2009 - Banca Mondiala - Analize Si Recomandari Strategice

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    Document of

    The World Bank

    FOR OFFICIAL USE ONLY

    Report No. 48665 - RO

    INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

    AND

    INTERNATIONAL FINANCE CORPORATION

    COUNTRY PARTNERSHIP STRATEGY

    FOR

    ROMANIA

    FOR THE PERIOD July 2009-June 2013

    June 12, 2009

    PublicDisclosureAuthorized

    PublicDisclosureAuthorized

    ublicDisclosureAuthorized

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    CURRENCY EQUIVALENTSUSD 1 = RON 2.9664

    FISCAL YEARJanuary 1 December 31

    ABBREVIATIONS AND ACRONYMS

    AAA Analytical and Advisory Activities

    CEM Country Economic Memorandum

    CP Convergence Program

    CPS Country Partnership Strategy

    DPL Development Policy Loan

    EBRD European Bank for Reconstruction and Development

    EC European Commission

    ECA Europe and Central Asia

    ECB European Commission Board

    EERP European Economic Recovery Plan

    EIB European Investment Bank

    EU European Union

    EU8 Member States that joined the EU on May 1, 2004,

    excluding Malta and Cyprus

    EU10 EU8 Member States that joined the EU on

    January 1, 2007, excluding Malta and Cyprus

    FDI Foreign direct investment

    FIAS Foreign Investment Advisory Service

    IFC International Finance Corporation

    IFI International Financial Institution

    IMF International Monetary Fund

    IL Investment Loan

    IT Information Technologies

    LA Lisbon Agenda

    MIC Middle Income Country

    MSME Micro, Small and Medium Enterprises

    MTEF Medium-term expenditure framework

    NATO North Atlantic Treaty Organization

    NBR National Bank of Romania

    NHIF National Health Insurance Fund

    NGO Non-governmental organization

    NRDP National Rural Development Plan

    NRP National Reform Program

    OECD Organization for Economic Cooperation andDevelopment

    OP Operational Program

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    Acknowledgements:

    The Country Partnership Strategy was prepared by a core team comprised of the followingWorld Bank Group staff: Benoit Blarel, Country Manager (TTL), Penny Williams, Senior

    Country Officer, Catalin Pauna, Senior Economist, Ana Maria Mihaescu, Chief of Mission, IFC,Kaikham Onedamdy, Strategy Officer, IFC, Toni Koleva, Operations Analyst, CorneliaBoranescu, Operations Analyst, Eugen Scanteie, Consultant, Iolanda Staniloiu, CommunicationsOfficer, Mihaela Dumitrascu, Executive Assistant, Raluca Banioti, Program Assistant.

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    COUNTRY PARTNERSHIP STRATEGY July 2009-June 2013

    TABLE OF CONTENTS

    Executive Summary 5

    I. Country Context 5A. Political Environment 5B. Recent Economic Developments 6C. Impact of Crisis 9

    D. Social Outcomes 10E. Economic Outlook 12

    II. Country Development Program 15A. Public Sector Reforms 16B. Growth and Competitiveness 18C. Social and Spatial Inclusion 19

    III. The World Bank Group Program 22A. Implementation of 2006 CPS and Lessons Learned 22B. External Partners and the Banks Value Added 24C. The Proposed Bank Strategy 26D. Strategic Pillars of the Proposed Program 28

    Pillar 1: Public Sector Reform 28Pillar 2: Growth and Competitiveness 29Pillar 3: Social and Spatial Inclusion 33

    E. Consultations and Partnership with the Government and other Stakeholders 35F. Measuring Results 36

    IV. Risk Management 36

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    Country Partnership Strategy for Romania

    1. 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 imbalancesand economic vulnerabilities in Romanias economy, rooted in weak economic management anda large, unfinished agenda of public sector and governance reforms.

    EXECUTIVE SUMMARY

    2. The new Government faces the difficult task of reconciling short-term fiscalconsolidation with the need to mitigate the social costs of the crisis and restore the sources ofsustainable and equitable growth. The new Government has moved rapidly to take fiscalmeasures aimed at containing the impact of the crisis, to mobilize an international financialpackage spearheaded by the IMF, the EU and the World Bank, and to resume the structuralreform agenda that had faltered since EU accession on January 1, 2007.

