A. Partnership in Romania’s Development Strategy

Like all countries in the region, Romania had to deal with the aftermath of the economic crisis combined with the risk of a renewed and deeper crisis in the euro area. Romania’s challenge now is to combine short-term crisis management with medium-term structural reforms that will make it not only more resistant to shocks, but will also allow it to take advantage of a future economic upswing. Structural reforms must support resumed convergence toward EU living standards, a sustainably macroeconomic and fiscal framework, and social cohesion.

The World Bank’s Development Policy Loan with Deferred Drawdown Option (DPL-DDO) helps to support Romania in the event of an exogenous macroeconomic shock while contributing to advancing the structural reform program. The DPL-DDO makes financing available up to EUR 1 billion that can be drawn down by the Government if and when required, provided they are on track with the macroeconomic framework and the reform program supported by the DPL-DDO. Structural reforms in the areas of public finance, the energy sector and the health sector are supported through this World Bank program. The DPL-DDO complements the IMF and EC assistance (TA) programs. The World Bank also has several sector investment operations, technical assistance programs, economic and sector work, and commitments through the International Finance Corporation.

The IMF and World Bank staffs maintain a close collaborative relationship in supporting the Government’s reform program and coordinate their policy advice to the Romanian authorities.

B. IMF-World Bank Collaboration in Specific Areas

Public sector reform. The Bank and the Fund support measures to address the weaknesses in public expenditure management that relate to addressing fiscal deficits and improving revenue collection through tax policy and administration reforms. The Bank’s DPL-DDO program supports the strengthening of the Medium Term Expenditure Framework to improve the financial management and predictability of public spending as well as the quality of public services. The DPL-DDO also supports the modernization of tax administration, with the objective to enhance revenue collection, improve tax compliance and reduce the transactions costs for doing business. In addition, through the DPL-DDO and a series of TA programs, some financed from the EU structural funds, the Bank supports measures to enhance strategic planning and policy formulation and coordination, as well as the establishment of policy monitoring and evaluation systems at the center of the Government. The purpose of the technical assistance is to strengthen linkages between resources and performance in the public sector.

Financial sector reforms. Under the DPL series, the Bank is supporting measures to strengthen the functioning and resilience of the financial sector. TA was also provided to the financial sector authorities, and the Ministry of Justice of Romania, in relation with the DPL series. The TA focused in particular on: a) assistance to the Ministry of Justice in the preparation of Guidelines for Corporate Debt Restructuring and in amending the Insolvency Law so as to remove obstacles to out-of-court corporate debt restructuring; and b) assistance to the National Bank of Romania (NBR) on the preparation of Guidelines for Mortgage Debt Restructuring. A crisis simulation exercise is planned for mid September 2012. The exercise will assess coordination and decision-making processes between and within the NBR and the Ministry of Public Finance. It will also test the new legal mechanisms for bank resolution which were recently approved. The securities regulator and the pension regulator will be involved as role players in the exercise. A first version draft scenario is currently for comments with the NBR and the Ministry of Public Finance.

C. Areas Where the World Bank Leads and Its Analyses Serve as Inputs Into the IMF Policy Formulation and Advice

Social Protection. Under the IMF-Bank partnership, the IMF has paid close attention to the social dimension of the programs. For example, the fiscal deficit target allows for protecting the poor and low-income earners from the impact of the global crisis, through higher social spending and measures to increase the coverage of the best targeted programs and the protection of the vulnerable household consumers against the energy price increases. At the same time the IMF welcomed the consolidation of the social assistance programs which is supported by the results-based program financed by the Bank, beginning with 2012.

Health. The Bank supports the Government program in health through an investment operation and the DPL-DDO program. The DPL-DDO program aims at strengthening the financial sustainability of the national health system through: (i) the revision of the basic package of subsidized health services, procedures and drugs through the introduction health technology assessment; and (ii) the implementation of the National Hospital Rationalization Strategy, including the reduction of the total number hospital beds.

Energy. Through the DPL-DDO the Bank supports key structural reforms in the energy sector. These include the privatization or sale of minority stakes in energy generators, transporters and distributors; the liberalization of the electricity and gas markets; governance reforms in energy SOEs, including the restructuring of boards and the appointment of professional management; legal and regulatory changes to align with the EU norms; and measures to encourage the participation of the private sector in energy.

D. IFC Program

IFC’s current committed portfolio is $619 million, the fourth largest in the Europe and Central Asia region after Turkey, Russia and Ukraine. IFC has played an active crisis response role in Romania, investing over $630 million of its own funds and mobilizing an additional $242 million in 25 projects since July 2009, with particular support provided to the financial, renewable energy, and health sectors.

