Cabinet and BNR agree: No more fiscal relaxation

 “There should be no further fiscal policy relaxation, either at year-end, or in 2008. I have the endorsement of the Prime Minister and the Finance Minister,” said Isarescu. He added there should be a tightening of the fiscal policy, but because 2008 is an electoral year, no one will want to be responsible for restructuring measures or salary corrections that will affect the level of productivity.

Reaction. The business environment was quick to react. “It is strange that we are incapable of developing a multi-annual budget, yet all of a sudden we make promises that there will be no more fiscal laxity,” said the President of the Romanian Businessmen’s Association (AOAR), Florin Pogonaru.

Besides uncertainties regarding the evolution of the fiscal policy, BNR’s Governor reiterated concerns relating to certain macroeconomic evolutions. He acknowledged that the index exceeds variation limits, but considers this to be normal.

Risks. “With lower figures, inflation comebacks are possible. This happens everywhere in the world, not only in Romania, especially in terms of external shocks, to which we add the combined effect of drought and national currency devaluation,” added Isarescu. He stressed that, in spite of appearances to the contrary, BNR has strongly reacted to the inflationary crisis in the past two months. “An increase in the interest rate of two percentage points, up to seven percent, means we reacted strongly,” explained BNR’s official.

Loans. In the monetary policy sector, BNR’s hands were virtually tied. Isarescu believes that an increase in the interest rate would lead to a powerful comeback of foreign currency loans. If the reserve requirements were subsequently raised, banks would externalize loan operations. In this context, the central bank’s Governor indicated that short-term foreign public debt increased significantly recently. “Short-term foreign public debt might constitute the only danger for Romania to lose points. In theory, short-term foreign public debt should be below international reserves,” BNR’s official added. He believes that the hard part is over and that BNR’s future decisions are to be found in any economics textbook. “What comes now is textbook economy. What we did in the past few years was innovative and we are cited as an example,” added Isarescu.

“What comes now is textbook economy. What we did in the past few years was innovative and we are cited as an example Mugur Isarescu Governor, Bnr