Economic Policies on June 16–30, 2009

Macroeconomics

Concerning remittances and relationship with creditors…

According to recent analyses, the deep economic recession in the 1st quarter was also linked to the fall of remittances and labor migration, respectively many Moldovans who came back home complete the number of jobseekers. The unemployment rate has grown much for the first time in the last eight years, and there are first signals that the real wages are on the decline (www.expert-grup.org). The fall of remittances from migrants involve two basic factors: 1) the decline of consumption, imports, taxes etc. and 2) pressures on the domestic labour market (many nationals who lost their jobs abroad come back home) fuelled by a high unemployment rate. In addition, the decline of budget accumulations is a negative consequence of the fall of imports. As the indirect taxes especially VAT are the main income source to the state budget, they are expected to fall much in connection with the decline of consumption, and therefore, they endanger the implementation of social projects and fulfillment of budgetary commitments.

According to National Bank of Moldova (NBM) data, the banking system recorded remittances worth 227 million dollars from nationals working abroad, which is by 43 percent less than in late 2008 and by 29 percent less than in the 1^st quarter of 2008. However, if the fall of about 30 percent would have been maintained till the end of this year, Moldova would have by half a billion (0.5 billion dollars) less foreign currency inflows, and this is a serious decline. One could say that Russia would “rescue” us, meaning the promised 500-million-dollar credit, which would cover somehow the shortage of remittances. But one should not forget that this is a credit and the contracting, refunding and use conditions are an incognito for the public so far.

Of course, Moldova needs an external loan, as it lacks funding sources at present. It cannot be funded via bond issues at present, with institutional creditors such as IMF, EU or WB being the only option. However, the Government has a strong trump in hands: the IMF postponed the decision to release a credit for next autumn. The relationship with this international organisation will depend much on the conditions in which Russia will release the credit and the situation after the July 29 elections.

At the same time, one should not forget that Moldova and Tajikistan only had poverty reduction and economic growth programmes with IMF until now, while all other CIS member states have more advantageous bilateral programmes regarding conditions and refunding terms, as well as value. For example, Belarus has a stand-by programme worth 2.5 billion dollars, Ukraine — 16.4 billion dollars, while Romania, Poland and other ECE countries have much more flexible credit lines. This is one more proof of incoherence of applied policies and poor capacity to implement structural and institutional poverty reduction reforms, as well as economic caps compared with countries from the region.

Banking system

System set to “infamy pillar”…

According to NBM data, assets of Moldovan banks increased by about 1 percent overall in May, up to 37.8 billion lei (3.375 billion dollars), while the deposit portfolio rose by 0.5 percent, up to 25.3 billion lei (about 2.26 billion dollars). In all likelihood, the banking system is developing again, so that assets which dropped by about 3.5 percent in five months and deposits by 6.8 percent overall are now on the rise. Banks expected highest losses in the first five months after the capital inflow from accounts of individuals (-6.2 percent). The supply of people’s deposits turns over 15.5 billion lei and exceeds much the deposits of individuals which count for 5.6 billion lei. The credit portfolio dropped by 3.4 percent, down to about 24 billion lei (www.businessexpert.md). The quality of credits keeps worsening. Reductions for credit losses rose by 2 percent in May and by 20 percent this year, up to 1.44 billion lei. Thus, partners and clients of banks borrowed 1.9 billion lei, while overall assets of commercial banks are worth about 30.7 billion lei and tend to fall.

The liquidity of the banking system is high so farRO, respectively 30 percent, compared with the norm of up to 20 percent, while the capital sufficiency is 32 percent versus 12 percent. However, the quality of accounts from the system could be influenced (negatively) by bankruptcy of Investprivatbank (IPB). What happened with IPB is actually a consequence of irresponsibility or administrative negligence by leadership of this institution, which ventured to contract or release high-risk loans despite warnings by the National Bank of Moldova. According to NBM officials, the monetary authority has warned IPB a year ago in connection with unsteadiness of assets management, particularly of credit portfolio. On the other hand, the bank itself gave the first signals of impasse half a year ago, when it was paying interest rates of 24 percent for deposits in lei and 16 percent for deposits in foreign currency, while the average on system was over 20 percent and 13 percent respectively.

