Economic Policies on January 19 – February 1, 2009

Banking sector

Central bank reducing interests…

Last month, the Board of Directors of the National Bank of Moldova (NBM) has reduced the basic interest rate by 1.5 percent, down to 12.5 percent. This is the forth reduction in the recent period. The NBM decision could lower interests on credits, but this would depend on possibility of commercial banks to modify their crediting policy. However, a reduction of only 0.5–1 percent (especially in market conditions) could have a null effect. Potential reductions of the monetary policy interest in future will particularly depend on the inflation dynamics and evolution, financial and economic conjuncture in country and, not the last, on developments outside the country (in particular, on regional markets).

On the other hand, the surprising decision of NBM means that the financial institution underrates the risk of future prices. Demands on salary rise and the investment acceleration will deepen the inflation. The inflation rate is low but it is hard to believe that maintaining the same pace of disinflation would be easy. Perhaps, the central bank is trying to achieve two antagonist objectives: reaching the inflation target and preventing a too strong appreciation of the leu. According to the economists, the reduction of basic interest will depreciate the domestic currency.

Regional realities…

The maximum basic rate of 18.5 percent was established in May 2008, with the NBM decision being required by the rise of the annual inflation rate up to 16.9 percent. Starting September 2008, when the inflation rate has decreased much, the central bank has reduced the rate more than once, down to 12.5 percent at present. For example, the basic interest rate or the refunding rate in Ukraine was reduced down to 7 percent in December 2008, with the neighbouring country hoping to encourage this way a cheaper crediting and an economic growth. The refunding rate in Romania is 10.25 percent. The Russian Federation has increased the refunding rate from 12 up to 13 percent, in order to make the capital market more attractive and stop the capital outflow from the country.

Moldovan banking system “keeps cool”…

According to The Banker, the Republic of Moldova is ranked the 5th place in the 2009 World Financial Health Index. It says that Moldova has very low debts (736 dollars per capita, compared with 171,000 dollars per capital in the United Kingdom), but instead, Moldovan banks present a high difference of over 17 percent between capital and assets and low crediting levels.

Moldovan banks have extended their loans at only 35 percent of the GDP, compared with the United States, where loans by local banks reached 230 percent of the GDP. Moldova pays only 2.8 percent of revenues by public sector to serve the governmental debt, while Italy for example, spends about 12 percent of governmental incomes to pay interests.

The 2009 World Financial Health Index by The Banker covers 184 countries with 25 financial and economic health indicators. According to the new financial risk model of The Banker, Moldova, Chile, Bolivia and Peru runs a lower risk to be hit by the current financial crisis than the United States, the United Kingdom or Japan.

Labour market

Government “not keeping” promises…

According to the NBS accounts, the average monthly wage in the national economy was 2,529 lei (244 dollars) in January-December 2008. Thus, the Government did not keep the promises it had made in 2005 to increase the average salary in economy up to the equivalent of 300 dollars by early 2009. Unfortunately, it failed. Perhaps, this happened for many reasons including external, as well as because of the productive sector which did not enjoy the best situation in 2008. And this hit collections to the budget, so that salaries were not increased more than once. However, salaries have grown by about 22 percent for majority of branches in economy.

As regards purchase power…

A distinction between nominal and real salaries is required. In fact, nominal salaries have increased, rather than real wages. The real wage, which people had in their pockets and is the ratio between nominal salary and PPI, has increased by 7–8 percent only, being hit by inflation rate, effects of the economic crisis, etc. In other terms, the purchase power of population in 2008 was lower than in 2007 and far from market realities. For example, the purchase power of the average wage of 2,500 lei is twofold lower than what a citizen could afford in 2004–05. Even more, the constant appreciation of leu versus main reference currencies erodes the salaries. In addition, the appreciation of the domestic currency hit most the people receiving money from abroad after exchanging.

Sectoral situation…

For example, employees in agriculture and secondary education sectors earn a little more than needed for the minimum consumer basket, which is worth around 1,300 lei. Wages paid in agriculture sector covers 60 percent of the average in economy. According to the official statistics, the number of employees in this sector is constantly declining and it decreased by 10 percent in 9 months of 2008. This sector faces a serious personnel outflow, as its workers are seeking jobs in other areas, trying to start up small business or considering migration possibilities.

On the other hand, salaries in certain sectors of budgetary system are much higher than in other areas. In particular, the average wage in public administration sector is almost twofold higher than the salary paid to a secondary teacher or doctor, and consequences of this situation become clearer, as the education is degrading, schools are short of teachers or the latter leave for other countries.

Regional situation…

In addition, statistical institutions should be more cautious while providing such data, given different circumstances and salaries in the country. While assessing the “medium wage” indicator specialists should take into account the fact that its relevance is low because of the regional-economic polarisation. For example, the medium wage paid in Chisinau municipality in 2008 exceeded by 40 percent the country’s average salary and the wage in Balti by 25 percent. Disadvantaged areas in terms of salaries (and implicitly disadvantaged in general economic terms) are rayons of Telenesti, Rascani, Leova, Soldanesti and Briceni, where the wage covered less than 60 percent of the national average.

Regional comparisons…

According to the National Institute of Statistics, the average wage in the Romanian budgetary sector exceeds 1,000 Romanian lei, which is the equivalent to about 400 dollars. The average wage in budgetary sector in Ukraine exceeds 300 dollars. Differences would be deeper if comparing salary quotas with those in Baltic Countries. For example, the average salary on economy in Baltic Countries exceeded 850 dollars in 2008, which is fivefold more than in Moldova. Therefore, the purchase power of an Estonian, Lithuanian or Latvian is much stronger than of a Moldovan. A simple comparison would be enough — the average wage in Moldova would be enough to buy 32 kilograms of pork (4 dollars per kilogram), compared with 170 kilograms in Estonia, where the average salary is equivalent to 680 dollars and prices are similar in general.

Consequences on budgetary employees…

Rise of consumer prices or inflation will hit the already low salaries. People earning low or average salaries will especially experience inflationist jumps this year fuelled by dearer energy agents (electricity, natural gas). As well, increasing tariffs will bring economic and psychological premises for the rise of prices of majority food products and manufactured goods.

e-democracy.md