Economic Policies on June 20 – July 3, 2005

Prices

Annualized inflation rate in the Republic of Moldova for January — May 2005 reached 13.4%, Moldova ranking third together with Russian Federation among other CIS countries. The highest inflation rate was registered in Ukraine — 14%, Armenia — 2.9%. This indicator reached 13.6% for Azerbaijan, Belarus — 11.8%, Georgia — 9.5%, Kazakhstan — 7.2%, Tajikistan — 6.7% and Kyrgystan — 4.2%.

Labor market

The medium salary in Moldova amounted to 1,270 lei (101.6 dollars) in May 2005. Also, the average salary rose by 21 percent compared with May 2004. According to statistics, in the publicly-supported sector the salary was 995.5 lei (79 dollars), and in the non-budgetary sector the wage was 1.409.5 lei (112 dollars).

The largest salaries were paid to bank employees, 3,394 lei (269 dollars), by 911 lei less than in April. Following financial institutions and banks were enterprises working in the energy industry, heating, gas, and water supplying sectors, which paid 2,689 lei (213 dollars) on average to their employees.

On the other hand, the lowest salary was paid in the agriculture sector, 580 lei (46 dollars) a month on average, by 27 lei less than in April. The average salary in the education area was 898

lei (71 dollars); and in the healthcare and social assistance, 1,034 lei (82 dollars).

Also, the medium salary on economy in Moldova accounted for 1,196 lei (95 dollars) in January-May 2005, by 20 percent more than in the similar period of 2004. The lowest salary was registered in the agriculture sector — 548 lei (43 dollars) on average, which covers only 70 percent of the cost of the minimum living. The cost of the minimum living in January-May 2005 was 771 lei (61 dollars) a month for one person.

Trade

The retail trade rose by 6.4 percent in January-May 2005, compared with the similar period of 2004, up to 3,613,100,000 lei (287 million dollars), while the growth in May was 11.1 percent. Constructions and retail trade continue to post a massive growth, being fueled by remittances of Moldovans who work abroad, economists estimate.

According to data of the National Bank of Moldova (BNM), Moldovans working abroad transferred 153 million dollars in the 1st trimestre of 2005, by 53 percent more than in the similar period of 2004. Every second out of five dollars or euros transferred by Moldovans who work abroad goes to consumption.

Joint ventures registered the highest growth of sales in January-May 2005, respectively 11 percent, and they held 23.1 percent of overall sales.

Private enterprises, which held 68.8 percent of the total of sales, registered a 6.4 percent rise, while retail sales of public and mixed companies continued to decline, respectively by 15.0 percent and 0.6 percent.

The volume of paid-for services granted to population accounted for 2,531,800,000 lei (201 million dollars) in five months, and rose by 8.3 percent compared with January-May 2004. Services provided by public enterprises represented 41 percent of the total, while private companies registered the highest rise — 14 percent.
Moldova’s exports to the European Union (E.U.) dropped by 2.5 percent in January-May 2005, down to 120.9 million dollars, after a long period of growth, when supplies to the E.U. markets rose about 2.5-fold. The difficult political situation inside of the E.U., depreciation of euro verso dollar, and small diversity of Moldovan goods exported to the European area explain this state of things.

The E.U. held 28.5 percent of Moldova’s overall exports in January-May 2005, compared with 32.5 percent in the similar period of 2004. Moldova’s exports to Portugal dropped by 66.2 percent, Germany by 48 percent, the Czech Republic by 47 percent, Austria by 38.2 percent, Hungary by 37 percent, the United Kingdom by 26.3 percent, and Slovenia by 3 percent.

Although exports to other countries registered significant rises — 7.9-fold to Slovakia, Poland 6.2-fold, Lithuania 2.8-fold, Greece 2.4-fold, the handicap registered with some of Moldova’s most important partners in the area concerned was not recovered.

Moldova’s imports from the E.U. rose by 32.8 percent up to 274.9 million dollars, the CIS by 20.7 percent up to 330.5 million dollars, Central and Eastern Europe by 42.7 percent up to 85 million dollars, and other countries 1.5-fold up to 129 million dollars.

Updated statistics show that Moldova’s trade deficit accounts for 395 million dollars and rose 1.6-fold in January-May 2005, compared with the similar period of 2004. We consider that our forecasts on trade deficit for the first half of this year will become true.

Banks and insurance

The international reserves of BNM dropped by about one percent in May, down to 473 million dollars. According to data of BNM, the central bank purchased 7.2 million dollars on the interbank market in May, or 2.5-fold less than in April. The BNM’s share on the interbank market in May was 11.0 percent.

The forward deposits and placements held the highest share in the structure of reserves — 346.1 million dollars, including 244.62 million dollars in banks abroad, 101.4 million dollars in other central banks and in the International Monetary Fund. Reserves worth 126.8 million dollars are kept in securities.

The international reserves amounted to 470.3 million dollars on December 31, 2004. The central bank intends this year to maintain the international reserves “at an acceptable level to cover at least three months of imports.”
Deposits in bank system rose by 400 million lei or 4.6 percent and accounted for 9,182,700,000 lei (734.62 million dollars) in late May. Deposits in lei rose by 7.3 percent. Also, deposits in foreign currency dropped by 0.9 percent due to depreciation of Leu and reduction of interest rates applied by commercial banks.

