By Oonagh Leighton
Other than monetary
policy, Mugur Isarescu's great passion in life
is growing wine. Romania's central bank governor says that he is planning a very special vintage for the year 2007, the proposed date of the country's accession into the EU. ?Of course it is not just down to me; I also need the cooperation of the sun and other weather conditions. In many ways managing the central bank is far simpler than producing a good wine,? says Isarescu chuckling in an interview with Emerging Markets.
If his fiscal results are anything to go by, it should be a very fine wine indeed. Isarescu, regarded as a technocrat rather than a political self-promoter, has steered the country's central bank from post-Communism to the eve of EU accession. Since taking up office in 1990 he has fought to correct the country's balance of payments, significantly lowered inflation and bolstered the country's central bank reserves.
Rebounding from years of recession, the macroeconomic outlook is positive for Romania, and GDP growth is forecast at 5.5%. Formal entry into Nato in April this year has removed some of the perception of political risk investors attach to the country, and it is hoped will boost foreign direct investment.
The big challenge
However, the country's biggest challenge may still lie ahead in meeting the numerous criteria necessary for EU entry, its primary goal this decade.
Romania has provisionally closed 25 out of the 30 chapters and, according to Isarescu, ?From this point of view, it is in as good a position as many of the current front-runners were three years before their accession date.?
?Romania,? he adds, ?fulfils two of the Maastricht criteria ? on budget deficit and outstanding public debt levels ? and in this respect we are on a par with most central and eastern European countries.?
?Real convergence criteria such as the openness of the economy or the share of EU-oriented trade in total trade are also at a comparable level to the acceding countries,? he adds. ?We cannot say that we have achieved all the targets, but with hard work and concerted efforts we will be able to enter the EU in 2007.?
Romania got a big boost in July when it negotiated a new stand-by arrangement with the IMF for $367 million, although the authorities do not intend to make any drawings since they are treating the arrangement as precautionary.
Anne Krueger, first deputy managing director at the Fund, says: ?The Romanian authorities are to be commended for their sound macroeconomic policies and progress in structural reforms, which have contributed to continued disinflation and robust GDP growth in 2003.?
Despite these comforting words, though, inflation still haunts the Romanian economy. Despite wrestling it down from 55% at the beginning of his term to a forecast 9.5% at the end of 2004, it remains a headache for Isarescu. ?We are fully aware that our performance regarding inflation is still unsatisfactory, and we stand ready to take further measures to bring inflation down to levels comparable with those of other accession countries,? says Isarescu.
Inflation Targeting
Part of this plan is to introduce a programme for inflation targeting as early as next year, provided the Bank hits its 2004 target of 9%. This would mean inflation of 6% in 2005 and between 4% and 5% in 2006, says Isarescu. ?The strategy is to reduce inflation by up to one-third from one year to another in a sustainable manner, while creating supportive conditions for addressing fundamental imbalances in the economy.?
Critical to this is the law, passed by Parliament in July, that establishes price stability as a key target. Isarescu says that he will not leave office until this goal is achieved. ?For a banker it has been a terrible shame to govern for such a long period with this problem,? he says. ?According to the new law, price stability becomes unambiguously the main goal of the central bank. I want to be in this office when I finally see four zeros drop off the end of our currency. I want one euro to equate to four lei not 40,000. It is important from a symbolic point of view.?
Isarescu has already achieved one of the bank's key goals by building reserves from virtually nothing to over ?7.9 billion (including gold and international currency). ?FX reserves are managed conservatively,? he says. The bank has three main objectives: prudential management to ensure the principal value of assets is maintained; the provision of liquidity to make payments and for intervention in the FX market; and sound investment to generate good returns.
Closing chapters
There are some fears that the government may increase its public spending because 2004 is an election year. Isarescu, who was also prime minister briefly at the turn of the century, is confident that the figures will be kept in check. ?The government has repeatedly stated its commitment to close the negotiation chapters this year,? he says. Romania also needs to secure a functioning market economy status during this Commission's term in office (before October), he adds. In addition, there's the new agreement with the IMF. ?All these external anchors make me confident that there will be very little room, if any, for political slippage in 2004,? he says.
Isarescu says that the first signs are encouraging. ?So far the government has been conservative in both fiscal and wage policies.? He acknowledges, however, that the government needs to push on with structural reforms and the privatization of the energy sector as scheduled.
The central banker must also oversee the completion of bank privatization. ?In the last few years, the rise in the share of foreign capital in the Romanian banking system has strengthened the banking system, improved corporate governance and enhanced competition,? he says.
The privatization of Banca Agricola, which was bought by RZB in 2001, was a crucial moment in the privatization process. Another important step took place earlier this year, when the EBRD and IFC purchased 25% of Banca Comerciala Romana.
The hope is that foreign influence in the banking market will also help develop areas such as insurance, leasing and mortgage financing. ?At present, even if the private pension system and the mortgage markets are in their infancy, credit institutions are working on diversifying their real estate and mortgage loans products, and non-bank specialized institutions have emerged,? says Isarescu. ?The central bank favours the smooth expansion of mortgage loans in order to ensure the sound functioning of this market and to avoid jeopardizing the health of the banking system. There is a very good potential for rapid expansion in all financial markets.?