CORRESPONDENCE FROM AUSTRALIA, ABOUT ROMANIA Monetary policy, between agony and ecstasy

Eugen Ionescu
English Section / 22 aprilie

Monetary policy, between agony and ecstasy

Versiunea în limba română

Eugen Ionescu

A few months ago, I visited Romania, a country that, in tourist guides, is characterized as offering natural beauties that rival those of many countries in the world, and is also admired by the royal family of England, whose first voyage after coronation was to Romania. Romania, for a foreign tourist, also had the advantage of competitive prices for goods and services used by them.

This year, I was surprised that this supposed advantage has diminished or, in certain cases, disappeared. The 20% inflation of the last two years, combined with the exchange rate of the leu-euro, which has remained at approximately the same level for several years, has substantially increased my purchasing power or the costs of my tourism. Many of these services are at a comparable level to those practiced in Australia, where the minimum net wage is approximately 12,000 lei/month (at the current exchange rate).

I'm not writing these lines to be pitied; I want to analyze the implication of the BNR policy of maintaining a constant exchange rate, thereby generating an appreciation of the purchasing power of the leu against the euro, considering that inflation in the European Union is substantially lower.

The BNR maintains that Romania's foreign exchange reserves can support this stability of the leu through the contribution of European funds, remittances from Romanians abroad, and possibly temporarily favorable external balance statistics.

What does this situation mean for the citizens of Romania? Of course, the effect is positive, although its internal purchasing power has decreased or remained constant if it has been compensated for the effects of inflation. On the other hand, the purchasing power of the compensated income expressed in euros has increased, approaching the desired minimum European wage. The economic policy element that made this phenomenon possible being inflation and the exchange rate.

I remember that, many years ago, in a similar situation (Romania hoped for a rapid entry into the Eurozone), an official from the BNR told me that the main objective would be for entry into the eurozone to occur at as high an exchange rate as possible!

I will only refer to the present implications of the phenomenon. As I have said before, for the Romanian citizen, this increase in the standard of living, that is, the purchasing power compared to imports, the decrease in the costs of trips abroad, and even services calculated in euros paid in Romania, is beneficial. This phenomenon can continue as long as the BNR has enough currency to support Romania's external balance.

Here we can add another element that supports the exchange rate of the leu - if foreign investors continue to have confidence in the BNR's ability to maintain the exchange rate, looking at the high interest rates on the leu market (around 8%+), it is possible that euro inflows to be invested in lei will increase.

The question remains - what happens to Romanian exports and the pressure on the external balance? I saw on TV an exporter complaining that he increased production capacity, but because he cannot export Romania's inflation by raising prices, he is faced with reduced exports, decreased production, and staff reductions. One solution, if possible, would be to try to increase productivity and focus more on the domestic market if it is not subject to competition from imports.

How long can this policy of encouraging imports, which makes the domestic economy uncompetitive, last? I leave the answer to this question to those who deal with forecasts and internal statistics.

In this article, I did not refer to the other objective of economic policy - that of substantially reducing inflation. The exchange rate can be used as an anti-inflationary element, but it is contraindicated for other ailments of the economy.

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