Democracy and governing in Moldova
No. 19, 19 November 2003
Activity of public institutions
Studies, analyses, comments
I. Activity of public institutions
One of the most important legal acts examined by the Parliament was the draft law on the state budget for year 2004 passed in two readings after many debates. Opposition tried to prove that the budget figures were not realistic and insufficient for attaining economic, social, cultural objectives, etc. The draft provides for revenues worth 5,647,000 MDL and expenses worth 5,307,000 MDL.
It is worth mentioning that for the first time in the last couple of years the Government came up with a budget proficit. Needless to say, though, that it is not realistic, as the difference between the revenues and expenses - 340,000 MDL - is to be used to service foreign debts. According to Prime-Minister Tarlev the budget is socially oriented and shall provide funds for the salary raise to the state employees.
Law on Sample-Statute of the Village and City is part of the package of laws regulating the activity of local public administration created as a result of May 2003 local elections and replacing the old law on the sample-statute of the village and city passed back in 1995.
On November 15, three parliamentary factions signed a joint statement featuring European integration as the "fundamental strategic objective" of the Republic of Moldova. The statement reads "the parties express their strong will to orient and promote the development of the Republic of Moldova along the principles of democratic European society. /…/ There are serious grounds for choosing the path of European integration. We truly believe that the efforts undertaken in view of EU accession, provided for in the Conception of the Republic of Moldova Accession to European Union, would facilitate the reunification of the country, the sustainable economic development, and gradual transformation of the Republic of Moldova into a modern European state".
Moldovan deputies also confirmed their will to "take advantage of the opportunities provided by the Partnership and Co-operation Agreement, Stability Pact for South-Eastern Europe and regional co-operation". The statement also reads "existing co-operation mechanisms between the Republic of Moldova and European Union are not sufficient for capitalising on our state's aspirations to join European Union". Both the aforesaid statement and Conception on EU integration refer to south-eastern path as the optimal way for achieving our EU accession goal.
The same day the document was signed, the Chair of Moldovan Parliament Eugenia Ostapciuc sent a letter to the President of the European Parliament, Pat Cox, requesting for a new provision to be included in the report on EU relations with its new neighbours, thereby including Republic of Moldova in the stabilisation and association process.
On November 12 the Government passed several decisions on the diplomatic corps of the Republic of Moldova. Andrei Neguta Chairman of the Foreign Affairs Commission of the Parliament was appointed as the Republic of Moldova Ambassador to France. Mihai Laur, Republic of Moldova Ambassador to Hungary was appointed also as Ambassador to Federation of Bosnia and Herzegovina, whereas Vasile Sturza Republic of Moldova Ambassador to Bulgaria was also appointed to Albania.
The Government endorsed the approval of the Additional Agreement on the children's non-involvement in armed conflicts to the Convention on children's rights signed on February 8, 2002. Under the Agreement the member-states undertake not to involve children under 18 in armed conflicts, as well as not to recruit them in military against their will.
Under the amendments to the Government Resolution "On raising the salary of state employees in the social sector" heads of the state funded institutions shall be able to use up to 50% of the extra-budget revenues to pay the wages and provide financial assistance to their employees.
As the owners of petrol stations of the Republic of Moldova failed to install cash registers (fiscal memory) due to delays in rendering those services by the domestic suppliers, the Government decided to extend the deadline until April 30, 2004. At the same time Government indicated that this was the last extension and unless the petrol stations complied with the regulations by the set deadline, they would be closed.
On November 5, Government extended the deadline for submitting applications on deposits indemnification for years 2004-2005. For year 2004 applications shall be collected from October 1, 2003 to March 1, 2004, whereas for 2005 from March 1, 2004 to August 1, 2005. So far, Ministry of Finance allotted 25 million MDL, out of which 22.1 million Lei were spent for indemnifying 34.5 thousands deposits. Noteworthy, the total number of applications reached 60.6 million, which would require a total of 38.7 million Lei.
