Romania Country Brief 2004

About Romania Population: 22.2 million Population per sq km:    93 Population growth:  -0.4% Life expectancy(2002):  70 years Population below national poverty line(2002): 28.9% GNI per capita (Atlas method): US$2,310 GDP: US$ 60.4 billion GDP growth: 7.6% 2003 data Sources: National statistical offices, IMF, IFS, WDI August 2004, and WB staff estimates

Romania is a lower middle income country with a gross national income per person of US$2,310 in 2003. With a population of some 21.7 million, it is the second largest country in Central and Eastern Europe and is larger than 19 of the 25 current members of the European Union (EU).

 

The country is comprehensively reforming and restructuring its economy with a view to joining the EU in 2007. As part of this, the Government seeks to build institutions and design and implement public policies to fundamentally transform Romania’s economy and society. This requires strong political commitment, considerable expertise and resources, as well as popular and external support.

 

Despite economic growth in the past three years, important challenges remain. Further structural reforms are crucial to build a competitive market economy capable of withstanding the pressures of EU integration. Moreover, poverty persists with 25 percent of the population living below the poverty line. Some 60 percent of Romania's poor live in rural areas despite the country's substantial potential in agriculture, forestry, and fisheries.

 

Romania was a pilot country for the Comprehensive Development Framework which allowed it to "own" and direct its development agenda by articulating its long-term development strategy. Consultations held in 1999, as part of the Framework, revealed a clear consensus among Romanians on the country's twin development objectives of reducing poverty and joining the EU.

Developments since transition. Romania's transition, starting in 1990, was in many respects more difficult than in the other countries of Central and Eastern Europe. This was partly because by the late 1980s, the country's economy was on the verge of collapse after 40 years of rigid central planning that emphasized self reliance, an excessive focus on heavy industry and large, uneconomic infrastructure projects.

In an attempt to minimize the social costs of transition, and often to placate vested interests, the Romanian government initially hesitated to impose tight fiscal constraints and privatize large loss-making enterprises. In the late 1990s, attempts to impose macroeconomic stability without full structural support led to negative economic growth, and poverty increased sharply, doubling from 20 percent in 1996 to 41 percent in 1999.

Recent economic performance. Since 2000, the Government has implemented macroeconomic policies which are supportive of growth. A disciplined fiscal policy, which complemented a tight monetary policy and was augmented by strong advances in structural reform, led to improved financial discipline in the enterprise sector and has placed public finances and the financial system on much firmer footing.

This resulted in robust GDP growth for three consecutive years. In addition, inflation and interest rates declined steadily, the fiscal deficit was brought under control, foreign exchange reserves increased to historic highs, and the external balance was held to comfortable levels.

Export growth remained vigorous, fuelled by private investment and the initial competitive depreciation of the currency. The competitiveness of the enterprise sector was boosted by productivity gains. Romania is now a visible and attractive destination for international investors as a result of better sovereign ratings and improved access to international capital markets.

 

Challenges Ahead

Romania faces a number of challenges to attain its twin goals of poverty alleviation and EU accession. These challenges include:

• Accelerating structural reforms. Key challenges include completing the privatization agenda, improving the business climate by eliminating administrative barriers, and implementing a transparent and predictable tax system.
  
  
• Reforming public institutions and improving governance. Public services need to be delivered in a manner which benefits the population. This can be achieved through the development of a merit-based civil service that is adequately remunerated. A supportive legal and regulatory framework is also needed.
  
  
• Reforming the legislative process and the judiciary. In the past, reforms were impeded by frequent changes in legislation and the lack of capacity to implement the new laws. It is therefore essential to streamline existing legislation and develop an effective system to pass new laws. In addition, the professionalism and integrity of judges needs to be enhanced and the independence of the judiciary strengthened. The judicial process also needs to be made quicker and more efficient. 
  
  
• Reforming the pension system. The Romanian pension system is challenged with 1.4 beneficiaries to every contributor. Reforming the system is therefore essential to ensure its sustainability.
  
  
• Developing the rural areas and reducing poverty. With the majority of Romania’s poor living in the rural areas, agricultural reforms are essential to reduce the country’s high levels of poverty. Although Romania has fertile agricultural land, vast tracts of forest, and a rich network of rivers, its rural areas suffer from inadequate infrastructure and inefficient agricultural production. In addition, access to education and social services in these areas must be improved.
  
  
• Reforming the energy sector. Although energy sector reforms have been impressive, payment arrears still exist and power sector subsidies continue. These continuing subsidies are one of the major factors contributing to the country's fiscal imbalances.

World Bank Assistance

Assistance so far. The World Bank is Romania’s largest creditor and Bank assistance to the country covers practically all areas of the economy. The Bank has helped the country to reform its child care system, reducing the number of children living in state institutions by more than 50 percent. With these numbers continuing to decline Romania, once regarded as Europe’s disaster case in childcare due to the neglect of the previous regime, is now a showcase for reform.

 

The World Bank has also helped to rehabilitate infrastructure, including school buildings damaged by earthquakes which were in danger of collapse. Poor rural communities have received funds to upgrade small-scale local infrastructure, improve services, and promote income-generating activities. While helping the country to close down uneconomic mines, the Bank has provided assistance to laid-off miners to find new employment.

In addition, the World Bank has promoted the modern management of transport systems and is facilitating trade and the free movement of goods between Romania and its neighboring countries.

Going forward. The World Bank's ongoing operations in the country focus on three broad areas:

• Promoting the private sector. A robust private sector is the most effective engine for growth, job creation, and economic prosperity. World Bank assistance aims to help create the right economic and legal environment for private businesses to thrive. This includes upgrading infrastructure and improving the flexibility of the labor market.

• Building public sector institutions and improving governance. World Bank financing  focuses on reforming core public sector institutions and processes. This involves reforming the civil service, improving the management of public finances, increasing accountability, implementing the anticorruption strategy, and reforming the judiciary.

• Developing human capital and improving social protection for the most vulnerable. To enable Romania to compete effectively in the European and world markets, the World Bank is helping the country to build human capital by upgrading health care and education. It is also working to protect the most vulnerable by improving the pension system. In addition, World Bank funds enable rural communities to build small infrastructure such as irrigation systems and improve social services.

World Bank Lending to Romania 

Total IBRD Commitments from FY91 to FY04: US$4,030 million
(by fiscal year*, in nearest US$ millions)

	upto 1996	1997	1998	1999	2000	2001	2002	2003	2004	Total
Commitments	1,916	625	130	340	113	130	60	486	230	4,030
Disbursements	957	182	352	162	442	238	157	317	105	2,912

Total Commitments by Sector since 1991
( in nearest US$ millions )

*Fiscal year from July 1 to June 30

September 2004