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 Romania
the awakening giant of Europe |
 Company
Profile
 Activities
Financial institution.
Facts
Figures
(Source : the National Bank of Romania)
Strategy
Interview
with
Mr. Mugur Isarescu,
Governor of the National Bank of Romania
Question: First of all I would like you to
give to our readers a brief historical background
of your bank, the Central Bank, since the 90’s
and of course a brief historical background of
your professional experience.
Answer: This bank is pretty old, not exactly
like others, but is from 1880 and I may had to
say a steady rising star up to the communists
took over, it was an eclipse for almost fifty
years, and in the late 90’s I was appointed
here as a governor in September with the clear
target to help the banking reform. We looked first
of all to our inheritance, of course to have continuity
after fifty years is very difficult, but at least
to establish some bridges with the past, and we
worked in this direction. Secondary, and the most
important, was to connect this reformed Central
Bank to what it supposed to be then, and still
are, the Central Banks of modern world, and particularly,
we looked to the western European standards. We
looked to have what are called now independent
Central Banks with a long-standing management
subordinated particularly to the Parliament and
to the public, not to the cabinet, independence
is understood in the relations with the cabinet.
We looked also to get rid of the commercial operations
and to be as much as possible a pure Central Bank.
We get rid very quickly of what were then the
commercial operations of the Central Bank. We
started from a very centralized system, from a
"mono-bank", 90% of what was functioning
in this institution before the 90’s were
pure commercial operations, that’s why we
split up. We setup a new bank, the Romanian Commercial
Bank, one of the largest now, and we remained
with the rest of 10% and we developed all the
others operations; we developed monetary policy
from ground zero, we developed here the banking
corporations of the Central Bank, refinancing
with the commercial banks, we developed here the
payment system and the clearinghouse, we developed
also the supervision licensing regulation departments.
We developed also the Department for international
relationships with IMF and all the other financial
institutions. Now, looking back, I could say that
it was done pretty rapidly, all this operations
were developed and now we have experience with
the law but also with the practice, we have monetary
policies, full conduct, full autonomy including
interest rate and reserves requirements. We have
in our responsibility exchange rate policy. For
example in comparison, foreign exchange policies
are not in the field of FAD, this is the field
of treasury. We have the payment system and we
have also the supervision regulation and licensing
of new banks. For example, another strong Central
Bank and pretty independent is Bundesbank, but
Bundesbank has no supervision of this. This is
nothing to be proud of, because having such a
large scope of activities we have also a large
responsibility and a lot of vulnerabilities that
I’m aware of, but I like to tell you what
we developed.
Now regarding my career I was in team that joined
IMF and World Bank in 1972 but in the last years
of Ceausescu this links were almost broken. And,
after this, because of my former fellows from
this research institute, which was a source of
specialist for the reform, and because the new
government had almost six or seven ministries
that were my former fellows they called me back.
As a joke, they called me back with a letter saying
that look, you are paid there in dollars, come
back, make the " leu " convertible and
we are also almost finalized this dream of Romania
and it was possible, because of the cabinet shuffle,
to accept the art. 8 on current account convertibility.
I’m married, two children. I’m still
a professor, when I have time; usually I don’t
have but I try to keep these connections with
the young generation. It is crucial for me.
Q: If you want, I want to talk a little bit
about the inflation, so inflation refused to pay
respect to official predictions and what is the
Central Bank going to do about that and what are
the forecasts for the next year?
A: This year it will be around 150%; our
prediction when we started the program was 90%
to December, 110% in the worst case . It will
be almost 150%, but the large part it will be
the corrective inflation, almost all prices remained
under control or monitored, including the liberalized
exchange rate in January - February - March, first
quarter. After this we had a tight monetary policy
that kept the money supply under control and we
reduced inflation. Because of different reasons,
according to our program it suppose to reach 2%
and then keep flat, there were two jumps: one
it was in September and the other in October,
particularly October was much higher than we expected.
We expected something in the fall, this country
is still a very seasonal country and also because
of the food and agriculture products prices which
were supposed to be adjusted to the new price
level. Then, on one side we were not very worried,
we were not very concerned about this increasing
of the prices, but this was double what we expected.
