No sooner had the IMF's Board of directors voted for the first-ever completion of a stand-by agreement concluded with Romania after 1989 that a new dispute between the central bank and the Finance Ministry was revealed yesterday, even before the heads of the two institutions had time to toast to the event: the National Bank wants the Finance Ministry to contribute to the increasingly difficult monetary sterilisation and asked the ministry to make peace with the banks about rates.
"I have not discussed this matter before with the Finance minister and I apologise for being the first to go public with this issue, but I think the Finance Ministry will have to review its capacity to finance the budget deficit from the domestic market," central bank Governor Mugur Isarescu told the press conference he held yesterday together with the minister of Public Finances Mihai Tanasescu, after the IMF's favourable decision.
The Governor's intervention came shortly after Tanasescu had said that next year's budget (estimated at 3% of GDP) will be financed just like it was this year, namely half by domestic market loans and the rest through foreign credits. However, foreign financing has come to hold the heftiest share. It must be noted though that the Finance Ministry was thus able to cut spending related to the public debt interest rates, from 3% of GDP last year to an estimated level of 2.4% of GDP in 2003. Moreover, Tanasescu said that financing through eurobonds would most likely increase in 2004, as costs continue to spiral down.
"I accept the fears of the Finance Ministry, because domestic funding has often proved more expensive than international financing. I do believe, however, that a serious talk with the banks can lead to an understanding, so that the budget deficit can be mainly financed internally," Isarescu replied.
The dispute is in fact revolving around the neverending inflation issue. And this is acknowledged by the National Bank Governor himself, in the last year when Romania is still facing two-digit inflation, according to the central bank's pledges.
"This all comes down to whether people believe inflation forecasts or not. If the bankers do not believe them, then it is only natural for them to question long-term investments in T-bills. Reality will, however, compel them to change their views," Mugur Isarescu said.
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