Financiarul

The sources of inflation in Romania, which, although seems small, is the highest in Europe, is generated by the country’s Finance Ministry, Executive Director of the Group for Applied Economics Liviu Voinea told on Friday in an exclusive statement.

Commenting on the inflation rate – up 0.01 percent in May from April 2009, and down 5.95 percent year-on-year according to the National Statistics Institute (INS), Voinea asks how is it possible for inflation to keep on rising, albeit in small steps, from one month to the other when the economy is contracting fast.

If money does not circulate, than what is the source of inflation?

If goods do not sell and nothing is bought, where does the inflation originate? In all countries when there is a decline in consumption there is also a decline in inflation, and even a trend toward deflation. In the Eurozone, inflation is zero and there are some countries witnessing deflation, says Voinea.

Voinea argues that the money supply in Romania is being increased to allow the Finance Ministry to borrow.

In repo operations of the National Bank of Romania with commercial banks money emerges needed for the commercial banks to lend to the Finance Ministry and this money makes up the money supply.

There is no printing new money, but issuing Government securities, which is the equivalent of a monetary issue, and proof to this equivalence is a 12-percent rise in the money supply.

And that, he says, is the engine that is pushing inflation up, albeit at a small pace.

‘One absolutely legitimate question may be raised here: what can the Finance Ministry do if it does not borrow from the monetary market?

What would happen would be a vicious circle: if it borrows, the Finance Ministry has to put up with weak budgetary constraints.

If, on the other hand, it does not borrow, it can no longer pay wages and pensions.

The ministry should break this vicious circle by improved debt management, that is to replace short-term debt with medium or long-term debt and try to curb its appetite because this way lending in the private sector is hampered and the ministry is not constrained to make another reform, given that it has always money available to prolong the current state of affairs by one month and then another one,’ says Voinea.

The bottom line, says Voinea, is that Romania continues to record the highest inflation in Europe, although its Gross Domestic Product (GDP) has plummeted.

‘The question now is where will inflation reach when lending is resumed or the beginning of an economic recovery is felt? If year-on¬year inflation is now 6 percent, then it will be in the double digits,’ says Voinea.

To prove the point, he says, let us look at the Eurozone countries: they now have interest 1 percent and inflation 0 percent, while Romania has interest 9 percent and inflation 6 percent.

‘When they recover, they will have interest 3 percent and inflation 2 percent, while Romania will have an inflation in excess of 10 percent, which will hinder business recovery,’ says Voinea.