    3. 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 andeconomic vulnerabilities and ii) putting in place the basis for sustainable economic growth in themedium-term. In the first few years of the Country Partnership Strategy (CPS), the Bankprogram will center on a programmatic series of Development Policy Loans (DPLs), the existinginvestment portfolio, and Advisory and Analytical Activities (AAA). A mid-term CPS progressreport would articulate the Bank program for the outer years of the CPS period. This CPS isfully consistent with a forthcoming Regional Framework that will set out the Banks value-addedand key areas of activity across Central and South Central Europe and the Baltics region.Notwithstanding the current economic crisis, Romanias EU accession is resulting in increasedmarket access and commercial banking activity, with a gradually declining role for the IFC. IFCtherefore, envisages a phased reduction of its involvement within a period of 5 years, subject to

    k di i ff i l i d i i i i hi h ill

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    5. In late December 2008 a coalition Government took office following parliamentaryelections a month before. The current Government, which enjoys a 70 percent majority in the

    Parliament, is formed by a coalition between democrat-liberals and the social-democrats/conservatives alliance under a political pact - Partnership for Romania. Given itslarge majority in the Parliament and the support of the President, the coalition Government inprinciple controls the important legislative initiatives needed to manage the crisis and renewreform. The breadth and depth of these legislative and policy measures will be necessarilylimited to the areas of overlap between the respective agendas of the coalition members. At thesame time, these measures will necessarily have cross-party support and therefore may be morelikely to be sustainable. However, the Presidential elections scheduled for Fall 2009 could strain

    the coalition as candidates from the two main coalition parties are likely to compete for thePresidency.

    6. The crisis provides stimulus for reform consensus. The crisis has forced strongausterity measures and a re-evaluation of populist policies, including in public sector wages andpensions. Success in mitigating the impact of the crisis hinges on the commitment and capacityof political institutions to work together to enact bold reforms and to mobilize key stakeholdersand the population behind them.

    B.

    7. The Romanian economy experienced an economic boom during 2003-08, associatedwith the process of accession to the EU, leading to rapid gains in poverty reduction. Growthaveraged over 6.5 percent per year during that period, reaching over 7 percent in 2008. Absolute

    poverty declined from 35.9 percent in 2000 to 5.7 percent in 2008. A large part of the domesticabsorption boom was driven by private investment: with EU accession prospects becoming morecertain, capital flows, particularly foreign direct investment, were attracted by perceptions ofl i t t i k th t d R i f bl i t t l ti Sh i i

    Recent Economic Developments

    Growing macro imbalances and the build-up of vulnerability

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    8. The strong economic growth was accompanied by widening current accountimbalances. Although exports to the EU countries grew at a robust pace, domestic demand grew

    at an even faster rate, and the current account deficit rose from just over 5.0 percent of GDP in2003 to 12.4 percent of GDP in 2008.

    9. At the same time, in the past two to three years, the composition of the capitalinflows moved increasingly towards private debt flowsin large part the result of borrowingby banks, often by subsidiaries of foreign banks from their parent banks but also as a result ofdirect borrowing by corporates.

    Figure 1.Growing current account deficits wereincreasingly financed with private borrowinguntil 2008.

    Figure 2... and the structure of private debt shifted towardshorter maturity

    2003 2007 2008

    -40

    -30

    -20

    -10

    0

    10

    20

    NBR Res

    Current

    Account

    Other incl E&O

    Pvt

    borrowing (net)

    Public borr (net)

    FDI

    Percent ofGDP

    NBR Res

    NBR Res

    Other incl E&O

    FDI

    Current

    Account

    FDI

    Public borr (net)

    Pvt

    borrowing

    (net)

    CurrentAccount

    Other incl E&O

    Pub bor(net)

    Pvt bor (net)

    2003 2004 2005 2006 2007 20080

    10

    20

    30

    40

    50

    60

    Percentof GDP

    Short-termdebt

    PrivateMLT

    PublicMLT

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    11. The overheating and large capital inflows complicated monetary policy. Monetarypolicy was relatively tightwith the National Bank of Romania (NBR) increasing re