Economic Policies on June 15–30, 2006

Real sector

GDP is diving…

The economic growth for the 1st quarter of 2006 (January-March 2006) exceeded 6% (about 6.2%). According to data of the National Bureau for Statistics (BNS), GDP accounted for about 8.45 billion lei (635.7 million dollars) in January-March 2006. This indicator was 8.2% in Moldova in January-March 2005 and 7.1% in 2004. Both the Government and the International Monetary Fund forecast a slower evolution of GDP for 2006, down to 6.5%.

Moldovan industry is regressing in continuation…

According to BNS accounts, the industrial production declined by about 7% in January-May 2006, compared with the similar period of last year, down to 7.8 billion lei. The reduction of industrial production was particularly marked by a crisis in wine making sector. The wine industry, which covers more than 13% of the Moldovan industry, declined by 38% in the first five months of this year and therefore reduced the overall industrial production by 7.3%.

At the same time, producers of distilled alcohol drinks have reported a 17% decline, oils and fat — 12%, tobacco products 21%, machines and equipment — 14%, editing and polygraph works — 10%, fruit and vegetable processing and canning — 7%. At the same time, some activities have grown in the period concerned, but this did not cover the declines in basic branches of national economy.

…but officials say that things will change in agriculture

In spite of all problems faced by agriculture, the Ministry of Agriculture forecasts a 4% rise of agricultural production for this year, anticipating the growth of some indicators in several sectors. According to forecasts, the livestock will grow the most — by 7.4%. The agricultural production was valued at 9.19 billion lei in 2005, by only 1% more than in 2004.

Tax policy

Government tables some amendments to tax policy for 2007…

The executive proposes among others that the annual tax exemption for individuals be 5,400 lei in 2007, compared with 4,500 in 2006, while the exemption for maintained people grow from 840 lei up to 1,440 lei. The cabinet of ministers has already approved some amendments and completions to the tax policy for 2007.

In addition, the Government has approved some amendments seeking, in particular, the reduction of income tax for individuals, adjustment of excise stamps for weak alcohol drinks to inflation rate. Also, the document exempts from income tax the economic agents that deposit their money in commercial banks for more than three years.

The state will encourage businesses making capital investments, and it will annul the VAT for building of residential blocks starting 2007. In this context, the new taxation system for different categories of real estate at their market value will be gradually implemented starting 2007. The government has excluded provisions on taxation from effective legislative acts, as they are part of the Tax Code.

Prices in inflation

Moldova is threatened by inflation clouds…

The inflation rate exceeded 7% in January-May 2006 after it was 5.5% in the similar period of 2005, growing up to 7.2%, as the monthly rate of 1.2% has revealed the highest price rise registered in May after 2002. This evolution was related to higher prices of food products, especially fruits and vegetables, as predicted by officials as well.

A bad news regarding inflation has come from oil market, where international rises have made domestic operators increase the gasoline and Diesel oil prices and they will likely do the same the next months. The state of things regarding inflation will be worse if the gas giant Gazprom increases the natural gas price for Moldova.

Banking sector

Banks in Moldova are capable to prevent a system crisis…

Although the exact size of loans released by domestic banks to wine makers (who are among biggest consumers of credits) is unknown, many analysts have hinted that the banking sector of Moldova could enter a system crisis after Russia has restricted the importation of Moldovan wines. However, many bank officials have denied these fears at a working sitting convoked by chief of state with heads of commercial banks last week.

Banks in Moldova hold enough resources to remedy any consequences of the crisis faced by wine sector after the Russian Federation has restricted the Moldovan wine exports. Even more, the National Bank governor has announced that the share of credits released by commercial banks to the wine and vine sector covers only 8% of their assets (more than 100 million dollars) or 14% of the total volume of granted loans. On the other hand, bankers decided that it is very necessary to take some intense individual measures with enterprises, aimed to establish a strategy on their further development, as well as bank assistance directions for the vine and wine sector.

Their assets grew by over 7.5% in period concerned…

The total assets of the Moldovan banking system grew by over 7.5% in the first five months of this year, up to about 19.37 billion lei (approximately 1.46 billion dollars). The assets have grown by about 35% compared with the similar period of 2005. Bonds of banking system have grown by 7.7% by late May, up to 16.15 billion lei, while the total normative capital of banks has risen by 7.3%, up to 3.08 billion lei.

According to BNM statistics, the total credits have grown by 12.73%, while total deposits have risen by 5.54%, up to 14.5 billion lei. At the same time, deposits have dropped by 119.8 million lei compared with late April, this being a consequence of some allegations that the banking system will face a crisis after the Russian Federation has restricted the Moldovan wines.

