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"Investment Boom": joining together banking capital and companies in real sector
Iurie Gotisan, 14 April 2004
Amidst recurring debates on economic issues in Moldova, a recently passed law has been unduly overlooked, namely the Law on Financial-Industrial Groups. At a first glance it seems to be a worthy piece of legislation once it seeks to boost investments in economy and establish competitive manufacturing branches. To this end the law intends to unite banking capital to companies in the real economy sector.
Moreover, two weeks ago Parliament passed the Law on Investments in Entrepreneurship in the second reading. Lawmakers claim the law is set to pursue similar goals to the above-mentioned law, i.e. improve Moldovan investment climate. In particular, the law is said to guarantee that no investments would be expropriated or nationalised. As the law hasn't been published yet, one may judge based on official statements only. Therefore we would consider in greater detail the Law on Financial-Industrial Groups below.
What were the reasons behind adopting the law? At the first glance everything seems plainly clear. Domestic manufacturers, driven away from banking sector by huge interest rates on credits, may not supply the total investments needed for the economy. For the sake of comparison, total investments in national economy reached 75 million last year, i.e. three times less that the estimated annual amount of drugs smuggled through Republic of Moldova. One of the Communists in Parliament argued that the new law was needed precisely to improve investment climate. However, it is our belief that the law raises more problems than the answers it gives. Therefore, one may easily claim it is more politically targeted than economically.
There is already one financial-industrial group in Moldova registered under the 1995 Law on Enterprises and Entrepreneurship. Once the current legal framework allows for the operation of financial-banking groups, then it is not clear why a new law was needed in the first place? It would have been much simpler to operate amendments to the Law on Enterprises and Entrepreneurship and Law on Financial Institutions.
What is striking is the procedure of registering financial-industrial groups. Under Article 11, to get registered groups should submit along with other documents the so-called organisational project, i.e. a note explaining the technical and economic reasons for establishing the group. The draft shall be submitted for the expertise of state authorities. In their turn they might refuse registration, among others because technical and economic reasons were not grounded enough. On the other hand, article 13 of the law stipulates that registration may not be refused on the grounds it is deemed inopportune.
Even more interesting is the fact that one of the main criteria in deciding whether to register or not would be the "degree of project orientation towards fostering efficiency in production based on re-establishing unification ties". In this respect, is it not the case of re-establishing the unification ties within the former soviet area? Buzz goes that the law was developed for one single enterprise headed by one of the former Prime-Ministers, which exports agricultural products to Belarus and imports agricultural machinery to Moldova.
Another interesting provision stipulates that profit and non-profit organisations (legal entities), except for public associations and religious organisations may found financial-industrial groups. Then, one may well read the provision as allowing let's say political parties not listed under exceptions, to be members of the financial-industrial groups!
However, the most striking fact is that the state would undertake measures to support financial-industrial groups active in the priority fields of national economy. Still, a quite simple question inherent to the very nature of the would-be financial-industrial groups arises. To begin with, those groups in fact represent a combination of long-term bank credits with greater technological possibilities of the group manufacturers, that is, such a structure would be endowed with a financial power anyone would covet. Then what's the state support for, if not the state's intention to take control of the most important fields of economy? An evidence to this effect is yet another provision of the law. Under Article 26, any debt a member of the group owes to the state may be converted into shares or bonds issued by the group and transferred into the state property.
Interestingly enough, the law was lobbied by Communists in the previous legislature. Supposedly, communists should have feared any merger of the banking and production capital, as Marx and Lenin put it - which brings the victory of the retrograde capitalist forces. However, Communist deputies, who were the pioneers of the law, claimed the most useful means of making use of the banking capital in the real economy sector was for the banks to have a share in the registered capital of the corporations.
Conversely, one of the National Bank's regulations limits commercial banks possibilities to have a share in the capital of other corporations as it might jeopardise bank's liquidity. This aspect is dealt with in the aforesaid law, which enables National Bank to grant privileges to certain banks, in particular by reducing the obligatory reserves quota. This in turn, would distort competition on the banking market. Further, it may well happen that new amendments to the banking regulations would not be possible to operate unless National Bank administration is changed.
It is our belief that the Law on Financial-Industrial Groups coupled with the denigration campaign launched by the incumbent ruling against public institutions and private businesses stand out as evidences that a campaign of redistributing key positions in financial and banking systems overseeing bodies is due to set out. Most likely persons loyal to Communists would secure those seats.
If this is to happen, Moldovan financial system would once get stuck in funding social and economic measures. Therefore there is only one way of meeting electorates' expectations, i.e. additional money issuing and crediting the state under preferential terms. The experience of other countries has shown far-too-well the consequences in terms of inflation of political tinkering in the financial and banking system. Is it then a new price hike that Moldovan people really want?