(story to be published in tomorrow's issue, March 22)
According to data published by the National Statistics Commission, in 1999 the gross domestic product dropped 3.2% against the previous year (in 1998, the drop was 5.4%, after the initial figure, 7.3%, was corrected). In real terms, gross added value decreased in constructions (-9.6%), services (-5.1%) and industry (-3.1%) and grew in agriculture, forest culture, forest operation and hunting (4.7%). Nevertheless, due to the different developments in prices, the GDP shares of the industry and services have grown (by 0.3 and 0.5 percentage points accordingly), while agriculture's share dropped (by 0.6%). Last year, industrial output dropped by around 8%, and agricultural output grew 5.5%. Over the whole of the national economy, the contribution of private sector to GDP was about 61.5%. Although decreased, the influence of the state sector (including national regies that hold the monopoly over a number of utilities) has continued to manifest, especially through financial arrears and through an induced inflation as an alternative to competition-based restructuring. Still, there are some positive signs in last year's developments, among them the trend to stabilise the trade balance and to stop inflation growth, the increased capacity to repay foreign public debt, and re-consideration by some international institution of the country's access to foreign financial resources. The essential element for this year will be to reform fiscal policy, with the stated goals of resuming economic growth and cutting inflation to at least half. This is how fiscal policy will find a better fit with monetary policy, which will aim at soothing inflation trends while keeping the national currency's depreciation below the inflation rate. According to our estimates, a GDP growth will be possible this year, between 1-2%, given that reforms and restructuring in the economy gain speed. In the future, however, attaining growth rates in excess of 5%, as planned in the medium and long-term strategy, will be strictly conditioned by an efficient management of foreign aid and the establishment of an economic environment auspicious to foreign investment. At the root of contained inflation will lie accelerated privatisation of state companies and a firm application of market economy principles, including for companies that remain in state hands.
Short-term developments
In the last month of the past year, industrial output suffered a severe decline (-9.9%), after four months of growth (Aâ1.8% in August, Aâ7.1% in September, Aâ1.2% in October and Aâ3.2% in November). The crisis that began last December in the industry continued into this January (-7.6%), when the absolute minimum was attained in the monthly output measured in comparable prices, for the entire period after 1989 (the previous minimum had been attained in January 1999). For February, we estimate resumed growth (3-5%), and for March we forecast a steep acceleration of growth (8-10%). Over the whole first quarter this year, we expect industrial output to be significantly lower compared to the fourth quarter last year (about -8%). But compared to the first quarter of 1999, industrial output expressed in constant prices will only be lower by 3-4%. As to a durable recovery of industrial output, efforts are still needed in restructuring based on efficiency criteria. For the whole of 1999, although industrial output has fallen in real terms by 8% (compared to a less severe GDP drop, only 3.2%), the relative share of this branch in the national economy remained virtually unchanged (27.5% of GDP in 1998 and 27.5% in 1999). Aside from a swifter price evolution, this could also signify some positive structural changes - higher share of added value in the total output of the industrial sector. What matters is for this trend to be deepened over the year 2000, especially in limiting industrial branches that lack selling chances in the future. After a certain calming in inflation tendencies last December (2.9% compared to 4% in November), in the first month of the new year consumer prices grew again (4.3%), especially due to the new VAT regulations. In February, however, inflation was only 2.2%, according to CNS data. For March we also expect an inflation rate below 3%. According to official estimates, inflation trends will be felt for some time ahead (probably by April or May), after which prices will stabilise. In fact, according to official estimates, in the entire year 2000 inflation should lie between 25-30%, or a monthly average of 1.9-2.2%. Besides the NBR policy, targeted at stopping the trends that could lead the economy into the dangerous area of hyperinflation, fundamental for decreasing inflation in the long term is to revive the national supply, including through promotion by the authorities of supply-side policies to stimulate savings and investments (including foreign ones). In January, unemployment grew significantly, to 11.9% (compared to 11.5% at the end of last year). According to our preliminary estimates, unemployment continued to grow in February, but more slowly. For the period ahead, we forecast a slight growth in the unemployment rate, 0.1-0.2 percentage points per month. Fast restructuring in the national economy this year will probably be accompanied by more jobless and by additional pressure on the public budget. Of course, restructuring in the economy will demand a higher unemployment rate for a while, which will need to be correlated with serious conversion and recycling programmes for the dismissed labour force, including via projects financed by international institutions. A significant drop in unemployment, in a more distant future, will be possible only if restructuring is completed in the national economy and conditions are set for healthy economic recovery. This calls for ample investment programmes, which, at least in the first stage, will be targeted at the public sector, and the modernisation of infrastructure, including by attracting foreign funds. After the slow growth in September and October, in the last two months of 1999 the growth rate of money supply (the daily average) had significant leaps (Aâ8.4% in November and Aâ15.3% in December, compared to inflation rates of 4.0% and 2.9%, accordingly). Against the whole of 1999, at the end of the period the money supply was 88.5% larger than at the end of 1998, compared to an annual inflation rate (December 1999/December 1998) of around 54.8%. In January, the change in money supply (daily average) was insignificant (Aâ1%), as it was in February, according to our preliminary estimates. For March, we expect almost 3% growth - higher than we had predicted for the monthly inflation rate. In the longer term, the money supply, reflecting the most direct channel of covering economy needs with monetary means, will be correlated with the growth rate of the real economy and with the inflation rate. Still, mindful of the propagation of perturbations induced by the new fiscal rules, at least in the first quarter of the year money supply (in nominal terms) is likely to develop further than consumer prices. We therefore forecast that starting with March, money supply will grow faster than inflation. In the last part of 1999, people's savings have evolved faster than inflation (Aâ6.1% in November and Aâ9.8% in December). In December, the gap measured almost seven percentage points, which points to households' renewed inclination to saving money. Over the entire 1999, however, people's savings have grown less compared to inflation (44%, against an almost 55% inflation rate), which is a significant depreciation in real terms. In January, the growth rate (4%) was below inflation (4.3%). However, in February and March, according to our assessments, people's savings will develop similarly with inflation. As to the structure of savings (in lei and in hard currency, converted at the exchange rate), the hard currency component continued to grow last year, from 26.0% at the end of 1998 to 34.9% at the end of 1999 (of course, a major impact was brought by the significant depreciation in that period of the national currency against the western currencies used by the populace in their deposits). Naturally, this tendency can only be stopped if confidence in the national currency is restored. At the end of January, the share of the hard currency component already exceeded 35%. After the leap in November (Aâ6.1%), the exchange rate (the leu/USD rate) developed in December and January at a slower pace than inflation (2.0% in December, compared to 2.9% inflation, and 1.2% in January, compared to 4.3% inflation). Over the course of 1999, the real-terms depreciation of the US dollar exchange rate has been roughly two-thirds, compared to an annual inflation rate of almost 55%. In February, depreciation in nominal terms (2.3%) was almost equal to inflation (2.2%). In the subsequent months, however (perhaps until April or May), under the impact of the forthcoming price growth, there will be significant pressure on the exchange rate, which could cause problems on the currency market unless countermeasures are taken. Therefore, NBR intervention will be required in the future, to keep the exchange rate within a safety perimeter and to interest the populace and economic agents in accumulating money in the national currency. For March, we expect a growth of the leu/dollar rate of 0.5 points above inflation.
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