Economic Policies on June 1–15, 2009

Macroeconomics

Year 2009 — gravest economic recession in Moldova’s history?..

National Bureau of Statistics (NBS) has recently published statistics on evolution of GDP in the 1st quarter of 2009, which revealed a fall of about 7 percent. Anyway, 2009 will certainly be the year of the deepest economic recession after 1991, shall similar economic trends be further recorded (inclusively at the end of this year) or the least will follow the same way like in the 1^st quarter. An almost similar fall of the Gross Domestic Product (by 6.5 percent) was recorded in 1998, the year of the financial default in Russia, which seriously hit Moldova as well. Almost all economic indicators except for agriculture (+3 percent) have declined much, being particularly influenced by two factors. The first is the fall of internal consumption demand, both of private and public (governmental) consumption and the second one is the dramatic fall of the demand for Moldovan exports, or the external trade of the country counts for more than 140 percent of GDP.

The industry recession, by 24 percent, hit the GDP the most. But the dramatic decline of building sector by more than 30 percent had the most serious impact. However, there is no connection between the economic crisis and the political crisis faced by Moldova, the way other economists said, as the economic crisis began long before the political crisis. Perhaps, the decline would not have been so serious, should authorities got involved in the due time and were not concerned with other problems but economic.

At the same time, the report released in early June by the British Group EIU described a worse situation for Moldova than in March 2009, while it covers the developments from April, in particular the economic and social trends of the country. The report presents a situation like the one described by NBS recently. Almost all economic indicators are on the decline, both imports and exports have decreased much because of the consumption, and therefore, lower collections go to the budget; remittances have decreased much, the productive sector which already faces a very difficult condition is “folded” by the appreciation of the leu versus dollar, and this hardens more the promotion of products on foreign markets, while the external and internal debts have increased much, with the rise of the first being linked to debts of the private sector, and this situation could make the country incapable to pay external debts.

Inflation and prices

Inflation is not a problem for the time being…

An inflation rate of 0.2 percent was recorded for April 2009, while a deflation was recorded for the first five months of the year (-1.5 percent) see Diagram 1. Apparently, the inflation does not give headaches, as Moldova recorded deflation for the first five months of the year, but there is a simple explanation — the consumption has decreased much, and therefore, prices did not grow. But the satisfaction of decreasing prices has a short term, and it could turn into discontentment on a long term, since enterprises reduce/stop making production or even become insolvent and/or shut down.

This situation fuelled by the fall of people’s incomes in Moldova reduces the revenues of the national public budget (state, social and health insurance) and wages of population. Even more, customs fees covered about 70 percent of the state budget incomes at least in 2007–2008. Imports decreased by more than 28 percent in the 1^st quarter of 2009, as well as customs fees. Therefore, everybody suffered the consequences: employees of the private sector and public sector, retirees, invalids, students and even businesses, which provide goods/works/services to the state. Public investments in roads, current and capital repair, constructions, equipment etc. are also on the decline or even ceased.

Diagram 1. Dynamic of key economic indicators, annual values in percent

Source: NBS

Public funds

Of course, the main challenge for the Government the next months will be revising or even reducing public expenses and state debt when the population is angry with social disparities and worries about effects of the economic crisis. The Government will face difficulties to fulfil social commitments. It is well-known that the unemployment rate is on the rise (and directly hits the budget), while some signals in the banking sector made many people withdraw their savings, and the financial system runs the risk of a liquidity crisis despite statements of authorities; external deficits are on the rise and they are very expensive, with Moldova being a “suspect on duty” in terms of non-sustainability of deficits. Budgetary collections for the first three months award victory to those who signalled unrealistic premises in elaboration of the public budget for this year and failure to reach the deficit target of 1–1.5 percent of GDP, especially because the effects of the crisis are just underway.

Banking sector

Legislative amendments…

Before being dissolved, the Parliament has approved amendments to the Law on Financial Institutions and law on guaranteeing of deposits of individuals. The amendments are likely welcome, as they would give fuel to thoughts of majority of domestic bank players to be very cautious when they contract credits or get involved in risky investment projects which endanger the assets of banks (as well as liabilities made of people’s savings implicitly), decisions which are often made consciously without resorting to an ample research on market or depending on the case.

An interesting approach is the introduction of a new chapter, “Chapter VI (1). Forced liquidation of the bank.” However, it seems that this chapter contradicts the organic regulations of the law on insolvency. Even more, Article 38(1) of this chapter stipulates the nomination of a liquidator on behalf of an individual in order to apply all legal measures to liquidate the institution and administrate its assets. It seems at a first glance that this is a tool capable to eliminate any corporate or clan interests, but on the other hand supposing the way they will be interpreted is very hard and it is uncertain that an individual will not play the group game or protect some corporate interests, though the new amendments stipulate express the incompatibility of these actions with the tasks of the liquidator.

However, the emergent modification of the law on financial institutions and law on guaranteeing of deposits of individuals, as well as the increased state intervention power is a clear signal that the situation is worsening in general, not only in banking sector.

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