Economic Policies on September 13–26, 2004

Moldova in the world

Prices on gas might go down

Moldova and Russian Federation proceeded to renegotiate Protocol on Amending the Agreement on VAT on gas and oil products. During their informal meeting at the Astana Summit Prime-Minister Tarlev and his Russian counterpart Mikhail Fradkov, decided to revise Agreement on general principles of indirect taxation in the near future. Under that document, VAT is applied according to destination principle to all goods, except for natural gas and oil products. Russian side agreed with Moldova’s initiative to abolish the 18% VAT tax on natural gas and petrol products.

A worthwhile decision and if the Agreement is amended, the prices on natural gas might go down. Moreover, Chisinau’s initiative comes at the time Fiscal Code of the Russian Federation is being amended, namely exported goods shall be subject to 0% VAT.

Another factor greatly influencing whether the prices would go down or not is the progress of negotiations between Moldovagaz and Russian Gazprom, who has recently insisted on raising the price for the natural gas supplied to the Republic of Moldova.

Labor market

Wage arrears surging

Recently a working group has been established at the initiative of the Prime Minister including representatives of various Ministries and Departments. The WG is entrusted oversee wage payment and wage arrears, after Statistics and Sociology Department reported wage arrears. Officials in the Ministry of Finance reported that commencing March 2002 there were no arrears on pensions and wages for state employees, historic debts were settled while wages were paid monthly in cash.

According to Prime-Minister the WG should undertake “extraordinary and urgent measures” to liquidate wage arrears, in case such cases are found. WG would oversee wage payments by employers and would mobilize all enterprises, relevant institutions and trade unions to pay wages on time in line with the law.

According to Statistics and Sociology Department total wage arrears per economy amounted 187 million Lei as of August 1. The highest wage arrears are in agriculture with 95.16 million Lei; in education wage arrears surged by 1.5 million Lei. Average salary per economy equalled 1,150 Lei (95 USD). Employers of banking sector and financial institutions had the highest salaries in August, an average of 3,583 Lei. Average salary in education and in healthcare were 716 Lei and 863 Lei respectively. In August consumer basket reached 1,386 Lei (116,13 USD).

Macroeconomic policies

Foreign debt

Republic of Moldova’s gross foreign debt amounted to 1 billion 896.32 million USD as of July 30, 2004 according to the findings of a National Bank report on the evolution of foreign debt. Government debt accounts for 36.2% of the total debt, National Bank — 7%, commercial banks — 2.4% and other sectors — 54.4%. The report also estimates the debt on imported energetic resources worth 295.26 million USD. Guaranteed public debt, which also includes Government and National Bank debts plus private debt guaranteed by the Government, is worth 874.62 million USD. Loans and interest rate arrears account for 71.4% of the total debt.

Post-war history is full of examples when countries lacking financial resources chose foreign debt as a temporary measure to recover and boost domestic economy. This is not the case of Moldova. Its foreign debt of 1.9 billion USD represents 84% of the GDP for 2003, well above the average for subdeveloped countries boasting just 35%. Draft budget for 2005 endorsed by the Government last week allocates 31.2 million USD to servicing foreign debt; while for servicing foreign debt guaranteed by the Government a total of 28.8 million USD; for interest rate payments — 2.4 million USD. In the last years, technically Moldova was insolvent, fact that it acknowledged every time it postponed disbursing debt until the settling day, or when it requested another debt restructuring.

Good agricultural year does not slow down inflation

Record high grain harvest (830 thousand tones), coupled with swelling consumption, would help Republic of Moldova speed up economic growth. Authorities forecast a 7% GDP growth, well over the 6% this year, even over the 6.5% forecasted earlier. A good agricultural year would definitely have a positive impact, however less so on inflation rate.

Despite record high harvest, prices on agricultural and food products did not go down. An overall 0.2% price hike in the industry has been registered, the highest hike was registered on meat (3.4% on pork, 1.8% on beef, 1.3% on meat products). Accordingly, inflation rate dropped slightly to 0.5% in August, from the record high 1.3% in July, still it was 0.2% higher than same time last year. Annualized inflation rate was also propelled further upwards to 12.4% in August.

Besides price hike on agricultural and food products, inflation was further sent up by the rising price of imported oil products. Fuel price has raised by 12%. Drivers were the first ones to be hit by the price hike and to adjust fuel consumption to the money in their pockets. As the price of transportation would grow, so would the goods as all of them have transportation costs included in the price. On average, transportation cots would raise by 2–5%, while prices of goods would raise accordingly.

Certainly, manufacturers and retailers would venture to raise prices even higher, however they stand little chance of success. Market is settled and does not accept 30% price hikes on the grounds costs are high. Albeit elections are coming, governors would be forced to raise the price on public transportation. Sooner or later they would have to adjust the price to the growing fuel price. So far, the latter affected businesses that struggle to lower the costs or cover them by raising the product price.

In the first half of the year prices rose amid a 9% consumption growth, all of which has sent GDP 6.1% up in the first six months of the year. Sales rose by 14.1%. Unfortunately this growth comes mainly from the sale of imported goods. Imports surged exceeding by far exports with a 380 million USD trade balance deficit.

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