Economic Policies on September 1–15, 2006

Inflation and prices

Inflation rate for eight months of this year is about 8%…

The inflation rate [Consumer Price Index — CPI] in August was 0.8%, while the cumulated rate for eight months of this year was 7.9%. In comparison with the precedent month, tariffs for services granted to population have grown by 5.9%, prices of manufactured goods have risen by 1.9%, while those of food products have declined by 3%. The natural gas tariffs rose the most in August — by 27.4%, followed by urban passenger transportation tariffs which grew by about 18%. Indeed, the calendar of administrated prices was declared by Government and a series of price rises were operated in the table of services provided to population.

…even some food products have become dearer

In addition, prices of fuels have grown by 5.3%, while of building materials have increased by 2.8%. Prices of a number of basic products have also grown, including of eggs by 14.3%, fowl by 3.4%. Per total, the CPI for food products has declined because prices of vegetables have dropped by 34.3% in the period concerned while of fruits and berries have declined by 6.3%. The Government and the National Bank will fail the 9–10% inflation rate target for this year and, therefore, they updated their forecasts. Some reports and surveys show that Moldova’s population is very concerned with eventual new rounds of price rises.

Public finances

The 2007 budget underwent a first stage…

The Government has worked out the draft state budget for 2007 and the 2007–09 Medium-Term Expense Framework in the period concerned. The state budget for next year is built on a 4% GDP growth, up to 46.6 billion lei (3.5 billion dollars), a 10.5% average inflation rate and an exchange rate of 14.6 lei per dollar.

It is interesting that the balance of the state debt administrated by Government will grow by 772.7 million lei in 2007, compared with what is expected at the end of 2006, up to about 15 billion lei (more than 1 billion dollars) in late 2007! Also, the draft approved by executive includes a budgetary deficit of 233 million lei or 0.5% of GDP.

State budget collections grew by about 17% in January-August 2006…

At the same time, more than 6.5 billion lei was raised in incomes to the state budget in January-August 2006, by about 17% more than in the similar period of last year. As much as 25.5 million dollars was paid to honour commitments on external loans contracted by Moldova, of which 13.9 million dollars in principal payment and 11.6 million dollars in interest on foreign loans.

Foreign trade

Moldovan exports down by about 10%…

Moldovan exports turned over 543.5 million dollars in January-July 2006 and declined by about 10% compared with the same period of 2005. Exports to CIS members have declined the most — by 20.3%. This fact reduced their share in the total of exports from 50.4% in January-July 2005 down to 44.3% in the same period of 2006. The reductoon of exports was mainly influenced by a delcine of deliveries of food products by about 12%, while they hold the largest share in the total of exports — over 46%.

At the same time, exports to the European Union amounted to 174.1 million dollars and grew by 0.4 percent compared with the similar period of 2005. Exports to Central and Eastern Europe amounted to nearly 86 million dollars and rose by 25.6% compared with January-July 2005. At the same time, imports exceeded 1.388 billion dollars in January-July, by 15.5% more than in the same period of last year. The considerable decalage between evolution of exports and imports produced a trade deficit of about 845 million dollars, by 40.3% more than in the same period of 2005.

Government is drafting strategies…

It should be mentioned that the Ministry of Economy and Commerce launched last week the Strategy for Attracting Investments and Promoting Exports for 2006–2015. We hope that the new strategy will be aggressive enough, the way it should be for a country which has to recover a lot regarding trade relations. It should mostly promote Moldovan enterprises willing to represent Moldova on European market after the model of other new memebers, insisting on markets where exports have declined.

…but exports do not progress

At the same time, the Moldovan exports to the E.U. have progressed very slowly or even declined on some positions, though Moldova benefits of the Generalised System of Preferences GSP+ starting January 1, 2006. Governmental officials have also noted that the implementation of GSP+ in foreign trade did not have the expected results. Moldovan exporters did not recover after the “cold shower” applied by the Russian Federation on Moldovan wines and food products and they failed to comply with most of quality standards in order to make their production competitive on the E.U. market.

So, the Government should “ring the bells” in these directions. We hope that the Strategy for Attracting Investments and Promoting Exports for 2006–2015, which was recently launched by Government, will mark the passage from drafting some strategies to their implementation and will not have the fate of the precedent documents forgotten on shelves of many governmental structures.

Potential macroeconomic forecasts

Moldovan economy in eyes of authorities and foreign analysts…

The recent macroeconomic forecasts on Moldova launched by foreign financial institutions differ with consistent percent sometimes, though nobody raises doubts against their capacity of analysis. Thus, if Moldovan officials speak about an annual inflation of 10.5% for this year, representatives of foreign institutions advance a price rise of nearly 12%. While the IMF estimates a 3% economic growth for 2006, the authorities indicate 4%.

We have an open economy where the rise of consumption and internal demand is expressed in foreign deficits and this fact is also found in estimates of independent analysts. Theoretically, we do not rule out the possibility of some quality advances reflected in a better domestic production, but these are suppositions only at present. The basic inflation has grown much while pressures of incomes and salaries still exist and they are fuelled by other factors.

Government’s estimates for 2006:

Economic growth: 4%
Current account deficit: 9% of GDP
Inflation: 10.5%

Estimates of IMF:

Economic growth: 3%
Current account deficit: 10.9% of GDP
Inflation: about 12%

Risks: vulnerability of exports, perpetuation of inflationist expectations, rapid rise of consumption credit, current account deficit and foreign debt. The things are not much better on labour market, as there is a trend there of restraining the number of salary earners especially in wine industry. On the other hand, a higher number of salary earners in building sector is anticipated.

Overall economic growth in 2006 could exceed 5%…

At the same time, IMF analysts say that the overall economic growth in 2006 will be 5.1% on average, by 0.25% more than forecasted half a year ago. They say that the economic growth could be influenced by inflationist pressures, high prices of oil and a potential decline of economic growth in the U.S.

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