Of particular interest is the Government Resolution on approving a draft law providing that the Information and Security Service shall verify all candidates to public positions. According to Ion Ursu, Head of the Information and Security Service the law was a necessary tool in "fighting corruption, defending public interest, and ensure state security". Under the draft a candidate shall be checked by ISS only if he/she agrees to. If the candidate refuses to be checked, to submit an income statement, or submits false data, he/she would not be able to take a public office.
At the initiative of the Ministry of Foreign Affairs, Government simplified the entry into the Republic of Moldova of the citizens of EU, US, Canada, Japan, Switzerland, Israel and EU candidate countries, holders of diplomatic or service passports for a 90 days period. Citizens of the said countries in possession of regular passports would no longer need invitations in order to apply for a visa of up to 90 days. Government believes those modifications would contribute to fruitful and long-lasting relationships with the said countries, would bring additional revenue to the state budget, and improve the country's image abroad.
113th session of the Council of Europe Committee of Ministers
On November 6, the 113th session of the Council of Europe Committee of Ministers was convened in Chisinau. Republic of Moldova handed over the chairmanship of the Ministerial Committee to Netherlands. The event gathered representative of 20 European states, of all the Council of Europe member states, as well as of the observer-countries.
A day before the reunion, the President met a series of officials, namely Walter Schwimmer, Council between Europe Secretary General, Jaap de Hoop Scheffer, Chairman-in-Office of OSCE and Dutch Foreign Minister, and Brian Cowen, Irish Minister of Foreign Affairs.
Moldova was praised for its chairmanship of the Council of Europe Ministerial Council at the meeting of President Voronin and Walter Schwimmer. The Two reviewed Moldova's chairmanship and considered such issues as illegal migration and Transdnistrian conflict resolution.
Given that Jaap de Hoop Scheffer currently holds the position of Chairman-in-Office of the OSCE, which is one of the three mediators in the Transdnistrian conflict - the discussions between him and President Voronin centred on "Transdnistrian dossier". On this occasion, Dutch Foreign Minister expressed his hope that the conflict would be settled by the end of 2004, thus indicating that the resolution might be speeded up, especially during the second half of the year, when Netherlands would hold the chairmanship of the European Union.
In his turn, Brian Cowen expressed Ireland's commitment to support Republic of Moldova's efforts to joint EU and reintegrate the country. He also stated that his country shared the same views on ways of Transdnistrian conflict resolution as OSCE.
In his opening speech at the Council of Europe Ministerial Committee, President Voronin stated that "Chairmanship of the Council of Europe Ministerial Committee was a historic event for our country, which has had a positive impact not only on our bilateral relations, but also domestically, thereby boosting a progress in democratic reforms. At the same time, we hope that the actions we undertook during our mandate have resulted in experiences and outcomes useful both for our entire organization, as well as for each member state, which is a good illustration to the unity through diversity principle". The President also indicated that "our fruitful cooperation with the Council of Europe is a strong incentive to set new goals, in particular the strategic objective of joining EU". This desire "stems not only from the fact that Moldova is geographically a part of Europe, but also from the fact that we have the same roots and traditions, we share the same European values, which include observing human rights, pluralist democracy, rule of law and diversity, in its multiple manifestation".
As expected, President Voronin once again reiterated that for the Republic of Moldova "acceding to European Union and to European standards is the only way to integrate the society, to unify the country and settle the Transdnistrian conflict".
On November 7, President Voronin signed a decree on the establishment of a new commission, which is to draft and submit for Parliament's approval the National Strategy on Fighting Corruption, as well as an action plan for its implementation. The initiative is part of a string of measures aimed at fighting corruption announced as a top priority once President Voronin took the office in 2001. Noteworthy, almost two years afterwards, Moldova is among the most corrupted countries in Europe according to the findings of Transparency International. The latest report reads "President of the Republic of Moldova, Vladimir Voronin, is viewed as a fighter against corruption, however his efforts are rather targeted at gaining more votes than at identifying solutions to the problem" 1. One thing is for sure, this complex phenomenon having negative repercussions would not be solved upon the adoption of a National Strategy unless backed up by a strong political will.
