Isarescu foresees limited room for manoeuvre in 2005

The National Bank of Romania’s (NBR) room for manoeuvre to counteract inflationary pressures from outside the monetary market will be extremely limited in 2005 due to persistently high interest rates at a time of strong appreciation of the ROL, said NBR Governor Mugur Isarescu in his first public speech since installation of the new government.

The head of the central bank merely evaluated the financial year of 2005 without making any direct comment as to possible implications of the new fiscal policy adopted by the government.

“The biggest difficulty in the continuation of the disinflation process comes from the fact that the very high pace of domestic demand in 2004 is continuing in 2005 due to the impact of a set of factors working in concert,” said Isarescu in an interview for Mediafax, referring to factors such as the strong raises in real salaries towards the end of last year, the full impact of which will be felt in 2005; the reduction of direct taxes, which adds to available income; and capital inflows in the form of direct or speculative investments, which cause tension in solvent domestic demand.

The 7% target for December 2004 to December 2005 is to be reconfirmed with the government, added Isarescu.

As far as the government is concerned, Ionut Popescu, the Finance Minister, is still thinking of “ways to bring money to the budget by rearranging the taxation system.” “We are considering all options, we have even thought of increasing VAT and excises. We don’t want to up VAT, but we’re trying to find other ways to bring money to the budget or reduce some expenses,” said Popescu in a different interview. Popescu “believes” the budget will make more money from improved collection and older arrears, “effects that can not be proven until several months have passed.”

The Finance Minister also mentioned the upward trend of budgetary revenues in other countries that introduced flat taxes, such as Russia and Slovakia. Here the head of Public Finance agrees that “one needs to have a low deficit not to generate inflation, but also low interest rates, so that hot money is not tempted by the Romanian banks,” adding that the budget deficit in 2005 will be set after the talks with the IMF due to begin on January 26. “A 1.5% level would be very good for us, but we’ll see what deficit we’ll end up with in the talks with the IMF. This deficit is low by European standards. Actually, our problem is the quasifiscal deficit, that is the losses of state-owned enterprises and regies autonomes, which are very high. Therefore the budget deficit needs to be very low so as not to re-inflame inflation,” added Popescu.

As to interest rates, the Finance Minister “aims” to launch the first issue of government securities with a single-digit interest rate “in a relatively short time.” Two-year bonds launched by the ministry in early December came with an 11.49% interest rate, while the three-year bonds sold in November came with 10.9% interest. razvan.voican@zf.ro