The low level of financial intermediation in Romania compared to other countries in Central and Eastern Europe can be explained to a large extent by the high level of arrears, estimated at 36 percent of GDP, while banking credits for the corporate sector represent only 8 percent, according to the World Bank's new Country Economic Memorandum on Romania.
"Many non-viable Romanian companies rely on quasi-fiscal financing to get resources instead of taking loans," said Rosalinda Quintanilla, the World Bank official in charge of devising this memorandum.
The energy sector in Romania has been a main source of persistently large quasi-fiscal deficits - more so than in many other transition economies. The bank's experts say hidden subsidies and losses in the energy sector were as high as 6.5 percent of GDP in 2001, and while these declined to around 3 percent in 2003, they remain high and should be eliminated.
"Hence, completing energy sector reform is an essential first step," the memorandum reads. The challenge is to implement hard budget constraints between the state and energy enterprises, and the completion of the restructuring of the energy sector.
The bank's official says one of the biggest challenges is the reform of the enterprise sector in general.
"The slow and inefficient enterprise reform of the past has left Romania with a larger number of enterprises to be privatised or liquidated than in all of the other CEECs combined," Quintanilla said on Monday during the presentation of the report. Public enterprises are the core of the unrestructured part of the economy. The recent momentum in enterprise reform needs to be accelerated, the memorandum explains.
"Romania has invested in non-viable companies more than in education, which is actually the future," Rosalinda Quintanilla said.
The report also finds that agricultural productivity in Romania is very low and, more seriously, stagnant. The agricultural sector includes 40 percent of the labour force whose share of the GDP is only 14 percent.
For Romania to realise its economic potential and to integrate into the EU, agricultural policies and transformation need to be driven by competitiveness, the authors of the report show. In view of impending European Union accession, Romania's export product structure, which comes with a low added value, needs to be changed. "Without further expansion of private sector activity in the economy, agricultural transformation, and enhanced labour market flexibility, Romania is unlikely to move to higher technology and potentially competitive activities," the World Bank report shows.
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