Could you tell us what has been the actual role of the National Bank of Romania in the process of restructuring of the Romanian economy?
I would say that we play the equivalent role of the European Central Bank. Particularly since 1998 there are in Romania three main banking laws which have been designed carefully in concordance with the European banking system. The National Bank of Romania is an independent Central Bank subordinated to the Parliament and it has among its responsibilities the monetary policy, exchange rate policy, administration of foreign reserves and banking regulations and supervision. We also take care of the regulation of the payment system. Next year the commercial part of the payment system is going to be removed from the tasks of the National Bank and will be done independently.
From the point of view of our legal statute we work with the Government in the design and implementation of the economic program. This program will establish very sharp adjustments regarding Romania's external position by reducing the current account deficit and setting up structural reforms. This economic program was supported by a 10 month agreement with the IMF and the structural reforms have been endorsed by the World Bank. We have focused on the monetary and exchange rate policy. We have kept a very prudent monetary policy to avoid the adjustments of prices, fiscal adjustments and the real depreciation of the exchange rate from generating a higher inflation. Despite the fact that the inflation was higher than we planed - we programmed it to be around 32% but presently it is around 50%-55% - we still consider the program is on track because the main target for 1999 was not the inflation but the adjustment of the current account deficit, something which we fully accomplished. We serviced our debt despite the fact that it was predicted that we would collapse, and we also did strong adjustments to the external accounts. Now more that 2/3 of our exports and imports fall within the European Community. We started with a big trade balance deficit, but in August and September 1999 we reached almost a surplus. The current account deficit in 1998 was US$3 billion. For 1999 we targeted a deficit of US$2.2 billion, in the summer we had already adjusted US$1.7 billion, in September $1.4 billion. It is clear that we over-performed in the current account deficit.
Another main target related with adjustment and aimed to regain Romania's credibility after all these rumors about the "unavoidable default" was to rebuild the gold and forex reserves. The gold remained practically intact. In 1999 there was a decrease in the forex reserves of the National Bank of Romania due to the fact that we settled particularly large redemptions, one with Samurai Bonds and another one with Merryl Lynch Bond. There was a decrease of up to US$600 million and after this major recoup, we could rebuild the reserves.
During all this difficult period the very liberal forex system of Romania and in the liberalization were by no means attacked. In fact, the country continues to liberalize. The forex reserves of the commercial banks were never nationalized, confiscated or surrendered to the official reserves of the National Bank of Romania not even in our most difficult periods.
Last but not least, in order to have these sharp adjustments we engineered a real depreciation of the exchange rate between October 1998 and May 1999. Comparing it with last year we depreciated in real terms by more than 20% - almost 30% - and starting with February 1999 we kept this real depreciation just to fuel the current account deficit. We have Kept the tight monetary policy the inflation lower than before and by depreciating more gently in nominal terms we kept the exchange rate. This was a difficult but successful exercise. This is one of the main reasons inflation was so high. The adjustment was much stronger.
How do you plan on controlling and fulfilling the 32% inflation target for the year 2000?
We have envisioned three scenarios: an inflation of 25%, 30% and 35%. If we accept to deteriorate the current account and to lose reserves it will be simple to lower inflation but it won't be sustainable, next step would be to move again through adjustments, etc. Lowering the rate of inflation sharply almost by half - which is our ambitious target - is achievable with three or four fundamental decisions.
First of all to keep on track the restructure reforms. This being an electoral year (2000) it will very hard to have tight restructure reform and to take hard decisions such as closing down big companies. I am rather talking about reasonable efforts that can be done in an electoral year in order to continue the restructuring reform, since this is the main source of those deficits in the current and external account deficits and high inflation. We want to continue these reforms and not to reverse them. Perhaps it might be difficult to tighten more these reforms in an electoral year. What is important is not to stop or to step backwards, but to keep steadily moving forward.
Secondly we need to have fluent foreign financing. I am not refering about large foreign financing despite the fact that the process of accession to the European Communities will create a larger capital influx, but I am stressing only the fact that with uncertain capital influx, it is very difficult to build up a consistent and coherent monetary and fiscal program. Next year we will have a much lower service of the foreign debt, so the external sector is not a big problem and we do not need a lot of money for that, but we need to have some kind of certainty and predictability in foreign financing.
