Economic Policies on November 1–14, 2010

Prices and inflation

Inflation seems to be reasonable…

According to BNS data, the consumer price index (CPI) was 101,5% in October 2010 compared to September 2010, and 108% — compared to October 2009 (for information: CPI was 101.5% in October 2009 compared to September 2009 and compared to October 2008 — 98.4%). However, the consumer prices have increased by 6.1% since the beginning of this year (in October 2010 compared to October 2009), the inflation rate being around this level. The increase of the average consumer prices in October 2010 compared to September 2010 by 1.5 p.p. was determined by the increase in food prices by 3.1%, non-food products — by 0.9% and tariffs for public services rendering by 0.1%. Increasing in prices to foodstuffs in October had largely a seasonal nature. However, the prices (the inflation, respectively) could grow in the next period following the transposition of several price increases for some housing maintenance services (natural gas etc.).

The external position of the state

Moldova’s foreign debt increased by 42% during one year, but…

Mostly it grew because of contracting more loans from international financial institutions, as well as from other institutional creditors. Moldova’s state foreign debt increased during the last year with 42 p. p. and it is slightly more than USD 1.1 billion. Reported to the GDP level, external debt tends to a level of about 20%, which is a quite acceptable level. For example, on 1 November 2009 this index was about USD 777 million. No doubt that the growth of state debt is conditioned by the inflow of credits to the country, which in January-October 2010 was almost USD 180 million. Also foreign debt payments during the reference period exceeded USD 43 million. As mentioned above, the main generator of the external debt growth rate was the agreement with international financial institutions. The big question is whether this accumulation of debt — a global phenomenon that has gained proportions due to the crisis — can be stopped. However, we believe that with a new loan from the IMF (but this will happen after the parliamentary elections only) Moldova will not defer its payment deadlines, but will continue to accumulate debts. Until when? Until when the state would restrain its budget device, would reform its social insurance system and would impose upon a prudent policy of public expenditures.

Labor market with electoral expectations

Wages, on the top of promises…

Most political parties when launching in electoral campaign are very generous in making promises, and big salaries and pensions are not an exception, in fact, they prevail on the current list of promises. However, the level of populist wages and pensions, such as those of 700 Euros and 300 Euros, respectively, set out by parties during 2009 spring campaign or even during the summer of the same year, is lower. Perhaps, the parties came down to earth and understand the socio-economic situation in the country. Despite the fact that generous salaries and pensions were always on the top of the list of promises made by parties and often were very popular with voters, maybe rather for a specific segment out of them. This campaign also provides offers that are apparently quite realistic. A minimum pension of 1300 MDL or an average salary of 5000 MDL declared by a political party, for example, seem to be more realistic. Of course, they are a bit far from the regional average, but still seem to be more connected to the reality of the Republic of Moldova. Other parties are more generous when it comes to the average pension, displaying a level from 1500 to 2000 MDL, or some social payments such as child birth allowance — from 5000 to 10000 MDL. However, these levels, even in the next 4 years, if believe that we would have a political stability, are very unlikely to be achieved. The fears are related to the fact that the economy of the country, taking also into account the internal and external conjuncture, will hardly cope with much higher accumulation in the budget that could increase the level of payments and social benefits. Furthermore, the employment rate has fallen markedly in recent years and it is an alarming mark.

The party said it should be so…

In spite of economic growth that was recorded in statistics and the one declared by authorities, the productive sector and the economic system of the Republic of Moldova, in general, is still recovering relatively difficultly, due to economic crisis consequences. Thus, there is a need for a longer period of stabilization to create new jobs. But, if we go back to wages and explain more theoretically on what depends their level, then in a market economy the wage is the marginal product of labor factor, i.e. labor productivity. But in an open economy like that of the Republic of Moldova, directly influenced by import prices, which also are largely dictated by world prices and, often, the size of wages has nothing to do with labor productivity. Salaries will be comparable or higher than in other countries, especially in the region, when per capita GDP will be higher. But, at this chapter, Moldova lags behind, so to speak. The most funny is the language used by parties. For example: “the salary or pension will be or should be”. But how will be it? From where it will come? It does not matter. The party said it and let it be so, ultimately ignoring the market mechanism for determining the labor price. That is to say, we set the level of salaries, pensions and allowances to our liking. However, we should not forget that we are in full election campaign and the parties do not lose the opportunity to display their promises and offers. The campaign will pass away, and the wages will return to “normal”.

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