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Inflation growth adjusted to statistics
Iurie Gotisan, September 15, 2006
Inflation phenomenon in Moldova
The Moldovan inflation reveals rather a clear season nature manifested steadily in January-April and August-October of every year. This is linked to a high dependence of economy on agriculture, massive import and emerging markets. As for example, prices grew spectacularly on summer 2003 because of high inflationist anticipations related to the poor cereal crop, contradicting the decrease trend registered in normal years. The so-called "bread crisis" was manifested that year.
At the same time, experts who monitor the evolution of prices in Moldova did not identify a significant correlation between monthly and quarterly developments of monetary aggregates and inflation. This makes us think that inflation in Moldova does not have a monetary nature in general, being mainly produced by non-monetary factors. Economists also call it imported inflation.
Perpetuation of inflation: current realities
We consider that the Government and the National Bank of Moldova could fail the inflation target of maximum 10% this year. Many economists have already contested the forecast, while statistics indicate a 7.9% inflation rate for the first eight months of this year. Although we had a 0.9% deflation in July, it was incapable to temperate the general rise of the CPI. Indeed, it is well-known that the deflation was something normal because this phenomenon is typical to summer, when prices of most of fresh vegetables and fruits are on the decline.
At the same time, the explanations of BNS regarding the July deflation that it was mainly due to lower prices of some food products, especially potatoes and vegetables have amused us somehow. It would be naively to believe that these reductions have lowered the inflation at least for two reasons: a.) food products cover about 40% in calculation of inflation rate (being double compared with their share in states such as the Czech Republic or Hungary); b.) we consider that the lower prices of vegetables could not influence the inflation rate per total for July because it was not very significant, while their share in the CPI calculation is low. Even more, prices of manufactured goods rose by 1.3% in July, while tariffs for services granted to population grew by 3.7%.
As regards the housing maintenance, the proportion of related prices in consumption basket is the second after food products. Much higher values are estimated for the group of housing maintenance or what we call communal services (water, electricity, gas and other fuels) after the gas price has grown. The rise of prices of some products with administrated costs starting July 1, 2006, may increase the monthly medium inflation rate for the next period.
However, the average growth by over 50% of natural gas tariffs, burdened by higher administrated prices of energy, water, transportation, fuels, etc., could raise the inflation up to values of two figures for the end of the year. The expansion of the consumption credit contracted by population from commercial banks, fuelled by rise of consumption demand could be added here. The central bank might increase the basic interest rate (which is 12.5% at present) the next period in order to combat the inflation, as the stability of prices is the key goal of the central bank after the law on the National Bank was modified. Those administrating the prices (Government and BNM) have already updated their forecasts and proposed more realistic values for inflation this year.
The national production does not mostly follow the evolution of internal demand and this is a pressure which develops into a higher inflation and foreign deficits. In this regard, we consider that a very professional dialogue between BNM and the Ministry of Finance is needed to conciliate the monetary and budgetary policies strictly for a continuation of stability of prices and limitation of foreign deficits. We think that BNM will still face many dilemmas and compromises regarding prices. We forecast an inflation of 12.5-13.5% for late 2006.
In addition, the Moldovan leu could face some pressures in the forthcoming period, as internal prices and inflation could grow; we mean a depreciation of the leu especially due to potential rises of fuel prices because it is well-known that economic agents acquire massive quantities of fuels on autumn. So, the bad news could come from the oil market, where potential international rises will force domestic operators to increase the prices of gasoline and Diesel oil.
On the other hand, a controlled inflation is not so bad for economy, given the fact that the persistence of some relatively high prices increased even artificially summons enterprises to enhance their production, and therefore, the productivity also grows. But this situation is favourable only when a strong demand exists and we may face what the economic theory calls inflation with consumption goods.
The control of tax policy would be the first measure, as there are some uncertainties in this field despite of some progresses. Having plans to reduce taxes, the Government and BNM must assure themselves of absence of macroeconomic skidding and of the fact that the budgetary deficit, the current account deficit and inflation will be under control. In addition, it should be taken into account that the inflationist expectations of population react to changes of the monetary policy.
The authorities should pay the necessary attention to the good combination between tax policy and monetary policy. This policy mix (monetary and tax policies) must include a policy of revenues and small budgetary deficits based on a strict control combined with reasonability of public expenses and imposing financial discipline to enterprises (debts of economic agents toward budget are estimated at over 2 billion lei).