Economic Policies on May 2–31, 2009

Inflation and prices

Inflation unlikely gives headaches…

Inflation in Moldova was 0.3 percent in April, and a deflation of 1.7 percent was recorded since the beginning of 2009. In particular, prices of food products and manufactured goods have increased by 0.3 percent each, while tariffs for public services have grown by 0.1 percent.

The deflation reveals in fact the plans of some economic agents (which reduced prices) to maintain or the least to slow down the reduction, sometimes important in a short period, of sales in crisis conditions. The fall of consumption fuelled by decline in population income (reduction of remittances, wages and other revenues, inclusively from investments, undesired vacations or even dismissal of employees) and enterprises, the use of savings, as well as reduction of people’s and business capacity to get credits generate and sometime encourage the inflation.

Unquestionably, the deflation is favourable for all consumers in Moldova, especially for those earning little. As well, it advantages the state as consumer when it purchases food products and manufactured goods for orphanages, kindergartens, elderly asylums, army etc. The further fall of prices will make consumer happier. But the satisfaction of falling prices has a short term, while on a long term it could turn into dissatisfaction, as in conditions of a long deflation enterprises reduce/stop their production or even become insolvent and/or shut up.

This fact amplified by reduction of people’s incomes in Moldova reduces incomes to the national public budget (state, social insurance and health insurance) and wages of population. Even more, about 70 percent of the state budget incomes for the 2007–2008 years were made of customs fees. Imports have dropped by about 33 percent in the 1^st quarter of 2009, as well as customs fees. In consequence, all have suffered: employees in private and public sectors, retirees, invalids, students and even enterprises which provide the state with goods/works/services. Public investments in roads, current and capital repairs, constructions, equipment etc. are on the decline or even cease.

Banking system

Deposits in lei are on the continuous decline…

The supply of deposits in banking system turned over about 22.5 billion lei in early April 2009, and decreased by more than 833 million lei (3.6 percent) compared with the last month due to the fall of deposits in domestic currency by more than 1.56 billion (about 12 percent), while the supply of deposits in foreign currency has increased by more than 728 million lei (7 percent). The supply of forward deposits was 5.74 billion lei and decreased by more than 246 million lei compared with February 2009. Their share has decreased by 0.2 percentage points, down to 25.5 percent of the overall supply of deposits. At the same time, the supply of spot deposits has decreased by about 586 million lei (3.5 percent), down to about 16.758 billion lei. The supply of forward deposits in lei was more than 8.19 billion lei in late March 2009, by over 1.19 billion lei (about 13 percent) compared with the last month, following the decline of deposits in lei of individuals and economic agents by about 1.03 billion lei (more than 13 percent) and over 163 million lei (about 11 percent) respectively.

The supply of forward deposits in foreign currency has increased by 605 million lei (7.6 percent), up to 8.565 billion lei. Forward deposits in lei attracted in March 2009 accounted for more than 1.257 billion lei, which is by over 103 million lei less than in February 2009. The fall was linked to the decline in deposits of individuals by more than 68 million lei (6.5 percent), as well as of deposits of businesses by about 35 million lei (11.6 percent). Therefore, the supply of forward deposits of individuals in lei rose by 78 percent in February 2009, up to about 79 percent of overall forward deposits in lei attracted in March.

The average interest rate on forward deposits in lei decreased by 0.48 percentage points in March 2009, down to an annual rate of 19.36 percent (14.31 percent for businesses and 20.71 percent for individuals, compared with 14.4 percent and 21.38 percent respectively in February 2009). According to NBM, forward deposits in foreign currency accounted for 2,127.6 million lei (equivalent to 196.7 million dollars) in the period concerned, and increased by 585.6 million lei (38 percent) due to the rise in deposits of individuals by 388.3 million lei or 27.2 percent, as well as to deposits of businesses by 197.3 million lei or 2.7 fold. The average interest rate on forward deposits in foreign currency was 10.18 percent (6.78 percent for businesses and 10.76 percent for individuals).

Foreign trade

Reversal of positions…

Exports of Moldovan goods to EU were worth 154.2 million dollars in nominal value in the 1^st quarter of 2009, decreasing by more than 14 percent compared with January-March 2008. According to NBS, exports to EU count for more than 55 percent of overall exports in January-March 2009. On the other hand, imports from EU were worth 301.6 million dollars, by 34.8 percent less than in January-March 2008, covering 38.6 percent of overall imports (44.2 percent in January-March 2008). The trade balance deficit with EU increased by 28.3 percent in 2009, up to 147.4 million dollars (282.9 million dollars in January-March 2008).

