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Socioeconomic Commentaries

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Inflation is thickening
Iurie Goitsan, November 16, 2007

Official data of the National Bureau for Statistics (NBS) have confirmed our forecasts from the precedent issue of the e-journal Governing and Democracy in Moldova regarding the inflation for October 2007. Thus, according to NBS, the inflation in October was 1.6 percent, while the cumulated inflation rate for ten months has reached 10.7 percent. Prices of food products have grown the most, notably by 2.4 percent, prices of manufactured goods have increased by 1.4 percent and tariffs of public services have advanced by 0.8 percent. The 10-percent inflation target of the Government and National Bank of Moldova (NBM) is compromised. The October inflation does not surprise anybody and a strong price rise is expectable the next two months as well, in particular, after domestic filling stations have increased the fuel prices. At the same time, we think that the inflation would not rush over stock and block in November-December due to potential reductions of food prices.

Prices of food stuffs had the key contribution to the inflation rise for sure. High price rises were registered for vegetal oil, eggs, fresh vegetables and fruits, and the bread price has grown a little, etc. For example, the vegetal oil provides a symptomatic situation. On one hand, the 2007 crop has declined about three-fold. On the other hand, the volume of annual production estimated at 45,000–50,000 tons exceeds the domestic consumption (35,000–40,000 tons). At the same time, the price of this product has increased by approximately 35–40 percent on the foreign market, while domestic producers have raised it by 50 percent. Perhaps producers followed the regional context, while this situation affects the domestic consumers. Therefore, authorities hold the right to verify how argued this decision of producers is. The domestic market is relatively small and traders may make a deal in order to impose exaggerated prices. For this reason, speculations have an immediate and strong echo.

Of course, the last summer drought has fuelled the prices of food products. The trends of this price rise are also felt in many countries in the region. Otherwise, this fact worsened the inflation prospects. Measures of authorities aimed at administrative interventions on the market in order to prevent galloping rises of prices of some food products may be justified one or another way. On the other hand, a market economy cannot admit the univocal intervention of the state, or producers and traders are free to establish the cost of their products, but in acceptable limits.

One may suppose that the effects of higher prices will be felt the most the next spring, and consequences of the last summer drought could have an impact on the 2008 agricultural year, too, particularly if authorities do not take enough measures to attenuate them. If adding a trend of increasing the prices of conventional energy carriers to this combination on the food market, the situation becomes more complicated, according to consumers.

NBM decisions in late September to increase the basic interest rate and the minimum mandatory reserves of commercial banks in the central bank reveal that the monetary authority is concerned with the most important issue: the inflation. Pressures on prices have intensified in the second half of this year, and they culminated in August-October. I have tried more than once via public interventions, commentaries, etc., to persuade that the anti-inflation fight should continue even when this rate is apparently low. However, many persons replied me that it would be too expensive for the economy, as a higher inflation (of course, when it is controlled) encourages enterprises to raise higher profits from sales. But are the long-term risks produced by inflation, increased interest rates or high unemployment rate less painful?! Two of them have already materialised – the increasing inflation and interests. As regards the unemployment, the very low rate indicated by official statistics is unreal.

Higher interest rates may become more attractive but only on a short term, as a high inflation will reduce the profitability on a long term. Although it helped reducing the inflation, the appreciation of the leu will fuel in continuation the appetite for contracting credits, but this will increase the consumption and implicitly the imports. In addition, if looking from another side, the appreciation of the domestic currency (which was actually supported and declared by NBM governor) will reduce the economic growth by lowering exports.

In other terms, the growth of the trade balance deficit will reduce the GDP growth the next months[1]. Unquestionably, the NBM decision to control the inflation is not enough if other shortcomings capable to undermine its effects are not eliminated. I mean, for example, that the National Bank could reduce its sterilisation volume on currency market and thus reduce the short-term interest rate. Otherwise, the inflation will grow more.

1 See the 8th issue of Euromonitor.





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