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Funding the Romanian economy is the great challenge of 2020 that requires responsibility, and if we do not prove it, we will quite soon reach a painful correction programme, as it was in 2009-2011, says academician Daniel Daianu, chairman of the Fiscal Council.
He notes that the suspension of tax rules in the EU - which is a temporary measure - does not mean that a member state "can borrow at will". Although real interest rates are much lower in the world, markets discriminate between countries depending on financial solvency, and that is also true of Romania's rating.
"Romania's demand for funding (deficit financing and debt refinancing) in 2020 is about 120 billion lei (according to the official scenario of the government) and can exceed 144 billion lei in a very severe scenario (Opinion of the Fiscal Council of April 24, 2020) which is the equivalent of between 25 and 30 billion euros. That is a lot given the state and attitude of the financial markets. What is to be done? All possibilities for access to financial resources must be considered: the special lines in the EU budget for the fight against Covid -19 and support for savings; money from the EU budget for a flexible use between various programmes; and then there is no longer need for co-financing that used to burden the national budget; the IMF quota and rapid financing instrument; discussions with banks to raise the exposure limit on Romania; the Pillar II investment funds to make investments only in sovereign bonds of Romania - at least in 2020 (the Fiscal Oversight Authority (FSA) has lifted the cap on holding domestic sovereign bonds)," says Daianu.
Daianu also mentions the "timing problem," as financial programming as a volume of resources is one thing, and the availability of money when actually needed, when the government has to make payments, is quite another thing.
"There is an EU funding facility for countries with balance of payments difficulties (the facility that helped Romania in 2009 as well). But it is difficult to get such assistance if there is no credible programme to narrow the structural deficit. That means that there should be no increase in permanent budget expenditures, which would deepen the structural deficit, which would send Romania's rating into the non-recommended category for investments. Going back to an issue mentioned above. There are strong economies where central banks use QEs (Quantitative Easing) programmes that are equivalent to monetary funding of deficits. But a central bank does not issue a reserve currency; it cannot buy government securities on a large scale without destabilising the local currency, its own economy. Romania also has the handicap of the mentioned structural deficits. These are underestimated aspects when it is argued that the National Bank of Romania (BNR) should engage in a large-scale domestic QE," he mentions.
Daianu points out that a poor budget of Romania, with tax revenues of about 27% of GDP, in which outlays on wages and social assistance eat up the bulk of these revenues, requires a moderate fiscal policy, especially in times of hardship, when more should be allocated to the fight against Covid19, to furloughing, to support the economy. "In the long run, we need to spend more on health, education, basic infrastructure, smart industrial policies to make the economy robust. That implies a strong increase in tax/government revenues, an issue that has been left out from public policies for years," says Daianu.
He adds that Romania started off with a great handicap in the fight against Covid-19, with a structural government deficit of over 3% of GDP, with an operational deficit of over 4%, with very low government/tax revenues, with considerable external deficits.
"The primary deficit (before debt service) is also among the highest in the EU. For these reasons, additional permanent spending (such as a 40% increase in the pension computation point) is economic nonsense. Romania is borrowing off more expensively off the markets than Hungary, Poland, the Czech Republic, with which we often compare ourselves. The government deficit this year could easily exceed 8% of GDP due to the pandemic shock. We would have a big deficit in 2021 as well if we persisted with measures that widen the structural deficit, that make the public debt unsustainable," concludes Daianu.
