Romania country report: business environment has hardly improved

Romania’s public administration has limited effectiveness and efficiency, while the business environment has hardly improved, the European Commission’s country report shows.

According to the EC, inconsistent human and financial resources management leads to an incapacity of the system to implement policies in a structured manner. At the same time, judicial independence and respect for court decisions continue to face challenges and hinder fight against corruption.

Investments in the country are also weighed down by complex administrative procedures and excessive use of emergency ordinances, which create uncertainty, alongside the volatility of fiscal and tax policies.

In terms of the business environment in Romania, access to financing for small and medium sized enterprises remains limited, while high tax evasion and undeclared work put a drag on tax collection and the economy in general.

The country report also draws attention to the local labor market, which has made steps ahead with employment increasing, but is still below the EU average. The percentage of young people not in employment, education or training is above the EU average, but no tailored programs are yet addressing them. “The National Employment Agency has yet to offer tailored and personalized services, either to jobseekers or to employers,” the EC observes.

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At the same time, vulnerable groups are offered too little support, with access to the labor market staying limited and the early school leaving rate being high, in particular for the Roma and the rural population. In terms of education, vocational education and training still presents a low quality level, while participation in adult education is very low.

Romania presents issues in terms of social protection and the health system also, the study notes, with poverty and social exclusion among the highest in the European Union, particularly for children and Roma. Social transfers have a limited impact on reducing poverty and the provision of social services is insufficient, the EC concluded.

When it comes to healthcare, the system is corroded by “inefficient use of public resources and widespread corruption,” leading to a limited access to such services, a prevalence in “informal payments” and overreliance on hospital care.

The rural areas in Romania face deep struggles with poverty and severe underutilization of human capital leading to social exclusion. Agriculture, the typical occupation in rural areas, accounts for 29 percent of total employment in Romania, but only 5 percent of GDP. This translates to a very high proportion of the rural labor force working in subsistence or semi-subsistence agriculture, associated with informal work or non-remunerated family work, low productivity and poverty.

Rural areas, though covering a large part of the country surface (some 87 percent, according to data from the Ministry of Agriculture and Rural Development) and condensing almost half of the population (45 percent), are the most vulnerable part of the country, facing issues related to education, health, social inclusion, basic infrastructure, diversification of employment, outwards migration, and population ageing.

However, it’s not all bad, the EC says, with Romania showing signs of improvement when it comes to the external position, based on a strong economic growth (our country posted the second largest economic growth in the EU in 2015), a “significant improvement of the net international investment position since 2012,” a rebalancing of the current account, and gains in export market share.

“The net international investment position is set to improve further. Challenges may arise in 2016 and 2017 with the acceleration of import growth due to surging domestic demand in response to the fiscal stimulus. Even in this case, however, the current account deficit is forecast to remain contained below 3 percent of GDP. Cost competitiveness has been reestablished in the post-2010 period, but pressures may resurface if the current acceleration of wage growth is sustained and outpaces productivity gains. Strengthening non-cost competitiveness to support the transition to a higher value added economy is another challenge,” further adds the country report.

The EC paid close attention to the “passing to pay” bill which is still in draft, but which, should it pass in its current form, “may generate a systemic risk for the entire banking sector, with risks for financial sector stability and implications for the whole economy”.

Another low point for our economy has been the ad-hoc manner in which fiscal measures have been adopted within the recent period, undermining the budgetary consolidation gradually achieved over the last years. The strong advance in our economy was based on tax cuts and public wage increases, while further expansionary measures have come into force at the beginning of the year. This will bring the fiscal deficit to more than triple as a percentage of GDP in only two years. At the same time, Romania is still battling “inefficient public investment planning and coordination, the lowest EU funds absorption rate, an unfavorable business environment, low research and development intensity and protracted structural reforms, including of state-owned enterprises”. Therefore, the fiscal expansion measures brought into force “without supplementary supply-side measures could lead to new internal and external imbalances,” the EC warns.

The European Commission has released its country reports today, in-depth analysis of the EU member economies. Romania was one of the 18 member states to have a report done based on the Macroeconomic Imbalances Procedure, as it was identified in November last year in the Alert Mechanism Report 2016. Greece and Cyprus, which are currently under stability support programs, are not covered by Country Reports at this stage.

Natalia Martian