Romania’s External Debt

During the financial crisis, many of the national economies have seek financial support from their governments or from foreign creditors, which means an increase in expenses, loans and, in most of the cases, the increase of national debt.

The external debt of a country is the sum of money a state is indebted to pay creditors from another country and it doesn’t only include their governmental debt, but also the one that corporations and people have towards entities outside their resident country. Romania’s external debt is about 36% of its GDP, with an external debt of 98.240 billion euros at the end of July, having decreased 185 million euros since the end of 2011.

The governor of the National Romanian Bank (NRB), Mugur Isarescu, declared that the external debt of Romania is due, mainly, to the useless indebting of the population by taking credits and leasing cars. The NRB governor mentioned that the population should realize that they are responsible for Romania’s external debt. For our country, it is important that the contracted external loans are used for the development of economy and public services substructure and for the achievement of an long-term economic growth, and not for expenditures, because this way the state can create the necessary monetary resources needed for gradually paying the debt.

In the economic balance, a special place is occupied by the financial equilibrium, a part of witch is the public financial balance, represented by the agreement between the state’s financial needs (public expenditures) and it’s financial sources (public incomes). This equilibrium cannot be reduced only to a simple  comparison and equality of income and expenditures, because it is the result of different factors underlying the establishment and use of financial resources and it is made in certain social and economic conditions.

The public financial imbalance is the result of high public resources demand, comparing to the funds that can be established by the state itself, this gap representing the budget deficit. The public budget deficit, resulting from the budget imbalance, comes upon one state’s investment capacity, the reason why we can’t cover it neither with monetary emissions nor by using the public credit. The public debt is strongly related to the financial intervention of the state in economy, which deals with: creating public capital, stimulating investment, increasing the labor force occupation, etc.

The external debt occurs because of some specific characteristics of the countries. In countries that are still growing, mainly, investments are superior to economies, because the need of technological equipment is very big, whilst the economies of different economic agents (population, enterprises, state) don’t prove themselves worthy of it.  Because of the fact that public credit means using internal economies (both private and the ones of the enterprises) or contracting external debts, the solution found is that of contracting external debts.

The need to contract external credits under the condition of insufficient internal financial funds is generated by the necessity of supporting some developing programs, investments, through which the development of national economy, the economic growth and the improvements in the wealth of the population are being realized.

The payment balance is of great significance to one country’s economy. If this balance is negative, it is being underlined the fact that the respective economy consumes and invests more than it produces. To finance the consume and the supplementary investments it is needed to seek help in external credits. These do not contribute to the economic growth, as they are used to finance unproductive activities or to counterbalance the excessive capital exports. In fact, in this case, the respective loans could even aggravate the pressure that is being exercised on the budget operations of public administration and on the payment balance. As so, an inefficient using of foreign capital entrances can lead, in the end, to the debt crisis.

Economically speaking, it is very important that external loans are used, mainly, to finance investment expenses, because this is the way that economical progress and growth is realized.

In the first six months of this year, Romania’s total external debt raises up to 99.040 billions euro. At the end of 2011, Romania’s external debt was 98.425 billion euros, according to RNB (Romania National Bank). Medium and long term debt is 79.6% of the total external debt of Romania in the period mentioned before, while the short-term debt is 20.4%. At the end of July, the short-term debt of Romania summed up 20.051 billion euros, having decreased by 12.2% since the end of 2011, when it was 22.828 billion euros. The medium and long term debt reached, in July 31^st 2012, 78.189 billion euros, increasing by 3.4% since the end of 2011, when it was 75.597 billion euros.

The direct public debt, which includes external loans contracted directly by the Minister of Finance and the local authorities, increased in the first seven months in comparison to the end of 2011, up to 21.017 billion euros compared to 19.571 billion euros, while the external debt that is publicly guaranteed decreased to 1.388 billion euros , down from 1.509 billion euros. The external debt not guaranteed publicly raised to 37.562 billion euros, having before been of 35.796 billion euros at the end of 2011. The deposits of nonresidents constituted on a long and medium term in Romania decreased to 7.625 billion euros, down from 8.490 billion euros at 31^st December 2011.

The loans from the International Monetary Fund (IMF) – based on the stand-by agreement with Romania, excluding the amount received from the Minister of Public Finance (MPF) from the IMF – summed up to 10.597 billion euros by the end of July, in comparison to 10.231 billion euros at the end of last year, according to the central bank.

The external debt service rate on medium and long term was of 27.5 % in the period between January and July 2012, compared to 28.3% in 2011. The coverage was 7.5 months of goods and services import at 31^st of July 2012, compared with the one registered at 31^st December 2011.

Radu Sarpe

[artigo de opinião produzido no âmbito da unidade curricular “Economia Portuguesa e Europeia” do 3º ano do curso de Economia (1º ciclo) da EEG/UMinho]