Just three and a half months ahead of elections, in a year we all expect to be filled with populist promises and speeches, Romania is apparently entering a favourable economic course. True, a mere six months of economic growth does not exactly spell a long-term tendency. But the fact that after almost four years of fruitless search for the capacity to grow further, the economy has eventually managed to find it, shows that encountering a controllable economic balance to build upon is, as in many other cases, a question of management.
Of course, what has been done so far was not enough. Not by far. Even more so, economic growth is so modest that it can easily fall prey to a yet un-restructured Romanian economy, full of surprising paradoxes. Developments in the trade balance are representative of these surprises, as months of record-breaking exports follow months of record-breaking imports, against an unpredictable volatility of foreign trade revenues.
An insight into the issue reveals major question marks as to the structure of foreign trade exchanges and the fact that out of the total exports, too little added value is effectively created in the country. These are all worrying signs, but they should not overshadow a positive element which, paradoxically, has already spawned differences of opinion. This element is the interest rate, which today is at its lowest in the latest years.
While some see this as a positive fact, a signal that crediting between banks and the private sector – short-circuited for such a long time by an interest rate ceiling which, in its flight from inflation, eventually doubled or tripled it – can resume, others are already seeing inflation spikes and even terrible dramas for the populace, deprived of the safest chance to preserve the value of its money, the bank deposit.
First of all, the argument with the populace is flawed. Had inflation expectations been high, interest rates would be high as well. What’s more, it is hypocritical and deceiving to say that the interest rate for popular deposits should be 60% when inflation is 55%.
The fact that banks have lowered interest rates and that the economy can function with rates being so low, is an indication that, for the first time after 1990, economic agents in the financial sector trust the Government’s actions. What bank would ever let its guard down and lower its rates had it known that the government can always abandon its own inflation targets and surprise with a higher inflation rate than expected?
The signal of trust is a very powerful one, and the fact that not everyone feels its true value is only a grim inertia of the years past, when government promised to stick to their goals every year – be they inflation, exchange rate or economic growth – only to deliver petty apologies for failure to do so every time.
Second, it’s time to replace the communist perception, that low interest rates are against the populace, with a realistic one, oriented toward added value. It’s time that someone thought about the economic agents, who in the last ten years have been compelled to put up with high interest rates, often forced to limit their dependence on bank credits. What would a healthy economic growth rely on, other than an expansion of lending, facilitated by lower rates? This would prepare the grounds for a phenomenon which, in the medium and long term, would be beneficial to the populace as a whole.
Third, as long as interest rates, although low, still top inflation, and therefore are positive in real terms, the people’s savings are safe. There is no normal country in the world where passive interest rates (interest on deposit) are double compared to inflation, and active rates (on loans) are triple. What’s more, when the lending market ended its lethargy, the state lost its monopoly on lending. After 1996, the state played an intelligent game in securing financial resources without upsetting the banks.
Treasury bill issues, with dazzling interest rates, detoured banks from their traditional activity, financial mediation, and allowed them to make money in a simpler fashion, by investing in government bonds. Since the Romanian state theoretically cannot go bankrupt, whereas a trivial investor who asks for a loan can always do, there is no question as to who would stand greater chances of getting the money.
The situation has created a paradox in the very notion it has defined; everywhere in the world, the state borrows money at the lowest interest – in fact, it is the reference rate in the economy – because the state is the safest place to put one’s money, with the lowest risk of default. In Romania, by contrast, the state has borrowed money at the highest interest rates (which, ironically, have become reference rates) and satisfied both ends – the banks and the need to finance deficits or its current activities – but, again, appealing to the taxpayer’s pocket, who in turn would have to finance the repayment of these loans.
Now, however, when the state borrows at much lower rates, banks can look again at their original activity. By re-creating the credit network, profitable activities which so far were unable to take off because of adverse financial conditions, stand a better chance of being enacted.
This will allow the economy to let those who, traditionally, saved money in banks – with few alternatives to multiply their money – choose other ways to invest. The capital market – especially BVB and Rasdaq – should be the direct beneficiary of falling interest rates, which, in turn, would open new venues for investment, through institutional investors.
Fourth, it is not far-fetched to say that the so-called “money-making machines” – deceitful institutions that do not exist in a normal economy – such as SAFI or FNI – would not have been possible had banks worked with lower interest rates. An institution that offers, say, 80% interest, whereas bank deposits yield 60-70%, and inflation is 50%, does not look suspicious (much less if it brandishes a CEC guarantee). Many FNI investors thought in those terms when they decided to put their money in the fund.
Had the fund kept paying the same interest, say 80%, while the average interest on deposits was 35%, it would take very little financial knowledge to smell foul play and keep clear of such an investment. So that, far from being tragic for the populace, the present drop in interest rates let taxpayers save their money and protect it from people who claim to have discovered “money making machines.”
In the bottom line, low interest rates are an absolutely decisive element in resuming economic growth and, in spite of fears over the future – either from the standpoint of the populace, devoid of the primary resort in times of need, the bank deposit, or from that of igniting inflation (which is not cured by high interest rates, but rather, by abandoning monopolistic price policies and restructuring and privatising infrastructure branches) – one thing is certain: for a government that seeks economic growth and control of inflation, it is easier to start with low interest rates and the confidence of the financial sector by its side.