Economic Policies on July 26 – August 29, 2004

Business environment

Debt burden pressures on state budget

As of August 1, economic agents’ debt to state consolidated budget amounted 1,059 million Lei (88.2 million USD) a 9% increase (87.5 million Lei), reads a press release issued by the State Fiscal Inspectorate.

“Bad debts” represent 72% (761 million Lei) out of the total debts. Among the debtors are economic agents who failed paying for three years in a row accounting for 226 million Lei, those who are in litigation accounting for 102 million Lei, and those declared bankrupt accounting for 97.5 million Lei, as well as enterprises without any patrimony 100,7 million Lei. Thermo-energetic companies owe another 228 million Lei.

On the one hand Fiscal bodies indicated that they managed to drop the debt to the state consolidated budget in 24 of the rayons. On the other, in Chisinau municipality alone the debt surged by 96 million Lei, especially to “Moldova-Gaz” 45 million Lei.

Hence, last week Government together with State Creditors Council decided to freeze historic debts of tobacco companies and several companies in the energy sector, worth 200 million Lei. The move involves high risks for three main reasons. To begin with it sets a negative example. Big debtors, state-owned enterprises, might be encouraged to believe that sooner or later they would again enjoy such big favours from the state. Therefore they would hold paying debts to the state budget expecting that the state would forgive them once again. However, small enterprises would even dream of such favours. They know that fiscal bodies are not as merciful when it comes to small enterprises. This brings us to the second risk: such moves undermine on the very principle of competition. It’s all about discrimination of those who enjoy favours against those who don’t. Finally, unless freezing debts is not accompanied by payment of current debts, in a year or so Moldova would be on the verge of collapse. Financial blockage would be so huge that it would suffocate the state budget and private sector. This “ticking bomb” would explode one day and bring about a major financial collapse. The aftermath of that explosion would hit us no matter how hard we try to hide behind balanced budget. In the given circumstances one should consider all the implications of such moves, so as not to trade the bird in the hand for the two in the bush.

Banking and insurance

Republic of Moldova — a high inflation rate country

According to Central Information Agency, Moldova ranks 192 with a 11.7% inflation rate in 2003 among other 221 nations. Moldova follows Serbia and Montenegro, Turkmenistan, Burundi and is ahead of Nigeria, Russia and Romania. The highest inflation rate was registered in Angola and Zimbabwe.

In 2003, 150 countries registered an inflation rate below 5%, while 100 registered a price hike of up to 3%. In July, annualized inflation rate for Euro zone reached 2.4%, i.e. 0.4% higher than the 2% recommended by European Central Bank.

According to official statistics, consumer price index in Moldova for 2003 amounted to 15.7%, while average index per year 11.6%. State budget for 2004 was based on a 4.5% inflation rate. However, after the release of official data on the evolution of Moldovan economy in 2003, Ministry of Economy adjusted its forecasts to a 10% inflation rate. In its turn, National Bank of Moldova and IMF forecast an inflation rate ranging from 8% to 10%. In the first quarter of the year the inflation rate reached 4.5%. With a 10% annualized inflation rate, Republic of Moldova would have ranked 184–185, if the other countries were to stick to 2003 inflation rate. For 2005 Moldovan Government predicts a 8.9% inflation, whereas for 2006 just 6.0%.

Moldova’s reserves are better-off

National Bank of Moldova has increased its foreign currency reserves in July by another 23 million USD to a total of 319 million USD, reads a press release issued in late August. For the second month in a row now a significant increase in reserves is being registered (in July by 25 million USD), after a decrease in May by 39.7 million USD. Central Bank bought on the domestic interbank marked that in July traded 36 million USD and 145 thousand Euro.

Long term deposits account for the greatest part of the reserves, 241.21 million USD, including in other central banks — 79.80 million USD and in foreign commercial banks — 161.41 million USD. Securities account for 77.38 million USD. National Bank also holds special drawing rights (SDR) worth 119.26 thousand USD and a reserve position at IMF worth 7.28 thousand USD. National Bank’s goal for 2004 is to keep the reserves at an acceptable level so as to cover the imports for at least three months.

Experts forecast that in 2004 National Bank would purchase foreign currency to swell its reserve to 335–350 million USD.

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