Resource information
This Country Economic Memorandum (CEM)
looks at the broad reform program, including institutional,
governance, and economic restructuring reforms Romania is
pursuing, which are anchored in its process for accession to
the European Union (EU). The challenge is to expand
integration with the EU more broadly throughout the economy,
by relying on market driven mechanisms in a predictable
rules-based policy environment, with the state sharply
focused on the provision of essential public goods.
Implementing the institutional reform agenda is the first
priority in the accession-led reform, having the country the
largest increase in its share of EU external imports among
the Central Eastern European Countries (CEECs), with trade
diversification providing a robust foundation for trade
expansion. But, to deepen trade integration, Romania would
need to broaden its trade performance throughout the
economy. On restructuring the enterprise sector, the CEM
indicates enterprise reform needs to be accelerated, and
budget constraint discipline needs to be extended to the
transaction interface between the state and enterprises. As
for implementing agricultural transformation, the potential
competitiveness of agriculture, associated with
Romania's moderate climate, and the availability of
land, remains largely untapped. Therefore, agricultural
policies and transformation need to be driven by
competitiveness. Moreover, increased labor market
flexibility is needed to improve sectoral employment
imbalances, and competitiveness, and hence reduce the risks
to the sustainability of growth, as competing in the EU, and
global markets becomes increasingly more difficult.
Notwithstanding recent progress, there are risks and
vulnerabilities to the macroeconomic stabilization, and
reform achievements. The energy sector in Romania has been a
main source of persistently large quasi-fiscal deficits,
more so than in many other transition economies, with high
hidden subsidies, and losses in the energy sector.
Completing the energy sector reform is essential, but the
challenge is to implement budget constraints between the
state and energy enterprises, so as to complete the
restructuring of the energy sector. Further recommendations
include elimination of quasi-fiscal financing, replaced by
efficient financial intermediation, and strengthening the
regulatory and supervisory infrastructure; deepening the
reforms of the social security system; and, containing the
costs of upgrading environmental standards.
