Let’s take a look at the public debt situation in Romania, the local public debt. Unfortunately, there are some legislative restrictions which, with all responsibility I say, are obsolete. They were defined somewhere around 2008-2009, when we were in financial crisis and all international markets were in crisis. At the time, some major restrictions were invented on the loans that local authorities could borrow. Those restrictions, unfortunately, are still in place. First of all, we are talking about that 30% ceiling that the local public finance law sets as the maximum amount of a local government’s annual debt service.
Exactly, what does that mean? It means that I as a municipality cannot take out more loans that will, when I pay interest as well as principal repayments each year… generate a total of repayments and interest payments greater than 30% of the total of own revenues. I am not allowed to pay more than 30% of what I collect in taxes, fees and payroll tax to pay capital repayments and interest. This may have been a good thing 15 years ago, but today it is no longer relevant. Because we are talking about different levels of municipalities. It is one thing to talk about Cluj Napoca City Hall, another to talk about Vaslui City Hall, another to talk about Ciugud City Hall or another thing to talk about Bogata City Hall. They do not all have the same level of own revenues and then the ceiling set uniformly at 30% for all municipalities regardless of size, regardless of the degree of economic development they have reached, is completely artificial. Because a municipality like Cluj, or a municipality like Bucharest cannot be limited to 30% because the economic development of these municipalities is much higher than the economic development of a municipality in Vaslui County.
But what do you do, the needs are somewhat similar. A commune town hall needs a dispensary, a commune town hall needs roads, a commune town hall needs a sewage treatment plant, a commune town hall needs gas, running water, hot water. How do you solve this problem? This threshold should be replaced by establishing a […] linked to the operating surplus that the municipalities in question have, so that we can be sure that if they borrow they can pay back, and the operating surplus is obviously the difference between revenue and expenditure. So that we can be sure that even if they borrow money, they are able to repay it and pay the interest. Another arbitrary threshold defined also in that period 2009-2009 is the threshold on drawdowns, the so-called drawdown threshold. Annually, by government decision or even by law, a threshold is set, usually one billion 200 million Lei. In recent years it was increased to one billion 700 million Lei, which is the maximum amount of money that can be drawn from credits by all municipalities and county councils in Romania per year. In the preamble of these laws or government decisions that concern the drawing thresholds, contracting thresholds and so on, it is said that it is for reasons related to budget deficit reporting, but in practice they have nothing to do with it.
Budget deficit, as it is “accounting” recorded, is recorded only when the loan is repaid, so we cannot talk about a budget deficit generated by the moment when the city takes the money from the loan and uses it for investments. There is no budget deficit here. The budget deficit only arises when, in 2-3-4 years, when repayments and interest payments start, these amounts are recorded as expenditure. Then it appears, until then it’s a zero-sum game. Obviously, Romanian accounting, and not only Romanian, but also international accounting, establishes as the moment of recording an expense when you take a loan, the moment when you start paying interest and when you start paying principal repayments, repayments of the loaned capital. But until then, you’re not running a deficit. Or the moment when you start to record expenses for the amortization of the investment objective, but that’s also done after you put an investment objective into operation. Moreover, in the case of territorial administrative units, in Romania, as well as in the case of public institutions, in Romania, no provisions are made for depreciation, no depreciation expenses are recorded.
Probably this is also one of the fundamental reasons why infrastructure development in Romania is happening at a snail’s pace. Because no public institution, no city hall, no county council registers the investment in the same way as a company, and from the moment the investment objective is put into operation, it has to start registering depreciation expenses. (44.20-44.51) But in terms of the thresholds set by the government on public debt, and I am referring to this drawdown threshold, we do not record amortization expenses, because I was saying that no municipality ever records such expenses, and we record budget deficit, or we can say that we contribute to Romania’s consolidated budget deficit only when we start paying interest and capital repayments. So the amount of the drawdown – I, as a municipality, draw 100 million this year and use it, invest it, make an investment objective – has nothing to do with the budget deficit. I will have a budget deficit next year when I pay 5% interest, I will have a deficit of 5 million. I will generate a deficit in another year, when I start paying, on top of the 5 million interest, another 10 million, let’s say, the repayment of the loan capital, because I pay it in installments. So 15 million. But the draw threshold tells me I can’t take 100 million. This drawing threshold has been reached and each year it runs out somewhere around May-June-July for the following year. We currently, in 2021, we no longer have a drawing threshold, it is exhausted, for 2022.
So even if I, as a municipality, take out a loan today, in December 2021, I won’t be able to access it until 2023. This is an extraordinary brake on the development of local infrastructure in Romania.
