Economic Policies on November 15–28, 2004

Banking and insurance

National Bank’s foreign currency reserves

Early November National Banks’ foreign currency reserves were estimated at 390.9 million USD with no significant change since last month when they hit the record high 391.6 million USD. Reserves mainly consist of liquidity and long-term deposits — 297.09 million USD, including in other central banks — 108.63 million USD and in other foreign banks — 188.46 million USD. Bank holds securities worth 93.80 million USD. It also holds special drawing rights worth 81.74 thousand USD and a reserve at IMF worth 7.47 thousand USD.

In October National Bank purchased 2.5 million USD on the inter-bank market. The growth registered in reserve assets this year outstripped forecasts made by independent experts who predicted they would reach 350 million USD. National Bank managed to reach the level of 1998, when the reserves dropped 2.5 times from 365.7 million USD to 143 million USD.

Future exchange rate developments

Many officials in the financial and banking sector claim the 12.7 Lei per 1 USD exchange rate that was used in drawing next year state budget, seems to be “real”. This would depend on both internal and external factors that would determine Leu/ Dollar rate.

Among the foreign factors that might wield some pressure on exchange market, experts point firstly remittances from abroad that are expected to continue to grow and would likely lead to appreciation of Leu. National currency’s appreciation would swell the trade balance and current account deficit. However, in a small economy open to and dependent on the foreign markets as Moldova is, it is useless to keep a fixed exchange rate. At the same time, a fixed exchange rate (that National Bank was promoting) protected domestic exchange market from various negative developments on the international financial markets. In addition, depreciation of the US Dollar against other currencies especially Euro would likely influence Leu/ Dollar ratio.

Also, analysts cite other factors that would diminish the aforesaid. Among those factors electoral campaign is cited that usually brings “calmness” to the exchange market. Having said, experts predict that in the next 3–4 months Leu/ Dollar exchange rate might fluctuate between 12.30 and 12.60 Lei per Dollar.

Macroeconomic policies

Moldovan investment position

Last week Chisinau hosted an international investment forum under the auspices of the Moldovan President. The message of the forum was “Moldova — open to international business”. One hundred twenty foreign companies and 300 public officers, ambassadors and local businessmen attended the event.

At the forum President Voronin outlined the investment strategy of the Republic of Moldova that had been developed by the Government, in particular its main goal to boost economic development of the country by raising foreign direct investments. According to President Voronin, in 2005 Moldova hopes for a 10% surge in FDI.

According to latest statistics, EU accounts for 40% of the total investments in Moldova, CIS for 24%, Central and South-eastern Europe 4%, while other countries 32%. The most attractive sectors for foreign investments are energy, gas and water supply accounting for 35% of the total FDI, processing industry — 27%, wholesale and retail — 16%, transportation and communications — 12%, and constructions — 2%.

Recently United Nations Conference on Trade and Development released its World Investment Report covering 187 countries. Republic of Moldova ranks 110th on its potential to attract investments. One of the most important findings of the report is that total global FDI shot down by 50% in 2003. Last year Moldova ranked 109th out of 140 states.

Foreign direct investments (FDI) in Moldova amounted to 790 million USD at the end of 2003. In 2003 FDI dropped by 50% over 2002, i.e. 58 million USD. Republic of Moldova ranks 25th on inward FDI performance indicator, as compared to 18th last year. Nevertheless, Moldova has the best rating for this indicator among CIS countries.

Moldovan foreign debt exceeds 1.3-billion USD and reimbursing such a debt is not an easy task, especially as foreign capital flows bypass the country. Given the lack of foreign investments and worsening relations with international monetary organisations, Moldova would find it quite difficult to fund its foreign deficit in the upcoming year. For instance, average annualized FDI in Romania is 1.5-billion USD, whereas in Moldova FDI reached in the last 10 years of transition a bare 800 million USD.

Infrastructure is obsolete, laws are purely decorative, whereas FDI account for only 4% of the GDP — insignificant if compared to 30% in Poland, Czech Republic or Hungary. Undoubtedly, a small and a poor country like Moldova, having a complex, unstable and ambiguous legal framework does not seem attractive at all to foreign capital while few investors dare to invest in its economy.

Ratio of cumulative FDI inflows to GDP in Central and Eastern Europe

Country                 FDI
               Investments 1991-2002 (%GDP)
Bulgaria                18.5
Czech Republic          29.4
Estonia                 33.2
Hungary                 37.5
Latvia                  35.2
Lithuania               19.6
Republic of Moldova      2.9
Poland                  22.8
Romania                 15.9
Slovakia                10.2
Slovenia                16.3

Source: ECE (2002), Economic Survey of Europe, United Nations, Economic Commission for Europe, Geneva.

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