Economic Policies on December 1–31, 2008

Prices and inflation

Inflation “perfectly” suits governmental forecasts…

According to official statistics, average consumer prices in November 2008 were at the level of October 2008. They were influenced by the fall of prices of manufactured goods by 0.6 percent and the rise of tariffs for public services by 1.1 percent, while prices of food products were at the level of October. Therefore, the inflation for 11 months was 7.5 percent.

Prices of key food products have decreased in the period concerned as follows: prices of vegetal oil declined by 14.1 percent, rice by 5.1 percent, fresh fruits by 3.3 percent (citric by 10.5 percent, apples by 6.3 percent), potatoes and mutton by 3.1 percent each, pork by 2.3 percent, sugar by 2.4 percent, wheat flour by 2.2 percent and fish by 2.0 percent. Food prices have degreased in connection with appearance of the new crop.

Prices of manufactured goods have declined as follows: fuels by 12.1 percent, bottled natural gas by 8.8 percent, drugs by 0.7 percent and building materials by 0.5 percent, etc. On the other hand, heating tariffs for households (Balti municipality and Ungheni city) increased by about 21 percent in November 2008, influencing the general price index.

Thus, the inflation rate for this year will be below 10 percent and it perfectly suits the governmental forecasts. But this rate could have been influenced, that means the state intervention into some administrative tariffs or prices. In addition, it is worth to mention the appreciation of leu, which helps reducing inflation, but directly hits domestic exporters and producers.

Currency

External pressures on leu…

NBM governor has recently stated that unlike neighbouring countries, the Moldovan leu is strengthening due to market relations and there are no premises for its fall. He noted that the central bank purchases up to 60 million dollars on market and it does not buy much currency now, just 50 percent of the existing daily volume. The governor added that the central bank cannot prevent the appreciation of the leu because of a major external pressure on the exchange rate of the leu. Many economists say that the appreciation of the leu is influenced by the central bank and less by demand and supply. However, the governor assured that the exchange rate depends on the demand and supply on market. “We do not have a fixed exchange rate, we did not ever have and we will never have one,” he added.

At the same time, minister of economy and trade has stated that the currency available on market influences the exchange rate of domestic currency. Exports, foreign investments, remittances are main currency inflows in Moldova. However, Moldovan nationals sent home by 17 million dollars less in October than in September. According to NBM, remittances transferred from other countries via commercial banks amounted to 139.4 million dollars in October 2008. In spite of a fall of inflows in 2008 compared with 2007, the import price of some products, energy resources, gas will also fall. It means that less currency will go to imports, and this fact brings equilibrium in this situation as well. Therefore, both IMF and NBM assure that there are no factors at present to influence the situation on currency market of Moldova like those in Ukraine, Russia or Romania. Anyway, further forecasts will depend on developments by February-March.

NBM policy targets at 9-percent inflation rate for 2009…

The monetary and currency policy of the National Bank of Moldova will focus on ensuring and maintaining a 9-percent annual inflation rate by the end of 2009, with a possible deviation of +/- 1 percentage point. It is based on a 6-percent GDP growth in real terms, a 19-percent rise of exports and services, and a 24-percent advance of imports. “Rise paces of monetary aggregates will be at the level of 2008”, reads the document.

The central bank promises to keep the positive basic interest rate in 2009, while the mandatory reserve norm will be established depending on inflation rate, inflationist expectations, economic situation and conditions of domestic monetary market. It will keep optimising monetary policy tools with the purpose to improve operations on open market. The monetisation of economy will be sufficient to ensure the planned economic growth. The floating regime of exchange rate will be maintained.

In 2009 the National Bank of Moldova will keep implementing the Action Plan on enforcement of the inflation targeting strategy, which aims to optimise monetary policy operations of NBM, build a centralised database and analysis, regulation and forecast framework, work out and improve public information models regarding actions to enhance confidence of civil society towards NBM monetary policy. The central bank will establish the basic rate, maintaining it at a real positive level, depending on accomplishment of fundamental objectives, situation on monetary, currency and credit markets and evolution of domestic economy, world situation, expectations and forecasts concerning the economy of the country.

Real sector

Elements of economic growth…

According to official accounts, GDP for January-September 2008 was worth about 47.15 billion lei and it has grown by 7.6 percent, compared with the similar period of 2007. The gross value added in commodity sector has increased by 11.2 percent compared with the similar period of 2007 and influenced by about 3 percent the real GDP growth. The rise was conditioned by a significant growth of gross value added in agriculture — by about 24 percent, while this indicator decreased by more than 32 percent in January-September 2007, compared with the same period of 2006.

The gross value added in service sector contributed by more than 62 percent to the GDP, compared with 61 percent in the similar period of 2007, while the rise pace has decreased from 110.3 percent in January-September 2007 to 106.4 percent in January-September 2008. It was particularly linked to an important decline of rise pace of the building sector, from more than 127 percent in January-September 2007 down to 108 percent in January-September 2008.

Although the share of taxes on product and import in GDP has increased from over 17 percent in January-September 2007 up to 18 percent in January-September 2008, their rise pace has decreased from 124.2 percent in January-September 2007 down to 110.4 percent in January-September 2008. It was linked to depreciation of the U.S. dollar versus domestic currency (the average exchange rate of USD versus Moldovan leu has decreased from 12.4 lei in January-September 2007 down to 10.4 lei in January-September 2008) on one hand, and rise of price index on imported goods (from 109 percent in January-September 2007 down to 120 percent in January-September 2008), on the other hand.

