We estimate economic growth for Romania in 2014 at 2.5-3 percent, even higher

April 24, 2014

Elisabetta Capannelli Agerpres

The World Bank estimates that Romania will record in 2014 and economic growth between 2.5 and 3 percent, possibly even higher, in case it will turn out to be a good agricultural year, said in an interview granted to AGERPRES, Elisabetta Capannelli, country manager for Romania at WB.

Furthermore, the World Bank official pointed out that the challenge internally is continuing structural reforms according to plans, and externally the challenge is the crisis in Ukraine, that has, however, limited implications for Romania, given the significant degree of energy independence of the country, while the exposure to commerce with Ukraine and Russia is limited.

AGERPRES: How do you see Romania's economy evolving in 2014?

Elisabetta Capannelli: The macroeconomic situation, which is already good, will continue to consolidate in the context of the program with the International Monetary Fund (IMF) and the European Union (EU). The fiscal deficit will narrow further, end-year target agreed with the IMF is to 2.2% of GDP, and the government is also working to improve spending composition, particularly by upgrading the framework for public investments. Inflation has reached a historical low of around 1% year to year in March, although it may increase towards 3-3.5% in the second half of the year due to a base effect; prices of food products brought down inflation in the second half of last year. The current account deficit is firmly under control:—1.1% of GDP in 2013, and estimated—1.5% in 2014. Access to the domestic and international financial markets is good, and Romania issued this year its first 30 years bond.

The domestic demand is gradually improving and this will help economic growth, together with the improved growth prospects of the Eurozone. We estimate economic growth at between 2.5-3.0, probably even higher, if 2014 is a good agricultural year. At this stage growth is projected to be lower than the 3.5% of last year, which was helped by a record agricultural year. However, non-agriculture growth will very likely be higher than the 2.4% of last year, driven by an acceleration of domestic consumption and improvements in investment, particularly due to the absorption of the EU funds.

The acceleration of the reforms in energy, with privatization, corporate governance, price liberalization etc., in transport, health, public investment, and a better alignment of the policy agenda with the budget should boost the medium term growth potential of Romania to 4-5% per year and accelerate the convergence with the EU. Romania is currently at around 50% of the EU 28 average in terms of GDP per capita at PPP, up from around 28% a decade ago. This is a remarkable catching up.

" We estimate economic growth at between 2.5-3.0, probably even higher, if 2014 is a good agricultural year.  "
E. Campannelli

Elisabetta Capannelli

Country Manager, Romania

AWhat do you think are the greatest challenges in 2014?

EC: The challenge is to stay on track with the structural reforms, as planned. We are convinced however that the government will show the same determination as in the last few years, when Romania also went through elections. Externally, the challenge is the crisis in Ukraine. The crisis in Ukraine and Crimea could impact Romania and other CEE countries, but the direct and immediate threats are limited because these countries are well anchored with the European and NATO membership. Romania has also a significant degree of energetic independence and limited exposure from trade with Ukraine and Russia. Indirect fallouts from the Ukrainian crisis are possible in case the European Union growth further declines and if capital flows are scared away of the region. Romania disposes of financial buffers that prevent any serious disruption in the short term and, if necessary, longer term solutions can be found at international level.

AHow many active projects does the Bank currently have in Romania?

EC: Romania's active lending portfolio includes seven projects worth US$2,422.5 million (listed below). A new project, Health Sector Reform, worth US$ 338.8 million was approved by the World Bank Board on March 28, 2014 and it is now awaiting formal ratification by Romania. The lending is complemented by non-reimbursable financing worth US$ 7.86 million under: (i) a Global Environment Facility for nutrients pollution control, US$5.5 million; (ii) a Japanese grant for policy making for people with disabilities, US$ 1.72 million; (iii) one Institutional Development Fund grant for the monitoring and evaluation of policy making, US$ 0.39 million, and (iv) one grant for Improving Financial Management, Oversight and Controls in Social Assistance, US$ 0.25 million.

