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Socioeconomic Commentaries

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Moldovan economy and IMF
Iurie Gotisan, May 31, 2009

Unquestionably, the IMF and WB are the key creditors of the Republic of Moldova. Absolutely, the assistance provided by these organisations was very important throughout years. But one should note that sometimes the policies of these organisations towards Moldova did not always meet the social security interests of population. The relations with IMF showed that the IMF acts sometimes like a medieval wizard who prescribes the same treatment to all countries, regardless of the source of economic problems and pain of the "patient".

The IMF Mission which started its works in Chisinau last week seems to have been long-awaited, in particular by authorities. The eventual IMF assistance could probably be a "life buoy" for the Government, since the latter has categorically said that the economy is in a difficult situation and the country faces a serious political crisis. For more details, the IMF provides means rather for macroeconomic stability, while central banks of member countries are in charge with administrating them. An important aspect is that if the WB for example shows readiness to provide funding to a country, it consults the IMF and vice versa. Therefore, the positive notices by a structure are reciprocal for the other one.

The main challenge for the Government the next months will be to update or even reduce the public expenses and state debt in a moment when the population is angry because of social disparities and worries about effects of the economic crisis. Majority of economic indicators have worsened much. The unemployment is on the rise, there are signals that many people withdraw their savings from the banking system, external deficits are on the rise, and it is funded very expensively, with Moldova being part of "suspects of service" in terms of non-sustainability of deficits. Finally, Government’s capacities will be tested during negotiations with main international creditors, in particular with IMF and WB.

However, external deficits (trade and current account) could probably fall volens-nolens this year, as commercial transactions, exports and imports, as well as foreign capital inflows and others will decrease much both in the region and in Moldova. A problem occurs here: in such conditions, should a budgetary deficit be reduced much (as recommended by authorities and some economists) while the private sector bounds its activities so much? A budgetary policy based on massive reductions of expenses (as the APC warned the APL in connection with the 20-percent reduction of expenses) and often on rise of taxes (measures recommended by incumbent president, in particular, the single taxation quota), in a period when the private sector reduces its activities would worsen the economic situation for sure. This would mean entering cruelly a logic of vicious circles.

Normally, if public budgets are not to blame in principle for the size of external deficits, they may be used efficiently to reduce external imbalances. One may note here that the heaviest burden of the short-term debt of Moldova is on shoulders of the private sector. Even more, one should remember the Asiatic crisis a decade ago. The IMF-promoted stability programmes relied then on getting budgetary surpluses to reduce external deficits since the public budgets were not the origin of external debts. Those programmes had finally collapsed the economic activity, while the international economy was not generally on the decline then.

Therefore, Moldova needs cautious budgetary policies which would take into account the possibility to make any issues of bonds in conditions of international crisis, and this fact indicates a controlled budgetary deficit. On the other hand, IMF and other international financial donors should take into account the extraordinary circumstances, generalised economic decline in the world, which raises questions regarding a stabilisation policy focussed on reducing the budgetary deficit at any costs and would stress negative dynamics in economy. Budgetary collections for the first three months award victory to those who signalled unrealistic premises in elaborating the public budget this year and the failure to reach the deficit target of 1–1.5 percent of GDP, particularly because the country did not experience yet the real effects of the crisis.

Eventual scenarios of economy in terms of economic evolutions, different budgetary deficits and exchange rates are being often discussed for a while, and these talks support the idea inclusively of the one concerned that keeping in franc a 1-percent budgetary deficit of GDP in conditions of international recession is meaningless. The public deficit should not halt the economy (amendments to fiscal legislation are dangerous) though it has a limited margin of action, when the private sector does not work at maximum anymore and external markets are bounding. If budgetary collections fall, a low deficit would encourage the recession. The aid of a good agricultural year is illusory, since the agriculture is mostly tax-free, and budgetary collections depend more than 70 percent on urban economy.

Let’s not forget the situation of the currency market, which seems to be stable but the conjuncture is not advantageous at all, given the fact that the central bank has rained currency. It would be naive to believe that the leu will keep being strong. According to some estimates, it will slowly depreciate versus dollar before August (while versus Euro it is not at the level recorded 2–3 months ago), so that one may be witness of a sudden depreciation should remittances decrease much. In addition, the budget will be affected, too, since some 40 percent of its incomes come from remittances, which encourage imports and consumption.

Inflows from donors could be hit as well. Given the fact that no creditor assumes the risk to fund a country, a project, etc. which faces a crisis or runs serious risks. One should not forget that many creditors could stop funding for an indefinite term. And the IMF funding will depend on relations with the Government and capacity of authorities to reduce much the expenses and incomes, as recommended by the Fund. Finally, the authorities should consider well the statements delivered by IMF mission head Graeme Justice, who said that the "Moldovan Government has two options to sign an agreement with the IMF. The first one is STAND BY, which provides funding in market conditions (but nothing preferential) to countries which signed the PRGF, and the second one is BLEND, an intermediary programme which provides partial funding in concessional conditions.






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