Q1. How badly do we need a new agreement with the IMF? And why?
Given the financing needs perspectives, Romania does not have a particular need for a new agreement with the IMF. The macro-stabilization process of Romanian economy continued, with the budget and external deficit reaching manageable levels, while the buffers that Romania has look comfortable. On the other hand Romania has to do more in terms of structural reforms to consolidate the macro stability and the growth path in the medium and long run. The credibility of any government’s commitment in this respect was exclusively enhanced under such agreements with the IMF-EC. So we see such an agreement (precautionary type) more important from the perspective of offering an immediate anchor for investors that Romania will do the right things in terms of reforms (though not guaranteeing the speed of implementation), rather than from a financial point of view.
Q2. Dreams of the euro-denominated Romanian economy. Are we ever going to be ready? Pros & Cons
The Romanian authorities admitted that 2015 as EMU entrance is not realistic, but no other official date was mentioned. In my opinion, Romania should not enter EMU unless a high degree of real convergence will take place, as the costs of adopting a common currency when the economic cycles between Romania and euro zone are not aligned might be high (risk of asymmetric shocks and no monetary instruments in authorities’ hands). If we take into consideration the real convergence process, that depends where we see the optimum level of convergence (Romania is somewhere to 50% of EU 27 average PPS GDP/capita). Could we consider an optimum level of convergence between 60% and 80%? There is not a handbook level available as a reference. Romania might need at least more 10 years to reach the middle of this interval and then to think about adopting euro.
Q3. Inflation swings vs. currency swings. Which one should be seen as worse? And why?
I cannot say that one is worse than the other – both are not welcomed for an economy as they imply instability and low predictability for business environment. Moreover, the currency swings are directly influencing the inflation swings. It is true that some companies can hedge the currency risks (and mitigate this risk in the short run), but this product is not available for every economic agent (including individuals).