Economic Policies on July 1–16, 2007

Inflation and prices

Inflation rate meets forecasts of Government and central bank …

The consumer price index (CPI) in June was similar with the CPI registered in May. At the same time, prices of food products have dropped by 1.3 percent, while prices of manufactured goods have increased by 0.7 percent. Tariffs of services provided to population have grown by 0.2 percent. Thus, the inflation rose by 3.9 percent in January-June 2007, compared with December 2006. In particular, the inflation was 10.4 percent, a level comparable with the 10-percent target of the National Bank of Moldova (NBM) and Government for 2007. However, the risks capable to halt the achievement of this target — growth of imports and consumption, unfavourable weather and volatility of Moldovan leu compared with main reference currencies — intensified in May-June. More than that, some economists doubt over truth of official figures, saying that the “official inflation rate is distorted.”

Public finances

About 65 percent of budgetary incomes come from indirect taxes…

The basic incomes of state budget for the first half of this year accounted for 5.7 billion lei (456 million dollars), which is by 6.3 percent more than planned for the period concerned. The level and pace of execution of the budgetary plan are impressive, as they fit the general trend typical to the past two years. Fiscal incomes amounted to 2 billion lei, while revenues administrated by customs accounted for 3.7 billion lei or by 9 percent more than planned for the first half of this year. It is worth to note that about 65 percent of budgetary collections come from indirect taxes: customs duties, excises, VAT, etc. This state of things is one more proof that the economy is preponderantly consuming.

Foreign trade

E.U. market continues to be main destination for Moldovan products…

The European Union has become the main destination for goods and products made in Moldova in the first five months of this year, in particular, E.U. member countries attracted more than 50 percent of the total. The share of E.U. has grown while trade exchanges with CIS have dramatically declined after the Russian Federation has banned the importation of wines and food products from Moldova. Statistics signal a decline of the CIS share from 46 percent down to 37 percent. Three out of the first five countries to which Moldova exported goods in January-May are E.U. members. Romania ranks the 1st place, defeating Russia (15.3 percent) with a share of approximately 16 percent, and Italy and Germany rank the 3^rd and 5^th places.

Textiles and items consolidate their position of main exports of Moldova growing by 24 percent in five months, while deliveries of food products, drinks and tobacco declined by approximately 34 percent. Thus, about 25 percent of Moldovan exports in the first five months of this year are “due to an active improvement of some temporarily imported goods,” that mean goods processed in lohn or under similar contracts. Contracts of this kind are based on cheap Moldovan labour force.

Trade deficit for first half-year will exceed 1 billion dollars…

The trade deficit for January-May 2007 reached 825 million dollars, which is by about 47 percent more than in the similar period of 2006. This level is comparable with the 2004 deficit, when the difference between exports and imports was approximately 790 million dollars. If these trends are preserved, Moldova could register a deficit of over 2 billion dollars for 2007.

Reflections regarding deficit…

In spite of statements backing exports and industries making some products capable to replace the imports, the imports continue to grow faster than deliveries of Moldovan goods to foreign markets. Officials of the Ministry of Economy and Commerce have recently said that the domestic productive sector “cannot keep the step with internal demand,” and therefore, the imports are massive. But shall it really meet the internal demand? May the comparative advantage of Moldova consist of goods that it does not consume much? This may be absolutely natural since the country has a surplus of currency and must redirect it where it came from. Why not to import tomatoes from Turkey or juices from Ukraine, if they are cheaper than those made in Moldova? Why to try reviving some industries which may be extremely expensive and inefficient instead of leaving the market alone to choose the branches in which Moldova shall be specialised?

Relations with foreign financiers

IMF accepts to allocate new financing to Moldova…

The Board of Directors of the International Monetary Fund (IMF) has accepted to allocate a new tranche worth 33.1 million dollars to support the international reserves of Moldova. The credit is released under the Poverty Reduction and Growth Facility (PRGF). The PRGF programme was approved on May 5, 2006, while all disbursements granted to Moldova within PRGF account for about 99.2 million dollars. The main goal is to maintain the macroeconomic stability and to encourage structural reforms, in order to give an impulse to economic growth by improving the business environment. Of course, this will activate programmes with other important financiers (for example, E.U. conditions its financial assistance with a memorandum with IMF).

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