Moldova’s main export partners in the EU are: Romania (57.3 million dollars, 20.5 percent of overall exports), Italy (29.3 million dollars or 11.4 percent of overall exports), Germany (16.2 million dollars or 10.5 percent of overall exports), United Kingdom (11.9 million dollars or 4.3 percent of overall exports), Poland (9 million dollars or 3.2 percent of overall exports). Moldova’s main partners in terms of imports from EU are: Romania (54.1 million dollars or 6.9 percent of overall imports), Germany (50 million dollars or 6.4 percent of overall imports), France (42.4 million dollars or 5.4 percent of overall imports), Italy (39.8 million dollars or 5.1 percent of overall imports), Poland (15.8 million dollars or 2 percent of overall imports), Austria (14.2 million dollars or 1.8 percent of overall imports).

At the same time, it is interesting that the external trade has declined in conditions of a reversal of rating both for exports and for imports. Exports to Ukraine dropped the most (-59 percent) because of the serious depreciation of Ukrainian hryvna. In particular, exports to Ukraine count for 10 percent of overall exports in January-March 2008, compared with 5.1 percent in the similar period of this year. Great rises (but small in absolute terms) were recorded for countries such as South Africa (91.1 fold), Switzerland (5.5 fold), Hungary (2.5 fold) and Iraq (2.4 fold). As for imports, the surprise is greater. Despite the formality, the Russian Federation has lost its status of No.1 trade partner in terms of imports, descending to the 6th place. Instead, Kazakhstan has become the No.1 partner. The situation was surprised by some domestic publications and economists, who monitor the external tradeRO and note that “Gazprom has founded a joint enterprise with the Kazakh Company Kaztransgaz, through which it buys natural gas and re-export them further.” This proves the very high share of gas in imports from this country (more than 20 percent). Therefore, Turkmenistan would be the No.1 trade partner, should Gazprom import gas from this country on the basis of the same scheme…

Remittances

…and remittances

Remittances sent to Moldova by individuals working abroad via commercial banks in the 1^st quarter of 2009 exceeded 227 million dollars, which is by about 93.6 million dollars (more than 29 percent) less than in the similar period of 2008. At the same time, about 181.5 million dollars or 80 percent of overall transfers in the 1^st quarter of 2009 came via rapid money transfer systems. This indicator was about 261.6 million dollars (about 82 percent) in the 1^st quarter of 2008. Money transfers by individuals working abroad via commercial banks amounted to 1.66 billion dollars in 2008 and rose by more than 36 percent compared with 2007.

Macroeconomics

Majority of indicators are on the decline…

According to a NBS reportRO for the 1st quarter of 2008, majority of economic indicators are on the decline. The industrial output has decreased by 24 percent, exports and imports for the same period declined by more than 18 percent and 25 percent respectively, and therefore related taxes and fees collected to the state budget have dropped as well, reducing much the incomes and endangering many national projects. In addition, almost all types of transports experienced declines of more than 50 percent. The retailing and service sectors face decreasing transactions and operations compared with three months or half a year ago. Capital investments have decreased by more than 40 percent, this being an unprecedented situation compared with last years.

Labour market

Unemployment is on the rise…

This is one more proof that the unemployment is on the rise. Many enterprises send their personnel in undesired vacations or even dismiss them. The explanation seems to be simple, as many enterprises cannot sell their products, do not have incomes, and therefore, cannot pay salaries, so that they do not have any other solution but to dismiss some employees. In fact, authorities indicated personnel cuts when speaking about reduction of budgetary expenses. Moldova faces the risk to experience a situation like in late 1990s, when the unemployment rate was over 11 percent and salary and pension arrears accounted for hundreds of millions in nominal terms lasted months.

The number of employees in agriculture has dropped much (about 23 percent of all employees, compared with about 28 percent in early 2008), by more than 88,000 people. The explanation would have two reasons: 1. the emigration of population to other countries (in particular from rural areas); 2. seeking a job in urban areas. In addition, the number of employees in industrial and building sectors has decreased by about 5 percent on average (crisis effects). According to latest surveys, the unemployment has hit more than 80 percent of families that means at least a family member was dismissed or obliged to take an undesired vacation. Respectively, 25 percent of those who lost their jobs have plans to immigrate to other countries.

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