Economic retrospectives & perspectives
Iurie Gotisan, 18 January 2005
In terms of economy 2004 was one of Republic of Moldova's best years since it stepped into the dire straits of transition. Economic growth, which according to the preliminary data might reach 7%, made this year quite special, fact acknowledged by economy-watchers, even the most sceptical ones.
Specifically, economic growth means a positive change of an aggregated economic indicator, such as GDP, in real terms over a certain period of time. In its turn GDP represents the gross amount of goods and services produced in a country in a given year by domestic and foreign businesses. As a rule, the key indicators considered when calculating GDP are:
- FC - final consumption;
- GFCP - gross fixed capital formation
Consumption. As was the case in 2003, surging consumer spending was the main factor that boosted economic growth. It is expected that the final consumption would surge by 20% over 2003 and would contribute 18% to the GDP growth.
Considerable remittances from abroad and growing salaries in the country have been the major factors that sustained economic growth and boosted the demand domestically. In our opinion remittances from abroad might diminish in the years to come and this because of family reunification abroad.
Still, if remittances are sustainable in the long run, economic growth based on consumption alone, would increase and consolidate structural disproportions. An illustration in this respect are surging imports that deteriorated current account. Massive imports have a negative impact on the current account deficit that has soared to 6.7% of the GDP.
Investments in fixed assets. As for investments, they had a quite modest contribution to GDP. Still, gross investments in fixed assets surged by 15% and had a 2.5% contribution to GDP. After a long while foreign investments show some positive signs. Total FDI in Moldovan economy has reached 100 million USD.
Although from an institutional point of view business environment registered a decline, fiscal conditions improved in 2004. Income tax for businesses dropped by 2% to a record 20%. Moreover, Government announced that in 2005 it would drop it even further. Therefore it is our belief that reducing fiscal burden would have a positive effect on the investment climate.
Exports. Certainly, surging production output of goods intended for exports in 2004 boosted GDP, especially due to growing exports of food and beverages. According to some preliminary data, exports shot up by 25.5% and reached 900 million USD.
Imports. Nevertheless, skyrocketed imports by 29% (1.6 billion USD) have shattered even further the trade balance. Statistics indicates that in the 11 months of the 2004 trade balance deficit reached an alarming 690 million USD, quite likely that for the 12 months of the year it would hit 800 million USD. Accordingly, the negative trade balance would soar by another 30% over 2003.
In 2005 and particularly in 2006 the gap between exports and imports would diminish and this because of those two factors:
- Firstly, current trade barriers set by the neighbouring countries (Romania and Ukraine) on the exports of eggs, poultry and sugar from Moldova would be abolished.
- Secondly, foreign demand would increase especially on beverages.
Some problems might arise with the exports of agricultural and food products. For instance CEE countries that are importing food from Moldova would join EU's CAP (Common Agricultural Policy) and would have to give priority to the goods manufactured within EU.
Other indicators that influenced macroeconomic situation in the country over 2004
Agriculture. We should also acknowledge that a good agricultural output also bolstered the economic growth. For instance, wheat harvest exceeded 830 thousand tones. Nevertheless, agriculture still remains to be extensive and backward. Recession in agriculture gave rise to unemployment. We wouldn't be as lucky this year, as it weren't agricultural policies that determined the success of 2004 but rather good weather. It may well happen that in 2005 prices on wheat would go up due to unfavourable weather conditions and surging demand worldwide.
Foreign investments. Diminishing FDI registered since 2000, points to the flawed economic policies that continue to undermine investors' trust in Moldova. Foreign investments flow is recovering after a long sluggishness. Total FDI in Moldovan economy in 2004 has exceeded 100 million USD.
Privatization. It was stagnating this year. In general, 2001-2004 were marked by numerous failures in privatization of such giants as MoldTelecom (telecommunications), RED Nord and Nord-Vest (energy sector) and many more wineries.
It is our belief that RED Nord and Nord-Vest privatization was thwarted for political rather than economic reasons. It is known for a fact that the price on one kW/hour delivered by RED Nord is much cheaper than the price of the same unit delivered by RED Centre and Sud-Vest. Everything is all-too-clear considering that the ruling party's electorate is at the north of the country.
Moreover, Government initiated re-nationalization of certain privatized companies such as Dacia Hotel, Air Moldova - air career, and Farmaco - pharmaceutical company, while provided no compensation whatsoever to the investors. Furthermore, the heavy-handed cancellation of privatization contracts scared away many investors from investing in Moldova.
Exchange rate. Over 2004 Leu continued to appreciate against USD. There are several reasons for that:
- Upsurging trade (foreign trade shot up by 26% over 2003);
- Skyrocketed remittances sent via banking system and non-banking channels (estimated at 1 billion USD);
- Increased consumer spending habits of the population.
Meanwhile, National Bank of Moldova continued to purchase foreign currency and according to preliminary data by the end of 2004 its reserves have reached 455 million USD.
Inflation. Cumulative inflation rate reached 12.5% in 2004. This figure outstripped Government forecasts by 2.5%, nevertheless it dropped as compared to 15.7% in 2003. Still, price hike on food pushed inflation further upward in certain months of the year.
Better inflation performance in 2004 over 2003 might be also explained by the appreciation in real terms of the Leu against USD. For instance in 2004 average nominal exchange rate was 12.4 MDL/USD as compared to 14.2 MDL/USD in 2003.
Due to parliamentary elections politics would again prevail over economics, therefore we should expect an increased control over price hikes. Electoral campaign is already in full swing, while the election outcomes would be of strategic importance for the fate of Moldovan economic environment.
Dynamics of economic growth and inflation (%)
Source: Statistics and Sociology Department