The facts and figures have changed, but the problem remains, after twenty years of the economy undergoing a continuous process of reform: amid an increase of just 2% in narrow money and a declining budget deficit, inflation is visibly on an upward trend, reaching 8.3% in April. The central bank’s official target is to bring inflation within the 2-4% interval (with 3% being the target) by the end of the year, but in May it admitted that its own forecasts suggested a 5.1% inflation was more likely.
“I have to admit this was not easy to understand for the IMF (International Monetary Fund), either. We ourselves had a hard time understanding it. We must grab a screwdriver and start fixing the economy,” Isarescu says. His advice, which he gave yesterday at the opening of a seminar on monetary policy organized at the headquarters of the BNR, draws a parallel between the current situation and the one in the ’90s.
The precautionary arrangement sealed this spring with the IMF and the European Commission, which comes as a continuation of the one sealed in 2009, through which Romania borrowed nearly EUR20 billion, provides for the privatization of state-held companies, which have accumulated losses in the last few years, but more importantly, very large overdue payments.
Over 58% of companies’ debts to the state budget, worth RON18 billion lei (EUR4.33 billion) in mid-year, are generated by state-controlled companies, according to a survey presented by Lucian Croitoru, Isarescu’s monetary policy advisor.
The tough fiscal adjustment measures taken last year – the 25% public sector pay cut and the VAT hike from 19% to 24% – helped Romania rein in its budget deficit.
The results of the fiscal adjustment are seen in an improvement of how Romania is perceived on external markets. The cost of covering the country risk – reflected in the CDS quotes (credit default swaps), has stabilized since spring at 230 basis points, which is better than Hungary’s CDS quotes.