Recommendations for public officers
On November 8, President Voronin attended the reunion of mayors, heads of rayons and rayon council secretaries. The President recommended local authorities to include water and gas supply of localities among the top priorities of their activity. Given the wide-range political representation of the elected officials, President Voronin suggested them "to forget about party affiliation and political differences, as the only goal of their activity is to serve their community".
President Voronin's visit to Cyprus
Last week, Vladimir Voronin paid an official visit to the Republic of Cyprus. According to the press service, during his meeting with Demetris Christofias Chair of the Cypriot Parliament, President Voronin was quite interested in Cypriot experience in settling a long-lasting a territorial dispute, which might be quite useful for Moldovan authorities in their efforts to settle the Transdnistrian conflict. As usual, President Voronin asked for Cyprus' support in Republic of Moldova's aspiration to join the stabilisation and association process.
Another major event of the aforesaid period was the official visit of Ukrainian President Leonid Kucima to Chisinau. During his meeting with President Voronin, the Two followed on the issue of joint customs posts at the border and reached a consensus on the functioning of five joint posts and two to be opened. Another issue considered during the meeting was Transdnistrian conflict. In this respect, President Voronin stated at the briefing hosted at the end of the meeting, that Kiev fully supported Chisinau's position on settling Transdnistrian conflict.
After the meeting the Two signed a joint declaration to be followed by a Free Trade Agreement between the two countries.
On this occasion, President Vladimir Voronin conferred "Order of the Republic" to his Ukrainian counterpart as a "profound gratitude for his merits in fostering partnership and co-operation between Ukraine and the Republic of Moldova". During the ceremony, Moldovan President referred to the "Ukraine's and President Kucima's personal contribution to the resolution of the Transdnistrian conflict, as well as his support in reunifying our country".
1 BASA-press, Chisinau, January 28, 2003.
The evacuation of the Russian military patrimony from the Transdnistrian region
After the Russian Federation resumed the withdrawal of its military patrimony from the Transdnistrian region two weeks ago, a second train composed of 20 wagons loaded with around 300 tons of Russian weaponry was sent to Russia on 6 November. According to some sources from the Operational Group of Russian Troops, quoted by Basa-press, this will be the last transportation of Russian weaponry from Transdnistria this year.
Earlier, the Deputy Russian Minister of Foreign Affairs Veaceslav Trubnikov visiting Chisinau on the occasion of the meeting of the Committee of Ministers of the Council of Europe here, said that the Russian Federation would not manage to withdraw its weaponry from Transdnistria until the end of 2003, according to its Porto commitments, due to reasons that are beyond it, such as the obstruction of the process of withdrawal by the Transdnistrian authorities. At the same time, the Russian dignitary stated that Moscow would be against setting up a new deadline for the withdrawal, since this could serve certain interested forces as a means to put pressure on Russia in order to prevent it from observing the new deadline.
The Joint Control Commission
The ordinary meeting of the Joint Control Commission (JCC) was suspended on 4 November after the representatives of Transdnistria on the JCC left the meeting room as a sign of protest against the introduction by the Chisinau authorities of special police troops in the security zone controlled by the JCC. The special police was introduced by the Moldovan authorities to set up checkpoints at the western administrative border of Transdnistria in order to counteract smuggling activities.
The protests by the opposition in front of the Russian Embassy
The Russian Foreign Ministry released on 4 November a statement in which it called upon the Moldovan authorities to stop the "anti-Russian hysteria" and prevent further "illegal actions organised by aggressive politicians of radical-nationalistic orientation". The statement referred to the protests organised by the People's Christian Democratic Party (PCDP) and a group of Moldovan journalists for the second month in front of the Russian Embassy in Chisinau. The protesters demand that the Russian troops and military patrimony is unconditionally withdrawn from Transdnistria by the end of 2003, in accordance with the commitments assumed by Russia at the OSCE Ministerial Council in Porto last year.