While vulnerabilities from the euro zone crisis and global economic downturn persist, IFC will continue to play a countercyclical role through selective private sector investments in Romania. In the real sector, this includes supporting projects which create jobs, increase investment in underserved frontier regions, contribute to the growth and competitiveness of local firms in promising sectors such as agribusiness and infrastructure, and improve resource efficiency. IFC will support competitive domestic firms seeking to expand into regional markets, as well as South-South investment into Romania. In the banking sector, which is largely dominated by foreign banks (accounting for approximately 80 percent of banking assets), IFC works with local banks to strengthen their capacity to provide loans to underserved sectors, such micro, small- and mediumsize enterprises and the agri sector, and to offer products such as local currency, trade and energy efficiency finance. The IFC response in Romania focuses on supporting both banks and nonbanking financial institutions in providing: (i) trade products to address immediate liquidity concerns; (ii) mezzanine and equity investments to shore up capital shortfalls with particular focus on the recapitalization of existing banking sector clients; and (iii) scaled-up funding support to micro, small- and medium-size enterprises. These actions, in coordination with other private investors and development finance institutions, are also expected to counter the deleveraging risk in these markets.

E. World Bank Group Strategy and Lending Operations

The current IBRD and IFC Country Partnership Strategy (CPS) for Romania, covering the period 2009-2013, was presented to the Board on July 16 2009. The main objective of the Country Strategy is to deepen the reform agenda for improved public sector management, economic growth and competitiveness, and social and spatial cohesion. The focus of the DPL-DDO program on public financial management, governance of SOEs in the energy sector, and health sector reforms is consistent with these objectives. The DPL-DDO program takes also into account the added focus of the CPS Progress Report (CPSPR)² on the European perspective: (i) policy reforms to reap the benefits of EU membership and meet the objectives of the Europe 2020 strategy; (ii) modernization of public institutions to enhance resource allocation and absorption of EU funds; and (iii) complement to EU funding. The CPS outlines a substantial Analytical and Advisory Services program that complements the DPL-DDO program.

Romania’s lending portfolio consists of 12 lending operations with an undisbursed commitment of $1,068 billion and an Analytical and Advisory Activities portfolio of eight ongoing activities³, including two Fee-Based Services (FBS-Transport and Justice). The size of the portfolio increased by about 75 percent as compared with June 2011 with the approval at end FY11 of the Modernization of Social Assistance Loan ($710M). Grant financing increased as well, as a new IDF grant for M&E of Policymaking (US$0.43M) was added, mid March, to the ongoing portfolio.

The weight of Analytic and Advisory Activities in country services is increasing significantly, with main emphasis on Fee-Based TA. This reflects the addition to the Bank program of the Fee-Based Functional Reviews TA (FBS FRs) and the follow up through the MAP (Modernization of Public Administration) TA program. Moreover, the Government through the European Commission, requested the Bank (and other IFIs - EIB, EBRD) to support the strengthening of its capacity in policy and strategy formulation, sector and project planning, design and implementation in order to increase the absorption capacity of EU structural and cohesion funds. In this sense a Memorandum of Understanding between the Government and the Bank was signed in January 2012 as an umbrella for the further development of specific activities. Meetings and exchanges with all stakeholders took place in Q3FY12 along the areas for technical assistance: public administration reforms; regional development; environment and climate change; energy; transport; competitiveness; human resources development.

The composition of Romania’s program is shifting from investment landing and analytical work to results based and DPL lending, and Fee-Based Services. This development is generated by the actual needs of the Government, namely: (i) an ambitious reform program for the Social Assistance Sector, that could be best supported by the Bank via a Results-Based operation; (ii) the Government structural reform agenda that needs to be completed (SOEs, Energy, Transport, Health sectors) combined with GOR’s market orientation for the financing of its public debt, which called for a “buffer” deferred draw-down DPL that can support the implementation of reforms and also consolidate Romania’s position on the financial markets, without adding to the debt outstanding; (iii) the availability of non-reimbursable Structural Funds (whose absorption is a first priority for Romania) which reduces the interest for classical SILs and calls on the Bank to only complement EU support via operations that can boost the outcomes from current budgets. Fee-based services weight in country services is increasing, in line with Romania’s actual priorities of modernizing its public administration, and strengthening its capacity for EU Funds absorption (32 FBS projects under preparation).