Economic Policies on October 18–31, 2004

Macroeconomic policies

Elections might slow down economic growth

2005–2006 might be tough years for the National Bank and future Government. There are a number of challenges lying ahead the governors: keeping budget deficit below 1% of the GDP, keeping inflation under control (below 10%), making domestic enterprises more competitive. It seems economic growth has slowed down in Moldova and this despite preparations for 2005 parliamentary elections. Regardless who wins elections, European integration would influence the policy led by the Government.

Predictions

A 6% economic growth is forecasted for 2005–2006 impinged by growing investments and consumer spending. It is estimated that inflation would drop to 8% by the end of 2005 and 6.5% by 2006. According to the same forecasts, current account deficit would drop to 5% of the GDP in 2005–2006 from the 5.5% of the GDP in 2004.

As for budget deficit, Government set a target of 1% of GDP in 2005, however there are many lingering concerns that fiscal reforms planed for the next year might have a negative effect on the revenues and would likely thwart attempts to reach the target. Recently resumed economic growth (6.5%) has been driven by better levied taxes and VAT, as well as wage raise.

Risks

Economy-watchers say a 6.5% GDP growth in the first half of the year coupled with surging consumer spending, eventually swell the net exports deficit, which raises the question whether such GDP growth rates may be sustained on mid-term. Trade balance deficit is still a source of concern, many questions arising regarding our economy’s competitiveness on long-term. Monetary policy led by the National Banks envisages a gradual decrease of inflation while avoiding an excessive appreciations in real terms of the national currency. Keeping inflation steady might work if coupled with a control of exchange rate.

Moldovan goods and services are loosing grounds on the domestic market, covering only 60% of the domestic consumption. Given the lack of an adequate response from domestic manufacturers, surging consumer spending has further deepened the gap between imports and exports, which had a negative effect on the trade balance deficit. Last year, exports surpassed imports by 622 million USD. Businesses worry that direct foreign investments (58.3 million USD) and portfolio (2.03 million USD) failed to balance current account deficit. This also explains why net average salary per economy in Moldova does not account for the tenth part of the average in Europe.

Comparison

Over 1999–2003, GDP in Moldova grew by 21%, while in Latvia by 36.4%, and in Estonia by 29.1%.
GDP per capita in Moldova (related to purchasing power parity) reached 650 Euro in 2003, while in Slovenia 16,410 and 12,960 in Hungary.
Foreign direct investments accounted for 2.5% of the GDP in 2003, while in Estonia 28.4%, and 26% in Czech Republic.

Banking and insurance

Swelling National Bank’s foreign currency reserves

According to the data released by the National Bank of the Republic of Moldova its foreign currency reserves hit a record high 391.6 million USD at the end of September. It came as a result of massive purchases of foreign currency — 117 million USD in the third quarter alone. As a result, National Bank managed to restore its foreign currency reserves to the levels before the 1998 Russian financial crisis, that reverberated in the entire region, Moldova being no exception.

Since the national currency was put in circulation back in 1993, National Bank managed to double its foreign currency reserves in three years, when they surged from 180 million to 365.7 million USD. However, after the crisis they dropped 2.5 times to a record low of 143 million USD in December 1998. Even if IMF suspended crediting Moldova over 1999–2003, loans that are usually used to fill foreign currency reserves, National Bank managed to add more than 150 million USD to its reserves mainly by purchasing foreign currency on the domestic market.

In 2004 National Bank purchased over 120 million USD mainly from the transfers of Moldovan citizens working abroad. Evolution of foreign reserves has even handily outstripped forecasts made by independent experts who expected National Bank’s reserves to reach 350 million USD by the end of the year.

Business environment

Tension growing in sugar industry

Great many sugar manufacturers participating in a seminar concluded that sugar industry would not make it unless both Parliament and Government agree to reduce VAT for sugar manufacturers from 20% to 8%. They voiced their lingering concerns about growing prices on energy that at the end of the day incurs additional costs, thus not allowing them to buy additional raw materials.

The major sugar manufacturers, among them “Suedzucker Moldova” and “Marr Sugar Moldova” conducted a market research estimating that the maximum price for 1 tone of sugar might reach the international market level, i.e. 460–480 USD, VAT not included. Such a price might be set for the Moldovan sugar only when exporting the extra above domestic market’s needs and only after introducing a record keeping system^[1], controlling and regulating the market similar to EU system. An 850–900 thousand tones of sugar beat are expected to be harvested this year, out of which an estimated 90 thousand tones of sugar are to be produced. On average 85 thousand tones of sugar are consumed by the domestic market.

Last year Russia and Ukraine excluded sugar imported from Moldova from the free trade scheme. Later on, Ukraine set a customs tax worth 300 Euro per tone, while Russia a tax worth 45% of the imported amount, or no less than 150 Euro per tone. A draft protocol signed by Republic of Moldova and Russia provides that exports of Moldovan sugar to Russia under free trade scheme would be resumed in 2005 at an annualized quota of 5 thousand tones.

Previously, sugar manufacturers estimated that sugar price on the domestic market might surge by 10%. On top of that, they believed that by the end of the year sugar may not be sold for less than 7 Lei per kg, as otherwise factories would be in the loss. Government decided to set an 8% VAT tax on white sugar, given that factories purchase sugar beat at a 5% VAT tax while sell sugar product at a 20% tax, it is only natural that the price on sugar is set to soar. The new tax would apply both to Moldovan sugar and imported one.

Moldova in the world

Relations with international financial organisations

On October 19 Shigeo Katsu, World Bank Vice-president for Europe and Central Asia left Moldova after a two-day official visit. One of the reasons for paying a visit to Moldova was to present the new World Bank Regional Director for Ukraine, Belarus and Moldova, Paul Bermingham, who as of October 1 replaced his predecessor Luca Barbone.

Shigeo Katsu and Paul Bermingham had a number of meetings with Moldovan officials, among them President Voronin, Speaker Eugenia Ostapciuc, Prime-Minister Vasile Tarlev. High on the agenda of the meetings was WB’s support to Moldova in building a market economy and poverty reduction. WB officials reiterated their interest for the Government to implement Poverty Reduction Strategy. In a related note, World Bank completed its Country Assistance Strategy for Moldova due to be examined on December 14, 2004.
On October 20, Prime-Minister Vasile Tarlev, Minister of Finance Zinaida Grecianii and National Bank Governor Leonid Talmaci met with an IMF mission headed by Marta de Castello Branco on official visit to Moldova between October 19 — November 3. IMF mission looks at the economic and financial situation of the country.

One of the conclusions reached at the meeting was that the country’s economic potential was not fully exploited, despite the success registered in the last two years. Moldovan Prime-Minister spoke of the importance IMF to support PRSP and jointly develop an action plan in this respect.

After completing its visit IMF mission would develop a report evaluating economic conditions in the Republic of Moldova and would submit it to the IMF Executive Council.

↑ Resolution of the Government of the Republic of Moldova no. 1150 of 18.10 2004 “On approving sample report on sugar consumption” published in Official Monitor of the Republic of Moldova no. 189–192/1324 of 22.10.2004.

e-democracy.md