Soon after the statement was released, the Moldovan Justice Minister Vasile Dolghieru asked the PCDP to stop immediately the protest actions, which, according to the Minister Dolghieru, would run counter to the constitutional provisions whereby the freedom of expression should not infringe upon other individuals' dignity. Furthermore, Dolghieru, quoted by Basa-press, said that the PCDP's actions take place "under slogans that harm both the dignity and honour of the Russian people and the dignity and honour of the current Moldovan Government".
Soon afterwards, the Moldovan bodies of interior initiated administrative case files for the leaders of the PCDP, who the Chisinau police accused of having organised an unauthorised street event.
The PCDP rejected both the accusations of the Justice Minister and those of the Chisinau police repeatedly, including in a statement made public during the plenary meeting of the Parliament, in which they said that the Moldovan authorities had threatened directly the PCDP by taking over unfounded accusations and having launched a new procedure of suspending the parliamentary immunity of several PCDP deputies.
The OSCE Chairman in Office talks to the Moldovan civil society
The Dutch Foreign Minister Jaap de Hoop Scheffer, current Chairman in Office of the OSCE and future Secretary General of NATO, on a visit to Chisinau on the occasion of the meeting of the Committee of Ministers of the Council of Europe, met with representatives of the Moldovan civil society to discuss their views on the issue of solving the Transdnistrian conflict through the federalisation of Moldova. This initiative has been to date commented negatively by a major part of the Moldovan civil society and political class. De Hoop Scheffer called the accusations brought to the OSCE and the OSCE Mission to Moldova as "nonsensical" and reassured the participants in the meeting that the OSCE will do its best to keep unbiased and to talk on equal footing with all the parties interested in the resolution of the Transdnistrian conflict.
A comment made by the Chisinau newspaper Moldavschie Vedomosti on 8 November regarding this meeting mentioned that the involvement of the civil society in the debates on the federalisation initiative is premature as long as there is no debate on the issue between the two top leaders in Moldova and Transdnistria. Under these circumstances, the protests of the civil society on both banks of Nistru River against federalisation might serve the two leaders as yet another pretext to postpone the political resolution of the conflict.
III. Foreign affairs
While Chisinau is still reticent towards Bucharest, the later continuously claims that Romania would under any circumstances continue to be Moldova's major proponent, both the most qualified and sincere one, in its European accession efforts. Romanian Foreign Minister, Mircea Geoana, on official visit to Chisinau at the 113th Council of Europe Ministerial Council, reiterated this position once again.
Mircea Geoana indicated that Romanian Cabinet of Ministers decided to restructure Republic of Moldova's debt worth 15 million USD for an eight-year period. The decision to extend the settling date for the debts accrued mainly on imported energy was taken at the request of Moldovan authorities and also due to the difficult social-economic situation of Moldova.
IV. Studies, analyses, comments
1. Moldova - Transdnistria: Clash of Economic Interests
by Galina Selari
Moldova and Transdnistria agreed on the "common state" formula and 5 common spaces - legal, economic, customs, defence and cultural as far back as 1999. Further steps seemed a mere technical matter - documents' development.
But it turned out to be quite different from what was expected. Withdrawal of rights to use customs stamps of the Republic of Moldova from Transdnistria "materialised" in the notion of "economic blockade". Gradually increasing tension has been becoming stronger and stronger during 2003, in spite of the fact that the parties have, as before, agreed that reintegration is the single opportunity both for conflict settlement and ensuring of economic revival of the two sub-regions. To achieve this goal the elaboration of the Constitution of the united state has been started. Nevertheless, the nerve-strain can be compared to some extent with the situation that preceded the 1992 confrontation, but now, however, the proscenium is taken not by immaterial problems - language and history - but by economic interests focusing on whom the property belongs to and who will control the financial flows. That's why the current aggravation of the situation represents no less danger than that that occurred in early 90s.
