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Macroeconomic evolutions. Tendencies for future
Iurie Gotisan, June 23, 2005
The statistics on macroeconomic evolutions in the 1st quarter of 2005 complied with the general forecasts for this year. Although the inflation rate for April was relatively high (1.4 percent), the consumer price index for May was 0.1 percent. The economic growth (of GDP) in the 1st quarter was 8.2 percent, compared with the 6-percent annual average forecasted by government for this year. The estimated value of GDP for January-March exceeded 7.13 billion lei in current prices. The GDP growth was mainly due to the rise of production volume and, as a result, of gross added-value by 11.7 percent, while the industry posted a 5.2-percent advance, according to data of the National Bureau for Statistics.
The final consumption rose by 12.7 percent the first three months, while investments grew by 16.2 percent. Indeed, the consumption will be the engine of economic growth in 2005 as well. The rise of the final consumption can be partly explained by evolution of the internal credit through reduction of interests and appreciation of national currency. In addition, the growth of consumption is also due to rise of trade deficit, which accounted for about 293 million dollars in January-April 2005. Of course, the imports cover most of internal consumption, as an enough internal supply is absent. If these tendencies of growth of trade deficit continue the same way, a level of 400 million dollars could be registered in the first half of this year, and about one billion dollars could be recorded for the entire year 2005. Under these conditions, the trade deficit will become the No.1 problem in the macroeconomic policy agenda of the government for 2005-2006 1.
The 10-percent inflation level for this year will be exceeded, if taking into account the fact that the basic inflation in January-April was 14.2 percent, and it will be higher than the 12.5-percent rate registered in 2004, for sure. The deflation phenomenon in case of prices of certain products (especially food products) could appear within 2-3 months. We think indeed that an inflation rate below 0 percent could be registered in August. However, if inflationary tendencies remain unchanged, we could expect a growth of interest rates. On the other hand, we cannot make the conclusion that the interest reduction policy (implemented by most of banks in Moldova in February 2005) could take a reverse way, of growth of interest rates. We are tempted to consider that the interests will not invert their trend, though certain banks could easily modify their interests for deposits of population, probably from reasons which are rather related to their internal policies, not exclusively because of inflation or amendments to monetary policy.
In addition, the growth of monetary mass by about 5 percent in April, especially through sterilization process and interventions of the National Bank of Moldova (BNM) on the currency market, led to higher prices. BNM has encouraged the rise of liquidity surplus on monetary market, in a larger or smaller dose, through its policy on maintenance of exchange rates (or raising of a "best" level of international reserves), though it does not recognize this. In addition, though the surplus of liquidity was not observed in the rise of prices of consumption products, it was visible in other sectors of economy. As for example, prices on the real estate market grew by about 15-20 percent, or presence of an increasing trade deficit and deficit of current account based on the rise of consumption and credits for consumption.
The real salary rose by 2 percent, compared with the 1st quarter of 2004. The salary rise registered a modest contribution in the 1st quarter, having source in industry, and partly, in bank sector. The decline of the salary rise paces was observed in the final consumption of population as well, which decreased in the 1st quarter of 2005. In our opinion, this evolution was a result of higher prices of food products, as well as to the increasing wish of population to save money, since deposits rose by 12 percent in the bank system.
On the other hand, the avalanche of assistance, electoral subsidies and salary rises will hardly show their efficiency. The government launched several measures of social protection. There was strong political and electoral reasoning in the 1st quarter of 2005, so that an important part of the public budget was directed to social payments typical to a kept, assisted population. The doubling of spending for social programs is dangerous, especially because these measures are often exacerbated for a political purpose, not for a growth of spending for economic services or public investments.
Incomes in the amount of about three billion lei were raised to the national budget in the 1st quarter of 2005, by 28 percent more than in the similar period of 2004. According to experts, the rise of revenues seems to be the effect of reduction of the corporate income tax. The executive plans to reduce this tax down to only 15 percent by 2006. On the other hand, a more liberal fiscal policy will lead to a higher inflation rate, a growth which was registered indeed until recently. Perhaps, these steps of fiscal relaxation are part of the government strategy, which would encourage the illegal businesses to legalize and declare all their profits. However, a proverb says: "The wolf sheds his fur but not his nature." There were businesses which avoided the 28-percent income tax, and what guarantees we have now that they will give up this practice when a 15-percent tax will be enacted. This is an archaic business mentality rather than a fiscal burden of which businessmen complain often. In addition, foreign investors will not come to Moldova for the simple reason that corporate taxes are lower (indeed they are among the lowest ones in the region), but for a stable political and legislative climate, with opportunities to generate profit and to invest in economy.
As for foreign economic relations, we should recall the recent "economic sanctions" of the Russian authorities against imports from Moldova, which are based on a political, rather than economic factor, and still disturb the commercial inflows between the two countries. Also, a regress of Moldova's economic relations with the European Union states was observed, and namely through a decline of commercial exchanges and, respectively, of collections from exports.
The negative tendencies overlapped the positive tendencies. In the context, we can recall a proposal of President Voronin to the parliamentary commission for economy, budget and finances to annul the law on offshore duty that the legislature approved in April 2004, a law which was incapable from the very beginning to fulfill the goals of its developers, "to make order in imports." The Economics and Trade Ministry has drafted a new program on sustenance of small- and medium-sized enterprises (SME). The key objective of the program for 2006-2008 is to increase to maximum the contribution of SME sector to the economic growth, while improvement of the legislative framework, facilitation of access to financing, especially of SME in the rural areas, development of a dialogue between public and private sectors, and a better cooperation between big and small enterprises are among priorities.
The "guillotine" law gave green light to the regulatory reform. Under provisions of the law, all the legislative and normative documents which regulate the entrepreneurial activity will be reviewed, while those which limit the free private initiative will be annulled. The adoption of the new leasing law by parliament is also part of the positive tendencies for business environment. In addition, the World Bank gave positive signals in the period concerned regarding the implementation of economic reforms, very useful signals for business and investment climates.