Consultations for the World Bank’s Country Partnership Strategy with Romania May-June, 2009

1. Consultations for the World Bank’s Country Partnership Strategy with Romania May-June, 2009

2. What is the CPS? • The Country Partnership Strategy is the World Bank's roadmap for its operations in Romania for 2009-2013 • Identifies key Government objectives where the Bank can provide support: • Short-term crisis management • Medium-term EU convergence priorities • Prepared in partnership with the Government and in consultation with other stakeholders including the Parliament, business community, trade unions, NGOs, local government, academia

3. CPS Objectives • To inform the Board of the Bank on Romania’s development objectives and proposed WB program (lending, project portfolio, analytical and advisory activities - AAA) • To build partnership with the Government on its development objectives and the Bank program • To get feedback and advice from all stakeholders on objectives of the Bank’s program

4. Why the CPS now? • A new CPS was due • Needed to underpin the rationale for the development policy loan series providing budget support • Timely input for the Government agenda

5. Context • Political: consensus on crisis management and renewed reform, tempered by coalition politics • Economic&Financial: after eight years of solid growth, the crisis exposed vulnerabilities (sources of growth, business environment, financial sector) • Social: impressive poverty reduction gains are put at risk by the crisis

6. Growth & Poverty 2002-2009

7. Fiscal deficit 2005-2008…

8. …driven in part by public pay policy

9. Economic Outlook • Economic contraction 2009, stagnation 2010, renewed growth as of 2011 contingent on reform • Fiscal discipline to maintain manageable deficits and contain inflation – EUROZONE convergence • Reduced current account deficits • Balance of payments financing gap in 2009-2010 projected at EUR 20 billion is fully financed

10. Actual Projected 2005 2006 2007 2008 2009 2010 2011 Annual percentage change Output and prices Real GDP 4.1 7.9 6.2 7.1 - 4.1 0.0 5.0 Domestic demand 8.3 12.8 14.3 8.9 - 8.2 - 3.3 6.0 Consum er price index (CPI av) 9.0 6.6 4.8 7.8 5.9 3.9 3.5 Unemployment rate 5.8 5.8 4.3 4.0 8.9 9.7 7.7 Nominal wages 17.0 18.9 22.6 23.6 5. 9 3.8 5.2 Public sector wages 25.9 27.3 18.5 31.0 5.1 3.9 3.5 Private sector wages 14.7 16.5 23.2 21.2 6.2 3.8 5.7 In percent of GDP Savings and investment Gross domestic savings 23.3 26.5 31.1 31.4 30.8 29.9 31.9 Gross national savings 14.4 16.1 17.3 19.0 23.2 23.4 25.7 General government Revenue 30.1 31.0 32.5 32.6 33.0 33.4 33.1 Expenditure 30.9 31.6 35.6 37.5 37.5 37.0 35.8 - 0.8 - 0.6 - 3.1 - 4.9 - 4.6 - 3.6 - 2.7 Fiscal balance Privatization proceeds 1.3 0.4 0.1 0.1 0.0 0.0 0.0 External financing 0.5 0.1 0.1 0.5 2.8 1.1 0.2 Domestic financing - 1.0 0.1 2.9 4.4 1.8 2.4 2.5 1/ Structural balance - 0.6 - 2.1 - 4.2 - 6.5 - 3.8 - 1.7 - 1.2 Gross public debt (direct debt only) 15.6 15.4 17.5 20.1 23.6 25.7 25.7 Macro Indicators 2005-2011

11. The Crisis = Opportunity for Reform • Reforms have stalled since EU accession • Crisis exposed need for renewed reform and helped build broader national consensus • EU, IMF and IFI’s support reform and ease the adjustment

12. Romania’s Development Agenda The Basis • The program of the Governing Coalition 2009-2012 • The May 2009 Convergence Program for joining the EUROZONE in 2014 • The 2007 National Reform Program based on Lisbon Agenda

13. Romania’s Development Agenda Pillar I – Public Sector Reform • Public financial management: unified compensation, MTEF, tax administration, fiscal responsibility law • Decentralization: health, education • Governance: reform of the judiciary (CSM, integrity and anticorruption)

14. Romania’s Development Agenda Pillar II – Growth and Competitiveness • Sound macroeconomic management • Financial sector health • Improved business environment • Education reform • Competitive agriculture and mobilization of EU funds • Improved quality and access to infrastructure • Energy efficiency and climate change mitigation

15. Romania’s Development Agenda Pillar III – Social and Spatial Inclusion • Poverty alleviation during the crisis • More equitable social safety net • Fiscally sustainable and equitable pension system • Improved health outcomes and cost effectiveness • Inclusion and equal opportunities for the Roma • Social benefits for the rural poor • Employment opportunities and pay for women

16. Effectiveness of Social Assistance

17. Bank Program: Principles and Outline Principles Outcome-based activities based on the Government’s strategic pillars and the Bank’s comparative advantage Flexible Bank response based on evolving objectives and needs from government and Bank’s comparative advantage Outline 2009-2010 program: crisis response DPL series (EUR 1 billion) Ongoing portfolio (EUR 1.2 billion) AAA to inform DPL and support its implementation 2011 –2013 program: sustainable growth with equity Ongoing portfolio New lending: general or sector-specific budget support AAA or knowledge services to the government

