Romania strategy overview

Full strategy  (0.6Mb) Approved 29  Apr 2008

Strategia pentru Romania

Summary of public comments  (0.1Mb)

Romania continues to meet the conditions specified in Article 1 of the Agreement Establishing the Bank. Since the last strategy, the country has made further progress with market-oriented reforms, in an environment of strong economic growth and major inflows of foreign direct investment (FDI). Romania’s accession to the EU on January 1 2007 was an important landmark and reflects the remarkable progress made by the country in its transition, especially during the current decade. The country remains well placed to capitalise further on the advantages of EU membership and to continue the catch-up process with other EU countries. However, Romania still faces significant economic and institutional post-accession reform challenges, and the Bank aims to assist the country in meeting these challenges successfully over the strategy period.

Economic progress

The Romanian economy grew by 7.9 per cent in 2006 and 6 per cent in 2007. The main driver of growth has been domestic demand, with strong wage and credit growth helping to fuel a consumption boom, whilst at the same time investment has grown rapidly. Signs of overheating, however, are apparent. Inflation rose during 2007 to end the year at an annual rate above 6 per cent, fiscal pressures have been increased by major spending increases on public sector wages and benefits, and the current account deficit has expanded to around 14 per cent of GDP. These trends have increased the risks facing the economy and call for a determined policy response in the short-term and an enhanced focus on corporate and bank governance to mitigate these macroeconomic vulnerabilities.

Progress over the transition period

Romania has made significant progress over the transition period towards the standards of advanced market economies. In many respects, these standards have been fully achieved; for example, the degree of liberalisation in price setting, trade and foreign exchange is fully comparable to other EU countries. However, the transition in Romania is not yet complete, and the country continues to face some post-accession transition challenges. Mostly, these challenges are associated with deepening and sustaining market forces, for example through the promotion of better standards of corporate governance, the enforcement of competition rules, the further expansion of financial intermediation (especially in the non-banking sector), the commercialisation of infrastructure services and the development of the local capital market infrastructure. These objectives are difficult to achieve, but they will be necessary to ensure long-term prosperity.

Business environment

The business environment in Romania has improved since the last strategy was approved, but competition from the EU’s single market has highlighted the urgent need to restructure many companies. Better governance standards and the enforcement of regulations are needed to support this restructuring. As noted by the European Commission, judicial reform and the fight against corruption are key challenges facing the country and, while progress has been made in the past year in these areas, efforts must be stepped up in order for Romania to remain an attractive destination for investment.

Operational priorities

The Bank is well placed to assist Romania in meeting the remaining transition challenges effectively. The Bank’s cumulative commitments to Romania have now reached EUR 3.54 billion and the Bank has signed 248 transactions (as at the end December 2007). In addition the Bank has mobilised further funding of EUR 6.5 billion or over 10 billion of total funding. The Bank has identified a number of key areas where it can still have a strong transition impact. Accordingly, the Bank will focus on the following priorities over the forthcoming strategy period.

• The Private Enterprise Sector – the Bank will provide support to the local private sector, with a special focus on competitiveness and expansion throughout Romania and cross-border. The Bank will pay particular attention to the development of businesses in less advanced regions of Romania in order to promote regional integration. The single EU market and competition from Asia are challenges to the Romanian private sector which the Bank will help address through finance and expertise. Investment requirements will be addressed in a range of areas including services, manufacturing, technology and skills training. Funding requirements will be considered in close collaboration with local banks and private equity funds. The Bank will diversify its range of financing products to include more high-risk instruments (such as equity, quasi equity, and structured debt) to support the restructuring, consolidation and expansion of local companies on the Romanian market and to attract further FDI. The Bank will enhance its efforts to lend in local currency to those borrowers which generate local currency revenue streams. Local currency loans are critical to mitigate potential foreign exchange exposure which may arise for borrowers whose revenues are denominated in RON but which do not have matching RON liabilities. Financial tools, such as dedicated credit lines utilising EU post accession funds, will be tailored to help local businesses.
• The Energy Sector – The Bank will continue to invest with both the public and private sectors in energy generation, transmission and distribution, including policy dialogue to promote appropriate regulatory and institutional reform in line with the EU Directives and the Government’s recently approved energy strategy. In addition there is a particular need to invest in the upgrade and rehabilitation of electricity assets, especially power stations. Energy efficiency and renewable energy projects will be promoted as part of the Bank’s Sustainable Energy Initiative. The Bank will work to help address Romania’s high energy intensity challenge (which is negatively affecting the economy’s competitiveness) by promoting energy efficiency projects, for municipalities, industries and households.
• Infrastructure – The Bank plans to assist Romania improve its infrastructure, including the transport sector, to ensure enhanced regional cooperation, improved trade and the utilisation of Single Market benefits. This includes improving the administrative capacity for structuring PPPs and supporting private sector capital in key transport infrastructure projects that will enhance economic development. In addition, the Bank will continue its activities in the municipal sector throughout the country, especially in view of the opportunities arising from the EU post-accession structural and cohesion funds. This will include a focus on the smaller municipalities. The Bank will continue to pursue lending on a commercial basis directly to regional water and waste water companies to upgrade and expand their assets and to municipalities for urban transport and roads, energy efficiency and solid waste transactions.

During the strategy period the Bank will continue to work very closely with the government, the EU and the EIB (including through the joint JASPERS initiative) on how to facilitate and properly use Structural and Cohesion Funds as part of the EU Agenda. In accordance with this Strategy, the Bank will continue to ensure that all EBRD operations in Romania meet sound banking principles have transition impact, are additional, comply with the Bank’s Environmental Procedures and incorporate, where appropriate, Environmental Action Plans to also support the country to meet its EU environmental acquis objectives.