This Country Partnership Strategy (CPS) was presented at a time when Romania was at the threshold of European Union (EU) membership. Romania faces the challenge of convergence with EU countries in terms of both incomes and living standards - its per capita GDP in 2004 is about one-third of EU-15' and it lags in several social indicators. To meet this challenge, Romania will have to build on its achievements and at the same time address risks to macroeconomic stability.
Bank support will be characterized by greater flexibility and responsiveness within the strategic framework. Bank lending will use a mix of instruments with strategic use of Development Policy Loans (DPLs) and programmatic approaches.
EU accession aspirations have enhanced macroeconomic stability and spurred renewed commitment to reforms in recent years. The economy grew robustly at 4 to 5 percent per year during 2000-05, with inflation declining from above 40 percent in 2000 to 8.6 percent in 2005, the lowest level since the start of transition. The EC Comprehensive Monitoring Report, issued in October 2005, reconfirms the functioning market economy status of Romania and underscores the need to tackle high level corruption and address the low level of preparedness for absorbing EU funds.
Romania still has to complete the ongoing reform agenda which it will have to pursue to underpin growth and improve living standards. The restructuring of the enterprise sector is by no means complete. Financial intermediation is still low compared to that of EU-8. Increasing productivity in the agriculture sector remains a major development challenge. Further improvements in the business environment include increasing labor market flexibility and reducing labor taxation. A skills mismatch with market needs will require a reorientation of the educational system. Poor governance and weak institutional capacity continue to be key concerns.
The strategic framework of the CPS, developed with the Romanian Government, builds on the Government Program, lessons from the EU-8, and Bank analytical work. The CPS has three pillars: (a) accelerating structural and institutional reforms to support sustainable growth; (b) addressing fiscal vulnerabilities and modernizing the public sector; and (c) targeting poverty reduction and promoting social inclusion. The CPS lists a set of principles that will govern the choice and design of Bank lending operations.
The proposed program faces a number of risks. First, failure to promptly address emerging weaknesses in the macroeconomic framework. Second, slippages in the implementation of the reform agenda would have an adverse impact on sustained growth and poverty reduction, and consequently on convergence with the EU members. Third, lack of attention to strengthening institutional capacity would put at risk program implementation. These risks are mitigated by the consensus on the EU accession and convergence objectives as well as the provisions of the Growth and Stability Pact, which would help focus Government attention on critical structural and institutional reforms.
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