NBR: Inflation no longer a tool to cover deficit

The times when the balance of payments used to be levelled solely through the exchange rate policy have passed, because Romania can no longer pay for the coverage of the current account deficit with a high inflation, Eugen Radulescu, NBR Governor’s advisor said. “Romania’s trade balance is lacking because the Romanian companies perform poorly, not because of the exchange rate policy,” Radulescu says.

Eugen Dijmarescu, Delegate Minister for Foreign Trade, at the end of last week said the economic environment had become very tough for the Romanian exporters given that it was no longer possible to grant fiscal incentives, the commercial policy measures were restricted and NBR’s exchange rate policy was solely pursuing a cut in inflation.

The deterioration of the trade balance was the outcome of the dwindling competitiveness of the Romanian producers, in the absence of necessary retooling funds and of an exchange rate policy to stimulate exports, Dijmarescu said.

The euro in 2003 rose some 18% in nominal terms against the ROL, and 3%-4% in real terms (inflation inclusive). If compared against the dollar, the ROL gained some 2% in nominal terms and about 16% in real terms. The ROL also gained 4% against the euro/dollar basket. Eugen Radulescu says the exchange rate policy that has the ROL appreciating against the euro/dollar basket is necessary to no longer induce inflation in the economy through imports. The inflationary threat has become serious from this standpoint because of the concurrence of two factors. “First of all, it is obvious we are dealing with a strong openness process of the national economy. This is measured by the extent of economy openness (exports plus imports/GDP – i.e.), which now stands at about 81%. This process will make us better integrate in the EU, but there is also a downside to this: the economy’s openness makes an accommodating exchange rate policy – the depreciation of the currency by the NBR to balance the current account deficit, less and less effective,” the NBR Governor advisor explains.

Then there is the pass through effect (imported product prices influencing domestic prices) picking up speed.

“For instance, when the yoghurt imported from Germany costs 10% more on the domestic market due to the ROL devaluation against the euro, then the Romanian producers will seize the price increase (opportunity) and raise their prices accordingly, generating inflation,” Radulescu says.

These two factors, i.e. the ever-widening openness of the economy and the pass through effect, are now making the national currency depreciation a less and less effective solution to boost exports.
sorin.pislaru@zf.ro