…while state’s currency treasury is on the decline

At the same time, the currency reserves of BNM declined by over 9 million dollars (about 1%) in June, down to 636.2 million dollars (8.44 billion lei). According to data of the central bank, the currency reserves declined after the Government has honoured some external payments, due to interventions of BNM on currency market and oscillations of leu/dollar exchange rate.

The reserves have especially declined after they rose by 37.91 million lei in May, as the first part of about 17 million dollars from the 118.2 million dollars credit of the International Monetary Fund entered the account of the central bank and due to currency purchases of the National Bank on domestic market. The programme with IMF stipulates currency reserves in the amount of 750 million dollars for this year, by 152.6 million dollars more than in late 2005.

Report on activity of National Bank in 2005 released…

According to the report, BNM purchased foreign currency in the amount of 174.8 million dollars last year in a move to calm down excessive fluctuations of national currency. As a result, the state’s currency reserves have grown by 127.1 million dollars or 27%, up to 597.4 million dollars in late 2005.

These operations have increased the monetary mass by over 31%, the supply of money in circulation by 23.5% and the bank reserves by over 50%. The monetary mass M2 increased by 36.7% last year, including deposits in lei by 47.7%. Deposits in foreign currency calculated in dollars have grown by 27.4%. Evolution of monetary mass M2 has increased the monetisation level up to 30.3%, compared with 25.4% in 2004.

The surplus of foreign currency on domestic market was the main problem of the state bank in 2005. The essential rise of the volume of remittances from abroad and the growth of collections from exports in 2005 should challenge an excessive appreciation of the national currency versus main convertible currencies. Under these conditions, BNM carried out a series of operations last year to purchase the surplus of currency through direct issues, in order to minimise the effects of the currency supply.

Labour market

Medium monthly salary on economy up by 27% in January-May…

According to BNS data, the medium monthly salary in January-May accounted for 1,515 lei and grew by 27% compared with the similar period of last year. The medium salary in the budgetary sector amounted to 1,282 lei in January-May 2006, while in the real sector of economy it accounted for 1,643 lei.

Employees of the financial-bank sector have earned the highest salaries in the period concerned — 3,583 lei, followed by workers in transportation and communication sectors — 2,385 lei, constructions — 2,008 lei, industry — 1,911 lei, public administration — 1,671 lei, etc. At the same time, employees of agriculture and forestry earned the least — 683 lei, fish breeding — 1,076 lei, education — 1,182 lei, healthcare and social assistance — 1,226 lei.

Foreign sector

Moldova seeks external help for wine crisis…

The International Organisation of Vine and Wine (OIV) proposes its assistance to Moldova and Georgia after the Russian Federation has restricted the wine imports. The three countries are signatories to the April 3, 2001 Agreement on creation of OIV and this document obliges OIV to mediate the conflicts if a signatory party appeals to this international organisation. The Moldovan and Georgian Ministries of Agriculture have recently appealed to OIV, raising concern with Russia’s restrictions.

The OIV is an intergovernmental organisation of a scientific and technical nature or recognised competence for its works concerning vines, wine, wine-based beverages, table grapes, raisins and other vine-based products. The organisation was created on April 3, 2001 and has 41 member countries (inclusively Moldova, Russia and Romania) and 5 observer countries (inclusively Ukraine) and observer organisations (national and international vine and wine federations and associations).

Romania’s entry in E.U. will poise trade balance with Moldova…

Romanian officials say that the January 1, 2007 scheduled entry of Romania in the European Union (E.U.) and the suspension of the free trade agreement between Moldova and Romania will poise the trade balance between the two states. The foreign trade between Romania and Moldova turned over about 412 million dollars in 2005, with a negative balance of 240 million dollars for Moldova. Moldova’s exports to Romania totalled 85 million dollars, while imports turned over 326 million dollars.

The situation could change after January 1, 2007, as the Romanian export will be taxed in the same measure as other E.U. member states, while Moldova benefits of the GSP plus system which allows the exportation of about 7,200 names of products to the E.U. without paying customs duties. The new trade regime (if Moldova and Romania sign a bilateral agreement) will affect the bilateral trade at a first stage until situation will normalise and companies will get used to the new taxation system. Exports from Romania will be influenced most as they will be in a stronger competition with those of other European countries besides new taxes.

Once Romania joins the E.U. on January 1, 2007, Bucharest will withdraw from all free trade agreements, including with Moldova. Romania’s entry in E.U. will mean the entry in a new legal framework of foreign commercial relations. Besides the Central European Free Trade Agreement (CEFTA), Romania has signed free trade agreements with Moldova, Turkey, Israel, Serbia-Montenegro, Albania, Bosnia and Herzegovina, and the European Free Trade Association. Chisinau says that the suspension of the free trade agreement with Romania will not affect the trade exchanges, being optimistic to obtain an asymmetrical trade regime with the E.U. in 2007.

e-democracy.md