Reinventing Development Banking in Frontier Economies: The Case of Romania

GEGI Working Paper Series

By Bryan N. Patenaude
February 2014

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Executive Summary

Since its accession into the European Union in 2007, Romania has consistently fallen short of its development objectives for the 2007-2013 period. Of particular concern is Romania’s repeated failure to obtain sufficient and sustainable fiscal and financial resources for domestic development. While discussion and analysis of underlying problems has been prolific, the obscurity, generality, and uncoordinated nature of proposed solutions continue to hinder progress.[1] With these shortcomings in mind, this paper uses case studies, personal interviews, and policy analysis to examine two key aspects of development finance: EU funds absorption, and development banking. Following the examination are specific recommendations on how Romania should address the issues at hand in order to improve development financing over the 2014 – 2020 period.

Regarding EU funds, steps to mimic the successful absorption models of Poland and Czech Republic through regionalization of fund management have failed due to insufficient inter-party dialogue, political deadlock, barriers to skills diffusion, and inadequate resources for monitoring. The evidence suggests that instead of regionalization, a centralized and coordinated approach to EU fund management should be taken via management authority consolidation. Additionally, clear priorities for EU fund use and a set of best practices regarding risk assessment should be implemented so that banks, applicants, and government ministries are on the same page in terms of project acceptability.

To facilitate transparent, coordinated, and successful EU funds use, management should be consolidated into two development banks. While capitalizing a new bank would be difficult, if not infeasible, the existing capital and financial infrastructure vested in the two public banks, ExIm Bank and CEC Bank, is sufficient to meet current needs. Specifically, ExIm Bank should expand operations and take on the role of managing authority for funds allocated to long-term infrastructure development, export-oriented SMEs, and long-term agricultural investment. CEC Bank should take on the role of managing authority for funds allocated to human capital development, agriculture, and domestic SMEs. The transition should begin with ExIm Bank as a two-year trial and be expanded to CEC Bank, which presently faces greater volatility in terms of stakeholder view of future operations.

[1] See National Sustainable Development Strategy: Romania 2013-2020-2030