Consequently, during 2005–2008 the NBR did not refrain from making discreet forex market interventions by purchasing considerable amounts of foreign currency so as to preclude the fast overappreciation of the leu, which was likely to cause a dangerous erosion of the Romanian economy’s external competitiveness and to lead to a fall in inflation, yet in an unsustainable manner. At this juncture, I should bring to the fore other arguments in favour of a managed float policy for the Romanian currency. The major reason underlying the NBR’s purchases of foreign  10  BIS Review 5/2010  currency consisted in the fact that the leu strengthened in both nominal and real terms, concurrently with an extremely loose wage policy in 2006 and especially in 2007. During those years, pay rises overtook productivity gains, thus reducing the previously accumulated competitiveness gains and contributing definitely to the worsening of the balance of payments current account. Another argument I would like to point out is of a precautionary nature. As it has been noticed in practice, the end of cycles of synchronous large capital inflows coincide with somewhat abrupt depreciation episodes, which can be avoided provided sufficient reserves are available. The pro-cyclical conduct of fiscal policy that added to the vulnerabilities associated with the widening of the current account deficit during 2004–2008 also underpinned the NBR’s purchases of foreign currency. In principle, fiscal policy may either cushion or magnify the undesired effects of large capital inflows.
Loans expanded for several successive years at annual growth rates ranging from 60 percent to 80 percent in real terms. The share of foreign currency-denominated loans to households grew more than five times, from 2.2 percent of GDP in December 2004 to 11.6 percent of GDP in 2008. Moreover, the share of foreign currency-denominated loans to the corporate sector picked up substantially (Chart 3). Overall, financial intermediation (loans to the private sector/GDP) increased from 16.6 percent in 2004 to 39.3 percent in 2008 (Chart 4). BIS Review 5/2010  7  Chart 3 Breakdown of foreign currency-denominated loans granted by financial institutions percent of GDP  14 loans to households  11.6  12  10.6  loans to non-financial corporations  9.2  10 8  7.1  7.5  7.1  6  9.8  4.7 3.3  4 2.2 2 0 2004  2005  2006  2007  2008  Source: National Bank of Romania Chart 4 Breakdown of loans to the private sector 45  percent of GDP  loans to non-financial corporations a.o.