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Dynamic of economy: truth or challenge?
Iurie Gotisan, September 30, 2008
The media asks my opinion and most of times I am right, pardon for my sincerity. But I do not have a special, supernatural relation with the Moldovan economy. Everything one needs besides basic economic knowledge is the economic common sense and support for believed things. There is a game of adolescence in which the subject must make a choice between giving the right answer to a question or giving green light to a provocation (usually something dangerous or foolish). Let’s play together by imagining that the domestic economy is the subject.
I commenced this way citing official statistics on evolution of economy in the first half of the year which I will comment below, and statements by many officials (including the chief of state) regarding the economic growth, fiscal facilities granted to economic agents, surplus of budget incomes and price-salary relation. So, many realities mainly based on statistics have been "acknowledged", but these truths could be also interpreted as a challenge… But let’s explain them step by step.
The 5.4-percent economic growth for the 1st semester (GDP rose by 6.2 percent in the 2nd quarter of 2008) is surprising, though it slowed down much in the last two years. Right. The surprise is growing since statistics cover a period of the year when the agriculture, a key sector of the Moldovan economy (sways towards one or another direction), was not covered much by accounts. Even more, the agriculture has declined in the 1st semester, while weather disasters in July-August (floods and drought) affected the final results in this sector. Challenge.
However, the economic growth seems a little like an "overheating". The overheating is linked to an excessive demand that the internal supply cannot meet, and this presses both the inflation and external deficits (of current account and trade). Right. The internal consumption lowered by the massive appreciation of the exchange rate until early September fuelled imports to exceed 60 percent of GDP in January-August 2008. Right. In 2007 Moldova had the highest trade deficit after 1993. The internal consumption is based so far on imports and borrowed currency, and this raises the inflation expected by National Bank of Moldova and Government to be at the level of 11 percent at the end of this year. Truth or challenge?
The current account deficit climbed in 2007 up to 15.8 percent of GDP, which is almost twofold compared with 2006. It could reach about 20 percent of GDP in 2008. In fact, the relation between the current account and GDP is the key indicator which should be taken into account while evaluating the external position of the country. Therefore, both the trade balance and remittances are part of the current account of the balance of payments. For example, the current account deficit of Moldova grew up to 250 million dollars in the 1st quarter of this year. By using the method of a simple extrapolation, one may estimate that the current account deficit will reach about one billion dollars or approximately 20 percent of GDP in 2008 (the IMF estimates only 10.3 percent of GDP). Right. Twenty percent is a hard-to-fund deficit for any economy. At such a level, Mexico, some Asiatic countries, Hungary, Poland faced serious financial crises in the last ten years marked by a massive depreciation of domestic currency. Right. The central bank has enough resources to self-defend against speculative assaults. Right. But no central bank around the world has enough reserves or is prepared to waste them all. Therefore, there are no premises for a crisis in Moldova. Challenge.
Despite efforts of the central bank to temperate crediting, loans for population have grown by 10 percent in the 1st quarter. These loans exceed 18 percent of GDP (in 2007) for the time being, compared with about 60 percent in the Euro zone in 2006. But different solidity of economy makes any comparison relevant, as long as the central bank does not cease notifying that any progress of crediting should be followed by a parallel progress of saving. Or, this is not the case of our country, as any supplementary earnings or salary rises go to consumption. Much of the consumption was based on loans, and the fact that savings do not grow is a clear indicator of an unhealthy consumption. Although economic indicators have grown, the life of population did not improve much. Truth or provocation?
The reduction of taxes in the last years and granting of fiscal facilities have stimulated the consumption. Right. Under the pressure of some conjectural factors many sectors of economy are reorganised forcedly, and this reduces the production and profit on a short term. Right. Larger consumption and small production mean inflation. Right. Elsewhere, many could wonder how may the Government control the inflation on one hand and raise prices of energy agents on the other hand? It is hard, isn’t it? Yes, it is a big challenge but one should probably regard the economic situation in Moldova in general. The reduction of taxes, fiscal facilities, rise of salaries for several categories of employees will bring additional earnings to people for sure. This would partly relieve the burden of further price rises.
Risks for the annual inflation target updated up to 11 percent do not come only from potential rises of natural gas and electricity tariffs. Reflected in many consumer prices, the fuel price is a serious threat as well. In general, dearer fuels (petrol, natural gas, etc.) will create economic and psychological premises for higher prices of majority of food products and manufactured goods. The inflation target for 2007 was exceeded much and the 2008 target could have the same fate. Truth or challenge?
It was noted that the state budget has a surplus (fulfilled 118 percent) . Right. On the other hand, reports by the Ministry of Finance concerning execution of the budget say that more than 60 percent of returns collected by the state treasury "are drawn" from indirect taxes such as VAT excises, customs fees, and only 40 percent from income, profit taxes, etc. This is a structure of the budget far from being balanced. Right. But this is a reason why officially displayed rises of budgetary revenues are not materialised in a better education, better healthcare or sanitary system, better infrastructure, etc.
In other terms, there are same taxpayers in the Moldovan economy. In consequence, imports are massive (a proof in this regard is the big difference between exports and imports, trade deficit, etc.) and therefore, indirect taxes prevail in the structure of collections to the budget. The explanation is very simple: the structure of Moldovan economy does not allow another proportion of collections to the budget because the productive sector of the country does not keep the step with the internal demand. Moldova has a consuming rather than productive economy. Why to produce? Everything may be imported. But there is a budget surplus (or small deficit, if envisaging the consolidated budget). Truth or challenge?
Prices of many goods and services in Moldova are higher than in the European Union. Right. Clothes are dearer, prices of foods are comparable, utilities become more expensive, prices of homes are comparable. Real salaries are on the rise, that’s true, but they rose faster than the productivity. In consequence, our competitiveness has declined. Right. Official accounts show that salaries have annually increased by 10 percent in the last three years, and this rate was maintained this year, too. In reality, the rise was higher, particularly in areas developing much such as banking, construction, services, etc. Right. On the other hand, such a rise of salaries (and incomes) fuels consumption and economic growth, but a consumption-based growth cannot ensure a lasting convergence in terms of real indicators. In order to improve the productivity, investments generating a high value-added, a crucial factor for a healthy economic growth, are needed. A growth based on constructions like in Moldova implies transactions on credits, speculative investments and often money raised from the shadow economy, which cannot be invested profitably in productive sectors. This finally encourages an unreasonable boom of housing prices. Challenge.
According to the governmental forecast on which the budget was built, Moldova will record a 10-percent inflation, a 6-percent economic growth and a 12-percent current account deficit in 2009. So, the next year will be better. Challenge.