The Board of the National Bank of Romania (NBR) has decided to:
- Modify the foreign exchange regulations in order to allow residents to open current and deposit accounts abroad.
- Cut to 16 percent from 18 percent the minimum requirement reserve on leu-denominated liabilities with maturities of up to two years.
- Gradually apply the 30 percent minimum requirement reserve on foreign exchange liabilities with maturities of over two years.
- Increase the comprehensiveness of norms on limiting household credit risk.
In its meeting on 8 July 2005, the NBR Board approved the free access of residents to opening current and deposit accounts abroad.
The move is an important step towards achieving full convertibility of the leu (RON) and is in line with the principle of gradual capital account liberalization - first inflows, then outflows. Under the schedule agreed upon with the European Union, Romania is to achieve full convertibility by 1 September 2006, a deadline by which liberalization of access to operations in money market instruments should be completed, given their higher volatile potential.
The 11 April move to allow non-residents' access to leu-denominated time deposits has proceeded smoothly, with the lower interest rate differential stemming excessive inflows of short-term capital. However, steady capital inflows (from investments, capital transfers and remittances) in the last few months have continued to put some upward pressure on the leu.
The NBR believes that allowing residents to open current and deposit accounts abroad - a decision due to take effect after the publication of the revised foreign exchange regulations in the Official Gazette - will help ease the upward pressure on the leu.
The NBR Board also assessed the developments in the monetary area and the real economy in the first part of the year.
The analysis of macroeconomic indicators shows that economic growth has remained robust. However, the increase in domestic demand still significantly exceeds the domestic supply's response capacity, thereby sharpening the external imbalance.
The disinflation process has registered a pause primarily as a result of supply-side shocks (steep adjustments in administered and fuel prices as well as in excise duties) but also due to pressures on the aggregate demand side.
Developments in monetary indicators highlight that the remonetisation of the economy has continued. Money supply (M2) saw a 33.4 percent year-on-year increase in real terms in May. Lending has remained on an upward path, with non-government credit advancing by 25.9 percent in real terms in May against the same year-ago period.
The analysis of non-government credit structure reveals the persistence of certain risks which could generate imbalances in the economy. The dynamics of foreign currency-denominated loans (which hit a nine-year high in May) outran the growth of leu-denominated credit, despite the March tightening of reserve requirements on foreign currency liabilities and the significant decrease in interest rates on leu lending.
The continuous upswing in foreign currency borrowings poses potential risks to macroeconomic and financial stability -- it reduces monetary policy effectiveness, stimulates imports and may increase foreign exchange risks in the banking sector, leading, over time, to an asset-liability mismatch.
In this context, the NBR Board agreed the need for additional measures to discourage foreign currency lending, improve non-government credit structure and prevent potential prudential risks.
These measures -- which imply changes in reserve requirements and in the norms limiting household lending risk -- are aimed at containing the potential risks to the economy and the banking sector as a whole, and at ensuring a healthy and sustainable long-run credit growth.
The NBR Board decided to apply a 30 percent reserve ratio on all foreign currency-denominated liabilities irrespective of their maturity and the date they had been raised. This measure will be implemented in two stages: for the 24 July-23 August 2005 maintenance period, a 15 percent ratio on foreign-currency liabilities with maturities longer than two years which were raised before 23 February 2005 included will apply, while the 30 percent ratio will apply to the above mentioned liabilities starting with 24 August-23 September 2005 maintenance period.
The NBR Board also decided to reduce to 16 percent from 18 percent the reserve ratio on leu-denominated liabilities with maturities of up to two years, starting from the 24 August -23 September 2005 maintenance period.
It also changed the norms on limiting household lending risk. The revised regulations will come into force 30 days after their publication in the Official Gazette.
Basically, the norms set a monthly debt service ceiling to the equivalent of 40 percent of net monthly incomes of the borrower or, as the case may be, his/her family. The ceiling covers all payment commitments under all types of credits (mortgage, real-estate and consumer loans) or similar contracts, such as leasing. Moreover, the monthly debt service ceiling related to consumer and real-estate credits, irrespective of the creditor, shall not exceed 30 percent and 35 percent respectively of net monthly income of the borrower or, as the case may be, of his/her family.
In order to increase the efficiency of these norms and in line with the memorandum agreed with the International Monetary Fund, the Romanian authorities are planning to draft new legislation to set minimum standards for licensing, regulation and supervision of non-bank financial institutions.
The National Bank of Romania will continue to closely monitor monetary and macroeconomic trends in order to appropriately use its instruments with the aim of maintaining the prudent monetary policy stance needed to attain its medium- and long-term inflation targets.