forward to continue its partnership with Romania to provide its expertise for sustainable and inclusive growth, and for EU convergence.”

The DPL DDO will support reforms that have three aims:

• Enhance the efficiency of public spending and the Government’s revenue-raising capacity through better compliance with tax laws;
• Improve governance of state owned enterprises in the energy and transport sectors to reduce the drain on the budget, generate savings and attract the private capital needed to modernize plants and increase their competitiveness, and pursue the liberalization of energy markets; and
• Enhance the quality of public health care by reducing unjustified outlays and reallocating resources to high-return preventive care and health promotion programs.

The DPL DDO contributes to the Government’s fiscal buffer created in response to continuing turbulence in export and financial markets.

It is following the successful implementation of a series of three Development Policy Loans totaling EUR 1 billion that contributed to Romania’s macroeconomic stabilization and crisis management program as part of a multilateral package of EUR 20 billion co-financed with the International Monetary Fund and the European Commission, in 2009-11.