THE LESSONS OF THE CRISIS Structural reforms can no longer be postponed

• Interview with Mr. Claudiu Doltu, state secretary in the Ministry of Finance

• Lowering some taxes, raising others or changing the structure of the taxation system or the modification of the structure of taxes are possible at any moment, but they do not solve the underlying problems

Reporter: Dear Mr. Doltu, is Romania ready for a potential exit of Greece exit from the EU? What would the consequences be for our country if this were to happen?

Claudiu Doltu: In Romania have been learned, I hope, the "lessons" which have resulted from the economic and financial crisis which has affected the entire economy of the world starting in 2007. We are recovering with great difficulty from the severe recession which affected Romania between 2009 and 2011. What is important now is to focus on achieving some conditions that would allow healthy economic growth. In other words, the major uncertainty in the economic area we are in should not prevent us from thinking about our objectives and to make the decisions which would allow us to reach them. Once we have obtained and confirmed macroeconomic stability, what matters is that we consolidate what we have and that we move further. We know now that it is easier to exit the recession when having efficient and flexible institutions. We also know that the sustainability of economic growth is confirmed by the increase in the degree of social inclusion as well.

The economic evolutions in the area of the European Union are very important for the immediate and future performance of the Romanian economy.

Claudiu Doltu: The economic growth in Romania has depended, will depend and will continue to be conditioned to a great extent by the exports to EU countries. As for the developments of Greece, or more recently of Spain (even though there are significant differences between the two), they increase the uncertainty and we note the reactions of the financial markets. We are very mindful of what is happening in Greece. We are close to this country geographically. There are significant economic flows between Romania and Greece. We have an important number of banks tied Greece in our banking system. These things are important. We are first of all interested in having communication between the institutions and the tools which would ensure the necessary flexibility to generate efficient responses in case various risks materialize.

But even though the foreign factors - conditions which can not be controlled by our actions - are currently causing a lot of concern and increased uncertainty, we need to focus on what we can and should do "at home". We are carefully watching what is happening in Greece, Spain or on the financial markets. But this shouldn't stop us from doing the work we should do in our own "household". This is where we should focus on three major avenues of action if we truly want to have economic growth, more jobs and better standard of living, the accomplishment of a critical infrastructure and the strengthening of the education system - so that companies and the public system would benefit from workers that are well trained, flexible and willing to learn and to adapt.

With or without "the Greek problem" around us, the public administration will have to be transformed to provide quality public services with the structure and volume which the society supports and which the political factors commit to achieve. The system of the state enterprises will need to be made more efficient, regardless of how we do it, we need to begin a serious construction when it comes to using natural resources and energy. We need to exploit the agricultural potential which we have in terms of rural development, first of all because we want to live better and tapping this resource could help us achieve that goal. We will have to see a serious approach of the problems of our pension and healthcare system because if these problems aren't dealt with they become more complicated. Last but not least, and it is precisely considering the experiences of Greece, we will need to change the manner in which we make politics, we will need to streamline and make the administration more flexible and we will need to use and respect the institutions that we have.

Reporter: Is there still interest from the Romanian authorities to borrow from the international markets?

Claudiu Doltu: At the moment, approximately 50% of the public debt is being financed from foreign sources, and the bond issues are part of the tools which the Romanian authorities are using for that purpose.

In the strategy for the management of public debt, drafted and managed by the Ministry of Finance, are mentioned potential financing sources in order to optimize the effort to pay off the public debt in terms of the tools used, of the maturities, as well as in terms of costs. The decision of the Ministry of Finance to turn to the foreign markets again by issuing bonds will be made based on what we deem as necessary and beneficial for us.

We are interested in building the structure of the public debt which would avoid large repayment peaks and at the same time we are interested in the costs of servicing the debt. We are considering accessing the foreign markets by the end of the year. If, where, (which markets) and when exactly it remains to be seen established, depending on the existing conditions.

Reporter: Are the European funds the opportunity of the economy, like the authorities were saying?

Claudiu Doltu: The European funds, used in various economic activities, depending on the priorities taken on by politicians, could strengthen the engines for economic growth. We will need to act quickly and significantly in order to increase the efficiency of the system we have to use "European money". Also, it is time to think of the outlook for the coming years - beyond 2020. In the immediate years, we will need to make better use of the cohesion funds and of those for agriculture, in the structure which we now know. But, we need to think ahead when it comes to the other types of European funds - such as the ones for competitiveness.

