Central bank’s deputy governor: Romania’s main advantage is its low public debt, but this can be reversed unless a prudent policy mix is implemented

Romania’s main advantage is its low level of public debt, but this can be reversed in the medium term unless a prudent policy mix is implemented, and the trend of fiscal consolidation has been reversed in the last couple of years, the National Bank of Romania’s deputy governor Liviu Voinea said at CEPS-IMF Spring 2018 Regional Economic Outlook in Brussels.

Voinea, a former budget minister in 2013-2014 in the PSD government, praised Romania’s efforts to consolidate its public finances after the global financial crisis.

“In the aftermath of the global financial crisis, we had one of the largest adjustments of the budget deficit in the EU: from 9.5 percent in 2009 to less than 1 percent in 2015. Romania exited the excessive deficit procedure in 2013 and also in 2013 reached the Medium Term Objective of 1 percent of GDP structural deficit, down from 8.8 percent of GDP in 2009. (…) The current account adjustment was also impressive, from -13% in 2007 to just -1% in 2013-2015,” Voinea said, according to a transcript of the speech released on Wednesday by the central bank.

But the central bank’s official warns that the current fiscal policy could jeopardize Romania’s economic performance.

“In the last couple of years, the trend of fiscal consolidation has been reversed. This has also impacted the current account, which has deteriorated by 2.2 percent of GDP, of which 2.1 percent of GDP came from the budget deficit widening. The main advantage of the country is its low level of public debt, but this can be reversed in the medium term unless a prudent policy mix is implemented, including a gradual return to MTO,” Voinea points out.

Romania’s gross public debt declined last year to 35 percent of Gross Domestic Product (GDP), down from 37.6 percent of GDP in 2016, due to the rapid growth of the economy, which outpaced the increase in the debt, Ministry of Finance data show.

These remarks come after the head of the ruling party PSD, Liviu Dragnea, has published the exchange of letters he had with the governor of the National Bank of Romania, Mugur Isarescu.

In February, Dragnea described as an “error the fact the inflation was caused by the fiscal-budgetary policy” of the government and said that BNR’s board induced in the economic environment a “feeling of distrust” in the left-wing government.

In turn, Isarescu said in an answer from March that the tightening of the monetary policy was required in order to steer the inflation rate to the estimated level of 3.5 percent for December 2018.