Economic Policies on November 29 – December 12, 2004

Macroeconomic policies

“Stability” on the domestic currency market

Domestic currency market had a “stable evolution” in November with Leu registering a slight depreciation 0.17% against USD, according to National Bank of Moldova (NBM). Exchange rate ranged between 12.4625 and 12.4841 Lei for 1 USD. A NBM press release reads that same time last years, except for 2003, national currency used to slightly depreciate. However, in November 2003 Leu gained almost 1% from 13.4257 to 13.2910 Lei for 1 USD.

Surging energy consumption last month had influenced the rate of Moldovan Lei against USD. At the same time, growing demand on foreign currency on the domestic market was watered down by surged inflow of foreign currency, i.e. remittances of Moldovans working abroad. Amidst growing inflow of foreign currency from abroad, National Bank continued its interventions on the currency market so as to prevent excessive fluctuations of the exchange rate. Therefore in November 2004 the Bank purchased 22.9 million USD.

Lei against USD exchange rate is influenced directly by the amount of transactions on internal market. As for the Lei against Euro exchange rate it is calculated based on the cross-rate against USD on the internal exchange market. Thus, the depreciation of the national currency against Euro in November 2004 from 15.8965 Lei/1 Euro to 16.5471 Lei /1 Euro (i.e. 4.09%) was determined by the Euro appreciation against USD on the international market.

Experts say the lower USD/Lei exchange rate is, the more expensive Moldovan exports are, while foreign customers back off from “made in Moldova” goods turning their eyes to cheaper goods. Leu appreciation has turned into a nightmare for exporters. If it continues it would diminish exports and boost imports, or net exports and raise exchange rate.

The impact would be even bigger if Leu appreciation would be sustainable. However, it doesn’t mean that ordinary people would enjoy cheaper imports. Albeit Leu is appreciating, prices on imported goods do not go down. On the contrary, there are inflation outbursts on the real estate market. Prices on real estate (both in Euro and USD) surged by 25% in the last year.

Who has to gain from a stronger Leu:

Imports are getting cheaper: either importers’ profit margins are fatter, or prices on imported goods go down;
Moldovans pay less (equivalent in Lei) interest rates on credits in foreign currency;
Moldova — having done a facelift in the international statistic reports — looks more appealing to donors.

Who has to loose from a weaker Leu:

Exporters who have to sell their products more expensive;
Moldovans having deposits in foreign currency;
There is a risk of financial crisis: if Leu rapidly gains grounds.

National Banks’ foreign currency reserves over 400 million USD

At the end of November National Bank’s foreign currency reserves amounted to 405.9 million USD hitting a record high since the Leu was put into circulation on November 29, 1993. As of December 31, 2003 foreign currency reserves were estimated at 302.2 million USD.

Amidst surging supply of foreign currency on the domestic market fuelled by the remittances of Moldovans working abroad, National Bank purchased 240 million USD. At the same time it reimbursed credits received from IMF, while in May it granted a loan to Moldovan Government worth 50 million USD.

NBM managed to refill its foreign currency reserves to the level before 1998 financial crisis that hit hard the entire region, including Republic of Moldova where it depleted foreign currency coffers by 2.5 times to a record low 143 million USD. Economy watchers say NBM is probably trying to secure a normal stock of foreign currency that would supposedly give Moldova more credibility on the international capital markets as well as in the eyes of foreign donors.

Inflation outstrips forecasts for the year

According to the latest monthly report issued by the Statistics and Sociology Department, as of November inflation rate in Moldova was 1.8%. The cumulative rate for the 11 months of the year was 10.7% and this despite the 9% inflation rate provided for in the Law on State Budget for 2004.

In November consumer price index (CPI) on food products surged by 2.4% over last months, on non-food products by an average 1.3%, and on tariffs and services by 1.1%. The most spectacular price hike was registered on eggs 23.7%, vegetables 13%, and diary products 6.4% over October. As for non-food products, fuel price surged by 2.4% and oil products by 2.7%. Tariffs on transportation also climbed by 14.9% and this after a 17.3% growth in October.

The 9% inflation target would not be reached unless “official figures are rigged”. Officials stay calm and see no harm in gradual price hike on all kinds of products. Surging prices on food was the main factor that propelled CPI further upwards. Experts do not exclude an eventual price hike in 2005 that might be also fuelled by reduced tax burden both for legal and natural entities.

As a rule, governments tend to raise their rating on the eve of elections (given that Moldova de facto entered an election campaign) by lowering taxes and raising spending on social security, thereby boosting domestic consumption that in turn swells public debt and budget deficit.

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