18. Bank Program – Public Sector Reform Objective: • Short-term: reduce fiscal vulnerabilities while protecting priority services and social assistance • Medium-term: improve accountability and responsiveness of public administration, and predictibility, transparency and efficiency of public resource management Actions: • Public Financial Management: • DPL: support for anchoring annual budget in MTEF • AAA: programatic PER’s to identify short term savings and efficiency gains in major public expenditures; systemic and institutional issues of budget formulation and execution • Possible new activities: support decentralization and tax administration reform, or/and performance-based budget in selected sectors

19. Bank Program – Public Sector Reform (cont’d) • Public Administration Reform: • DPL: support of public pay system reform • AAA: analytical support for public pay system reform • Possible new activities (AAA, lending): functional reviews of administration and institutional reforms • Governance: • Ongoing Judicial Reform Project - efficiency of courts, accountability of judiciary • DPL: Governance theme intrinsic to most actions • AAA: Governance theme intrinsic to most activities

20. Bank Program – Growth and competitiveness Objective: • Short-term: crisis management in the financial sector • Medium-term: EU convergence goals through improved business environment, enhanced skills and innovation, upgraded infrastructure, and more efficient agriculture Actions: • Financial sector strengthening • DPL: support for Strategic Action Plan to guide response to potential financial crisis, strengthen supervision, and ensure independence of sector regulators • AAA: analytical work in outer years if external conditions or regulations change • Possible new activities: to be determined by mid-term review

21. Bank Program – Growth and competitiveness (cont’d) • Business environment • AAA: advisory work considered on tax administration; • Possible new activities: support for implementation of 2008-2013 Better Regulation Strategy • Education, Skills & Knowledge • DPL: focus sector, support for design & implementation of decentralization of pre-university education, key reforms in resource allocation, quality and access to public services • AAA: TA on decentralization of pre-university education and on introduction of a Student Loan scheme; future TA to be determined my mid-term review • Investment Lending: ongoing Knowledge Economy Project; possible future output-based investment operation

22. Bank Program – Growth and competitiveness (cont’d) • Agriculture: • Ongoing operations: three projects suppor land tenure & titling reform, absorbtion of EU funds, competitiveness of farmers and agroprocessors, agricultural research, improved food safety, rehabilitation and reform of irrigation systems • AAA: possible support on optimal mix of EU and national funds to maximize impact on competitiveness, to build strategic planning and programming capacity • Possible new lending: output-based operations • Transport: • AAA: PER to inform fiscal savings & efficiency gains; possible future support for strategic planning, institutional and policy reforms, safety • Possible new lending: output-based operations

23. Bank Program – Growth and competitiveness (cont’d) • Energy and Environment • Ongoing lending: rehabilitation of a hydropower station, a guarantee operation, adoption of energy efficient technologies, support to meet water quality commitments and facilitate absorbtion of EU funds • AAA: TA on energy strategies, energy efficiency by state-owned energy companies, possible future support on climate change adaptation and mitigation • New lending: Integrated Nutrients Pollution Control loan to help meet EU Nitrates Directive

24. Bank Program - Social & Spatial Inclusion Objectives: • Short-term: address core and transient poverty during crisis • Medium-term: promote social inclusion and rural development Actions: • Social Assistance • DPL: core theme; support for better design and coverage of the most efficient and well targeted social assistance programs, and gradually rationalize coverage of less efficiently targeted ones • AAA: programatic poverty monitoring series to support monitoring and evaluation and design of future improvements • Possible new lending: output-based operations to develop activation policies and programs

25. Bank Program - Social & Spatial Inclusion (cont’d) • Inclusion • Ongoing operations: Social Inclusion Project addresses needs of Roma, persons with disabilities, children at risk, victims of family violence. Knowledge Economy Project targets remote and disadvantaged communities. Rural Education Project supports innovation in remore regions. Mine Closure Project supports socio-economic regeneration opportunities. • AAA: programmatic poverty monitoring

26. Bank Program - Social & Spatial Inclusion (cont’d) • Health sector • Ongoing operations: modernization of maternity and emergency services • DPL: focus sector, supports government policies on drug pricing, prescription of generic drugs, review of health benefit package, co-payment system with exemptions for poor, hospital rationalization, shift in focus to primary care • AAA: analytical work for the above • Possible new lending: output-based operations

27. Bank Program - Social & Spatial Inclusion (cont’d) • Pension System • DPL: support to pension reform for fiscal sustainability • AAA: analytical work on social protection of elderly poor farmers, capacity building pension administration • Regional Development • Ongoing operations: build on lessons from the Rural Development Project • AAA: possible support for decentralization • Possible new lending: support for decentralization

28. Next steps… • CPS available on WB Country Office Webpage to inform and get feedback from stakeholders • Stakeholders’ comments and suggestions will be factored in the CPS, and documented in CPS annex • Consultations of stakeholders is ongoing process and will continue under all Bank operations