For this year, the increase of the absorption rate for the cohesion funds is very important. The expected economic growth for this year will significantly depend on the use of these funds. And for the coming years, the financial resources coming from European funds will have a greater weight in explaining the success or the failure we will have when it comes to the pace of the economic growth. Why? Since saving in Romania is and will remain relatively low, there won't be other additional consistent financial sources for investments with the exception of direct foreign investments and European funds. (The loans help us solve current problems and, maybe, to a certain extent, they will help us consolidate certain institutions). More European funds attracted mean more investments, more jobs, higher revenues. In other words, "the cake" which society will have to share will be bigger.

The economic growth this year will be somewhere in the 1-1.5% range. The more European funds we will succeed in absorbing, especially from the cohesion funds, the better.

Just like in the previous years, exports will remain an engine for economic growth. However we are realistic and we do not expect a spectacular growth of the exports because almost 70% of them are aimed towards the EU countries, where uncertainty remains high. It's not out of the question to see a negative economic growth in the Eurozone.

As for the consumption of households, we shouldn't expect spectacular increases either, but we can expect a slight recovery in consumption. A decision to bring wages to the level they were at two years ago has been made, but we can't expect that all of that increase in income will be reflected in consumption.

When it comes to investments made by companies and government spending we can't expect significant changes compared to last year, which would significantly increase demand at the national level. The severe budgetary constraints when it comes to the government sector will be honored. Even though this is an electoral year, the budget deficit will not increase above the level agreed with the IMF and the European Commission, precisely to avoid compromising the macroeconomic stability.

Structure-wise, the situation of the Romanian economy hasn't changed compared to the previous years. We need to understand that there isn't much that can happen in a few months.

Reporter: Prime Minister Victor Ponta said that for 2013, he is considering a new taxation system, the introduction of different tax rates for salaries, the cutting of employer social security contributions by 5% and the implementation of differentiated VAT rate for foodstuffs. Can these measures be implemented without destabilizing the main macro-economic ratios?

Claudiu Doltu: As for what concerns the decisions on taxation, it is always desirable to pursue the implementation of a compromise between the approach of the tax expert and the economic approach. In other words, there is the possibility of striking a balance when establishing the structure and level of some taxes and their impact on the efficiency of the allocation of resources; between the relationship between the fiscal authority - which wants to raise money for the tax budget - and the taxpayer and the economic approach - including here the requirement of macroeconomic stability.

It is obvious that in Romania, the taxation of labor is very high and that is why we are facing a high level of "black market" hirings. Cutting the taxation on labor is a political priority. At the same time, it is also politically acknowledged that the fiscal pressure should not increase and it is acknowledged that when it comes to fiscality nothing is worse than the instability of the legislative framework (laws, procedures, norms, etc.). The business sector is justified in complaining about the lack of predictability when it comes to taxation. Entrepreneurs, whether they are small or big, want a predictable environment, first of all.

Cutting some taxes, raising others or changing their structure is possible at any time. It is not these things that can convince and encourage the business sector to invest, to innovate or to hire new workers. Taxation needs to be looked at as a whole. If we don't, than a few years from now we will still be speaking about good intentions to cut the cost of doing business or about other "new ideas" to encourage companies to generate new jobs. Simply changing some taxes - cutting or raising them - can't solve the problem which the business environment constantly complains about, namely the lack of predictability.

Taxation can't be separated from the ensemble of the system of public finances. Or, what we need here is a concerted approach which needs to pursue six avenues of action running in parallel. We are talking about making the budget more credible, about setting the priorities when it comes to the expenses and increasing the quality of public spending, improving the execution of the budget, the ability to absorb the European funds, improving the revenue collection, the IT system of the public finances and, last but not least, the management of human resources in the system.

In order to cut the costs needed to do business and to reduce the lack of confidence of the business sector in an administration which can cause unpleasant surprises at any time we need a systematic approach of the reformation of the public finances system. This kind of work involves not abandoning the race too early and keeping at it for 3-4 years. Even if you can't see the results of such labor immediately afterwards, the good results will become visible as early as the first year. Then it will become increasingly visible that we are on the right path and entrepreneurs will gain confidence. After 3-4 years, Romania might have a European system of public finances - more efficient, more transparent, more predictable than the one it has today, which is only being constantly patched, and the taxpayer will stop being merely a cash cow for the state.