The third point of consistency in the policy mix
is not only the monetary policy. If the monetary
policy will is very tight and the income policy
very relaxed, the result will not lowering the inflation
but it will lead to a high one will widened current
account deficit and a decrease of output. This is
our economic model in Romania: consistency in monetary
policy, fiscal policy and income policy. |
The fourth point required is a minimum of political stability. The fact that we are a young democracy but with Latin blood, some Balcanic habits and a Communist inheritance could create disputes. I am aware of that, but I am talking of a reasonable political stability. But if foreign investors will perceive the country as politically unstable then we would not be able to have predictability regarding the capital influx. Without a minimum political stability the legal framework which is still creating a lot of troubles for the foreign investors will be unstable. Every change in the Government will create problems to the general business climate.
By having these four elements under control you can see that will not only the monetary policy that will help reduce inflation.
What can you tell us about the serving of the domestic government debt?
Basically, the domestic debt was more than doubled last year, for 1999 it will be around 17 billion Lei i.e. less than US$4 million. All the rumors that circulated of the imminent default of Romania were originated by comparing the total debt (public plus private) only to the official forex reserves. But in fact nobody mentioned the gold deposits. We have already deposited half of our gold reserves abroad - to be sure that we have gold - and nobody looked at the foreign reserves of the commercial banks. We have no obligation to service this, and the private debt is in fact serviced by this. I believe that these informations that were circulating were aimed at hurting us purposefully and they were done lacking information. However, the private debt for the next year will be around US$900 million and the public debt service will be around US$1,4 billion. And we already have forex reserves for more than US$1.4 billion. The private reserves of commercial banks are more than US$ 1 billion. The total reserves of the country are US$4.4 billion.
It is true that additionally to the servicing of the foreign debt we have a domestic public debt of around US$3,5 billion. It is also true that it is a pretty large sum. The problem is not one of solvency of the Romanian State because the external debt into the GDP is less than 22%, and if we add the domestic debt it is not more than 30%. A warning signal in the European Communities is around 60% of the GDP. Thus Romania does not have a problem of solvency, we are well below the warning signal. Regarding the foreign debt we do not have problems servicing it because we have the official reserves. The problem with the domestic debt is only a problem of short maturity. It is financed from the domestic money market and it is in clear need of consolidation of a longer maturity. The consolidation of the domestic debt is not a simple issue, but is can be perfectly done if we regain the credibility and the confidence in the Romanian State.
How is the Romanian National Bank helping to change the negative international perception of the country?
First of all we have serviced our foreign debt impeccably. Secondly by showing the real data we try to erase all this negative information such as the one I have presented to you regarding the comparison between our foreign reserves as the National Bank of Romania and the total service of the debt.
Do you think there was an international campaign which tried to destabilize the country?
I do not want to think so but I do not know why all the international rating agencies said we would default. The only reason I see for saying this is that we had a service of more than US$3 billion current account deficit. In order to service the debt we also have to cover the gap between exports and imports. The current account deficit is not something that is paid at the end of the year, but it is generally financed autonomously. As I was saying, we service the debt very well, and we will also do it in the future, we will present our data clearly and we will have the external adjustment at all costs with a very low official financing. We will keep a credible mix of fiscal and monetary policies, even in an election year, and I do hope that gradually we will regain credibility. I forgot to mention that we will be assisted by The European Community for the accession process to the EU.
One of your responsibilities is the regulation of the banking system. How do you see the development of interest rates for year 2000?
The interest rate will be moving according to the inflation rate. It is true that in 1999 inflation was the second factor that most strongly influenced the rate of interest. The National Bank became then a net debtor to the banking system because we sterilized the amounts and a large part of our base money moved with Government credits. If the Government were not successful at keeping under control the fiscal deficit and additionally we were not to be able to consolidate the domestic public debt, then we would have the pressure on the domestic money market rates, and these in turn would affect the lending rates despite the fact that the inflation would be high. Provided that the pressures of financing the budget deficit would not be very large or that they would be kept under control, the level of the interest rate in Romania will lower alongside with the inflation. |
