Economic Policies on December 6–19, 2005

Economic year 2005 — preliminary evaluations

Economy is on the continued rise…

Although preliminary final data are unavailable, it is sure that the economic growth pace will make 2005 a special year in the evolution of Moldovan economy and any spirit must recognise this thing, no matter how critical it is. We had a very good agricultural year, with a rich crop of cereals. Also, the industrial production rose by 9.1 percent (truly, in January-September 2005, but the trend will continue the entire year). However, this growth pace will unlikely be maintained.

…while inflation could meet governmental forecasts…

Inflation could fit the limits of 8–10 percent forecasted by government for 2005, but we will be able to report about this only at the beginning of the year, when preliminary data for the entire year will be available. However, the inflation rate in November was 1.9 percent, while the CPI (Consumer Price Index) for 11 months of this year was 8.5 percent.

Though exports rose, they are little competitive…

Exports have grown, but they remained little competitive, while imports exploded after the rise of the internal purchase power. As a result, the trade deficit is on the rise. The consumption is based on credit and imports, while constructions developed mainly on money of Moldovans who work abroad. The consumption boom and declining interests on deposits have a negative impact on domestic savings.

…while key areas for long-term growth are underfinanced…

On the other hand, we have key areas for long-term growth which are much underfinanced (research and development) and we have phenomena with perverse effects (consumption, low interests on deposits, etc.), phenomena which affect the quality of economic rise.

…due to lack of structural changes…

Indeed, almost nothing has changed from structural point of view. The agriculture remained as undeveloped and extensive as before, massive imports have a negative impact on the deficit of current account, while as regards constructions their financing is sporadic, rather than programmatic and sustained, and it depends on the international labour market in a big measure.

Business environment

Business environment was marked by both accomplishments and by failures in 2005…

We attended a series of business roundtables and forums. The meetings discussed with the government the future of investments and private sector in Moldova. Businessmen tabled concrete and judicious proposals such as adoption of a law on protection of competition, mainly for protection of domestic market of non-qualitative imported goods.

Forecasts for business in 2006…

If Moldovan firms do not focus to enhance the productivity in 2006 and in future, they will face serious problems: the rise of productivity must be our goal. This should be one of strategic priorities of Moldova in 2006. At the same time, Moldova must also increase its capacity to absorb funds, in order to increase the capacity of absorption of funds. It is limited and results from the fact that we cannot define clear investment projects at this moment.

Privatisation

Privatisation developed slowly and defectively…

The transparency of privatisation worsened in 2005. The example of the Cojusna winery is meaningful in this context, as the plant was privatised after a long period of secret negotiations. The fact that conditions of the privatisation contract are not made public, rather than the proper privatisation, raises concern: price, obligations of investor towards salary earners, schedule of future investments.

In general, we must say as regards privatisation that what has happened in the past years was rather a sale of state-owned assets at counter because few objectives of privatisation have been fulfilled. We mean the optimisation of exploitation, improvement of living standards, creation of jobs, etc.

Bank system will have to review its crediting policy…

Year 2005 for banks in Moldova was a period when the savings was blocked. As for example, the savings in banks in October declined visibly compared with crediting and this difference continued in November. This is a dangerous trend that banks will have to stop early next year. On one hand, the competition says that if we want to release better credits, we must lower the interests and offer more attractive interests for deposits on spring, in order to attract savings.

Labour market

Massive migration of population continued in 2005 as well…

The intense migration of workers abroad continued in 2005, too. However, the unemployment rate rose though the phenomenon of intense migration of population to other countries was predominant this year as well, and this seems to be a paradox.

It may be presumed that a large part of population in rural areas faces a hidden form of unemployment; this is what we may name “rural overpopulation”. The marginal negative efficiency in agriculture would be the economic interpretation of this overpopulation.

Although many people in villages cannot use their capacity of work appropriately, the cost of making a job and cost of life in cities make them stay in rural areas. Youths try their chances by migrating to the urban environment, holding the opportunity to obtain a higher professional education.

There is also the alternative to leave for work abroad; this opportunity is used by many citizens due to the very high difference of salary that compensates the costs of move to other country; a strictly economic analysis of cost-benefit favours the external migration in most of cases.

Agriculture sector

Taxation in agriculture…

The agriculture sector did not enjoy much assistance from the state this year as well. Even more, agricultural producers often complained that the state undertook many fiscal experiments on fields and finished production. We consider that the consolidation of family farms should be the priority of year 2006 and for future in general. We cannot tax them before encouraging them, especially because subsidies for agriculture are insignificant in 2006.

Like in other cases, the success of a fiscal measure (we mean the introduction of a 20-percent VAT for agricultural production in the 2006 budget) depends on how the tax is applied. If the VAT is increased for the farmer from market who sells 2–3 kilograms of apples from his own garden, we will see social tensions rather than larger budget revenues.

The taxation of agricultural fields is meaningful because the land has an economic value. However, this tax must not be higher than the capacity of many farmers to pay taxes — in agriculture of sustenance. However, taxation of production which is not sold on market (self-consumption) is much more than disputable.

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