In November it was already reduced to 4%. We were
worried about the monetary policy. This year we
were for the first time in the situation to get
rid of any refinancing by the National Bank. And
that because the capital inflows were much larger
that what we expected we started to sterilize
the excess of capital inflows, sometimes a very
difficult job. Anyway for the National Bank of
Romania it was the first exercise in years if
not the really the first, we never have been in
the position not to extend credits, not to be
creditors to the banking system but to became
debtors, we took deposits from banking system
because of the too large capital inflows and extended
the national reserves. The sterilization proved
to be not very simple, we had some slips here,
and now we retighten the monetary policy. In fewer
words, we were not the best in controlling the
base money. The secondary reason is services,
which were a lot below the CPI, the consumer price
index, and their price increased. On one part
this is not good, any inflation is bad. But, on
the other part, because our third sector is so
underdeveloped I’m not concerned about the
fact that the prices in this sector are increasing
a little bit more rapidly because this is the
sign of revitalization of this sector. I repeat,
as a Central Bank I couldn’t say that any
inflation is good but if I need to develop this
third sector I must increase prices. For example,
traveling to the University of Timisoara, where
I had courses, 600 km with an express train I
paid 7$; traveling in Switzerland from Bern to
Zurich, 100 km - 40$.
Of course is not the case to increase the fairs
on the railroads in Romania like in Switzerland,
but I wanted you to see the huge difference; but
is also not the case to increase with 10% but
double or triple. The third reason was the high
compensations, particularly for the dismissed
miners. This government had the courage to enter
rapidly in one of the most inefficient sectors
in Romania: the mining. They closed down some
mines and then, to avoid social problems the program
provided 10 salaries which were in advance; this
increased the incomes and contributed to the inflation,
so, in one part, the inflation, which was higher
in September and October, was also the result
of this large payments. It’s the cost of
reorganization. We, the National Bank, had to
tight more just to compensate for this high wage
increases and unemployment benefits. As I already
told you were also the seasonal factors. For the
future we will tight more the monetary policy,
the control of the base money and we will try
to keep the inflation under 3%; in December is
possible to be between 4% and 5% but we will keep
this target for the first quarter of the next
year.
For all the next year the target is around 30% - 40%, with a good functioning of markets, free price determination and free exchange rate determinations, which is crucial for the future of this country. These are reasonable limits and I do hope this is acceptable also for the foreign investors. There will be also some changes in our policy, the control of the base money will remain the key operation and instrument of the monetary policy, but will be also much more predictability for the exchange rate, we had a huge increase in the reserves of the National Bank, a part of our sterilization effort, and we had also macrostabilization of the foreign exchange market. The exchange rate depreciated rapidly after the liberalization, but after this it was encouraging and then it stabilized. We accepted a great nominal depreciation just to keep the competitively of our exports, to be sure about adjustment in our balance of payment and to avoid what happened now in the Asian countries.
Q: So, more predictability?
A: The predictability? I said something about a sliding corridor which will be sliding from the basis, inflation target is to become at least half this year, because at least we will kill the inflationary expectations, so we could say to the Romanians and to the foreigners: look, my target is to depreciate, but to depreciate with the inflation target in mind, and below the inflation target and this way they will be some improvements in productivity, some reorganizations and so on. And to look also to the balance of payment. This is the idea of predictability. Perhaps after the moment of your publication I could say more, in January or early February.
Q: While the IMF said it’s pleased with the actions undertook so far by the Central Bank, not the same respect was showed to the government microeconomics actions; so the World Bank was particularly critical.
A: I will tell you very shortly why. It’s been not exactly like this. It’s a little bit exaggerated. Let’s take the exchange rate, which is a crucial indicator. It was not possibly for the government not to be involved. The government it was involved firstly because they kept a tight fiscal policy and secondary because they let the Central Bank to do it’s job. I’d like to be honest and to say that without the support of the government this program would have been impossible to do. We don’t like to take the lion share to our side, we like to work with the government.
