Economic Policies on August 1–31, 2009

Inflation and prices

Rather about deflation…

A deflation of more than 2 percent was recorded for the seven month of this year. Advantages and disadvantages of this phenomenon will be explained below. Firstly, the deflation is an absolutely normal phenomenon in the current conditions of crisis, while the fall or freezing of prices of majority of products and services is recorded in almost all countries hit by the crisis, in which the consumption (generated by the decline of incomes, remittances, wages), economic or production activity are on the suspense or decline. This is a first explanation.

Another explanation of deflation is related to underrating of dynamic of vicious circles in economy, as the country experiences a relative lack of liquidity. In fact, an increased demand of liquidity is observed, with both companies and individuals willing to enjoy as much as possible cash. This state of things is also clear in the conduct of banks, as they are much more reticent over providing credits, despite the rise of the monetary mass. This phenomenon is obvious in Europe, United States, in the world, too.

Thus, one could ask what inflation it is when the cash does not circulate? What inflation when goods are not sold and bought any longer? All countries record a fall of inflation while experiencing a decline of consumption, and even a certain deflation trend. The inflation in the Eurozone is zero, and many states record deflation.

Advantages and disadvantages…

Unquestionably, the deflation advantages all consumers in Moldova, especially those earning little. As well, the state is advantaged as consumer when it purchases food products and manufactured goods for orphanages, kindergartens, army, and others, or while purchasing energy agents such as natural gas. Therefore, this fall in prices will make consumers happier on the one hand. On the other hand, the contentment with falling prices has a short term and it could turn into anger on a long term, as enterprises reduce/cease their production or even become insolvent and/or go bankrupt during a long-term deflation.

Of course, suffering companies cannot pay taxes and fees to the state and the public budget faces difficulties to honour commitments towards nongovernmental sector. Even more, about 70 percent of the state budget incomes for 2007–2008 were made of customs fees. Imports have decreased by about 35 percent in the first half of 2009, as well as customs fees. In consequence, everybody suffers: employees in private and public sectors, retirees, disabled people and students, and even enterprises which provide the state with goods and services. In addition, many domestic enterprises are involved in expense-cutting processes, which often imply massive dismissals.

Eventual forecasts, recommendations…

Frozen crediting, precarious circulation of currency in economy, which could give birth to a financial lock deepens the economic fall. This relation should be considered in mutual terms: the public budget collections depend on fate of private economy and vice versa. The rise of budgetary deficit is unavoidable in 2009 and it could exceed 5 percent of GDP, up to 3 billion lei. Even more, one should not forget that the heating season is close and it will require larger public expenses. So far, the signing of a memorandum with IMF, extension of programmes with WB, eventual attraction of funds from EU and other donors would be the only piston capable to resuscitate the economy and budgetary collections the least partially. Unfortunately, no decisive step was made in this regard, and it is clear that the uncertain political situation makes administrations of institutions concerned postpone decisions in this respect. On the other hand, the earlier developed European economies will get rid of recession, the easier Moldova will stop the economic decline.

Remittances

Currency inflows reducing…

Remittances from Moldovan nationals working abroad via banking system have decreased by nearly 32 percent in January-June 2009, compared with the similar period of last year, down to over 515 million dollars. According to NBM, about 420 million dollars or 81.5 percent of the overall transfers in January-June came via rapid money transfer system. More than 54 percent of currency transfers came in US dollars, about 41 percent in Euros and 5 percent in Russian roubles. The largest amount of nearly 110 million dollars was sent to Moldova in June 2009 and the smallest amount of over 64 million dollars in January 2009.

The decline of currency inflows in the first half of 2009 may be explained by the loss of jobs by many migrants, their reticence towards sending home large amounts like before and perhaps the reduction of the number of those who come back home on holidays. Many Moldovan migrants work in building sector and while being able to negotiate their summer holidays until last year, now they cannot afford this luxury during the crisis. In addition, their earnings have decreased and now they are trying to use their work time at maximum. However, the decline of remittances could be seasonal, and savings of some of those working abroad could be counted next year.

However, money keeps going in…

Despite the fall of remittances in the first half of 2009, currency keeps going in. According to IMF, WB, and others, Moldova shares the 2^nd-3^rd places in the world concerning remittances by emigrants, recording 1.6 billion dollars in 2008, which counts for 1/3 of the country’s GDP, but many economists say that their real value could be higher. According to estimates, more than 500,000 Moldovans work abroad or about 15 percent of country’s population.

According to IMF and WB forecasts, remittances by immigrants to origin countries will decrease by more than 7 percent in 2009 but less than foreign direct inflows to the same states. Perhaps this constancy of remittances could be explained by the fact that while new migration inflows have declined, the number of emigrants was hit by the economic crisis a little. However, Moldova experiences a deeper decline of remittances than other developing countries on background of economic crisis in Spain, Italy, and other states.

Remittances of emigrants are very important at regional level, especially in areas where they are a key income source. They have a double importance for Moldova, as the economy is on the decline and a fall of money transfers is dangerous for our country as long as foreign direct investments in Moldova are very small.

Investment environment

Investments will fall down…

For comparison, foreign direct investments in Moldova have grown up to 680 million dollars in 2008, according to official accounts, which is by nearly 38 percent more than in 2007, while half or even less is estimated for this year, and FDI could be much lower than remittances of Moldovan migrants. The effects of economic crisis hit the Moldovan economy for sure. On the other hand, despite the rise of investments in the last period, they could not cover capital outflows from economy especially through imports.

Regional comparisons…

Despite the statistical rise of investments, Moldova’s economy is one of least attractive countries for foreign investors in the region, ranking the 19^th place among 22 states included in the 2008 World Bank’s rating on investments per capita. For example, the leader of the rating, Estonia, has investments worth 10,000 dollars per capita, Romania — 3,000 dollars per capita, Georgia and Armenia 800–1,000 dollars per capita. As for Moldova, it records 250 dollars per capita. Moldova is ranked before the three Middle Asian states (Kyrgyzstan, Uzbekistan and Tajikistan).

Some causes which halt investment abundance…

The causes include political instability, government’s meddling into business, unjust and corrupt legal system, and other factors which taken altogether place Moldova far away from countries with most attractive investment environments. In addition, an unusual trend is observed: the labour force is not a determinant for making decisions and placing investments. The crisis made many foreign investors optimise their investments at maximum and make a strict evaluation of destination markets, on the basis of outputs, costs etc.

Fields of investments…

As for the structure of investments (just foreign), they rather go to electricity and gas providing sectors, telecommunications, banks, trade, which means in sectors with a maximum and safe profitableness. Domestic capital stays in 2^nd-degree sectors, which require much work to get profit and difficult investment efforts. Of course, foreign investments which are not very strong but influent compared with investments by domestic companies are building economic growth, but with a low employment rate and polarised distribution of its results, with the most of profit being repatriated.

Instead of conclusion…

The evolution of foreign direct investments which are the key funder of the current account deficit of Moldova or foreign debt is an enigma and concomitantly a great challenge of 2009. Given their low level this year, FDI cannot be any longer the main funder of Moldova’s debt, particularly foreign debt, current account deficit and some of the long-term external debt. Signing an agreement with the International Monetary Fund would be the only way to fund Moldova’s foreign deficit.

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