The private sector is to blame for the foreign deficit widening to more than 14% of GDP this year, as well as for the wage increases above productivity, which fuelled inflation, the media instigates price increases and the NBR can no longer anchor the inflationary expectations under the circumstances, nor it can efficiently resort to rate increases or administrative measures to contain consumption, NBR Governor Mugur Isarescu explains.
"There are principles that have to be observed in order to achieve low levels of inflation. One cannot have two wage raises in one year. One cannot request 20% salary increases when inflation is at 4-5%, just because of a wage gap between Romania and Germany. One narrows the gap by improving labour productivity. Previous productivity gains were lost because of wage increases," the head of the central bank said yesterday, during a dialogue with the Economy and Finance Minister Varujan Vosganian, at a financial seminar.
Isarescu said that the NBR had reached its limit in terms of using the available instruments: "If we raise the RON interest rate any further, foreign currency lending will explode, (when) we increased the minimum mandatory currency reserve to 40%, the loans were outsourced."
Although sitting next to each other at the same table and trying to convey the same message, the NBR Governor and the Finance Minister have completely different views.
"I remain in favour of controlling demand. The wages have to go up less than productivity does, and we need to be careful with the growth of the private sector, because foreign investments are not a panacea," stated Isarescu, and further stressed that "now is not the time for fiscal relaxation."
"We are not building budgetary surplus, I want to be clear on that. I don't want fiscal restrictions placed on consumption, I want supply brought up to par with consumption. Incomes are moving faster in comparison, whilst supply hasn't had time to adjust yet," Vosganian retorted, and joked: "It's the best combination: one of us focuses on demand and the other focuses on supply."
Isarescu continued his warnings and believes the economy cannot indefinitely cope with "wage raises, pension raises and tax cuts for business people all at once." "Stop pulling at the economy, it will eventually break. Priorities need to be set. The economy can only give so much."
"I would like to request you to be our negotiator with the unions," the Economy and Finance Minister replied laughing.
What should be done? In Isarescu's opinion: "Keep the fiscal policy prudent, do not add a high budget deficit to the 14% of GDP foreign deficit."
Isarescu also explained that the messages he had been conveying about the fiscal policy over the last few weeks "concern the next 3 or 4 years." "We are not criticising the current government, we're merely highlighting the risks," the governor said, and pointed out that the state budget was registering surplus even ten months into the year.
At the same time, Isarescu is wiling to face the unpopularity of the messages he conveys.
" I know the limits of the public messages to temper wage raises. I know I will be asked, 'How much do you earn?' in return, but the central bank must send out such messages."
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