Economic Policies on December 17–30, 2007

Inflation and prices

Old inflation problem…

The 2007 inflation seems to be out of control, with prices declining a little in July only. The evolution of local and regional prices could press the central bank to increase the monetary policy interest soon, in order to stop the growth of inflation a little. Even more, analysts do not rule out an inflammation of the inflation on spring 2008 up to 15 percent a year.

The rise of the basic interest followed, of course, by interests on money market could induce the phenomenon of speculative transactions on domestic market, creating premises for a new groundless appreciation of the leu. Deals of exporters will be hit again, and the budgetary, commercial and current account deficits will reach new “records”, and there will be one way to settle them: the depreciation of the leu. The non-confidence of people towards domestic currency will be worse than an eventual inflation rise in 2008 and the inflationist side-slip for the fourth year in a row.

Remittances fuel inflationist expectations…

Moldovan citizens working abroad sent home more than 972 million dollars in January-October 2007. Remittances fuelled the inflationist expectations and the appreciation of the leu for sure. But the leu cannot appreciate for a long time, as foreign deficits could tell their word at a moment and depreciation with an inflationist impact could occur. Remittances in the period concerned exceeded by about 14 percent the transfers for 2006. Nearly 80 percent of remittances come via rapid transfer systems. The Western Union system, the main operator, covers about half of transactions. Largest remittances came from Moldovans working in Russia.

The continuous rise of remittances is a consequence of the advance of the number of citizens working abroad, their legalisation and growth of collections. According to an IMF forecast, currency inflows could reach 1.283 billion dollars in 2007 and 1.411 billion dollars in 2008. The share of remittances in the GDP exceeds 36 percent and ranks Moldova on the first place in the latest World Bank standing.

Diagram 1. Annual remittances

Source: NBM, 2007

Real sector

Industry declines GDP…

The Moldovan industry has decreased by about 2 percent in January-November 2007, compared with the similar period of 2006. All industrial enterprises manufactured production worth about 23.8 billion lei (more than 2 billion dollars) in current prices in the period concerned. The industrial production has declined compared with January-November 2006 because the wine production decreased by nearly 31 percent, sugar by 52 percent, distilled spirits by approximately 28 percent, and tobacco products by more than 10 percent. The production volume of food and drink enterprises has decreased by about 10 percent.

The negative trends of the industry have influenced much the evolution of GDP for the first three trimesters. It increased by 3.3 percent after an 8.2-percent rise in the 1^st quarter. This indicator is lower than forecasted by Government, which anticipated a 5-percent advance for 2007. The growth was due to the rise of net taxes on products and imports by about 21 percent, intermediary consumption by more than 6 percent, while the gross valued-added rose by 0.2 percent only, and the production volume increased by nearly 4 percent. Many analysts contest this economic growth, saying that it is “arithmetically bloated” and runs counter the decline of industrial production, stagnation of agriculture, reduction of wine production, etc.

Foreign trade

Wine exports increased at all…

Wine exports to the CIS, except for Russia, have increased by 35 percent in January-October 2007, while deliveries to the European Unions have advanced by more than 14 percent. They reached 82.72 million dollars, compared with 60.65 million dollars in January-October 2006. The largest exports went to Ukraine — 37.3 million dollars, Belarus 27.5 million dollars, and Kazakhstan 14.3 million dollars.

Exports to the EU have advanced by 2.2 million dollars. Poland ranked the 1^st place, receiving Moldovan wines worth 4.4 million dollars, followed by the Czech Republic — 1.67 million dollars and Germany about 1.4 million dollars. At the same time, following the accession of Romania and Bulgaria to the EU and enforcement of community requirements for Moldovan wine exports, deliveries to these states have declined much. Moldovan wine exports to Romania have decreased by about 14 million dollars and deliveries to Bulgaria by 1.16 million dollars. Exports outside the CIS and EU have advanced by 11 percent, up to 2.23 million dollars. Large wine exports went to the United States, Israel and Japan.

Labour market

Evolution of salaries…

The medium salary on economy accounted for 2,234 lei (197 dollars) in November 2007. The average pay in the budgetary sector amounted to 1,792 lei (158 dollars) in November, while the medium salary in the real sector accounted for 2,468 lei (218 dollars). Moldovan farmers earned 1,339 lei (118 dollars) on average in November; teachers were paid 1,545 lei (136 dollars), while doctors and social assistants earned 1,791 lei (158 dollars) on average.

e-democracy.md