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Strong leu, great leu or new heights for the dollar?!
Iurie Gotisan, May 15, 2007

I have often reported on the exchange rates dynamic and currency market and I resumed this topic given the recent evolution of these two indicators. Beyond various figures advanced by economists, bankers or analysts of financial market in their commentaries on exchange rates, two words revealing a convergence of opinions are often found. The first word is appreciation and it is linked to the leu, which many experts say could moderately strengthen in 2007, particularly due to the record share of  credits in lei, large remittances of people working abroad, high interest rate on monetary market that makes the deposits in lei attractive and frequent currency "injections" of the National Bank of Moldova (NBM) on market. As regards the big currency supply on market, some persons say that banks also speculate on exchange rates, as well as investment funds that sell dollars for long-term investments.

Volatility is the second word met frequently in disputes related to currency market. Less predictable moves of the exchange rate are not ruled out in the second half of this year, though big fluctuations will not be observed. The direct intervention of the National Bank on monetary and currency market could also amplify the volatility of the market. On the other hand, trade inflows (collections from export/import operations) will gain more importance for evolution of exchange rate, given the massive growth of imports which have direct implications on exchange rate.

Although some experts and dealers of commercial banks say that it will be hard to exceed the threshold of 12 lei per dollar, the domestic currency could appreciate, if we mean what I have said above and a new maximum of the past 2.5 years versus dollar and euro was recently registered. Analysts say that the effects of depreciation of dollar are being felt: exporters signal losses, while import-related deals are flourishing. If the leu continues to grow versus dollar and euro, we run the risk to have some "beginnings" of financial crisis. The exchange rate may go out of control at any moment; that means it may decline, not grow.

Moldovan products – dearer on foreign markets…

It is clear that a stronger leu directly affects the country’s exports calculated in foreign currency which face difficult times anyway. For example, if a product costs 66 lei on domestic market, it means that this product was exported for about 5 dollars in November 2006 when the exchange rate was 13.2 lei per dollar. When the exchange rate drops down to 12.3 lei per dollar (like at present), the 66 lei is the equivalent of 5.4 dollars. Therefore, Moldovan products are dearer on foreign market and the price rises are based on caprices of exchange rate only, so that foreign clients start ignoring the few products made in Moldova.

So, those in charge with economy (Government, NBM, commercial banks, etc.) shall give a respiro to domestic exporters and producers because I think that all talks have forgotten the real economy. Consequences seem to be clear: a 3-fold growth of imports compared with exports and a trade deficit of about 500 million dollars in the 1st quarter of 2007 is one more confirmation. The impact will be stronger if the appreciation of leu is a long-term trend. I think that we will have a clearer image of Moldovan exports after 2–3 months, if the exchange rate declines in continuation.

Cheaper imports and credits and better statistics…

The domestic market risks to be invaded more by imported commodities, if the leu strengthens versus main reference currencies. At the same time, Moldova "may play this card" for own interest, if equipment and technologies allowing the modernisation of economy for lower costs are imported. However, cheaper imports could be less beneficial for national economy: the growth of imports of consumer goods, which are cheaper and have a better quality than Moldovan products, estranges clients and domestic producers.

At the same time, the appreciation of leu could increase by more than 10 percent the GDP calculated in dollars in terms of economic growth. Indeed, I do not think that the real growth in 2007 will be higher than 5 percent, and another 5 percent are due to the decline of the dollar, which will finally have no connection with growth of productivity of domestic enterprises. We will probably have a statistical illusion rather than a real economic growth at the end of the year. However, attraction of foreign investors would be an effect of alleged illusion, as the strengthening of leu will increase on a short term the appetite for credits in foreign currency and foreigners will not lose this opportunity to invest their funds. However, the attracted funds could be of a short term and they could finally produce new real rises of Moldovan leu, lower collections from exports and a higher trade deficit.

At the same time, I fear that we run the risk to face a crisis of confidence, if the leu grows very much. Seeing the dollar depreciating, population will try to get rid of foreign currency and massive sales will appreciate the exchange rate more, and this situation could be the beginning of a crisis, if the leu suddenly depreciates. Some Central European states such as Hungary or Poland have faced this phenomenon, but I fear that it could be stronger in our country. I think that the appreciation will not be lasting. Macroeconomic bases influence the exchange rate on long term, and we may be witnesses of a depreciation of leu in maximum one year because foreign deficits (trade and current account deficits) grow too much.






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