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There are some critics to the government and not only to the government but also to the Central Bank. These critics are for the "micro" or, so-called, structure reforms. Here it’s clear that we are lagging behind, and we are lagging behind al least in four fields. First of all it’s clear that we could tighten more the monetary policy but the large loss making companies would still created surrogated money in the form of financial barriers. Just not paying bills to the others enterprises or not paying taxes to the government, to the budget. And they are creating money. They are paying salaries but they are not paying their obligations. The solution for this was to close down boldly the large loss making companies. This government was the first having the courage to do that in August. After this there were critics and this slowed them down. This was the first critic of IMF, to keep on track with these structure reforms. It’s no way to keep them under control but to close them up to the moment when a foreign or somebody else would take them. We can tell them that some of them are good companies from technological point of view and if they have export market they could reopen them. The second critic was regarding the privatization. Another important part of our structure reform was to speed up the privatization. That was done, but is above our possibilities and beyond the needs, because the process of privatization of the Romanian economy was lagging behind for seven years and now is the case to speed up as much as possible in this direction. In the privatization it was another fact that it was important, it was the fact that the privatization remained pretty rapid for small and medium size companies and not the large companies and here are the main problems. No large company was privatized except RomCim, a cement factory. The third direction where we are lagging behind is clearly the Autonomy Regis. This was one of the unfortunate decisions that was taken in 1991, to divide all the Romanian enterprise sectors it two parts: Autonomy Regis and Commercial Companies and the first not to be privatized. This increased the appetite for a lot of commercial companies to become Autonomy Regis and this became to be a problem. This government was asked, it was necessary to clarify this situation, to transform at least half of the Autonomy Regis back into commercial companies, to privatize them, because the movement was from the managers. A good manager in the communist system was supposed to be a manager working with the state. They had no responsibility, all the losses were in the budget and they had a nice life in a state company. So, the government must firstly transform at least half of the Autonomy Regis back into commercial companies and to privatize them and then solve the problems of this Autonomy Regis, which unfortunately are free to pay high wages. They have monopoly and you know how dangerous is this, and the inflation increases. If this Regis, based on their monopoly power, are paying high wages, the general level of wages is increasing, conducting to an increasing of the inflation level. The forth critic was about the privatization of the state owned banks. In this direction, as we stuck the proliferation of the state owned banks, all the banks, which were setup, were either foreign banks branches, either foreign capital banks, either mixed banks. We remained only with the state owned banks, which we have started with, five banks. This five they still are almost 70% of the banking system. So, the Romanian banking system is still state owned and this is very dangerous. The Romanian GDP is now produced more than 50 % in the private sector but the banking system is dominated by the state owned banks. They have the behavior of the state owned banks and here we are also lagging behind including the fact that the previous government changed the law for privatization, said that the banks will privatize by a special law but the Parliament never passed a special law for privatizing banks.
This Parliament passed such a law in June, we did all the technical operations and we have three banks to be privatized, one of them had to be privatized this year, we haven’t privatized it but we will do this next year. Then, in the total banking activity, including the fact that the new banks will the only private banks, they will take a larger share and we do expect them next year to have in the total baking activity a share of more than 50%. This are the critics and I consider them right, we need to speed up otherwise the World Bank said that without a very rapid movement in the structure reform the macrostabilization is in danger. The problem now is not the political commitment, the problem is that there are a lot of legal bureaucratic, logistic, political and social problems to deal with.
Q: And it’s all at once.
A: Yes, and we are also considering the fall, you know how it is in Romania; we looked back to the reform movements of this government and we saw that they started in April and stopped in October; we had six months during the winter and the fall.
Q: One month ago it was a big investment summit at the Hilton. Did you get a feedback from this investment?
A: For the foreign investors there are two issues. First of all is to clarify our legal frame. There are too many omissions in our legal frame. When the legal frame will be made more consistent, more balanced, is also very good, and we discussed with the government, to send a message, including specialist insures that the legal frame will resist, that what we are making now will be lasting. My feelings about the foreign investors is that they don’t expect to have tax exemptions, they need reasonable tax system and to be certain, to be sure that they are coming to Romania and they are not supposed to go from bureaucrat to bureaucrat and not to be sure that the new government will change this again.
The second issue is that they need to have at least one year of macro stabilization and a functional market to believe in, because they have also the perception that Romania is a seasonal country, more than any other country. Sometimes the wrong things happened in the fall, sometimes in the winter and I felt that if we will prove that we are very serious and our micro stabilization processes are sustainable also in the winter we will win the credibility. For that we need to impose credible policies, and, after years of going of track, we are OK. I’m very sure about this and also I’m very sure that in the spring, with a good and healthy monetary policy the credibility will be fully restored. But not after the spring because the investors who are accustomed with Romania they will know sometimes, something will happen in the winter. They still don’t trust us totally.
Q: Now I would like to ask you a more personal question, what has been your most satisfying personal achievement since you are general manager, governor of the Central Bank?
A: The most satisfying personal achievement will be, is going to be, I’m not very sure, is my feeling that I could move out and nothing will happen in this bank, it will function in a pure institutional mode, that nothing here depends on my person.
Q: You’re being too modest.
A: Not at all. This institution will function by it’s strong staff, I dare to say also young, it will not depend on one person. What we need are strong institutions, we had this kind of myth, personality, Ceausescu, you know. We like to get rid of this, we need in this country strong institution and this institution is going to be one of them. I tried also to convince my staff not to enter in the politic. It was a crucial decision in 1991. The history was not supporting us because historically this bank was setup in the last century by the Liberal Party and remained with a strong liberal tradition. My grandparents were also liberals, both my mother’s and my father’s but I said that this bank, in the new conditions must be politically neutral and we put this also in the law. Yesterday we discussed into the Senate the law and the President of the Banking Comity had this idea of forbidding to the Central Bank Board to have political man in. Of course, if somebody was supposed to be a political personality we can’t forbid him to give his vote for one party or another. I told to the president of the comity look what is my idea: my idea is that if in the board of the Central Bank, which is now totally free of politics, we have professors, persons dedicated to the monetary policy, enters somebody which was a political activist, just to give a public statement that, at least for the period he is in the board, he’s totally free of any political influences. Otherwise what we’ll have in the board? We will have the debates between political parties and this isn’t a way to manage such a crucial institution. In this institution we have to look only to the monetary policy, to the health of the national currency. That’s why I’m not at all modest when I said I want the bank to function properly because it’s a strong institution.
