Economic Policies on April 16 – May 1, 2009

Macroeconomics

Crisis goes ahead…

Statistics clearly reveal that the GDP has decreased by about two percentage points in the 1st quarter of 2009, compared with late December 2008, and the year is just at the beginning. The industrial output decreased by about 26 percent in the 1st quarter. Exports and imports dropped by about 20 percent and 30 percentRO respectively in the period concerned and, therefore, taxes and fees collected from export-import operations to the state treasury and are the lion’s share in the budget have fallen as well. Even more, almost all forms of transport have suffered losses of more than 50 percent, and the retailing and service sectors experience a fall of deals and operations compared with three months or half a year ago.

Even more, IMF has raised concern about situation of the banking and budgetary system during the April 22–24 mission to Chisinau. If adding strains on political scene, then altogether could have a dramatic impact on Moldovan economy this year. Statistics on unemployment are unavailable so far and it is hard to provide statistical evidence, but given the number of people on technical holidays or dismissed, the unemployment rate is on the rise.

IMF forecasts that these indicators will continue to worsen. In particular, the dramatic impact of the crisis on Moldovan economy will be of even minus 5 percent for this year and stagnation in 2010, and a rise of budgetary deficit from 1 up to more than 10 percent, as well as of the external debt. The revision or even reduction of public expenses (as the Government has promised higher wages and pensions) and state debt when the population is angry because of social inequalities and is afraid of the impact of global crisis would be the main challenge for the Government. There could be more short-term negative effects, but long-term opportunities are more uncertain. A future fall of the country rating would enhance the cost of foreign funding and influence foreign investments.

Possible solutions…

Perhaps the IMF along with other donors and investors will support Moldova should the latter have a responsible governance, and this would mean at least the reintroduction of income tax for legal entities (though the productive sector faces a deplorable situation) and the freezing of salary rises for sure. These are not the best solutions, but they are the only possible in the current conjuncture. Another solution to enhance budgetary incomes would be the privatisation of some enterprises, but putting them on sale in crisis times would be a worse solution since little of those put on sale last year have been privatised. A special attention shall be granted to the strengthening of financial system, so that small and medium businesses shall be provided access to funding for trade and investments, and this would eventually bring new jobs.

Banking system

Domestic banks experience effects of crisis…

Effects of the economic crisis made many domestic banks stop granting credits to individuals and even to economic agents. The main explanation that the financial-banking sector has become much more reticent over granting credits would be that many companies, particularly in building sector are incapable to refund the loans. Even more, some banks have stopped crediting personal needs (consumption) and mortgage. Therefore, the system could be short of liquidity, though the main bank indicators show the contrary.

In addition, much liquidity of banks was made of remittances from Moldovans working abroad, or since transfers have decreased (by about 60 million dollars compared with the 1^st quarter of 2008), the banks could have less currency in portfolios. On the other hand, citizens do not crowd to demand credits from banks. This situation is particularly due to the current economic conjuncture (such as potential depreciation of leu versus main reference currencies). In other terms, if someone borrows for example 11,000 lei, it will finally reimburse at least 13,000 or 14,000 lei (and the interest) in case of depreciation.

Effects of restricted crediting…

The consumer power of population will fall down given the slowing crediting. Thus, price rise pressures are expected to slow down should the monetary policy keep being restrictive in 2009, too. This happens despite the deflation recorded in the 1^st quarter of 2009. Fewer loans would mean a smaller demand for imported consumption goods. Imports would be smaller which means a reduction of trade deficit, but also potential declines of budgetary incomes, so that budgetary expenses could be affected. Finally, fewer credits (inclusively for economic agents) would reduce the consumption and implicitly the GDP and imports. Limited crediting with a direct impact on population’s consumption will be felt beginning with 2009 and could slow down the economic growth or even the recession, especially in building and service sectors.

Labour market

Statistics say wages are on the rise…

According to NBS accounts, the average monthly wage of a worker in domestic economy amounted to 2,569.1 lei (227 dollars) in January-March 2009 and increased by 12 percent compared with the similar period of last year (just in nominal terms and much below the 300-dollar average promised by authorities). The real wage has grown by 9 percent in the period concerned. The average salary in budgetary sector was 2,208.6 lei (195 dollars) and increased by 23 percent compared with the same period of last year, while the medium wage in the real sector of economy accounted for 2,782.4 lei (246 dollars) and increased by 9 percent compared with the similar period of the last year.

A worker earned 2,643.7 lei on average in March. In comparison with March 2008, the average wage has increased by 12 percent and the real salary by 10 percent. The average wage in budgetary sector amounted to 2,305.5 lei and increased by 24 percent, compared with the similar period of last year. The average wage in the real rector accounted for 2,840.9 lei and increased by 8 percent, compared with the similar period of last year. As well, NBS accounts show that minimum consumer basket in 2008 was worth more than 1,368 lei, and increased by over 24 percent compared with 2007.

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