Monitoring→Economy→The Socioeconomic Environment

What happening on the domestic currency market or where the leu “is going”?

The Moldovan leu has appreciated by about 10 percent versus dollar and by approximately 4 percent versus euro this year. The appreciation of the leu versus dollar has exceeded the maximum level registered three years ago. Of course, both global and regional trends influence the strengthening of the leu, since the economy of the country is connected to the regional market as regards the export of commodities and products, as well as to financial transactions and conjuncture of the domestic currency market. Similar appreciations were also observed in countries in the region which develop commercial relations with Moldova.

The growth of remittances from abroad has internally advanced the appreciation, so that the National Bank of Moldova (NBM) had to intervene more often on domestic market, acquiring large amounts of foreign currency. The rise of international reserves of the central bank up to over one billion dollars particularly explains and justifies this situation. Even more, the bank system has lowered the interest rate on credits as an effect of the appreciation of leu.

However, both the Government and NBM should be more careful when the appreciation of the leu is supported one or another way, even if it helps somehow stop inflation. Or, a stronger leu advantages the state, which finally buys fuels such as natural gas, for example, as a worthier leu allows the state to pay less currency for gas when the currency is converted accordingly to the exchange rates. By telling this, we think about exporters above all, as a strong leu disadvantages them and they already face a difficult situation, the exported production is cheaper and therefore they raise less money.

An appreciation of the leu by 10–12 percent on average is not sustainable for sure when the trade deficit for the first half of this year accounts for 1.2 billion dollars, by over 40 percent more than last year, and the economic growth of Moldova is approximately 8 percent (and it is mostly stimulated by consumption), compared with other states which report a growth of 2–3 percent only. This is a proof that something goes wrong and the figures run counter each other. Even a correlation between the trade deficit and the exchange rate may be done, as the imports have grown very much. Finally, the strong appreciation of the leu lacks an economic ground and this deficit is chronic since it is on the rise for approximately six years.

We do not rule out a reversal of the trend in the near future, that means a light depreciation that could be fuelled including by a deepening of inflationist pressures (especially because the inflation rose up to 7.3 percent in eight months of this year), which is now the main target of the National Bank. Such pressures could also come from the strong rise of salaries, indemnities, as well as from the avalanche of remittances from other countries. The Government and NBM will probably update soon the 10-percent inflation forecast for 2007. If the National Bank does not intervene on currency market via massive currency acquisitions in order to reach the inflation target, the domestic currency could depreciate down to 12.5 lei per dollar at the end of this year.

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