Q: And with a good reputation.
A: A good reputation, of course, because, for example, I looked to the experience of other Central Banks. It’s not just the legal frame that is important .For having an independent Central Bank, it’s also the reputation and the best example is Bank Capital which after 1993 was subordinated by the law to the government. But because the board of the bank, and particularly the governor, are truly high personalities like Professor Carliersson and they remained in their functions for 10 years while the finance ministers were changed, the reputation of Bank Capital was so strong that in practice that bank was independent. Legally it wasn’t. So, to have an independent Central Bank is not enough to have a legal frame but also a reputation, which can be build in years. Bundesbank was build in years.
Q: As a final issue, what will be your final message to our readers?
A: To travel to Romania and to invest here and that we’ll do our best to have a working and acceptable macroeconomic environment, because I can’t say that will be totally without inflation or that we will have more than 10% inflation at least for two or three years. This is not possible and I’m aware of it. I said acceptable, manageable meaning I know that the foreign investors can work with inflation around 30 %. This is not a bad message. We will do our best and we are sure that we are here to resist to any influence and to keep inflation between manageable limits, next year around 30% - 40%.
And after this it will take around three years to take it to 10 %, because this 10% is depending more on the micro reform, on the structure reform than on the macro reforms. It’s much easier to reduce inflation from 300% to 30 % than to reduce it from 30% to 20% and to reduce it from 20% to 10%.
Q: Well, thank you very much for this interview and for your time and co-operation..
A: Would you accept some presents from the National Bank, this is something special with the " leu ", you know what the " leu " is meaning? It means lion. " Leu ", the Romanian currency means lion. " Lei
" it’s the plural, the singular it’s leu. The history is very interesting. It begins with the " taller " a silver coin who circulated in the seventeen and eighteen century, native of Netherlands, and on the back of the coin it was a standing lion. It was highly accepted in this part of the world, this is why in Bulgaria " leva " means also lion. It was very accepted in Transilvania, in Hungary, but Hungary was most influenced by Austrian " crown ". But this " tallers " were the most frequents silver coins that circulated for almost two centuries in this country. And it remained unit of account also last century when it disappeared from circulation; and it was unit of account because Russia, The Ottoman Empire, Austria were also on this territory, they were a lot of coins and this was the unit of account. When Valahia and Moldavia united and formed Romania they decided to have a Romanian monetary system. The model was French, everything was French. The influence of Napoleon the third was great, it was said that Napoleon the third setup Belgium Is a Latino "island" in the west and Romania as a Latino "island" in the east. Everything, the education system, the government, the Parliament, was based on the French model; France was our older sister. The first idea was to call the Romanian currency " roman ", like in France " franc ". But in Romania is not exactly the same. Franc doesn’t mean Frenchmen but " roman" means Romanian in our language.
Our first king Alexandru Ioan Cuza, by the way this is a speculation, it isn’t sure but it’s close to history, was about to sign the papers for this currency when one of his advisors came and say: Your Highness, what will happen on the market when somebody will go and ask how much costs this ox? The answer it would be 20 Romanians. And, because there were no alternatives it was called " leu " - lion, because the lion remained in Romanians mind like a symbol for a strong coin.
And now, another story, with an American connection. The dollar is also a " taller ". The grand-grandfather of the dollar is also the " taller
". It was not the Netherlands " taller ", it was the Bohemian " taller
", another silver coin which circulated in Bohemia, Italy, Spain and moved in the seventeen-eighteen century in Mexico. After this entered in the United States from the south and the sign $ is coming from 8 which was the exchange rate between the " taller " and the Mexican currency. To put it in other words, the " leu " and the dollar we have some old connections; we are relatives.
Q: That’s already a good connection isn’t it?
A: That’s good and, you know, three centuries ago we started from the same route, perhaps next century we’ll meet again.
Q: It’s not far, the next century. |
© World INvestment NEws, 1998.
This is the electronic edition of the special country report on Romania
published in FORBES
Magazine's enriched with complementary information,
such as full interviews, detailed company files and more.
June 1 st 1998 issue
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