Economic Policies on April 1–15, 2008

Prices and inflation

The Consumer Price Index (CPI) rose by 1.1 percent in March compared with February 2008. In particular, prices of food products have grown by 1.7 percent, prices of manufactured goods by 0.7 percent, and tariffs for public services have increased by 1.1 percent. Prices of meat, fresh fruits and vegetal oil have grown the most in the period concerned, by more than 5 percent on average. Tariffs for providing services to population have increased by about 4 percent. Even more, prices of real estate transactions have grown by about 15 percent this year. The cumulated inflation rate for 2008 is 4.1 percent (March 2008, compared with December 2007). For comparison, the inflation rate in March 2007 was 2.1 percent, compared with December 2006.

Central banks should monitor real estate prices more carefully…

A recent report by the International Monetary Fund (IMF) says that central banks should monitor real estate prices more carefully. In addition, central banks should take into account prices on real estate market while making decisions on monetary policy interest. The non-performing loan crisis in the United States, which has made important banks go bankrupt, tens of thousands of people lose their jobs and thousands of persons lose their homes because they could not reimburse their credits, brought back the crediting problem on the forefront.

In Moldova for example, the central bank has raised the basic interest rate up to 16.5 percent and thus many important banks had to consider the interest rates on their credits. But a high reference interest practised by the central bank means higher interests on credits by commercial banks and this lowers the crediting level and finally reduces the demand on real estate market. The share of real estate market is different in every country, particularly depending on development level of the mortgage loan market. IMF notes that there are big crediting differences between countries, indicating in this regard the United States, which had a low interest rate which facilitated the access to mortgage credits, and France, which has a stricter credit policy.

The fall of the real estate market does not mean the decline of prices only. It may direct to bankruptcy of banks which granted property-guaranteed credits and now the estate is less worthy, cut jobs of tens of thousands of people, from real estate agents to bankers, and not the last, may affect the economic growth of a country.

Banking sector

Interests on deposits following inflation …

Promotions by local banks and new offers make savings more attractive, with the medium interest rate on deposits in lei reaching roughly 16 percent. The medium annual interest on savings in lei rose by more than 0.5 percent last month. After interest rates on deposits were below inflation in late 2007, now they recover the difference compared with price rises. Banks were summoned to raise afferent interests on savings after the basic interest rate has grown, the National Bank of Moldova recently increased the minimum mandatory reserves and a high inflation rate was forecasted.

Banks’ interests on deposits were on the rise in the past weeks. Some banks offer a medium annual interest rate of over 18 percent for deposits in lei from 6 months up to one year. However, higher interests on deposits did not exceed price rises so far. Many depositors realise that they do not gain anything after deducing the interest tax and inflation rate. Thus, banks’ interest rates on deposits in lei are really negative yet.

Foreign sector

Moldova’s overall foreign debt counts for about 77 percent of GDP…

Moldova’s overall foreign debt rose by more than 30 percent or 776.5 million dollars in 2007, up to over 3.3 billion dollars, which is approximately 77 percent of the GDP.

According to NBM accounts, the public and public guaranteed debt has grown from 876.4 million dollars in late 2006 up to 938.7 million dollars in late 2007. At the same time, the private non-guaranteed foreign debt has increased by 43.4 percent, up to over 2.36 billion dollars. NBM statistics also reveal that loans count for 48.7 percent of Moldova’s overall foreign debt in late 2007.

In 2007 the National Bank of Moldova was credited about 33.3 million dollars by IMF and reimbursed old loans worth 22.1 million dollars. At the same time, the governmental sector received 47.4 million dollars and paid loans and securities worth about 36 million dollars. According to the central bank, foreign commitments under the shape of loans and securities including related arrears rose up to over 2.25 billion dollars last year. This rise is linked to net inflows (465.14 million dollars), net interest arrears (7.15 million dollars), influence of the exchange rate of U.S. dollar compared with other currencies (65.02 million dollars), and other adjustments (10.75 million dollars).

Labour market

Existence minimum in Moldova is over 100 dollars …

The existence minimum in Moldova increased by 17.6 percent in 2007 compared with 2006 and was about 1,100 lei a month. According to NBS accounts, employees of all sectors of national economy except for agriculture afforded the existence minimum for people able to work. Employees in finance sector earned about four fold more than needed for the existence minimum, while salaries in transportation, communication, constructions exceeded the minimum level 2.6 fold. This difference on households is especially linked to different consumer expenditures and high self-consumption share in rural areas. The non-food basket was 44.2 percent of the existence minimum in urban areas and 34.4 percent in rural areas (this indicator is 39.3 percent on country).

People able to work get the highest value of existence minimum, notably 1,159.5 lei, in particular men — 1,227.0 lei. The existence minimum for retirees was 943.4 lei and it covered 85.5 percent of the average per population. As of January 1, 2008, the medium monthly pension accounted for 548.3 lei and covered 58.1 percent of the existence minimum for this category of people.

The maintenance of a child costs 1,002.7 lei on average a month, and this indicator depends on the age of the child, from 394.3 lei per child under 1 year old and up to 1,118.8 lei per child between 7 and 15 years old. Given the monthly indemnities of 230.7 lei paid to insured persons looking after a child below 1.5 years old and 100 lei paid to uninsured persons, these social allocations cover 58.5 and 25.4 percent of the needs of a baby under 1.

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