Insisting on their own rights the parties seem to compete with each other in pilling up restrictions for the economic agents and population of the far bank. And this is happening notwithstanding the fact that as early as 1992 after the "heated" phase of the conflict it was agreed that "conflicting parties considered application of any sanctions or blockades inadmissible. In this context any barriers to free movement of goods, services and persons shall be eliminated".
Practices used during last months by both parties in order to ensure these economic freedoms have given rise to surprise. Let us bring them back to the mind:
First act: spring - summer 2003
- May 15, 2003 - the Customs Department of the Republic of Moldova and the State Customs Service of Ukraine signed the Protocol on Mutual Recognition of Motor Waybills, Commercial and Customs Documents and, as a result, starting from May 25, 2003 the entrance of goods with Transnistrian customs documents to Ukrainian territory was ceased;
- June 12, 2003 - the Government of the Republic of Moldova introduced temporary (till January 1, 2004) registration of Transdnistrian economic entities in corresponding Moldovan institutions.
The Administration of Transdnistria considered these as toughening of "economic blockade" and Chisinau's pretensions to the sub-region's property and took retaliatory as well as prohibitive, measures:
- July 1, 2003 - gas supply to the villages Malovata and Cocieri which are under the Republic of Moldova's jurisdiction but are situated on the left bank of the Dniester was suspended on the grounds of arrears.
- July 14, 2003 - the Decree of I. Smirnov introduced a special customs duty at the rate of 100% of goods customs value for all commodities imported from the Republic of Moldova ;
- July 18, 2003 - the Decree on Establishment of Most Favourite Nation Treatment in Trade and Economic Relations with Ukraine was issued.
Further, an utterly absurd situation based on reciprocal accusations of "jamming" has arisen and resulted, since the middle of September 2003, in the breakdown of telephone communications between Moldova and Transdnistria causing considerable damage to the economic entities and population. Can we believe it is taking place in Europe?!
Second Act - autumn 2003
- October 15, 2003 - the Government of the RM took the Decision to establish stationary customs posts in order to apply the customs control rules to goods brought from Transdnistria;
- November 4, 2003 - the Transdnistrian party suspended its participation in the sittings of the Joint Control Commissions.
All these actions on "isolation" and "forcing to harmony", etc. resulted in sizeable decrease in reciprocal trade between the sub-regions, the shift of economic entities from both sides of the Dniester to shadow economy and, as the consequence, activating contraband and corruption. A seemingly unexpected surge of contradictions against the negotiation background arose to a considerable degree out of the fact that for the first time after 1992 the economic interests of so called elites - the old one and the new one - and certain "business groups" from both sides of the Dniester had been visibly damaged.
As the secret came to light, revealing the domination of economic interests, it is time to liven the search for "common grounds" primarily in the field of economy. The problems which both Moldova and Transdnistria are facing with are similar. And it will be logical to seek for the possible ways of their settlement together.
The increase of the level of living standards and maintenance of sustainable economic growth are strategic goals for the both sub-regions. Reviving of real sector both in Moldova and Transdnistria has been advancing slowly, thus the need of "second wave" of reforms both in industry and agriculture and social policy has come to a head. Moreover, both parties are facing with tough budget constrains associated with the necessity to maintain a social safety net while at the same time the burden of taxation needs to be reduced to encourage entrepreneurship and attract foreign investment.
The situation is getting even more complicated if we take into consideration that for both Moldova and Transdnistria the problem of external debt servicing is very acute and as a consequence brings about "twin deficit" in the budget and balance of payments. The problems like these are typical for many economies in transition but it could be easier to solve such problems within the frame of "common state", involved in the stabilisation and reconstruction processes in South - East Europe.
