After eight years of rapid economic growth and impressive gains in poverty reduction, the shockwave of the global economic and financial crisis has exposed the growing imbalances and economic vulnerabilities in Romania’s economy, rooted in weak economic management and a large, unfinished agenda of public sector and governance reforms. The new Government faces the difficult task of reconciling short-term fiscal consolidation with the need to mitigate the social costs of the crisis and restore the sources of sustainable and equitable growth. The new Government has moved rapidly to take fiscal measures aimed at containing the impact of the crisis, to mobilize an international financial package spearheaded by the IMF, the EU and the World Bank, and to resume the structural reform agenda that had faltered since EU accession on January 1, 2007. The World Bank Group will complement and support this program by i) helping the Government to implement structural reforms to help mitigate the crisis by reducing social and economic vulnerabilities and ii) putting in place the basis for sustainable economic growth in the medium-term.
The Romanian economy experienced an economic boom during 2003-08, associated with the process of accession to the EU, leading to rapid gains in poverty reduction. The current crisis has forced strong austerity measures and a re-evaluation of populist policies, including in public sector wages and pensions. Success in mitigating the impact of the crisis hinges on the commitment and capacity of political institutions to work together to enact bold reforms and to mobilize key stakeholders and the population behind them. Over the medium term, a gradual economic recovery is expected, whose pace and strength will reflect the restoration and broadening of the economic reform agenda initiated before EU accession.
Romania’s overarching objective is to achieve convergence with the EU in terms of income and living standards. With a GDP per capita of slightly over 40 percent of the EU 27 average, Romania has a large unfinished development agenda. The approach to pursuing the convergence agenda has been consolidated in the National Reform Program (NRP) for promoting sustainable and equitable economic growth in the context of the European Lisbon Strategy. The NRP, updated annually and reviewed by the European Commission, complements the four themes of the Lisbon Agenda – investing in people and modernizing labor markets, unlocking the business potential, especially of SMEs, investing in knowledge and innovation, and energy and climate change – with the need to improve the quality and management of administrative capacity and government expenditure in the context of prudent macroeconomic policies.
The dual objective of the Bank is to support Romania deal with the economic and financial crisis, and to broaden and deepen the reform program for sustainable and equitable growth. The proposed Bank program is largely defined for the first two years, and outlined for the outer years. Learning from the earlier CPS, the approach of this CPS seeks flexibility and ability to respond to evolving circumstances and demand by adopting a results-based program centered on development outcomes and objectives that, on the one hand, reflect the Government priorities and, on the other, are aligned with the Bank’s comparative advantage and value-added.
The proposed Bank strategy carries risks. Institutional capacity risks relate to policy formulation and coordination capacity, medium-term vision, implementation, and accountability. External economic and financial risks relate to the uncertainty of the global economic outlook, the risk that financial markets may remain frozen over a prolonged period, the risk that the economic downturn in the EU may be more severe and protracted than currently envisaged, and that the perceptions of institutional investors and risk-assessment agencies may be more pessimistic than expected. Domestic economic risks include the ability of Romania to withstand external shocks, the response of the economy to reforms, and the capacity to mobilize and absorb external funds. Social risks stem from popular expectations, the persistence of core poverty relatively unaffected by economic growth, and the rise in transient poverty during the crisis. The Bank-supported DPL and other programs target assistance towards those in poverty or socially excluded.
Read More
RSS