(story to be published in tomorrow's issue, March 8)
The Government, in agreement with the IMF, announced a 27% overall inflation this year, both in the year 2000 draft budget and in the medium-term economic strategy. But the latest issue of Finance Ministry bonds for the populace bore a 72% interest rate. The digits must have reversed, from 27% to 72%! Because, if according to the government institution itself, inflation will be 27% this year, the annual interest rate offered by exactly the same institution for its bonds should have been roughly the same, or a few points over that! But no! With a 72% interest rate, we are talking about a fabulous difference, 45 percentage points, compared to the forecast inflation rate. And there can be one out of two explanations: either the Government wants to empty its own budget with such interest rates, or it does not believe itself in the inflation it had forecast. More likely, it's the latter, because inflation in January was 4.3%, meaning an annual rate of 65.7%, which compared to the interest in question, 72%, is strictly normal! But beyond this, if the Finance Ministry had not believed in the annual inflation derived from the real inflation rate in January, but in the government-forecast 27%, it would have offered, say, a 35% interest on the bond issue, which would obviously not attract any buyers. Because no one in Romania, not only among potential bond buyers, believes in a 27% annual inflation, since, as it becomes apparent, the government itself does not believe in it. This is another one of those years with inflation forecasts of 25-30% that no one believed in or took seriously, which statistics eventually come to dismantle, with real-life inflation rates of 50-60%! So it remains almost a mystery why the government keeps pursuing this practice by which it is stealing its own hat. Indeed, an actual inflation above the predicted value helps the budget execution because, while revenues, generally coming from taxes, grow in absolute terms with inflation, although their significance does not grow, expenses, on the other hand, are listed directly in absolute numbers and become easier to cover, even if their real significance diminishes. In rest, however, government credibility is affected, and official data are not being considered as a prediction base. There is an explanation to the mystery, and a very simple one, but it is not in the government but at the IMF. The latter - by virtue of one of its biggest fixations - does not admit a programme without a low inflation, in fact, with an inflation that is even lower than last year, although its experts are perfectly aware that this is strictly impossible. This is why, although statistics are stubborn to note 50-60% annual inflation rates, Romania time and again makes absurd pledges to achieve annual inflation rates of 25-30%. Even worse, in the 1999 memorandum, the inflation target accepted by the IMF was 32%, and since IMF clichés say this year inflation should be lower, the 27% was introduced without any justification! How could a 27% inflation be possible, when this year VAT has almost doubled on foodstuffs, which weigh about 50% in the general price index, and VAT will grow from 0% to 19% on household electricity and heating? Perhaps the IMF can tell us how we can get a 27% inflation under these conditions, or rather, it should say whether it believes itself in such a figure. And if it actually does, how come it accepted the Finance Ministry's move to borrow at 72% a year to cover the budget deficit? The IMF believes that low inflation, albeit impossible, can be forced: with restraints and more restraints in the intake of resources - whether by demolition to stop inefficient industrial consumption, or by reducing consumption among the populace, even omitting to pay salaries if needed. Reducing the intake of resources to match the possibilities is nothing to be blamed in itself. What is missing in the IMF programmes is that they are looking for a balance at ever lower levels. And for no other reason than the fact that these programmes include absolutely nothing to replace what has been demolished or purged. Therefore, things are starting off from the wrong foot. Restraint in itself cannot be a purpose in the economy, as cannot be demolition itself, or failure to pay salaries. A low inflation serves no practical purpose if there are no enterprises around for people to work in and they have no money to buy products that are at last unaffected by inflation. And if low inflation has still not been accomplished, the IMF will easily toss the dead cat into the government's court, since it can say the target has not been attained not because it had been unrealistic, but because the government has not been firm enough - firm enough, that is, to keep demolishing and refrain from paying salaries. The current government, led by an economy professional and encouraged by a team of professional advisors, should exit this game.
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