Therefore, those possessing elementary financial knowledge could intuit that the bank was facing an acute liquidity yet in November, and it was giving pretty high interests in order to attract resources. But the National Bank knew for sure that IPB was in a very difficult condition and should get involved emergently, while it dallied until March-April 2009, when all banks undergo an ordinary NBM control. It was too late. In fact, NBM relations with commercial banks proved that the central bank acts sometimes like a “witch doctor” who indicates the same treatment to all banks (reprimands, warnings, etc.), regardless of the source of financial problems and pain of the “patient”, i.e. bank, as NBM is a bank of banks and the law obliges it to take the necessary measures. Even more, most of IPB assets went to mortgage business or more than 75 percent of the credit portfolio of the institution was made of mortgage loans. NBM knew well and should notify the bank to diversify its portfolio.

Certainly, the bankruptcy of IPB will make people angry while choosing a bank for their savings, particularly because many of them remember the stories of OguzBank, Intercapital or BancoSind from 1996–1998, and many people did not recover their deposits so far. The worst which could happen in this case would be the massive withdrawal of deposits in connection with panic, which is more probable in crisis times. The risk of such a situation consists both in losing deposits and jeopardizing the entire banking system, which normal functioning is vital for any economy. Coldly considering rumors and not lending oneself to an eventual panic of deponents, as banks’ operation is mainly based on people’s deposits is very important during financial crises. Becoming a prey to panic just worsens the situation.

Public funds

State treasury entering a deficit surely…

Incomes to the state budget of Moldova accounted for over 5.1 billion (more than 455 million dollars) in early June, which is by about 10 percent less than expected. Collected revenues have dropped by 10.5 percent compared with 2008. According to data by Ministry of Finance, more than 39 percent of the incomes came from the State Tax Service, 65.2 percent from the Customs Service, 70.8 million lei (by 5.3 percent more than the planned indicators) came from income taxes on entrepreneurship, 2.26 billion lei (-2.4 percent) from VAT on goods made in Moldova, 1.99 billion lei (by about 15 percent less) from VAT on imports, and more than 563 million lei (by about 7.5 percent less) from excises. Budgetary expenses amounted to 6.25 billion lei (558 million dollars) in January-May, over 23 percent less than expected, but by 1.3 percent more than in the same period of last year. Moldova operated external payments worth 31.5 million dollars, and more than 297 million lei went to the internal state debt.

Labour market

Wages stagnating…

Average wage of an employee in Moldova was about 2,746 (245 dollars) in May 2009. The average wage has grown by 8.2 percent and the real salary by 10 percent, compared with May 2008. According to NBS data, the average salary in budgetary sector accounted for 2,455 lei (219 dollars) and rose by about 20 percent, compared with the similar period of 2008. The average salary in the real sector accounted for about 2,914 lei (260 dollars) and rose by 4.5 percent compared with the similar period of last year.

Employees in financial sector earn the most so far, 5,577 lei on average in May. They are followed by employees of electricity, heating, gas and water providing enterprises who earned 4,676 lei on average, transportation and communication sector — 3,735 lei, extractive industry 3,423 lei, real estate companies 3,460 lei, and employees of public administration sector who earned 3,252 lei on average in May.

Lowest salaries were paid in agriculture, hunting and forestry — 1,322 lei, pisciculture 1,412 lei, entertainment, culture and sport 2,060 lei, education 2,134 lei, hotels and restaurants 2,175 lei. The average wage on national economy amounted to 2,642 lei (236 dollars) in January-May 2009, while authorities have promised a 300-dollar average salary for 2009.

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