This Public Expenditure and InstitutionsReview (PEIR) was undertaken at a critical juncture ofpublic expenditure management in Romania. Following threeyears of economic decline, the economy began growing in2000, reaching a real GDP growth rate of 5.3 percent in2001. The Government thus defined an economic reformstrategy, to move forward the banking system and enterpriseprivatization, contain fiscal deficit, and reduce centralgovernment expenditures, with further fiscaldecentralization. The PEIR focuses on five areas: (i)Structure of central state budget; (ii) Fiscaldecentralization; (iii) Social expenditure; (iv) Pensionreform; and (vi) Military and defense sector budget. ThePEIR presents a policy framework for enhancing theeffectiveness of processing, and allocating publicexpenditures, to improve Treasury accounting, curbe budgetceilings by accumulating payment arrears, and, by subjectingforeign financed public investments to full budgetaryscrutiny. By emphasizing accountability in the management ofextra-budgetary funds, the PEIR places also a need forfirmer financial foundations for health, and pension funds,as well as on reconsideration of the present educationfinance mechanisms. Finally, it takes a broader look towardsthe need to define more stable local government expenditureassignments, that clearly define local government's ownfunctions, from delegated functions.