William Davidson Institute Working Paper 402
And it still carries out frequent and large interventions in the foreign exchange
market, notably as a dollar buyer after 1999, another policy that leads to monetary
base ballooning. We know that after 1999, sterilisation has become a major concern
for the NBR, but it did not fully neutralise the increase in reserves of foreign
exchange. This happened, seemingly, since the NBR programmed relatively high
inflation targets (a substantial expansion of base money), and focused on a rapid
recovery of foreign exchange reserves. The NBR’s original sterilisation instrument, of
deposit-taking, was utilised in various moments, and its effects were felt, especially,
in the aftermath of the 1999 crisis. Now, the NBR has more than recovered the pre-
crisis foreign exchange reserves and may cease buying dollars. This would limit
further increases in the monetary base. But the NBR may wish to keep on buying
dollars in order to force the real depreciation of the leu, in the context where
Romanian current account deficits look too high. We know that in the long-run,
export competitiveness may be gained only through firm restructuring and
productivity gains. But in the short-run, real depreciation may help export-oriented
firms to compete in the world market. In order to achieve this target and
simultaneously fight inflation, sterilisation should be carried out much more
vigorously than in the past. But this points to the risk of pushing interest rates higher,
and crowding out domestic investment. Favouring export-oriented firms may harm
domestic-oriented ones. Unfortunately, the aggregate effect of the policy is
ambiguous. A better policy would involve a solid disinflation package, which would
trigger re-monetisation, less sterilisation pressures and a competitive exchange rate in
relation with productivity gains.
Therefore, what should be done to improve the operation of monetary policy
in order to engage the disinflation process? Quite importantly, NBR monetary policy
would have to be unburdened of quasi-fiscal operations. There has been substantial
progress in this respect in recent years, but more has to be done. The central bank
management should be insulated in his current tasks from any inference from the
Parliament and the Government even if, quite normally, the NBR has to be fully
accountable to the political representatives with respect to the achievement of the
assigned objectives.
The NBR acquired a new constitution in recent years and new rules for
conducting operations in money and capital markets were established in late April
2000. Although these rules contain a comprehensive list of instruments, most of them
cannot be utilised in an efficient way in the Romanian context, characterised by an
undeveloped banking sector and a thin market for Treasury bonds.
Indeed, the success of monetary policy management in Romania rests to a
large extent with the banking sector. The contemporary situation, where for restricting
the monetary base the central bank must become a net borrower from ordinary banks,
points to the underdevelopment of the banking system, and to its incapacity to finance
the productive sector.20 Time is needed to develop credit banks networks, to build
infrastructure and acquire skills. And with time will also emerge trust between banks,
their lenders and borrowers. Trust and expertise are basic preconditions for the credit
market to take off. And then the NBR may be able to extend its repo financing of the
banking sector, and thus set up a powerful mechanism for managing short-term
interest rates. This is a long-term process, and it may take the full decade 2001-2010
to have it implemented.
20 This may also signal the lack of worthy investment projects.
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