As time goes on, the external factors can further contribute to a balanced and, what is most important, civilised conflict settlement. First of all it is related to the European Union enlargement to the East and surely to the new Neighbourhood Policy of the EU. If the Republic of Moldova will be the first-hand EU "neighbour" not earlier than 2007, Russia, Byelorussia and Ukraine will be neighbouring the EU as early as 2004.
And what is more, now the concept of "common European economic area" is far more exceeding the frames of enlarged EU. It is mainly related with transformations of Russia's and Ukraine's relationships with European countries, strengthening and intensification of economic partnership. It is evident that such partnership will become stronger following theirs accession to the WTO and implementation of the Agreement on Common Economic Area signed by 4 largest CIS countries - Russia, Ukraine, Byelorussia and Kazakhstan - in September 2003. The fact that the same countries are both key and common trade partners for the two sub-regions of Moldova will undoubtedly affect relations between these countries and the "common state" and at the same time between the sub-regions.
The "political and economic" tension between Moldova and Transdnistria aggravated during the spring - autumn 2003 has negatively affected their reciprocal trade. According to the Transdnistrian Republican Bank data the share of the Republic of Moldova in total Transdnistrian external trade has reduced to 9% (the lowest indicator over the last years). It is interesting that the most sizeable decrease was registered in Moldova's inflows to Transdnistria but at the same time the opposite flows of goods to Moldova even increased by 24%. And Transdnistrian export growth to Russia and Ukraine amounted to 300 and 84%% correspondingly. It is also interesting, that according to the social and economic forecast of Transdnistria for 2004 Russia and Moldova will remain the main Transdnistrian trade partners within CIS (38.5% of total external trade turnover). And this is observed under circumstances in which the favourable conditions were created for Ukraine - products imported from this country are not subject to customs duties, excisable goods being the only exception but Moldova's ones are subject to special 100% duty.
A way out of the current situation which considerably damages both Moldova's and Transdnistria's economies can be found solely by means of a mutual compromise including that on economic problems solutions. It seems that this compromise should be realised during the initial stage of transition period of reintegration and this point was set up in the draft agreement on settlement proposed by OSCE (July 2002, Kiev) but has never been realised.
The attempts to de-block economic "obstructions" through official negotiation process have been to no effect for the time being. So, involvement of entrepreneurs and non-governmental organisations in discussions of economic aspects of Moldova - Transdnistria relations would be in favour. These aspects are much spoken of: property, privatisation, financial flows, customs procedures, registration and taxation, free movement of persons.
Why not to discuss the possibility for the parties to sign the document in which it will be stated that until the Constitution of "common state" is approved:
- respectful attitude to the property in the territory of the both sub-regions based on mutual guarantees of efficient use and management of the property with consideration of each parties interests and interests of the future "common state" will be guaranteed;
- economies of the two sub-regions will operate during the transition period within the framework of existing legal environments namely those of the Republic of Moldova and Transdnistria.
It is understandable that these suggestions are to be discussed. But theirs acceptance could in many respects defuse the current situation, mutually undermining and often absurd.
2. Domestic Implications of the Economic Policy in the Foreign Sector of Moldovan Economy
by Iurie Gotisan
Recently National Bank of the Republic of Moldova released some figures, in fact rather surprising ones, on the growing trade deficit that has reached 400 million USD in the last nine months as compared to only 240 million in the same period last year. What are the reasons behind the said figures and why do they come as a surprise?
One may cite arguments forecasting changes in the trade balance for this year. Given that other conditions did not change, such as slow economic recovery, that is not exclusively based on exports, the double drop in foreign investments has lead to a growth of trade deficit albeit the boosting exports. Both arguments make sense if considered based on the figures showing the evolution of economy (industry production, labour force employment, etc) for the relevant period of the year.
