Economic Policies on September 27 – October 10, 2005

Prices and inflation

Inflation could be 8–10 percent or a little bit higher…

According to preliminary data, the inflation rate in September was 1.2 percent. A 4.9-percent cumulative inflation rate was recorded in January-September. The consumer price index (CPI) of food products dropped by 0.3 percent, CPI for manufactured goods rose by 2.8 percent, while tariffs of services provided to population increased by 0.7 percent.

Taking into account the governmental annual inflation target, we think that it could be 8–10 percent or a little bit higher at the end of this year, compared with 12.5 percent in late 2004. Consumer prices rose by about 12 percent from August 2004 to August 2005, and the growth was mainly generated by rise of administrated prices and oil price on international market.

The National Bank of Moldova (BNM) adopted last June a synthetic indicator of inflation — basic inflation — which is used as basis to draft monetary-valutary policies, macroeconomic forecasts, and to reduce the price rise level.

Financial-bank system

Officials say that bank sector needs revolutionary reforms…

“The Moldovan bank system must be reformed as soon as possible, in line with laws on market economy, while bankers must implement these reforms in a revolutionary manner, so that to reduce interests down to 15 percent in lei and 9 percent in foreign currency,” said Premier Tarlev at the end of the forum of businessmen “Investment Climate in Moldova”^[1]. According to data of BNM, the average interest rate on bank credits in lei was 18.7 percent and 10.7 percent for loans in foreign currency in August. Interest rates on credits in national currency declined by about 2 percentage points this year, while rates on loans in foreign currency dropped by about one percent.

On the other hand, Mike Davey, regional director of the European Bank for Reconstruction and Development (EBRD), said that the domestic bank system is closed and rigid and the lack of known international or regional banks is visible on market. “BNM argues that the bank sector is open for foreign investments and 52 percent of properties belong to foreign firms, but they are registered in offshore zones,” the EBRD official noted. “Moldova is part of few countries in Europe where the presence of some serious foreign banks is not felt. There are no other serious financial institutions in Moldova except for EBRD and Western NIS Enterprise Fund”, Davey estimated.

Labour market

Government promises to increase salaries…

Passing some amendments and completions to the draft law on system of calculation of basic salaries in budgetary sector, the executive plans to double the minimum salary, from 200 lei (15.8 dollars) up to 400 lei (31.8 dollars), starting December 1. In addition, this draft law calls for growth of medium salary in budgetary sector by about 33 percent next year. Thus, the salary of teachers will grow by about 40 percent, wages of doctors will increase by 25 percent, social assistants by 33 percent, and farmers by 50 percent.

The cost of this draft is estimated at about 4.3 billion lei (341.43 million dollars). According to data of the National Bureau for Statistics (BNS), the medium salary of a budgetary employee counts for 981 lei (77.9 dollars), while a worker in real sector earns 1,520 lei (120.7 dollars). Workers in agriculture sector earned the lowest monthly medium salary in January-August — 583 lei (46.3 dollars). The medium salary of teachers accounted for 875 lei (69.5 dollars), while doctors and social assistants earned 986 lei (78.3 dollars). The highest salary was registered in the financial-bank sector — 3,430 lei (272.3 dollars).

Foreign trade

Russia stops imports of Moldovan wines…

Moldova did not relieve yet the exportation of vegetal and animal products to Russia. Even more, the customs service of the Russian Federation has stopped issuing excise stamps for Moldovan wines. Under these conditions, exports could drop a lot compared with last year and, respectively, the presence of Moldovan wines on Russian market would be essentially reduced, a fact confirmed by Russian press reports as well.

About 80 percent of Moldovan wine exports go to the Russian market. The Russian Federation imports more than 2,500 sorts of wines from Moldova, while 60 percent of wines consumed by Russia in 2004 were made in Moldova. Moldova exports wines and cognacs worth over 250 million dollars to the Russian Federation a year.

…while trade deficit is on a continued rise

The trade deficit is on a free rise, while situation of exporters is worsening. This situation lasts for several months and no signs of improvement are available. Data released by BNS recently show that the trade deficit for January-August is by some 40 percent higher than the value of the same period of 2004.

As for example, the trade deficit turned over 705.2 million dollars in eight months of this year, since imports rose by 30.8 percent while exports grew by 11 percent. Many economists say that the trade deficit could turn over 1.1 billion dollars by late 2005, if this trend remains stable.

