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October 16, 2021

RON’s unknown quantity

Once the decision to raise the VAT from 19 to 24 per cent has been published in the Official Monitor, there is no way back for the present government. Instead of restructuring the public sector, the government prefers to pass the burden of economic and financial problems which Romania is facing at present onto the citizens. Onto the public sector employees (twice affected, by the 25 per cent wage cuts and by the soaring prices which the raising of the VAT will bring about) and, implicitly, onto private companies. Moreover, all of the above will, inevitably, bear on the national currency’s exchange rate. This is already happening, as we speak, the RON having reached, this week, a historical minimum after another against the EUR. In a fully incomprehensible internal economic situation, unknown quantities regarding the near future are joined by yet another one, a most crucial one – the impossibility to predict how the exchange rate and, implicitly, inflation would involve.

The euro rose, on Monday, to another historical maximum in the Central Bank’s reference exchange rate, at RON 4.3257, to reach, on Tuesday, RON 4.3523, RON 4.3688 on Wednesday, and RON 4.3537 on Thursday, an infinitesimal drop. Romanians crowded at the exchange offices at the beginning of the week to buy EUR. Reading the opinions expressed by specialists and non-specialists in the Romanian press, one cannot make any estimates on the future evolution of the exchange rate. No one can anticipate up to what point the RON would depreciate and whether this trend will continue, nor for how long. Bank analysts speak of a RON 4.5/ EUR exchange rate, others, more panicky, hint it may rise to up to RON 5/ EUR. The most pessimistic stance was adopted by Eugen Radulescu, director within the Central Bank, who stated there was no knowing where the rate was heading and that he didn’t even wish to consider that, but that “the stalling of the IMF agreement, coupled with a potential blockage in political decision-making, could lead it astray. It may end up to RON 5-6 per EUR, even worse, perhaps”. He added that the statement represented his own views, rather than BNR’s official position. Radulescu was also the one to explain that his statement had been quite clear and that the estimate regarding such a rate was part of a scenario in which the IMF agreement would freeze and the Government would fail to balance the state budget in due course.

The National Bank of Romania (BNR)’s “stance” on the matter is far from clear, either. The governor Mugur Isarescu kept silent, his advisor, Adrian Vasilescu, spoke, at the beginning of the week, of a “psychological shock” which led to the sharp depreciation of the national currency. For many analysts, the fact that the BNR reserve amounts to EUR 34 M is comforting, and they give assurances that the institution may intervene whether pressures on the national currency rise sharply. It is said that actions to reduce tensions on the market may go on for at least one year. This is not certain, either, especially as there is mention of the BNR having already spent about EUR 1 bln only in May to this purpose. There was no official confirmation of that, as the Central Bank preferred to keep such interventions … discrete.

Mihai Tanasescu, Romania’s representative at the IMF, also mentioned, at the beginning of the week, psychological shock, arguing, however, that this is merely a momentary pressure, rather than a trend.

Unofficial sources also speak of a certain dissatisfaction of the Central Bank, which repeatedly warned the Government that raising taxes should be avoided at all costs during a recession. Therefore, it is speculated that BNR allowed the RON to fall so as to “scare” the Boc Cabinet “off”, to bring home to them the real implications of recent economic decisions. On the other hand, a depreciated RON comes to the aid of exporters at a time when Romania needs foreign currency inflows.

We don’t know whether it is still worth asking or wondering how we ended up in this predicament. Since the beginning of the economic crisis, the Government has failed to take any real measure to help the economy recover, preferring to take a EUR 19.95 bln-loan from the external markets, from the IMF and the European Commission, as well as from merchant banks on the internal market. Thus, Romania’s external debt rose to over 30 per cent of GDP. Instead of the active measures of restructuring the state apparatus, the Government opted for indirect measures, such as raising the VAT. Admittedly, real restructuring would have implied “betraying” the political clientele, its many representatives employed in generously-paid state positions. Thus, the public apparatus will remain oversized, the social system, inefficient and the tax system, ridden with problems – all these contributed overwhelmingly to Romania’s sliding on a dangerous path. Moreover, at the moment, the Government seems to be set on only one target, namely, that of getting the IMF instalment and of ensuring its political survival, even at the risk of throwing a great deal of the population into dire poverty.

Even a member of the ruling party was wondering the other day whether the Boc Cabinet had seriously weighed the consequences of the measures taken. Public sector employees will lose 25 per cent of their wages and will be affected, on the other hand, by the rising prices which the raising of VAT would bring in its wake, by the inflation and the depreciation of the national currency. How will they manage to pay their loans? About 15 per cent of the loans granted by banks are taken on by public sector employees. We may ask, moreover, if the failure to pay credits builds up into a grand-scale phenomenon, how the banks will cope in the new context. Faced with so many unknown quantities, we are left with few certainties. Maintaining in office a government which proves, on a daily basis, it fails to see the larger picture, is hardly a guarantee that we will emerge smoothly out of the crisis. On Friday we will find out whether the IMF board approves the next instalment of the loan. Sadly, even a positive verdict would not make much of a difference. It will merely postpone the moment in which the harsh restructuring measures will become unavoidable. Until then, we must give in to a gradual descent into poverty.

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