If the trend continues it might well happen that by the end of the year the trade deficit would reach 500 million, i.e. 25% of the GDP. Moreover, this indicator might as well grow by 100 million as compared to the previous year, that in itself runs counter to the provisions of the Memorandum signed with IMF on the economic and financial policy of the Government and National Bank of the Republic of Moldova for year 2003. The said institutions predicted a trade deficit not exceeding 300 million USD for this year.
Let us go back to why the growing trade deficit has come as a surprise. There are several reasons for the people responsible for the economic policy, including National Bank, to worry about. Firstly, the 6% economic growth the Government forecasted for this year might not by itself account for the growing trade deficit, except when domestic real economic growth would have been far more emphasised than what the figures are really telling. Nevertheless the discrepancy is reflected in the trade balance.
Secondly, the foreign exchange policy declared and applied by the central bank has allowed for a real appreciation of the Lei, which in its turn affected the trade balance. The fact that the said policy is not making the struggle for reducing inflation much easier is another story and I would not dwell on it here. A great risk especially in the countries under tremendous pressure from outside is the appreciation of the real exchange rate. Even in the countries where inflation is reduced to a reasonable one-digit figure, appreciation may destabilise trade balance if not backed up by a considerable raise of productivity. National Bank has always clearly stated its top objective, i.e. to reduce inflation at any price. Besides this, stabilising national currency has been and will be another priority.
Exchange rate should reflect the real situation in economy and should have a positive impact on it, which is not exactly the case in the Republic of Moldova. Irrespective of this, National Bank has been promoting an overstated exchange rate for the national currency. And this in the context of unbalanced trade. It has used appreciating foreign currency to cover the imports. Given that the degree of inflating depreciation of the Moldovan Lei has never been reflected to a full extend in the exchange rate, what monetary institutions really did was to apply the practice of strong currency rather than free floating one. Still, monetary appreciation discourages exports, and on the contrary encourages imports, which in the long run affect trade balance.
Due to the understated US dollar exchange rate, Moldovan exporters have incurred huge loses for several years now. This "stability" policy not justified from the theory of transition point of view was promoted irresponsibly and as a result has had some severe repercussions. If National Bank had refrained from interfering by uselessly maintaining an overstated exchange rate of Lei, then most likely the favorable exchange rate would have been a strong insensitive to the exports, thereby inhibiting unproductive imports in favor of domestic initiatives. The only counter-argument I could bring myself is the fact that, we have nothing to export after all, and even if something is produced the raw materials are also imported, therefore the profit margin is very low.
The experience of macroeconomic stabilisation programs throughout the world indicates that appreciation of the real exchange rate is a source of vulnerability if not backed up by a relevant increase of the productivity. Both in Latin America in 80' and 90's, in South-Eastern Asia during the wide-scale financial crisis, and turmoil in Argentina back in 2000 - the appreciation of the real exchange rate impaired credibility and boosted trade deficits to a level of unsustainability resulting in a financial collapse. This is why careful administration of the trade balance is a very important objective and in great many cases governments conceive the economic strategy with an eye towards securing foreign trade balance.
Thirdly, this year's imports constantly exceeding those of 2002 point to the fact that what we are dealing with is probably not a simple "accident". Even if we take into account the impact economic recovery has on the foreign trade, the discrepancies mentioned above still hold true. At the same time, transfers from the current account are far from considerably reducing the trade deficit. To put it differently, despite the considerable amount, transactions are impaired by the more considerable growth of imports as compared to exports. In the end, one may not speak yet of a flow of direct foreign investments, which accounted for just 65 million USD in 2002 as compared to 114 million in 2001, and 128 million in 2000. According to the report of the United Nations Conference on Trade and Development for 2002 on the global investments, the share of foreign direct investment in GDP in Moldova is the lowest in Europe. It is believed that the volume of foreign investments in Moldova in the last couple of years is even smaller than the volume of international drug smuggling through our country. Lack of foreign investments is determined equally by economic crisis and by political instability and ambiguous legal framework.
