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Financial challenges lying ahead of Moldova in 2003
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It is probably due to the fact that ruling party’s electoral program has been declared as socially oriented, that different Ministries and Departments have engaged in a competition of producing socially oriented drafts. However, during the latest session of the Government the lack of financial resources for implementing such kind of programs was at issue, consequently some of those drafts were rejected.
This is the more straightforward given the initiatives to revise the administrative-territorial division and local public administration system due to be enforced upon local elections scheduled for May 25, 2003. Albeit, local public administration reform would require considerable financial resources that were not provided for in the state budget, the Government passed a decision on increasing the minimal salary as well as increasing by 18% pensions commencing April.
The situation gets even more complicated due to the Government’s failure to define clear-cut priorities in its relations with international monetary organizations, which are currently looking to define a new strategy for cooperation with the Republic of Moldova. Needless to say, good relations with World Bank and IMF are paramount for disbursement of further tranches and for servicing the foreign debt.
Recently Ministry of Finance has confirmed some earlier forecasts on the financial challenges lying ahead of the Republic of Moldova in 2003, in particular budget enforcement. Although at the time 2003 budget had been worked out it was already clear that some problems would eventually surface, the Ministry preferred to neglect them and adopted a budget, which right from the beginning was labeled as a too optimistic, due to its virtual revenues forecasted from privatization, exaggerated foreign aid and high expectations as far as expenses are concerned.
Ministry of Finance’s report published in “Moldova Suverana” (governmental newspaper) highlights some contradictions: on the one hand it praises the effectiveness and cooperation in enforcing the budget, and on the other the very same effectiveness is blamed for the situation Republic of Moldova has found itself in, which in its turn determined Minister of Finance to alert on the financial challenges in 2003.
Preliminary reports on the budget enforcement released by the Ministry of Finance for the first months of 2003 indicate an increase in the revenues to the state budget. It is worth mentioning that the reported increase is compared to the “same period of the last year”. However, the latter was characterized by stagnation in foreign trade (both import and export). A number of importers from Moldova anticipated the introduction of pre-shipment inspection and imported huge amounts of goods in November — December 2001, whereas the normal trade resumed only in March — April 2002, when the inspection procedures became clear. This was also confirmed by the data released by the Customs Department reporting high revenues in January -February 2003 as compared to the same period of 2002. Again increased foreign trade (both in value and in number of import — export transactions) accounts for the boosted Customs’ revenues.
There is another explanation for the increased revenues as compared to the same period of the last year, namely evolution of exchange rates vs. national currency. This refers in particular to the considerable fluctuations of Euro vs. MDL, some of the excises and customs taxes being calculated in Euro whereas levied in MDL. In early 2003 one Euro was around 16 MDL, whereas in the same period last year it was around 11 MDL.
Even if domestic and foreign developments are favorable for levying higher revenues to the state budget in nominal terms, it is claimed that rather the boosting business accounts for it. Cases have been registered of fiscal administration by imposing businesses to make the payments to the state budget in advance or by means of the newly-established Center for Fighting Economic Crime and Corruption, which is persecuting even the businesses that comply with the law. It seems that domestic business, regardless of its field of activity, is confronted with more and more legal or other constraints raised by the state.
To a large extent the enforcement of 2003 budget would depend on whether international monetary organizations would resume funding Republic of Moldova. Although troublesome, negotiations in this respect might bring 10 million USD from the World Bank and 15 million from the EU. This would enable the country to service its foreign debt. Further, if foreign aid is not resumed it might impact financial markets, interest rates, fluctuations on exchange market and inflation rate in 2003. It seems that the seasonal character of national currency depreciation is taking a longer period, while resumed external funding would reduce its further depreciation.
Furthermore, if the foreign funding is not resumed, the temptation to directly borrow from the National Bank of Moldova would be much higher, although neither the Law on the State Budget for 2003, nor monetary policy provide for such borrowing in 2003. Inflation pressure has become too obvious in the first months of 2003.
Debates on economic, customs, currency and other kind of unions have been recurring both domestically and abroad lately. I would like to dwell on the customs union by pointing that the stability of national currency relies on a number of economic as well as psychological (behavioral) factors. That is, any doubt in the future of the Moldovan Lei (including whether it would be still in use) may lead to some negative outcomes, like depreciation of the Lei (although there would be no economic grounds for such depreciation). A clear message from the authorities, including the monetary ones, anticipating (rather than mere ascertaining) the developments, should calm the spirits to a certain extent.
Year 2003 may be by all means characterized as tough from financial point of view. The last ditches on a short term are foreign creditors. However, they would not guarantee stability in the long run. Worsening business environment and foreign debt burden would continue to destabilize Republic of Moldova economic policy as long as there would be confused, contradicting and chaotic messages and initiatives in the field of economy.