The NBR insists on requesting support in its battle with inflation, especially from the Economy and Finance Ministry, as it increases its focus on bringing the current account deficit under control.
"Romania's economic situation remains positive and manageable, although improvements in the economic policies mix are required," warned NBR Governor Mugur Isarescu, during the "Mediafax Talks about Corporate Loans" seminar.
Over the last two years, the monetary policy, through the exchange rate lever, has born the brunt of disinflation.
"We have to know exactly what a central bank can do," the governor pointed out. Exaggerated use of the exchange rate and the interest rate to push prices down can be counterproductive in terms of foreign deficit. Isarescu sees a solution to manage the current situation in avoiding a relaxation of the fiscal policy along with certain adjustments for monetary conditions, although he did not specify what those were. Although the NBR identified a rapid increase in revenue as the main source of inflationary pressures, Isarescu is reluctant to rely on adjustments in this field or on strengthening the fiscal policy, because next year is an electoral year.
"Under no circumstances should the fiscal policy be relaxed at the end of this year or in 2008. I have the approval of the Prime Minister and of the Finance Minister on this," Isarescu added. He explained that such a solution was less than optimal, and the ideal scenario would entail a correlation of the increase in salaries with productivity gains, overlapped with the strengthening of the fiscal policy.
Over the past two years, the strong appreciation of the RON, which tempered the increase in prices, has fuelled the demand for imported goods, while Romanian exports have become more and more expensive on foreign markets. Under the circumstances, the current account deficit has swollen under the pressure of foreign currency outflows caused by trade, to about 13% of GDP (calculated over the last four quarters), exceeding even the most pessimistic estimates. The latest official estimate indicates a current account deficit of 13.4% of GDP for the entire year.
"Continuing to rely on interests and exchange rates in the disinflation process means that instead of gradually preparing for soft lending, we must prepare for hard lending."
In the past the governor has explained that if no steps are taken domestically to adjust the oversized foreign deficit, the market will have to rectify the trend through fast-paced and significant depreciation of the RON. However, the NBR is looking for an adjustment of the current account deficit over a broader time frame, thus avoiding any sudden exchange rate moves.
Building a broader scenario for the excessive use of the monetary levers, Isarescu explained that an attempt to contain lending by raising interest rates on RON and by increasing the mandatory minimum foreign currency reserves would lead to new loan outsourcing operations, as banks are already accustomed to such moves. This will affect foreign debt, an indicator that has rapidly deteriorated over the last few years.
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