How could one explain the growing deficit of the trade balance and current account? One explanation would be the growing Euro against US dollar, as well as structural and geographic changes in Moldovan trade, though there are no reliable data to back up this assumption. One might also consider possible adverse evolution of the prices on products and services (raising prices on oil and energy) which account for a great proportion of Moldovan trade, although this year boost in Moldovan exports seem to invalidate this assumption as well. Sluggish economic activity throughout Europe, which accounts for 30% of Moldovan trade, while eastern market accounts for another 60%, meaningful might be considered as another explanation. Trade policy applied by the Government is another reason. For instance facilities granted by Government on certain imports is nothing but an appreciation in real terms of the national currency, which in its turn boosts imports. Moreover, when Moldovan Lei registered a nominal appreciation against US dollar it also appreciated against Euro, which again boosted imports. This requires for the foreign exchange policy to take into account foreign unbalance. We could also cite the lack of financial discipline (such phenomena as "money laundering", fiscal evasions, etc), which indicates that certain available funds could have been used for additional imports.
Given the deteriorating international economic situation, the challenges lying ahead of the Republic of Moldova's economic recovery are far more. It would be more difficult to export, whereas external funding of our deficits would be more complicated. And this is not it. Besides good news, year 2003 brought some bad news as well: growth of financial indiscipline (arrears of up to 40% of GDP) as well as doubled deficit of the trade balance and current account. Those deficits are not sustainable and therefore require a raft of correction measures especially given the ever more uncertain international financial environment. The Government has already announced some measures that are also featured in the letter of intention on the new agreement with IMF. Those measures, most likely restrictive ones, would influence the pace of economic activity in the year to come.
A string of factors such as - a budget surplus of 0.8% of the GDP provided for in the draft budget for year 2004, a decrease in the non-governmental sector deficit by 3% of GDP in the next year (from the 6% forecasted for this year), annulment of some fiscal and trade facilities, a restrictive monetary policy (aimed at reducing inflation), strictness in granting funding to state enterprises -make the 5% GDP growth forecasted for the next year totally unrealistic. Under the given circumstances even 4% seem a too ambitious task! The Government may want to revise its forecasts on the next year economic growth given the recession of the western economies, raising oil prices, negative trends in agriculture, and problems in the domestic energetic sector. To count on an unachievable economic growth is to forecast budget revenues that would be never secured, which would jeopardise the budget even further, would skyrocket interest rates and inflation, and as a result would perpetrate foreign trade unbalance.
Having said that, and considering the evolution of the trade balance we are inclined to believe that National Bank should not venture in appreciating substantially the national currency in its efforts to reduce inflation. This is especially true since Government should be aware of the risks involved in "overheating" an unstructured economy. We don't think it's a good idea to rely exclusively on budgetary and trade policy when trying to keep trade balance deficit under control. In other words, National Bank should not refrain from pursuing two goals, namely keep inflation and interest rates under control.
At the same time Government may want to be more willing to fight debtors by imposing tighter budgetary constraints, to oversee budgetary spending, privatisation, revenues policy, oversee monopoly practices, and through various means shape the commitment of certain companies doing excessive imports by taking advantage of the favourable conditions.
If an efficient approach towards trade balance deficit is imposed, then it would require an adjustment of the elements to the economic policy mix, including privatisation, as well as a good co-operation between the decision-makers responsible for economic policy. So far, everything was more or less quite; the governor didn't came up with any spectacular actions, whereas Central Bank had an average performance. The way trade balance deficit is handled would test Government and National Bank's ability to reach the most advantageous compromises.
It is difficult to choose the right economic policy as it inevitably involves compromises at the time it is necessary to boost economic growth simultaneously with reducing inflation expectations. However, neglecting the threat posed by the trade balance deficit may well result in problems surfacing in 2004, as well as in a return to the so-called boom and bust cycle. There are no reasons to panic yet, however one may want to keep a close eye on the evolution of the trade balance deficit.