AWhich project is the oldest?

EC: The oldest ongoing project to date is the Judicial Reform project: 8.3 years since the Board approval.

A: Were there instances when you considered the projects were unsuccessful or had little success?

EC: There are no projects which have been entirely unsuccessful. The ongoing projects are rated moderately satisfactory or satisfactory. However, there some recently closed projects where sub-components did not have the expected impact. One example is component 1 of the Modernizing Agriculture Knowledge and Information Systems project, dealing with strengthening the sanitary, veterinary and food safety institutions and phyto-sanitary Units in Romania. On the positive note, this part of the project was very effective in supporting Romania implement the new food safety regulations adopted to comply with EU requirements. The project accomplished this via construction and equipment of three food safety border inspection points, in Otopeni, Constanta North and Constanta South; the project component endowed two regional animal welfare laboratories in Bucharest, and Brasov with the needed equipment; the project component developed of a functional phyto-sanitary laboratory network at country level; and it covered the training of relevant staff. However, this same component 1 was not successful in completing the institutional development agenda for the National Sanitary, Veterinary and Food Safety Agency. The Bank supported projects undertake internally a very complex ex-post evaluation which includes process evaluation, cost-benefit evaluation, and impact evaluation. Sometimes the methodological rigor is so high that projects with significant impact on the ground are penalized on technical ground, for instance for too broad formulation of their development objectives, which makes it difficult for the project to directly attribute success. This is also the case of the Modernizing Agriculture Knowledge and Information Systems project in the area of increase in agri-food export to EU 27 relative to Gross Value Added. Another example is the Irrigation Project. Although the physical infrastructure was rehabilitated and new water users' organizations received logistical support for strengthening their capacity, the project failed to help small farms to restructure their cropping pattern towards a higher coverage with high value crops that can pay for irrigation. As a result, the irrigated area did not increase as expected after the project and the project sustainability could not be demonstrated.

AWhat can you tell us about the assistance programs offered by the WB to the Romanian institutions?

EC: The World Bank Group is currently preparing the country partnership strategy for 2014-17. In the coming period a full array of instruments will be used by us and our partners to support the Government's efforts to enhance Romania's growth and development. Our support is complementary and closely coordinated with the European Commission, the International Monetary Fund, and other financing institutions. The poor in Romania have been protected during the crisis, as lower revenues held up better than the average. But despite this, there are important challenges related to the marginalized community in the country. About a third of Romanians are still poor, so more needs to be done going forward. A new model of growth is required. We want to promote growth, job creation, and we believe that for these a new series of structural reforms is required. Some of the weakness in the public sector of administration needs to be addressed, but also deeper reforms are required in energy, health, education. The Bank has been a partner for Romania for a long time. We will continue to provide a very large envelope for the next 4 years; we intend to provide additional financing, and also to continue to provide technical assistance as reimbursable advisory services. The focus will be on promoting a 21st century government, supporting growth and job creation, and of course social inclusion.

A: Which are the latest? I understand the WB will offer assistance to MPF to evaluate the opportuneness of continuing the public projects already started and remained unfinished in Romania? What can you tell us about this project?

EC: The Bank will be working with Ministry of Public Finances and a number of ministries, responsible for areas like transport, and regional development, to further consolidate the framework for public investments. This is in order to ensure that scarce public resources are allocated effectively and efficiently to good uses. The government has set up a unit for the evaluation of significant public investments, projects larger than RON 100 million, in the Ministry of Public Finances, and has improved the legal framework for public investments, see Ordinance 88/2013. The Bank will help consolidate these gains, by working with the unit and the counterparts in the ministries to build institutional capacity to prepare and assess project proposals, to revise methodologies and regulations, such as pre-feasibility and feasibility studies, and to review the existing portfolio of projects. We hope that this way we will enhance the returns of the public investment, with positive contribution to economic growth, and create additional fiscal space for new projects, including the EU co-financed ones.