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May 16, 2021

Croitoru: CAS reduction is a good measure, sustainable by the state budget

The reduction of social security contributions (CAS) is a good measure aimed at stimulating competitiveness, which is also sustainable by the state budget, Lucian Croitoru, counselor to the governor of the National Bank of Romania (BNR), said yesterday, quoted by Mediafax.

“Company taxation apparently is excessive in Romania. Everybody knows what labour costs employers must sustain. The measure of curbing the CAS was initiated in the days of the Nastase government, if you remember, and there was a trend that has been interrupted because there were some difficulties. As soon as conditions are met, the CAS must be reduced,” Croitoru explained in a seminar on ‘Financing the foreign trade operations.’ Anyway, the Public Finance Ministry will make the exact calculations, he added.

“There should be an interest to promote this measure, because it is directly related to competitiveness. And this is the noblest goal: allowing the sector to become competitive. You cut as much as you can afford. Too many things rely on the budget and there’s only so much you can do, hence it is better to make a small step in the right direction,” the BNR official went on. According to Croitoru, a lower CAS is reflected by company profit, which means there is an investment resource.

The government envisages curbing social security contributions from 44 pc to 41 pc in the second half of the year, by cutting three percent points from the contributions paid by employers, and in the near future authorities will decide when the measure will come into force.

In a different move, referring to a possible reduction of the flat tax, Croitoru said that authorities should first evaluate whether such a measure is sustainable, or it will have to be reversed in the future, thus destabilising the business environment.

“It is very difficult to get rid of the flat tax system, because a progressive taxation scale would deal many blows to competitiveness. If you want to get rid of this system and start taxing efficient salaries, you deal a severe blow to efficiency, which is a bad move. Then, if you really want to cut, while being under much pressure, you must be sure that the measure is really sustainable… As I said, it is hard to get rid of this system and you risk damaging some business plans, as you let them believe that you are working with 12 pc instead of 16 pc, and two years after that you realize this is impossible and revert to 16 pc or more. This is no predictable business environment. So, one must carefully consider the measure, before taking it. I do not think we should change the flat tax rate,” said the counselor of the BNR governor.
Croitoru also spoke about changing the economic growth model, saying that the modification must focus on the expansion potential held by consumption, which accounts for some 80 pc of the Gross Domestic Product (GDP). He said that he knows neither the potential level of consumption, nor its long-term trend.

RON appreciation in march will have no significant impact upon inflation

The appreciation of the Romanian currency against the Euro in March will have no significant impact upon inflation, said the BNR official, who believes that the Central Bank did not intervene on the foreign exchange market last month.

Croitoru mentioned that the econometric model to be used in the next quarterly report on inflation has not been used yet, but the appreciation of the RON usually does not have a significant inflation-curbing effect.
In March, the Romanian currency gained 2.4 pc, as the exchange rate dropped from 4.2150 RON/EUR to 4.1141 RON/EUR. Annual inflation rose from 6.99 pc in January to 7.6 pc in February – the highest rate in the EU, above analysts’ forecasts – and the monthly inflation rate stood at 0.77 pc, driven by higher food prices.

In 2008, BNR saved the RON by selling EUR 1 bln

To protect the exchange rate, BNR sold 3.6 pc of its foreign currency reserve in October 2008 – almost EUR 1 bln – and did not operate repo operations, explains Lucian Croitoru, the monetary policy advisor of BNR Governor Mugur Isarescu, in a paper on “Liquidity, the speculative attack of October 2008, and the reputation of the Central Bank.” “Answering the speculative attack by sales of foreign currency, the central bank extracted cash from the market, at a time when there was a liquidity deficit throughout the system. But this extraction equally was a decision of the central bank and of the banks that purchased the foreign currency,” Croitoru explains. In parallel, interest rates went up and the 1-day Robor rate jumped to more than 43 pc a year, significantly above the key interest of 10.25 pc a year. In fact, BNR aggressively sold foreign currency, while avoiding to provide cash on a large scale to commercial banks, so speculators were unable to cause an increase of the exchange rate, as they intended, reveals the paper signed by Lucian Croitoru.

According to the BNR official, the banks that had severe cash deficits were forced to sell foreign currency in view of financing their current operations, which contributed to avoiding the speculative attack. At the same time, the Central Bank also fended off a crisis of the exchange rate and a potentially much more severe recession than the downturn suffered by Romania during 2009-2010.

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