Business environment

Corporate tax in Moldova is one of the lowest taxes in the region…

Many foreign investors who shared their experience at the Chisinau forum Moldova Exposed to the World Business said that Moldova holds great investment opportunities but investors still face some obstacles on way of their business such as fiscality, ambiguity of legislative framework, etc.

However, we do not believe that fiscal burden is hard for investors, since the 18-percent tax is one of the lowest taxes in the region. These are institutional pressures, rather than exaggerate fiscal pressures. Moldova does not face a deficit of laws, and even more, we can speak about a legislative inflation, a deficit of fair interpretation of laws in justice system which is often regarded as corrupt and bureaucratic, as well as about a chronical deficit of execution of judgements.

As for example, reports of the World Bank show that about 80 percent of interviewed enterprises in Moldova describe the judiciary system as “unfair, expensive, corrupt, and incapable to impose respect for law.” Elsewhere, many investors consider that justice in Moldova is unsecure for them, since courts protect only state institution and state.

Government should stop concessions and fiscal vacation…

On the other hand, the Government should stop concessions and fiscal vacations, restructuring or freezing of debts of enterprises. The elimination of firms with arrears will increase the crediting and, respectively, the investments will also grow. Closure of non-performant societies could create a “virtuous circle” in which the rapid development of economy will give an impulse to financial intermediation in real sector.

In addition, specialists say that elimination of firms with arriars will increase the competition in real sector and will improve financial performances of viable firms. Thus, banks will be able to reduce risk margins and to lower interests. In their turn, enterprises will have access to cheaper credits, loans which are so necessary for investments in production processs.

Insurance system for business is underdeveloped…

On the other hand, we must admit that the insurance system for business is underdeveloped, though a sufficient number of insurance companies work on market, since only few of them provide a wide range of services, and their costs are very high. In addition, they are not very interested to insure certain risks, especially in agriculture.

Issuing of documents is not very operative…

The low operativeness of the document issuing procedures at customs stations needed for exportation/importation operations, insufficient equipment and training of customs officers and, not the last, the high share of goods imported without paying all duties or what we name contraband are some obstacles on way of foreign investors. As for example, the West needs only three days to issue documents for importation of production, and only two days for importation. Instead, we need many days or even weeks.

Many goods are illegally imported for a low price and quality, creating an unfair competition for local producers. Real competition principles must be ensured or free entrepreneur in Moldova is limited only with trading in streets or at stalls. In addition, the problem of uncontrolled border (Transnistria). According to informal sources, the volume of foreign investments allocated to Moldova the past several years is estimated to be smaller than value of international trafficking in drugs or smuggling of goods which penetrate our country.

Bureaucracy and small salaries harden implementation of reforms…

Bureaucratic elements and low salaries of functionaries involved in legislative regulation process is a cause which hardens the implementation of regulation reform or “guillotine” law. Earlier, the granting of paid-for services (regulation taxes, payments for expertise, instructions, issuing of certificates) was a source of extra-budgetary income for most of public regulation authorities, while the implementation of “guillotine” or regulation reform limits these sources and possibilities of functionaries to raise additional revenues. This situation creates clear reasons for participants to delay it.

Moldova in the world

Moldova faces shortages regarding economic competitiveness…

The World Bank has approved the financing of the project “Improvement of Competitiveness in Moldova”, drafted at the initiative of the Moldovan government on basis of the Economic Growth and Poverty Reduction Strategy Paper (EGPRSP). The financing will count for 9.8 million dollars, of which half will be released as preferential credit under IDA (International Development Agency) conditions, while the other half will be allocated as grant.

The project aims to enhance competitiveness of enterprises through a better business environment; modernisation of Metrology, Standardization, Testing and Quality System (MSTQ); development of quality and control insurance mechanisms at level of enterprise; facilitation of access to financing. The project will encourage the creation of a competitive market environment with the purpose to maintain the macroeconomic stability, economic growth, and creation of jobs, as well as growth of competitiveness of national enterprises at local and international levels.

↑ President Voronin has also urged commercial banks at the forum of businessmen “Investment Climate in Moldova” to reduce interest rate son credits granted to businesses

e-democracy.md