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Economy: retrospectives 2009 vs. forecasts 2010
Iurie Gotisan, December 31, 2009
Effects of economic crisis…
The economic crisis had more or less devastating effects on Moldova in 2009 for sure. The Moldovan crisis does not have distinct particularities in general. This crisis is afferent to an economy which is quasi dependent on external factors, as the economic growth in the latest period was particularly due to earnings of Moldovan migrants working abroad, which means that the economy is mainly based on consumption. Political events, in particular those recorded during the two parliamentary campaigns have affected economic processes in country at a large or small extent, but not at the same extent as the economy was hit after the world crisis. On the other hand, the formal non-recognition and non-participation of the former government in concrete actions against some problems made us "hostages" of an ample recession. In particular, the GDP dropped by 7.7 percent in January-September 2009 and the decline for the whole year could be 8–9 percent.
However, the Republic of Moldova faced a prolonged economic crisis in evolutional terms. Ascents and descents of the productive sector could not keep the economy on waterline. The sectors hit by the crisis could sustain the Moldovan economy, as the latter was mainly based on earnings of Moldovans working abroad; in other terms, Moldova had and has a consumer economy. For example, the agriculture. The situation in this sector did not change much compared with the pre-crisis period. Moldova has the same extensive, primitive and unequipped agriculture. It lacks a real agriculture like neighbouring economies such as Romania or Ukraine and it would seriously hit the economy if ever perturbed. It does not have a developed market like western countries or the least like Romania, and this fact would strongly jeopardise the financial-bank system.
On the other hand, there is no solution, as the structure of economy was built this way. This is the true at the end. For example, the agriculture employs about 35 percent of the economically active labour force, while it contributes with 18–20 percent to the GDP formation. Even more, profitableness in agriculture depends more on weather than on state policies. At the same time, the crisis hit the building sector the most, after this sector has achieved a great progress in the latest period, but the funding was not lasting and programmatic, but sporadic, depending on international labour market that means on money of Moldovans working abroad. The transportation was another sector hit by the crisis seriously, as it dropped by more than 50 percent in connection with the downfall of exports and imports. Operation of hundreds of export-import companies was jeopardised in connection with the fall of demand and supply inside and outside of the country. These facts altogether resuscitated the rise of unemployment, as lots of companies discharged their employees. Formal accounts say that the unemployment rate could exceed 7 percent in 2009 (www.statistica.md).
So, the economic year 2009 is expected to end with a sombre perspective for sacral sectors, particularly for all of us who faced the dreadful financial and economic crisis. Preliminary data for 2009 already indicate a budgetary deficit of nearly 9 percent of GDP, an expected economic recession of 8–9 percent, and revenues worth 14 billion lei, which is by about 4.5 billion lei less than the budgetary forecast. A budgetary deficit of 6.4 percent of GDP was proposed for 2010, with expenses being reduced much. However, certain economists fear that even a 7-percent deficit followed by a fiscal crisis is a serious challenge for Government. The fiscal crisis involves painful adjustments, especially in areas suffering of a low economic growth potential.
Government Programme and enounced priorities…
Nevertheless, the instauration of the new Government, which people expect to improve their lives and already took revolutionary measures, seems to remedy the situation, but effects will not be immediate. The Government Programme Economic Stabilisation and Recovery for 2009–2011 aims above all to revive the real sector of economy, and optimise public funds and pays a great attention to social aspects. There are three major challenges which the Government will have to handle. Many actions have been taken to sustain economic agents in these difficult times. Many export restrictions for domestic producers, as well as business registration and licence issuance formalities have been cancelled etc., with these measures being capable to give a respiro to companies in order to recover from economic crisis.
On the other hand, the problem of quality, productivity and conformity of Moldovan products persists so far. The still low quality of Moldovan products bars the massive reorientation of exports to the West. Perhaps domestic managers invest too little in marketing and promotion of their goods, and this is very important. For example, the great majority of companies in Romania allocate 5–10 percent of turnover in promotion of their products, while businesses in Moldova allocate 1–3 percent of their turnover for this purpose. The incompatibility of quality, certification, standardisation and conformity standards with those from EU members hardens the access of Moldovan products to the West.
But if Moldovan enterprises will keep ignoring the growth of productivity and quality (a task of business managers rather than of state structures), they will face serious problems. Enhancing productivity and quality shall be a strategic priority of Moldova for the next future, as Chisinau officials shall provide concrete examples when they will negotiate a more advantageous trade system with the West.
Public funds and budget for 2010…
The draft budget for 2010 is austere that means reducing expenses while increasing some incomes with the purpose to lower the budgetary deficit. An austere budget would also mean a high budgetary deficit, giving the commitment strongly assumed in front of the International Monetary Fund. In fact, the economic crisis and myopia of those in charge with the public budget the last years pushed Moldova to an impasse, after investments in real estate sector had been fervently promoted, almost ceasing the commodity production. The Government shows a clear political willingness to normalise public funds.