Reporter: The fifth assessment of the Stand-By Agreement by the Board of Directors of the IMF is scheduled to take place at the end of June. What do you think its conclusions will be?

Claudiu Doltu: Nothing has changed compared to the steps which the Government promised it would follow on the last visit of the IMF in Romania. We have honored the obligations taken on by the foreign partners; therefore I think that the message will be positive.

Upon the next evaluation, just like in every quarterly evaluation from the past years, the macroeconomic parameters will be checked first. After that, will be discussed the structural adjustments which the government will have to operate in the state enterprise sector, in the energy sector, healthcare, as for the liberalization of the prices of energy and gas, the process for the appointment of private managers in state owned companies, the privatizations which the authorities have agreed to and for which a concrete schedule has been set.

Romania needs to continue the structural changes which can tap the potential for healthy economic growth. I think that the last three years weren't spent very well in terms of solving the structural issues. It is true that we have gained some time through the structural agreements with the IMF, the European Commission and the World Bank, and we have achieved a certain degree of fiscal stability. But it is not enough. We need to continue adopting decisions which concern structural changes in the economy and which can lead to changes in behavior when it comes to the resources we have. In doing so, we will not only have the economic growth which we want. We will also have the flexible institutions which will allow us to come out in better shape from the serious periods and will lead to an increase in the degree of social inclusion which supports long term economic growth.

Reporter: In March this year, the IMF admitted that the austerity measures it asked to be implemented in Romania have delayed the recovery of the economy. What is your opinion?

Claudiu Doltu: A fiscal adjustment was necessary. But the manner in which it was achieved raises a lot of questions. The real problem is the fact that the fiscal adjustment was not also accompanied by the acceleration of the changes which could have affected the structure of the economy. Why? Because the cost of the adjustment was heavily borne by a large part of the population - I am referring here to those who have as their main source of income the activity in the state sector - but the resolution of the structural problems has been postponed.

Sure, the wage cuts in the public sector were massive. The change of the pension system took money out of the pockets of many pensioners. The increase in VAT has affected everybody. But let's not forget that the salaries in the private sector have also been "frozen" in nominal terms. As a result, the purchasing power of the employees' income has dropped. In other words, the employees in the private sector have also had to suffer over these past few years where the structural changes needed to avoid further wage cuts or other types of "undesired emergency situations" were postponed.

That is why, beyond the importance of the "oxygen mask" which we can resort to having this type of preventive agreement with the IMF, what is far more important is to restart the engines of the economy and to accelerate the structural reforms.

The fundamental issues of the Romanian economy today are the same as they were three years ago and ten years ago. We can find them in the state owned companies sector, in the transports system, in the energy sector, in agriculture. They have continued to remain unsolved because financing has continued to be available under favorable conditions. From this point of view, we can say that the simple fact that we have had agreements with the IMF, the European Commission and the World Bank was not enough to get the job done at home. Not even when we had an agreement with the IMF did we tackle the reforms of these areas. In other words, it is not the existence of an agreement with the IMF which is the problem, but rather the political decision to do or not to do these things.

If we look at the sector of state companies, at the behavior of state-owned companies...their debts seem to represent only a "matter of money". But what is important is going beyond that and seeing what is choking the economy. There are state companies which have an irrational behavior, which waste resources which could have been used by somebody else. But that "somebody" doesn't have access to resources precisely because some state owned companies continue wasting them. Companies which, on one hand, don't pay their taxes or their social security contributions. On the other hand, they don't pay their suppliers either - whether they are state companies or private companies. In doing so, they spread their problems to the rest of the economy. Just like 10 rotten apples in the same basket as 60 good ones. These troubled state owned companies are constantly waiting for some of their debts to be erased, or to be included in the public debt... But eventually, if the good apples aren't separated from the bad ones, the latter will damage the former.

The authorities must express their option on what to privatize and what not to. It is a pragmatic decision, beyond its political connotations. That is why, the sooner the things are taken on, the sooner we can get the economy in motion.

The problem is far more important than some money we get from the international financial institutions. If we use the money we borrow from our international partners without dealing with the fundamental issues, it is all for naught. Because if they remain unresolved, these issues of substance will continue to obstruct even more the good functioning of the public administration and eventually, of the economy.