The share of spot deposits in the total was 3.42 billion lei (273.6 million dollars) or 37.3 percent, and rose by 1.6 percentage points compared with April, when they accounted for 3.15 billion lei.

Forward deposits in lei amounted to 392.2 million lei (31.4 million dollars) in May, up by 27.6 million lei compared with April. The average interest rate on forward deposits in lei dropped down to 13.35 percent.

Forward deposits in foreign currency in May accounted for 27.1 million dollars (338.4 million lei), and dropped by 11.4 percent. The average interest rate on deposits in foreign currency amounted to 5.24 percent.
The foreign public and state-guaranteed debt of Moldova dropped by 7 percent in five months of this year down to 817.26 million dollars. It accounted for 878.64 million dollars on December 31, 2004.

The foreign public and state-guaranteed debt dropped by 12.8 million dollars in May. Also, Moldova paid interest arrears in the amount of 0.26 million dollars, while the difference of exchange rate after appreciation of the U.S. dollar verso other currencies accounted for 10.9 million dollars.

The government’s debt was 650.8 million dollars on May 31, and dropped by 8 million dollars compared with April. BNM officials have recently said that the governmental debt is declining in continuation and it dropped down to 36 percent out of the overall foreign commitments. It amounted to 36.3 percent in late 2004 and to 42 percent in late 2003.

Certain experts say that the public debt will decline in continuation due to the slight appreciation of Leu, partial reimbursement of the debt, and arrears for energy resources. On the other hand, the foreign private debt unguaranteed by state (governmental credit) remains very high, and it amounts to about 465 million dollars.

Also, the foreign guaranteed and unguaranteed public debt of Moldova amounts to about 1.9 billion dollars or equivalent of 74 percent of GDP for 2004, a much higher level than the average of about 60 percent on underdeveloped countries. In addition, the debt for energy resources amounted to about 290 million dollars at the end of the 1st trimestre of 2005. If comparing the current payment obligations of Moldova and capacity of the national economy to generate internal budgetary incomes and obtain international reserves from exports, we can realize that a budget which is stifled by a permanent lack of resources will not bear the pressure of foreign debt for a long time.

Moldova and the world

A delegation of the International Monetary Fund (IMF) headed by Thomas Richardson was on an assessment visit to Moldova from June 22 to July 1, in order to evaluate the macroeconomic environment and other aspects of economic policies and structural reforms, medium-term spending framework, fiscal reform, salary policy, and the foreign debt problem.

The IMF mission highlighted the economic growth registered in Moldova the past four years and its perspectives for future, with IMF officials expressing readiness to update the process of granting of necessary assistance. Also, the Chisinau authorities opted for an urgent signing of a cooperation program with the IMF, which would encourage a better investment environment in Moldova, and re-organization of foreign debts of Moldova.

However, the IMF officials said that negotiations on a new financing program will start not earlier than in the 4th quarter of 2005. They noted that well-considered actions are needed in spite of certain progresses in some directions. According to the IMF mission, it is important to maintain the economic stability.

The IMF dignitaries appreciated the intention to reform the public service, but recommended an assessment of public offices and reduction of staff on basis of this evaluation. Also, it saluted the implementation of the so-called guillotine law. On the other hand, the IMF experts recommended Moldova to review the State Board of Creditors. Businesses which benefit from support of this board enjoy better conditions than enterprises working under a normal fiscal regime. Evidently, this is a discriminatory treatment between businesses which enjoy facilities and enterprises which do not benefit from the same conditions.

At present, Chisinau does not have any financial program with the IMF. The old program valued at 147 million dollars, of which Moldova received only three parts worth about 37 million dollars, expired in December 2003. The last tranche was released in July 2002.
More and more employers working in the Romanian light industry want to transfer their business to Moldova or Ukraine, after the Bucharest government has increased the value-added tax up to 22 percent.

Maria Grapini, chairwoman of the Romanian federation of light industry employers, has told journalists that many foreign investors working in the textiles sector in the Botosani area seriously consider the possibility to stop business in Romania in favour of other states such as Ukraine or Moldova, because they have no competitive advantage in Romania.

Romanian entrepreneurs are also unsatisfied with frequent amendments to legislation, higher prices for public services, appreciation of national currency, and, not the last, unloyal competition of imports from China, Vietnam or Turkey.

Most textiles, ready-made clothes and fur and leather articles in Moldova are made in lohn, that means investors provide raw material, equipment, technology and models. The relatively cheap and well-skilled labor force represents the advantage and attractiveness of industry.

Moldova’s exports of textiles and items accounted for 63.5 million dollars in January-April 2005, compared with 51.5 million dollars in the similar period of 2004.
The Russian executive has decided to create commercial representations in eight states in the CIS in 2005–2006, including Moldova, Azerbaijan, Armenia, Georgia, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan. Also, a governmental decision calls for closure of Russian commercial representations in 52 states, including in countries such as Portugal, Greece, Romania, Cyprus, Cuba, Korea, Israel, Afghanistan, Iraq, Ireland, Estonia, etc.

The commercial representations will aim to promote the foreign economic policies of Russia, to increase and diversify the exports. Russia is the key commercial partner of Moldova. It absorbed more than 36 percent of Moldovan exports in January-April 2005. Moldova’s exports to Russia accounted for 125 million dollars in the first four months of 2005, by 17.5 percent more than in January-April 2004, while imports amounted to 78 million dollars, up by 14.7 percent.

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