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Mugur Isarescu, NBR Governor: Speech at Regional Economic Outlook: Europe - IMF meeting
Let me commend the European Department Director Alfred Kammer and the former mission chief for Romania, Jaewoo Lee, now in a new position – not only for this Regional Economic Outlook, but also for their trusted cooperation, helpful policy advice and open communication.
A few facts about the macroeconomic situation in Romania - Romania had one of the mildest output losses in Europe in 2020 (- 3.9 percent) and is expected to have one of most vigorous rebounds in 2021, 6 percent respectively, according to the latest IMF forecast. The inflation declined last year, from 4 at the end of December 2019, to 2 percent at the end of December 2020 and the budget deficit remained below 10 percent despite the strong measures taken since the outbreak of the pandemic and despite the large structural deficit at the end of 2019 (around 5 percent). The current account deficit lightly widened from 5 to 5.5 percent.
This year’s recovery is further enhanced by a thorough mobilization and implementation of the vaccination campaign in Romania. The rollout of the vaccination process goes pretty well, the authorities aiming to have 50 percent of the population vaccinated by summer. However, further improvements would be supportive for a brighter economic outlook, or, as very well summarized by the Managing Director Georgieva last week, the Vaccine policy is economic policy!
Economic policies - The Romanian Government and the National Bank of Romania have acted decisively and effectively, using a mix of fiscal, monetary, macro and micro-prudential measures. Taken together, the monetary and fiscal policy actions have prevented a worse outcome of the pandemic.
At the Government level the measures adopted aimed to support the business environment and the consumers by tax reductions, exemptions and deferrals for payment obligations, economic stimulus by credit guarantees for SMEs affected by the coronavirus crisis and subsidized interest for loans, employment related-measures and social protection measures (such as possibility of working time reduction and 75% of salary paid technical unemployment and leave paid days for parents when schools closed), as well as customs measures including duty relief and exemptions for certain products and payment facilities including VAT deferral - to name the main lines of fiscal policy action.
The National Bank of Romania’s measures were to cut the interest rate from 2.5 percent in March last year to 1.25 percent currently. The central bank used the entire toolkit to provide liquidity to banks (reinstating regular repo operations; purchasing government bonds on the secondary market). We have also allowed banks to use their additional capital buffers, conditional upon a restriction on distributing dividends and to temporarily deviate from the minimum threshold of the liquidity coverage ratio.
In the meantime, we have closely monitored the evolution of non-performing exposures and asked banks to adequately provision especially when the ratio exceeded 5%, as well as requiring them to perform regular assessment and reporting on their largest exposures.
The measures implemented as a whole by the Romanian authorities were taken having in mind the particularities of the economy at the beginning of this sanitary crisis. Since 2016, growth has been mainly driven by wage increase and rapid growth rate of consumption, while fiscal and external imbalances widened and the annual inflation rate remaining around 4 percent - the highest among peer countries in the EU. Against this background, the initial impact of the crisis was forceful, deepening existing unbalances, and marked by increasing pressures arising from temporary supply-side frictions, particularly of food products, depreciation of the national currency and rising liquidity needs. The rising unemployment and the response measures to alleviate the negative effects of the crisis have also increased budgetary pressures.
Therefore, the authorities have taken fiscal measures looking carefully to the existing fiscal space. On the same front, the central bank has reduced the policy rate just to the half and purchased adequate amounts of government bonds on the secondary market not neglecting inflation target and exchange rate relative stability around economic fundamentals. As the monetary measures taken have been appropriate, the interest rates are now at historical low levels and there was no need to flood the market with liquidity.
In the medium and long run, there is no substitute to sound macroeconomic policies – and this is where the Fund’s expertise should continue to focus in the coming years.
Additionally well-tailored macro-prudential regulations and policies also help preventing further accumulation of vulnerabilities. I would like to emphasize here the role of the IMF’s advice; in 2018, the Financial Sector Assessment Program recommended a debt service to income limit for household loans, higher capital requirements for non-bank financial institutions and a systemic risk buffer to deal with the sovereign-bank nexus. We implemented these measures in 2019, prior to the crisis, which served us well.
Looking forward, the Romanian authorities will continue to maintain appropriate support measures. However on the fiscal front we do see merit to start the consolidation. On the monetary front, we do not see reason for further reductions of the policy rate and we are ready to ensure the flexibility of our inflation targets having in mind the pretty elevated debt levels. With respect to the exchange rate, we stand ready to ensure more flexibility having in mind its role as anchor of social trust in the case of Romania.
I don’t ‘want to conclude this intervention without applauding the Fund for its unprecedented policy response. Romania also consider that carefully calibrated policies and stronger international cooperation is vital to safely exit the crisis. Therefore, will work together within our Constituency to support the best macro-policy response to the pandemic policies to maintain debt sustainability and improve transparency: a new allocation of SDRs; the measures to fight rising inequality and policies to limit climate risks.