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ROMANIA

Conference “Productivity, Investment and Growth” Sofia, May 17-18, 2004. ROMANIA. Romania: Recent Macroeconomic Developments and Monetary Policy Coordinates. Wilhelm Salater Senior Economist. NATIONAL BANK OF ROMANIA. Recent Macroeconomic Developments. Looking Back at 1999.

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ROMANIA

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  1. Conference “Productivity, Investment and Growth” Sofia, May 17-18, 2004 ROMANIA Romania: Recent Macroeconomic Developments and Monetary Policy Coordinates Wilhelm Salater Senior Economist NATIONAL BANK OF ROMANIA

  2. Recent Macroeconomic Developments

  3. Looking Back at 1999 • Economic growth: -1.2% • Inflation rate: 54.8% (December/December) • Fiscal deficit: 1.8% of GDP (but quasifiscal deficit larger) • Current account deficit: 4.0% of GDP

  4. Gradual disinflation Robust economic growth 2000-2003:Sustainable Disinflation and Growth

  5. Gradual disinflation Robust economic growth Significant, but sustainable, current account deficits Moderate fiscal deficits and low public debt 2000-2003:Sustainable Disinflation and Growth

  6. Gradual Disinflation • Smooth disinflation path, without trend reversals • Gradual approach chosen as: • prices, tariffs and wages have recorded major adjustments • external equilibrium has not yet been consolidated • Supported by a consistent policy mix: • prudent monetary policy • cautious fiscal policy • sustainable income policy • structural adjustments

  7. Robust Economic Growth • Higher GDP growth rates than in most CEE countries • Driven initially by external demand and afterwards by domestic demand (on the back of rising wages and loans)

  8. ModerateFiscal Deficitsand Low Public Debt • The official financial accounts have been maintained under control • Fiscal deficit declined gradually from 4% of GDP in 2000 to 2.3% of GDP in 2003 • Quasifiscal losses are still significant (the quasifiscal deficit is estimated to hover around 2.5% of GDP) • The level of public debt (around 27% of GDP at end-2003) compares favourably with that of other CEE countries

  9. Current Account Deficits:Significant, but Sustainable • Moderate current account deficits in 2000 (3.7% of GDP) and 2002 (3.4% of GDP) due to: • Strong export expansion • Supportive exchange rate policy • Beneficial influence of substantial current transfers surplus • Larger-than-foreseen current account deficit (5.8 of GDP) in 2003 due to: • Weak external demand • Substantial investment growth • Rising household demand for imports • No financing difficulties • Satisfactory coverage through FDIs - although larger productivity-enhancing FDIs desirable - and MLT external borrowings • Adequate level of official forex reserves (covering 3.5 months of imports) • Low foreign debt

  10. 2004: Official Forecasts • Economic growth: 5.5% • CPI inflation rate: 9% (December/December) • Fiscal deficit: 2.1% of GDP • Current account deficit: 5.5% of GDP

  11. II. Monetary Policy Coordinates

  12. Major Guidelines • Single-digit inflation rates in 2004 and in the years to come • Interest rate policy: firm and transparent • Exchange rate policy: managed floating regime preserved • Inflation targeting: introduction envisaged for 2005 • Expected timing of euro-area entry: 5-6 years after EU accession

  13. Interest rate policy • The current policy rate is high enough to encourage savings and to smooth credit expansion • Gradual downward adjustment of the policy rate is envisaged once the disinflation trend has been confirmed • Interest rate policy gains in transparency

  14. Exchange rate policy • The managed floating regime avoids excessive rate fluctuations • Central bank foreign interventions tend to be less frequent and ample • Euro link gets tighter – the current composition of the currency basket is EUR 75% - USD 25% • The preferred range of real exchange rate appreciation (2-4 percent) supports disinflation without endangering external competitiveness • The real appreciation generated by the Balassa-Samuelson effect is not counteracted through exchange rate policy

  15. Inflation targeting • The monetary policy regime switch envisaged for 2005 (after enhancing central bank credibility and inflation forecast capability) • Increased transparency and accountability: Inflation Reports already published (semiannual frequency) • Monetary policy firmly committed to pursue the inflation targets and relieved of supporting conflicting macroeconomic objectives • Higher exchange rate flexibility (decreasing role of exchange rate as BoP adjustor) • Harmonization of monetary and fiscal policies (fiscal dominance on the wane) • Sound banking sector (but not yet fully-fledged financial system)

  16. Macroeconomic Context Before Adopting Inflation Targeting

  17. The road towards euro-area • Sped-up nominal convergence, but without hurting the process of real convergence

  18. The road towards euro-area • Sped-up nominal convergence, but without hurting the process of real convergence • EU accession prospects in 2007 • ERM II entry: not too soon (3-4 years after EU accession) • ERM II stay: as short as possible (2 years) • Euro-area entry: when ready (5-6 years after EU accession)

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