As for the fiscal policy, the authorities are testing any possibility in crisis times to enhance fiscal revenues, which increase budgetary incomes. The heavy fiscal "burden" (annual budget incomes compared to GDP) is being discussed in Moldova for a long time. However, Moldova is part of countries with unstrained taxation in Europe. For example, the "fiscal recipe" in EU-27 exceeded 43 percent of GDP in 2008, compared with nearly 30 percent in Moldova. The "taxation rate" includes all taxes and mandatory social fees.
Therefore, high taxes and excises would not hit people, as rises would cover some luxury products with an elastic demand – tobacco, spirits etc. Higher taxes and excises would not necessarily have negative effects (this would mobilise companies to save resources, be more efficient and enhance productivity) the least for a long term. Higher fuel prices would certainly mark up prices of some services and products which have a heavy share in production cost, particularly because the fuel price is present in many consumer products. However, higher prices of these products should not be regarded as a serious threat in general. A higher fuel price is not necessarily a bad news for the state budget, as it would bring higher excises, larger budget incomes, and authorities could handle social challenges well.
Funding for social sector…
The (economic) ruling programme foresees a series of social protection measures addressing poor categories, such as increasing social indemnities for children, elderly, etc. A novel priority is supporting the employment of jobseekers and former emigrants. All these actions will depend on stabilisation and optimisation of public funds, a basic priority of the acting Government. The way the Government will implement this programme, its skills, perseverance and intelligence, capacity to take recommended actions, and not the last, the way the executive will explain this programme to people will be very important.
The authorities should think well about future jobseekers, as their number will be high. One cannot discharge employees by closing eyes, as the private economy does not open jobs. But shortening the work time as a social solidarity formula would be a solution. Many European countries use this measure. They do it because they cannot achieve any longer the economic growth rates of 6–8 percent like the precedent years, and the international environment has changed, becoming more complicated. Of course, people cannot like these assessments, but their meaning should strengthen economic policy messages promoted by authorities.
However, achieving again an economic growth in 2010–11 would be a relief. A massive absorption of foreign funds would be a great advantage. Resuming negotiations with IMF and other development partners is a great progress made by Moldova in 2009. The donor community (IMF, WB, EU, Millennium Challenge Account etc.) is open to cooperation and crediting, and this would compensate the volume of necessary adjustment of budgetary expenses for 2010 and opening of social and infrastructure projects aimed at economic redress.
Expectations for 2010….
The 4th quarter of 2009 could reach the bottom of the crisis and could be the last quarter of economic decline, so that the economy would start recovering in 2010, no latter than in the 2nd quarter. Businesspersons, exporters, Moldovan producers are probably waiting for redress signals from regional markets. There are signs that international markets have overcome the critical situation and the International Monetary Fund confirmed it.
In fact, Moldova enjoys an advantage in 2010, which would guarantee a relatively fast recovery, as the financial system (banking in particular) did not suffer, banks did not go bankrupt (Investprivatbank is a distinct case) and the government is not required to get involved like in other countries. A functioning financial system helps recovering from recession. The banking will keep facing disadvantageous credits in 2010 for sure, which according to official accounts exceed 15 percent of overall loans; that means banks will keep being restrictive in terms of crediting and very careful in terms of costs.
Prices on real estate market could fall in 2010, but those willing to buy a home should wait and monitor evolutions on real estate market. One should not forget that 2010 could also be an electoral year and therefore, the course of economic reforms or potential changes could go other way. Fiscal policy and afferent budget for 2010 are austere and restrictive, but nothing else could be done in the current crisis conditions. The internal and external debt, fiscal policy and budget for 2010 will be the big challenges of the year. Salary policy, exchange rate and evolution of prices will be the focus of talks between authorities and international financial organisations in general and IMF in particular.
The inflation will be the target of targets in 2010, perhaps more than in the precedent years. Other macroeconomic indicators which have an impact on population will depend on inflation rate. So far, one may assure that the annual inflation rate will not exceed the 5-percent target foreseen by the draft budget for 2010, but it could also overpass the forecast, should prices of hydrocarbon and energy imports increase, a fact indicated by authorities as well. The inflation will have the heaviest impact on economy for sure.
NBM will probably practise a directed currency regime in 2010 as well, in a special effort to control inflation. But evolutions on regional and international markets will be also important. The very good relationship established between authorities and international financial organisations in general and IMF and WB in particular will be a great signal for institutional and other investors in 2010. In addition, Government’s relations with the European Commission have improved, with the latter disbursing funding worth tens of millions of Euros. One should not forget the productive cooperation between Government and Millennium Challenge Corporation, which gave green light to the signing of the Compact Programme in early 2010.
The year will not be easy, given the economic conjuncture and potential indebting which could increase both at internal and external level, but efforts, patience, striving help overcoming at least some of them.