Economic Policies on July 30 – August 30, 2005

Prices and inflation

Inflation could grow next weeks…

Although a deflation of 0.8 percent was registered in June and 1.1 percent in July, most of analysts and economists describe the annual forecast of 8–10 percent as a joke. Firstly, because the autumn and winter mean a higher inflation. This year seems to be special because of the rise of prices of fuels and electricity, so that the inflation will grow. Also, estimates show that the price of natural gas will easily grow under influences of quotations of international market.

…because of higher prices of fuels, electricity and growth of production costs

Firstly, the tariff of heating, which will be probably adjusted (increased) because of higher prices of fuels when the thermal energy will be supplied to consumers, will produce its effects when the statistics will take into account a new value. The way the international quotation of petrol will change is another concern for inflation rate, if taking into account the fact that the gasoline and Diesel oil influence almost all prices included in this rate.

The rise of salaries of public functionaries by about 30 percent, money which will probably increase the consumption, is another potential stimulus for inflation. In addition, the production costs are on the rise, being fueled by a growth of salaries as well. The productivity is on the decline, and the economy will show signs of tiredness, if no investments go to technology. This scenario is not good at all for the National Bank of Moldova (BNM), which focuses first of all on stability of prices.

Financial-bank system

National Bank has reduced the basic interest rate…

BNM has reduced by 0.5 percent the basic rate for refinancing of commercial banks through two-month REPO operations for purchase of state securities, undertaken within open market operations of BNM. Under a decision of the Management Board of BNM, a 12.5-percent annual interest rate was established. The basic rate on long-term credits (for more than five years) was reduced by 0.5 percent down to 10.5 percent a year.

Perhaps, BNM modified the basic rate, following the dynamic of inflation and current conditions of the monetary market. The cumulated inflation for the first seven months is 3.6 percent, after a deflation of 0.8 percent in June and 1.1 percent in July, compared with the forecasted annual inflation rate of 8–10 percent. The reduction of basic rate and decline of inflation will attract lower interests on deposits and, respectively, bank credits. The average interest rate on bank system in July was 12.96 percent (15.7 percent in January), and the average interest rate on credits released by commercial banks was 19.32 percent (21.2 percent in January).

…commercial banks could reduce interests

Under these conditions, the placement of savings as bank deposits becomes more disadvantageous every day, at least from perspective to obtain a visible profit. Analysts forecast the continuation of the trend to reduce the bank interests for the next period. Banks could reduce their interests on deposits in lei in the near future.

This trend may continue, though reductions of interest rates will not have the sizes registered in the first half of this year^[1]. Anyway, the interest rates cannot grow the next period, if taking into account the current juncture and the fact that all other possible points of interest of BNM regarding the evolution of economic indicators will be subordinated to inflation objective from now on.

International reserves of BNM could grow up to 600 million dollars by the end of this year

Moldova’s international reserves rose up to 506.5 million dollars in late July, after a monthly rise of about five percent. BNM purchased 23.3 million dollars on the inter-bank market in July, by about 7 million dollars more than in June. International reserves could grow up to 600 million dollars by late 2005 due to a significant supply of currency on domestic market, mainly generated by remittances of Moldovans who work abroad, and if the trends remain unchanged.

International reserves accounted for 470.3 million dollars in late 2004, compared with 302.2 million dollars in late 2003 and 268.5 million dollars in late 2002. Reserves amounted to 365.7 million dollars in 1998, but they dropped about 2.5-fold after the Russian financial crisis, so that BNM needed many years to recover the position it had lost.

Foreign trade

In spite of interdictions of the Russian Federation…

Food products, alcohol and non-alcohol drinks and tobacco held 36 percent of the total of Moldovan goods for exportation in January-June 2005, by 13.6 percent more than in the similar period of 2004. They were valued at about 190 million dollars.

…the share of food products for exportation is on the rise

The CIS marker remains a priority for Moldova’s food products and alcohol drinks in spite of interdictions of the Russian Federation and some tariff and non-tariff obstacles. Data of the National Bureau for Statistics (BNS) show that the supplies to this market in the 1st quarter of 2005 accounted for 89 percent of Moldovan exports of food products, alcohol, non-alcohol drinks and tobacco.

Exports to the European Union (E.U.) represented more than 5 percent, while supplies to Central and Eastern Europe count for 4 percent. Certain experts say that these markets are excessively protected on one hand, while Moldovan products unfit the European quality standards on the other hand.

Imports rose more rapidly than exports in the first half of this year, respectively by 27.7 percent, compared with 13.6 percent in January-June 2004. Moldova imports about 54 percent of food products, alcohol and non-alcohol drinks from the CIS, 22.7 percent from the E.U., 13.5 percent from Central and Eastern Europe, and the rest from other countries.

…but trade deficit seems to exceed 30 percent of the annual value of GDP

In this context, BNS indicates a trade deficit of about 500 million dollars for the first six months of this year, compared with 312.6 million dollars in the similar period of 2004. Thus, forecasts of analysts who indicated a negative balance of maximum 400 million dollars after six months did not meet the expectations.

Moldova’s trade deficit in January-June 2005 accounted for 1.52 billion dollars (these data do not cover exportation-importation operations of enterprises and organizations based on the left bank of the Dniester river). Exports absorbed 507.1 million dollars in January-June, while imports turned over 1.65 billion dollars.

Moldova’s trade deficit with commercial partners in the E.U. accounted for 191 million dollars in six months of this year, 148.1 million dollars with the CIS, 48.6 million dollars with Central and Eastern Europe. Moldova registered the largest trade deficit with Ukraine — about 190 million dollars.

Taking into account the decline of profit margin of exporters and reduction of investments in exporting branches, we consider that the trade deficit will exceed 30 percent of GDP by late 2005. We run the risk to be witnesses of run of foreign investments and depreciation of Leu. It looks like a scenario, but not an impossible one.

Moldova and the world

Moldova ranks the last places in the CIS regarding several economic indicators

According to data of the CIS Committee for Statistics, Moldova ranks the last places in the CIS regarding some economic indicators registered in the first half of 2005, including the development of transportation, industry or inflation rate.

Posting a 19-percent decline of cargo transportation for the first half of this year, Moldova closes the CIS top regarding this indicator. Only Kyrgyzstan and Ukraine also registered declines of cargo transportation, respectively by 3.9 percent and 1.9 percent. The rest of CIS members increased the transports, while Georgia posted the highest growth — by 9 percent.

As for industrial growth, Moldova ranks the 3rd place in the bottom of the top with a 4.6-percent rise in the 1st quarter of this year, being ranked before Kyrgyzstan -9.8 percent and Russia +4 percent. Azerbaijan reported the highest industrial rise of 20.1 percent.

Moldova ranks the 7th place among 10 members of the CIS which presented data on consumer price index in the inflation “top”. Moldova registered a 4.7-percent inflation rate in the first half of this year, after Azerbaijan 4.8 percent, Ukraine 6.4 percent, and Russia 8 percent. Georgia registered the lowest inflation rate — 0.7 percent.

↑ Interests decline when inflationary pressures disappear.

e-democracy.md