Economic Policies on July 4–29, 2005

Prices

Season reductions…

The consumer price index (CPI) dropped by 0.8 percent in June compared with May 2005, mainly due to the season-related decline of prices on food. Indeed, summer months register significant declines of prices on food, and thus a deflation. The inflation in June validated our forecasts and a deflation was registered for the first time this year. The cumulated annual inflation rate was 4.7 percent in the first half of 2005.

…affected by structural factors…

The recent continued rise of fuel prices will influence most sectors of the national economy. In addition, dangers for the annual inflation target of 8–10 percent do not come only from potential rises of tariffs for public transportation, natural gas or electricity after increase of tariffs by Gazprom. Reflected in many of consumer prices, the price of fuel is also a serious threat. As a general rule, the rise of fuel prices (oil products, natural gas) will create economic and psychological premises needed for boosting prices on most food and manufactured goods very soon.

…and less so internal factors

The cabinet decision on raising VAT from 5 percent up to 20 percent for agricultural products supplied by local producers to domestic market raises doubts over level of macroeconomic indicators. The Government needs budgetary resources for sure. However, the additional incomes which will be raised from this tax will be insufficient. If it finds them from other sources than VAT, we will probably register an inflation rate lower than 10 percent in 2006. In addition, the planned reduction of income tax and corporate profit tax will also affect the potential inflation for 2006. We think that the inflation rate for 2006 will also depend on fiscal policy that the Parliament is to adopt in this period.

Indicators, Prices, 2005	January	February	March	April	May	June
Inflation rate, % compared with the precedent month	1,2	2,1	0,8	1,4	0,1	-0,8
Growth of prices on food, %	2,6	2,8	0,9	1,8	-0,3	-2,3
Growth of prices on manufactured goods, %	0,4	0,6	1,0	1,3	0,6	0,4
Growth of tariffs on services rendered population, %	-0,7	2,4	0,2	0,8	0,1	0,8
Inflation rate, %, last 12 months	12,9	12,1	13,6	15,0	14,5	13,5
Cumulated inflation rate, % since early 2005	0,6	0,2	0,4	5,6	5,7	4,7

Sources: BNM, BNS

Financial-bank system

International reserves rose…

The international reserves of the National Bank of Moldova (BNM) rose by 9 million Dollars in June, up to 482.6 million Dollars. The central bank had an active enough participation in the interbank currency market in June, too, as it purchased about 16.4 million Dollars. BNM bought about 65 million Dollars on the interbank market in the first half of 2005. The continued rise of currency supply was mainly fueled by remittances of Moldovans who work abroad. Independent experts forecast that Moldovans will transfer more than 700 million Dollars through bank channels alone this year.

According to a study undertaken by the International Organization for Migration (IOM), about 600,000 Moldovans work abroad, or 40 percent of the economically active population at end-2003, and more than 70 percent of them work illegally. Most of them send money home to cover current consumption spending.

Commercial banks continued the modest reduction of interest rates, so that the volume of credits issued to population was on the rise in the past two months, especially consumer loans. We think that interests on deposits and credits will not drop anymore because of intensification of inflationary expectations.

…due to instability of exchange rate

The Leu/Dollar exchange rate did not change a lot in June-July 2005, while the average rate was 12.59 Lei per Dollar. The “advance-collapse” evolution of Euro versus Dollar was mainly influenced by external factors, so that the Leu/Euro exchange rate changed significantly and the Leu rose against Euro up to 15.3 Lei per Euro in late July.

As for the further “fate” of Leu, BNM will promote a policy aimed to make the exchange rate more flexible, in the context of maintenance of a controlled floating regime. Perhaps, the demand or supply will be influenced, but the exchange rate will be “floating”. Even more, the Leu is on the rise and this would affect the exports.

Labour market

More than half of Moldova’s population spends less than one Dollar a day…

The average salary in economy accounted for 1,219 Lei (about 97 Dollars) in January-June 2005, by 16 percent over similar period in 2004, but it dropped by 4 percent compared with May 2005, when the average salary in economy amounted to 1,270 lei. According to a newsletter entitled “Poverty in the Republic of Moldova-2004” produced by the Economics and Trade Ministry, every seventh citizen of Moldova or 14.7 percent of population lives below poverty margin, while every forth citizen or 26.5 percent of population lives below extreme poverty line. The poverty level was calculated on basis of consumption spending for a person of medium age compared with the minimum consumption basket. The monthly minimum living average was 670 Lei in 2004.

According to studies undertaken by the World Bank and UNDP, Moldovans are the poorest nation in Central and Eastern Europe, earning a minimum salary of 13 Euros or 200 Lei a month. The international standards accept a poverty level for a one-Dollar daily income, but Moldovans spend 0.8 Dollars or 10 Lei a day. As much as 25–30 percent of active people in Moldova live below poverty line. They do not eat 2,500 calories a day through the minimum consumption basket.

…while lack of education of labour force is a cause of poverty

Many local analysts fear that the low education level of human resources in Moldova is one of the causes of poverty. Agriculture and processing industry, which are exclusively based on manufacturing, continue to maintain the labour force at a low level. Perhaps these products do not have a high added-value. The big problems faced by Moldova on foreign markets have their origins here.

Indicators Housekeeping, 2005	January	February	March	April	May	June
Medium salary on economy, Dollars		89,1	95,6	101,4	101,6	97
Growth of retail sales of goods, %, cumulated for this year	6,1	2,8	3,0	5,5	6,4	7,3
Growth in services rendered to population, %, cumulated for this year	6,8	6,0	5,3	7,4	8,3	9,1

Source: BNS (National Bureau for Statistics)

Trade

Wine production accounts for 1/3 of Moldovan exports…

Moldova exported production worth 424 million Dollars in January-May 2005, 11 percent over the similar period of 2004. Imports accounted for 819 million Dollars, and rose by 31.3 percent compared with January-June 2004. The trade balance deficit for the first five months of 2005 amounted to 395 million Dollars, and grew 1.6-fold, compared with the similar period of 2004.

The wine production represents 30.4 percent of overall exports for that period or 128.8 million Dollars. Moldova exported 25.4 million deciliters of wine, which is a 15-percent rise. According to competent specialists, the growth of exports was a result of the rise of production. Moldova ranks the 11th place in the top of the biggest wine exporters in the world. Moldovan wines account for 1.2 percent of the world wine export.

Real sector

Industrial production posted a modest recovery…

Industrial enterprises of all forms of property made production worth about 9.3 billion Lei in current prices in January-June 2005. The industry posted a 4.6-percent growth for the first half of this year, compared with the similar period of 2004. Also, the added- value in industry grows more slowly than the production value because of the faster rise of production costs (especially of energy).

The slowdown in the growth pace in industry sector in the latest period is a result of the low capacity of the market, rise of stocks, obsolete equipment of enterprises, and low level of investments, rather than of the use up of extensive factors. Enterprises monitored by the Ministry of Industry and Infrastructure registered a 7.1 percent growth in the first half of this year, compared with the 4.6 percent rise on industry in general. The monthly growth dropped over 2-fold compared with the similar period of 2004, when a 13.1 percent rise was registered.

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