(story to be published in tomorrow's issue, March 15)
1. Hypotheses of the medium-term development scenario (2000-2004 period)
The growth scenario is based on the establishment of a business environment needed to attract foreign investments and revive domestic investments. Hence, the following are implied: development of the financial-banking system along with its convergence to models in the European Union, elimination of distortions between sectors, clarification of the ownership right, more flexible administrative systems. As a result, between 2000-2004, foreign direct investments (FDI) are expected to grow in Romania (excluding privatisation earnings). It is assumed that foreign financing needs will be covered each year. Grants offered by the EU are little below 2% of annual GDP, starting 2001. Privatisation will continue beyond year 2000, and will comprise some autonomous regies. Privatisation earnings are expected to peak between 2000-2001 (1.9% of GDP), to drop in the subsequent years. The benefits of FDI for the economy will be clearly felt in exports. Exports competitiveness will grow as the export structure changes in favour of products with more added value. The elasticity of exports demand will gradually grow, due to growth competitiveness induced by foreign-capital exporting firms. The elasticity of imports demand will decrease gradually until 2004. Revenues from customs taxes will keep falling, as a result of accords with the EU, CEFTA and WTO. Worldwide demand for Romanian products is calibrated around the growth rate forecast for the main commercial partner. The gross domestic product of the European Union has been estimated to grow 2.4-2.5% per year, in the forecast interval. Worldwide inflation is expected to average between 1.3% and 1.4% a year. Monetary policy will be aimed at a relative growth of the M2 aggregate, but the priority is to expand other monetary aggregates (M3), by introducing new banking instruments. Real interest rates will go down slightly, allowing a growth of demand for cash. The exchange rate regime will remain one of controlled float. Investment transfers from the rest of the world will result in a gradual real-term appreciation of the leu, compensated by net capital entries, also boosted by better labour productivity. The National Bank of Romania will lead a policy of raising currency reserves, so that they can reach a level equivalent to five months of imports. The effects of fiscal reforms in early year 2000 will be increasingly visible after 2001, and the budget deficit will be maintained around 3% of gross domestic product, until 2004. The results of fiscal measures will be seen in the gradual growth of indirect revenues from VAT, in lower revenues from the profit tax, in more transfers for social security. Reforms in health insurance and in the pensions system will also continue. Spending on education, health care and research will grow as well. Budget revenues will be bolstered due to a better collection system (stronger financial discipline, lower arrears). The foreign debt service is calculated based on the payment period, for the existing period. The foreign debt service is correlated to the interest rate. The state's share of the foreign debt or the share backed and paid by the state will tend to drop, from 70% to 60%. The public debt (domestic and foreign) will grow, but its weight in the gross domestic product will remain between 30-60%. On the labour market, the rate of participation among the active population will gradually grow. In 2000, and to a lesser extent in 2001, lay-offs are expected following reform in the industry and public administration. The size of the active population and retired citizens follows demographic trends, without unexpected perturbations. The real appreciation of the leu and the real growth of labour-related revenues will lay the foundation for a considerable growth of nominal income per capita (in hard currency terms). As investments resume, also based on foreign direct investment flows, new jobs will be created in the economy. They will attract the active population from outside the occupied labour force (unoccupied people plus those working in the informal economy). This effect will become predominant toward the end of the period, bringing with it the risk of higher unemployment.
2. Results of the forecast for the 2000-2004 scope
The scenario starts with the assumption that a pace for sustained economic growth will be instated, starting with year 2001. Only in 2000, when recovery will effectively begin, the annual growth rate will be more moderate, 1.3%. In aggregated demand, economic growth will rely on accelerated investment rates, as the savings rate improves slightly, along with the inflow of foreign direct investments. Foreign trade will grow in volume and the average exports growth rate will exceed the economic growth rate, but not that of imports growth, due to domestic demand addressed to the latter, and to the preservation of a structural deficit in the first stage. The economic growth strategy also considers a substantial improvement of the credibility of Romanian institutions and economic policies. More coherent policies will consolidate trust in the domestic currency and confidence among foreign economic operators in the Romanian economy. Acquired credibility will be reflected in the following indicators: the share of the foreign debt service in commodity and service exports will drop from 22.4% in 2000 to 20% in 2004, especially as a result of lower interest rates and longer maturity terms (the share of foreign debt in commodity and service exports will rise from 98.5% to 112.8%); the gross reserve expressed in the number of average import months (commodities and services) will grow from 3.6% in 2000 to 5.1% in 2004. On the supply side, there will be a significant change in the economic structure. The services sector will grow, to the detriment of the agricultural sector. The structural adjustments that will be promoted and encouraged with economic policies will make the Romanian economy more competitive starting with year 2000. Productivity gains will allow, in turn, for better real net salaries, significant year after year, with a 26% growth over the scope of the forecast period (49% in salaries expressed in dollars at constant prices). After 2001, economic growth (real GDP) stabilises around an average rate of 4.25%, while the average growth rate of gross capital formation, in real terms, is forecast around 10% a year, bringing with it major effects of restructuring and efficiency in the economy. As a result, gross capital formation will reach 24% of GDP in 2004. The share of the industrial sector in forming added value will remain roughly constant, around 31.1%, while the role of agriculture will diminish, to 14.2% in 2004. Services (including constructions) will grow to 54.7%. The forecast gross domestic product is 8,400 euros per capita in 2005, evaluated in terms of buying power (world inflation was considered; 2005 figures refer to the euro's value in 2005). Inflation will drop gradually over the forecast period, reaching an annual average rate of 10.1% (or a December-to-December rate of 9.1%) in 2004, due to the fiscal dominance. Unemployment will tend to drop toward the end of the forecast period, as new jobs are created in a growing economy. The scenario assumes a higher unemployment rate in 2000 as a result of mass firings. The real-terms salary will grow because of the productivity plus gained by the economy following massive entrance of foreign direct investments. Due to the slight appreciation of the leu in real terms, the salary in nominal dollars will grow further. Economic recovery will be impossible without a growth of Romanian imports, which will call for a careful monitoring of the payments balance. The growth trend of the trade gap thus expressed needs, even with growing foreign direct investment, additional foreign financing, via other capital entries. The foreign debt will grow as a consequence but, according to the scenario proposed in the strategy, foreign financing needs will remain within acceptable limits. The leu/dollar exchange rate (and the leu/euro exchange rate) will tend to appreciate in real terms. A higher foreign debt will also affect the total public debt, which will account for around 30% of the gross domestic product The budget deficit is designed to stay within 3% of the gross domestic product, against the background of mild drops in the share of revenues (up to 31%) and spending (up to 34%) in the GDP consolidated budget. The share of the broad-sense money supply (M2) in the gross domestic product will gradually grow over the forecast interval, reaching 30% at the end of 2004. At the same time, the savings rate will also improve, allowing more investments into the Romanian economy. The gap between savings and investments will remain, however, as a major misbalance of the Romanian economy, in the medium term."
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