Economic Policies on August 1–31, 2007

Inflation and prices

Inflation may grow…

The Consumer Price Index (CPI) rose by 1.1 percent in July 2007, compared with June. At the same time, prices of food products have grown by 1.6 percent and prices of manufactured goods have increased by 1.1 percent. Tariffs of services provided to population have advanced by 0.4 percent. Thus, the inflation rose by 5 percent in January-July 2007, compared with December 2006. This rate apparently meets the 10-percent target forecasted by National Bank of Moldova (NBM) and Government for 2007. However, the risks capable to influence the fulfilment of the target, in particular, the growth of imports and consumption, very serious drought and many internal economic shortcomings intensified in June-August. In addition, higher electricity tariffs, potential rises of prices of first-need food products (bread, milk, etc.) could influence the evolution of inflation.

Financial-bank system

Crediting of economy and population is on the rise…

According to statistics, the supply of credits in economy rose by more than 706 million lei in July and exceeded 17 billion lei (about 1.42 billion dollars). This is the highest rise this year. The supply of loans has grown due to the rise of credits released to individuals, private companies and organisations that practice financial operations, while the share of credits released to state enterprises has declined. Commercial banks released credits in domestic currency worth about 1.2 billion lei (approximately 100 million dollars). The average interest rate on credits in national currency has declined by only 0.16 percentage points, in spite of a relatively low inflation rate. However, the excessive consumption could fuel the inflation in the near future.

Leu appreciated much versus main reference currencies…

Interventions of the central bank on currency market have reached an absolute record after seven months, with the NBM buying more than 155 million dollars after purchasing over 58 million dollars in July, but NBM did not sell any currency in the period concerned. The rise of currency purchases was due to the advance of currency inflows, particularly from remittances of Moldovans working abroad. Moldovans working abroad sent roughly 500 million dollars in the first half of this year, which is by about 35 percent more than in the similar period of 2006. Thus, Moldova’s international reserves have grown by over 167 million dollars, up to about 1 billion dollars due to currency purchases and after disbursement of an IMF credit.

At the same time, these operations have strongly strengthened the leu versus main reference currencies. It appreciated by more than 8 percent versus dollar and by over 5 percent versus euro this year. The appreciation was a result of the considerable growth of currency supply on domestic market on background of a significant rise of remittances, as well as of regional trends, in particular, in neighbouring countries. The leu will continue growing versus euro, if the European currency loses the ground to the U.S. dollar.

Real sector

Agriculture and industry declined in first half-year…

According to statistics, the agricultural production decreased by 5.4 percent and industrial production dropped by 0.3 percent in the first half-year. The agricultural production has decreased because the production of phytotechny sector declined by about 22 percent. The most serious drought in the past 50 years has compromised the crop. The fruit and vegetable crop this year will decline by at least 30 percent, compared with the plan. In addition, losses of agriculture will produce afferent costs in interdependent branches such as milk, meat processing, etc. Also, in spite of an industrial growth in July, the Russian embargo on Moldovan spirits exports, decline of electricity and thermal energy production, clothing industry, tobacco products, machines and equipment also affect this sector.

Labour market

Salary differences…

Official statistics reveal that the medium salary on economy accounted for 2,144 lei (178 dollars) in Moldova in July, which is by 77 lei more than in June. However, the real salary rose by more than 11 percent in January-June 2007, particularly in the budgetary sector. Moldovan farmers earned 1,050 lei on average in July, which is by 27 lei more than in June; teachers were paid 1,352 lei on average, by 70 lei less than in June, while doctors and social assistants earned 1,803 lei, which is by 134 lei less than in June. At the same time, salaries in industry have grown by 103 lei on average, up to 2,565 lei, builders were paid by 21 lei more than in June, and wages in transportation and communication sector have advanced by 51 lei, up to 2,940 lei. Traditionally, employees of financial sector were paid the most in July, notably 4,813 lei on average, which is by 561 lei more than in June.

Foreign trade

Trade deficit exceeds 1 billion dollars…

The deficit of trade balance exceeded 1,007 million dollars in the first half of this year and rose by 45 percent, compared with the same period of 2006, and it will exceed 2 billion dollars in late 2007 for sure. Exports have grown by more than 27 percent, up to about 600 million dollars, but imports have increased faster, notably by 38 percent, up to over 1.6 billion dollars. Moldova has the highest deficit of more than 222 million dollars with Ukraine, followed by Russia — about 133 million dollars, Germany 108 million dollars, Romania 87 million dollars, etc. As regards products, Moldova had a huge deficit for mineral products and fuels — more than 327 million dollars, followed by machines and appliances — more than 180 million dollars, chemical products — over 144 million dollars. The import-export coverage rate in January-June was 37 percent, compared with 40 percent in the first half of 2006.

E.U. market is main destination for Moldovan products…

The European Union market continues to be the main destination for goods and products made in Moldova, and E.U. member states attracted more than 50 percent of Moldovan exports in the first half of 2007, by about 4 percentage points more than in the similar period of 2006. Moldova exported goods worth over 300 million dollars to the E.U. in January-June 2006, by about 38 percent more than in the first six months of 2006. Deliveries of Moldovan goods to CIS turned over 231 million dollars and increased by 10 percent, compared with 2006. The share of CIS has declined much, notably from 45 percent in January-June 2006 down to over 38 percent this year, as exports to Russia have decreased because of the embargo on imports of Moldovan spirits and agro-food products. At the same time, Moldova imported goods worth over 732 million dollars from E.U. in January-June 2007, by about 45 percent more than in the similar period of 2006. Moldova’s trade deficit with E.U. amounted to 432 million dollars in January-June 2007.

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