Economic Policies on November 1–15, 2006

Inflation and prices: potential forecasts

Inflation rose by 1.6% in October, risks will persist in continuation…

Inflation rose by 1.6% in October compared with September. Prices of almost all groups of goods have grown: food products (2.4%), manufactured goods (1.4%) and services granted to population (0.6%). The cumulated inflation rate reached 10.8% in ten months. Prices have grown more compared with last year, up to 6.5% in ten months. As a rule, a stronger price rise is observed at end of year, so that inflation will exceed the 12% updated objective of the Government.

Dangers capable to perpetuate inflation may come from a relaxation of tax policy (reduction of some taxes) and rise of salaries (both in public sector and in private sector). The rise pace of prices may also influence inflation when authorities are trying to correct the trade account deficit or when the calendar of administrative prices is uncertain. The evolution of prices of food products and manufactured goods is also a risk in maintaining a target inflation rate. Another danger would be a bad agricultural year 2007. Eventual rise of petroleum price could raise prices though prices of fuels have insignificantly declined on domestic market.

Labour market

300-dollar medium salary on economy and creation of 300,000 jobs: myth or reality…

The Government approved earlier this month some measures aimed to increase the medium monthly salary on economy up to the equivalent of 300 dollars and to create 300,000 new jobs by 2009. In this context, we come with some commentaries on objectives of the executive.

We consider that the salary quota could be real only if the economy grows by at least 9–10% a year the next period, when the productive sector truly produces and keeps the step with internal demand. Of course, this situation would enhance the productivity and budget incomes, which would increase salaries. But these conditions, better saying the economic conjuncture in Moldova, are not observed for the time being.

We consider that observers of the economic phenomenon in Moldova will contradict the optimistic estimates of officials for sure. The puffed rise of salary up to 300 dollars is a very good thing and we should be happy but we do not know how realistic this figure is and probably it is rather a mathematical finding. We would be cautious when giving such figures for real economy because of various reasons, including those mentioned earlier. In addition, the smallest Moldova is, the most various are salaries which are not identical at all. We have various circumstances and very various salaries on labour market.

While using the “medium salary” indicator we must take into account the fact that its relevance is reduced because of regional-economic polarisation. For example, the medium salary paid in the Chisinau municipality in 2005 exceeded the medium salary on country by 40% and the wage paid in Balti by 25%. The districts of Telenesti, Rascani, Leova and Soldanesti are disadvantaged areas regarding salaries (and disfavoured in general economic terms implicitly) and there salary paid there was below 60% of the national average. We think that it is important to ensure a macroeconomic stability in a strong inflationist environment in order to reach such a level (300 dollars) because the perverse effects are overwhelming.

On the other hand, we must ascertain that salaries rose strongly in the latest period, especially in public administration sector. At the same time, the medium salary paid in agriculture does not reach at least half of the average on economy. According to official statistics, the number of employees in this sector declines permanently: the number of workers in agriculture dropped by about 11% in the first trimester of this year. The real salary rose by 2% only in industry in the first eight months and a significant reduction (14%) of salaries in regressing wine industry was observed. This sector faces a strong retreat of personnel who seek jobs in other sectors, try to open small business or estimate possibilities of emigration. However, statistics are very optimistic. The medium monthly salary rose by 29% in 9 months up to about 1,620 lei (122 dollars).

As regards the explosive creation of jobs (about 300,000!!!), it is strange that it will be associated with a strong salary growth. It happens vice versa in economy very often, at least the economic theory tells this, especially because statistics reveal a decline of jobs in Moldova. As a rule, firms use the easiest method to fire labour force in order to increase salaries.

Secondly, there is a growing pressure on labour market; that means higher salaries, a thing that obliges firms to introduce new technologies which save labour force and to save labour force by relieving the surplus of reserves. We discuss here the need of massive restructuring in industry and other sectors on background of circumstances, which require higher costs — tariffs of utilities, for example, and a stronger competition. On the other hand, official statistics do not cover the shadow labour, though this phenomenon is consistent in Moldova, influencing salaries and real productivity. In this regard, we mention that the Ministry of Economy and Commerce (MEC) unveiled two weeks ago the draft national strategy on employment policies for 2007–2020.

Foreign trade

Foreign trade faces a critical situation…

Official statistics for January-September 2006 (T1-T3) reveal that exports dropped by 8.2% compared with the same period of 2005, while imports rose by 14.5%. Low competitiveness of domestic products conditioned by high costs and inefficient management made them less solicited on foreign markets. At the same time, the Russian embargo on exportation of production from Moldova has affected all domestic producers and exporters.

The trade balance deficit has registered an excessive level, which will affect the economic growth for sure. In spite of efforts of the Chisinau authorities aimed at resumption of exports to the Russian Federation, they finally failed. MEC presented in September the draft strategy on attracting investments and promoting exports for 2006–2015, which is expected to be implemented better than the precedent strategies.

Exports to the European Union and Central and East Europe rose constantly in the 3rd trimester of 2006. At the same time, Moldova exported few competitive products, this being a reason of satisfactory use of the GSP Plus system (60% only). According to authorities, the E.U. stands ready to issue the package of documents needed to award the system of autonomous commercial preferences. Everything will depend on Government’s insistence in negotiations and promptness or receptivity of economic agents to meet the E.U. standards. At the same time, we consider that if the E.U. policy does not suffer cardinal changes, our goods for exportation, mainly agricultural, will be uncompetitive on European market.

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