Å·ÃÀÈÕb´óƬ

Country Context

Romania has made considerable progress in economic performance and convergence with the European Union (EU) but faces challenges in fostering growth that is more inclusive and sustainable, both economically and environmentally. Challenges include regional disparities, weak institutions, skilled labor shortages, poor connectivity, and vulnerabilities to natural hazards and climate change. Pro-cyclical fiscal policies have stimulated consumption, resulting in persistently high twin deficits.

The Romanian economy decelerated to 2.1% in 2023, impacted by higher inflation and weaker external demand. Growth is expected to accelerate in 2024 supported by private consumption, benefiting from rising disposable incomes, and EU-financed investment. Fiscal and current account deficit pressures will remain elevated, necessitating structural reforms. A slightly faster poverty reduction is expected in 2024 supported by more robust economic growth.

Last Updated: Apr 15, 2024

Strategy

Å·ÃÀÈÕb´óƬ Group is preparing a new Country Partnership Framework (CPF) with Romania to cover Fiscal Years 2025-2029. This CPF will be aligned with the World Bank Group¡¯s vision to create a world free of poverty on a livable planet, as reflected in the . Our projects will continue to prioritize enhancing public institutions to better serve all people and businesses.

International Bank for Reconstruction and Development (IBRD)

Ongoing portfolio. Å·ÃÀÈÕb´óƬ is present in Romania through the IBRD. The current investment portfolio includes 12 projects ($2.99 billion net commitments) in key sectors: health (the largest share of over $1.07 billion), followed by macro/fiscal management ($650 million), finance competitiveness and innovation ($403 million), urban/resilience ($384.05 million), education ($243.1 million), governance ($176.79 million), and environment ($63.6 million).

Key Advisory Services and Analytics (ASA) Activities consist of core World Bank-financed ASA and externally funded activities such as Reimbursable Advisory Services (RAS) and trust funds). Two World Bank-financed core ASA are being delivered in FY24: a Climate Change Development Report (CCDR) completed in December 2023 and a Public Finance Review (PFR) to be finalized in June 2024. The RAS program consisting of 13 tasks under implementation ($44.28 million), and and EU-funded trust fund  program ($2.31 million) are integral parts of our Romania program and help strengthen institutional capacity in the areas of governance, public administration, fiscal management, early school leaving, flood risk management, the energy sector regulatory framework, market development and energy efficiency, access to education for displaced children from Ukraine and access to assistance services for Ukrainian migrants. Since the adoption of the National Recovery and Resilience Plan (NRRP), the RAS program has expanded to support the Government¡¯s key reforms in pensions, public wage, social protection, and taxes.???

International Finance Corporation (IFC)

Romania is IFC¡¯s largest portfolio in Europe with a total of $2.1 billion and a significant subregional hub. Since 1991, IFC has invested more than $7 billion in Romania and contributed to landmark privatizations in banking, utilities, and the real sector. In the past few years IFC successfully stepped up its support to systemic banks to develop the climate finance market, including through blue, green, and sustainability-linked instruments. More recently, nearshoring trends as well as the green transition created momentum to further develop a program in manufacturing / logistics, supporting industrial decarbonization and the circular economy, connectivity, and green logistics.

The IFC envisages boosting productivity growth in Romania by: (i) facilitating higher value-added investments and innovation, (ii) promoting access to finance and deepening the capital market, and (iii) improving access to quality social services and affordable housing. Bridging the productivity gap requires: (i) improving regional trade logistics and (ii) addressing the infrastructure and digital gap. Innovative solutions for green growth will be supported by: (i) scaling up of clean energy and decarbonization, (ii) smart-city infrastructure, including waste, water, and circular economy, and (iii) green and climate-linked financial instruments. The program is supported by advisory services for PPPs and M&A as well as green transactions.

Last Updated: Apr 15, 2024

Recent Economic Developments

Romania¡¯s economic growth decelerated to 2.1% in 2023. Investment, boosted by EU funds, was the main driver of growth. The contribution of private consumption remained significant, supported by low unemployment (close to pre-pandemic levels) and minimum wage and pension increases, which partially offset the impact of high energy and food prices on disposable incomes. Trade and current account deficits narrowed due to higher services surplus and reduced goods deficit amid import compression driven by slower consumption growth. Construction remained the main growth driver but faced reduced momentum due to a deceleration in residential construction. Industry shrank for the second consecutive year due to elevated production costs, especially in energy-intensive sectors.

Headline inflation eased to 10.4% in 2023, supported by reduced energy and food market pressures and improved inflation expectations. The National Bank of Romania has maintained a tight monetary policy stance, keeping the policy rate at 7% since January 2023. Private sector credit growth decelerated to 6.4% YoY in December 2023 from 12.1% YoY in December 2022, reflecting the slowdown in loans to households (up 1.4% YoY).

Economic Outlook

Economic growth is expected to firm over the medium term. The outlook depends on multiple factors, predominantly external shocks mainly stemming from the ramifications of Russia¡¯s invasion of Ukraine, persistent structural fiscal challenges, and strains in the context of the 2024 multi-level national and EU elections. As fiscal consolidation is expected to accelerate with the resumption of the Excessive Deficit Procedures and the new economic governance framework, efficient EU fund absorption is key for a sustainable, green, and inclusive recovery. The NRRP funds and associated structural reforms are essential for a sustainable reduction of the fiscal deficit over the medium term, alongside strengthened lifelong skills formation and private capital mobilization, boosting potential growth.

Poverty reduction is estimated to have decelerated in 2022 and 2023 due to slower growth and inflationary pressures and a slightly faster poverty reduction is expected in 2024. Maintaining or strengthening social safety nets during fiscal consolidation can help protect vulnerable populations from falling deeper into poverty, as some of the fiscal measures (i.e., higher VAT) can disproportionately affect low-income households. Adequate support for those facing economic hardships can be a crucial aspect of poverty reduction.

Last Updated: Apr 15, 2024