The GDP growth on expense elements was particularly linked to the rise of the gross fixed capital formation by 9.3 percent, compared with the similar period of 2007, ensuring a 2.4-percent real GDP rise. This element contributed by 27.6 percent to GDP in the period concerned, compared with the similar period of 2007. The investment rate (the gross fixed capital formation compared with the gross value added) has advanced from over 30 percent in January-September 2007 up to more than 33 percent in January-September 2008 due to the rise of investments.

The final consumption, another important element of use of GDP, has increased by 7.3 percent, compared with the similar period of the precedent year. The rise was particularly due to the final household consumption, which increased by more than 8 percent, compared with the similar period of 2007. The overall internal demand (final consumption and gross capital formation) went 78.8 percent to the final consumption and 21.2 percent to collections, compared with 79.1 percent and 20.9 percent in the similar period of 2007.

Governmental economic syntheses for 2008…

According to macroeconomic data, the national public budget has grown by 15 percent in 2008, compared with 2007. The inflation rate for 11 months of 2008 was 7.5 percent and the GDP for 9 months was 7.6 percent. The Government has appreciated the macroeconomic achievements as “very good”. According to officials, these accomplishments are due to the fall of prices of some products and efficient governmental policies, a fact confirmed by IMF as well.

Foreign direct investments have doubled this year, compared with 2007. They exceeded 307 million dollars in the first semester of 2008, compared with 500 million dollars attracted in all 2007.

Exports. In 2008 domestic products were particularly exported to the EU — 51.4 percent, CIS 39.3 percent, and other countries 9.3 percent, and Moldova exported, in particular, textiles — 19.7 percent, food products 10.4 percent, vegetal products 11.6 percent, electronic appliances 10.9 percent.

Imports by Moldovan economic agents went, in particular, to EU — 44 percent, CIS 39.3 percent, and other countries 21.3 percent. Moldova imported above all mineral products (natural gas, fuels, etc.), electronic appliances 15.8 percent, chemical products 8.5 percent, transportation means and materials 8.1 percent, etc.

As regards human resources, 1.36 million people were declared employable in 2008, of them 49,000 were job seekers, and the unemployment rate was 3.6 percent, compared with 6 percent in 2007. The action plan for 2009 stipulates salary rises as well.

In spite of positive results for 2008, minister of economy has stated: “The Government is aware of challenges Moldova will face in the first months of 2009. In this regard, drafts are being worked out to prevent such crisis situations.”

External economic position

IMF “praises us”…

A mission from the European Department of the International Monetary Fund (IMF) led by Mr. Graeme Justice visited Chisinau on December 4–15, 2008. The key purpose of the mission was the fifth assessment of results of the programme supported via the Poverty Reduction and Growth Facility (PRGF). Despite criticism and objects against governmental policies, the recent IMF mission has appreciated and even praised the governmental economic policies, in particular, the way the executive is managing potential effects of financial crisis, stressing that the financial system of Moldova resists to global crisis.

The mission welcomed the great performance within the programme, the reduction of inflation rate below 10 percent and the robust economic growth. Reforms planned within the programme have been generally implemented on time, but with some exceptions. The financial system resisted to the global financial crisis. At the same time, the mission shares Government’s worries with the impact of slower regional economic growth paces and discussed adequate actions aimed at promoting policies on reducing the impact on Moldova. The mission stressed the increased importance of promoting prudent macroeconomic policies in 2009. This fact was reflected in the updated Memorandum of Economic and Financial Policies (MEFP) for 2009. As a rule, the IMF leadership will revise the agreement and will further submit it to the IMF Executive Board in order to be examined.

PRGF is the IMF’s low-interest lending facility for low-income countries. Loans under PRGF carry an annual interest rate of 0.5 percent. Repayments are made semi-annually, beginning 5.5 years and ending 10 years after the disbursement. The PRGF programme in Moldova foresees a credit worth about 168 million dollars, of which about 133 million dollars has been disbursed. The IMF will give green light to the next tranche in early 2009 and the next IMF mission within PRGF is set for late February 2009.

Forecasts for 2009

Economic growth paces will slow down in 2009…

The economic growth rate of Moldova will slow down from 6.5 percent in 2008 to 4 percent in 2009. It will stay at the same level in 2010. According to the Global Economic Prospects 2009 by the World Bank, this is the lowest growth among CIS member states. The report says that the current account deficit will suddenly decrease from 4.4 percent of GDP in 2009 and 5.8 percent in 2010. The European Bank for Reconstruction and Development and the Economist Intelligence Unit also forecast a slowing of the economic growth pace down to 4.1 percent and 4.0 percent respectively for 2009.

The International Monetary Fund expects an economic growth in Moldova of at least 6.5 percent and a 9-percent inflation rate in late 2008. “The economic crisis did not hit so far the Republic of Moldova, which has a good enough performance due to unimportant integration into international financial markets, and governmental policies,” Graeme Justice, head of the IMF European Department mission, has recently stated. WB analysts note that Moldova could gain about 25 percent of the GDP after the reduction of fuel prices. The fall of prices of goods expected in 2009 will suddenly reduce the correlation between export and import prices. About 30 countries including Moldova will gain from cheaper fuel.

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