Govt and NBR lose control over current account deficit

Romania’s current account deficit spectacularly doubled in the first five months of the year compared with the year ago period, reaching $1,197bn.

The deficit has been increasing at top speed, with the gap widening by more than $100 million month by month. Last year’s deficit ($1,400bn) was most likely outstripped by mid this year. Under the circumstances, the 6 percent of GDP threshold (some $2.1bn) recommended by the International Monetary Fund as the acceptable annual deficit level Romania could afford will be “challenged” this fall.

“This wave will break by the end of the year. It is something that cannot be avoided,” said financial analyst Aurelian Dochia.

He says the deficit increase pace is already extremely high, so that even though steps were taken right away, it would still be too late to produce effects by the end of the year. At the same time, Dochia feels the current account deficit issue will make negotiations with the IMF much more difficult.

The trade balance deficit is still the main pressure factor, as it was three times higher than in the same time in 2000.

“It was only expectable, especially because of the technology imports by SMEs, which are now rushing to benefit from the incentives that will seemingly be cancelled next year, due to IMF’s pressures,” financial analyst Daniel Marinescu said. He claims an increase in the current account deficit is not necessarily a reason for concern, provided that there are sources to finance it.

“This is a matter of credibility. It remains to be seen whether the international market does not get scared and continues to lend money to Romania,” Marinescu added, mentioning that other countries in the Central Europe had been registering significant current account deficits for years.

“The Government and NBR are walking on a tightrope now,” says Daniel Marinescu. After all, in his opinion, NBR has already missed out on promoting the idea of perseverance in terms of monetary policy, as it suddenly gave up its actions to reduce the depreciation of the ROL.