Economic Policies on February 15–28, 2011

Macroeconomic developments

Encouraging figures, but without systemic effects yet…

Increase of about 7% of GDP in 2010 makes it a special year for the country’s economic developments and, in fact, Moldova has achieved one of the highest rates of economic recovery in Eastern Europe and CIS. Moreover, all figures of official statistics show that the agricultural sector grew by almost 8%, and the industry, if we can call it so, has made an advance of 7 percent. The exports also grew — by about 23%, and imports by 17 percent. These also have resulted in bigger accumulation of customs duties, excise duties on imports, which is actually a normal situation also generated by changes in state fiscal policy early this year. Additionally, transfers from abroad, particularly the remittances, have also increased compared to last year (2009), which also reflected on taxes and consumption.

The current model of growth should be revised…

On the other hand, it’s unlikely that this rhythm of increase would maintain longer and this in case if the current growth model will be maintained, based mainly on consumption, as experts findRO. Expenditures cuts or tax increases could not be done endlessly, because these were some of the factors that contributed to economic growth last year, but almost nothing has changed essentially in economic structure. The increase of duties and taxes can be seen, ultimately, with not very good eyes by business or manufacturing sector, which hardly recovered yet from the economic crisis. We have the same extensive and poorly tech agriculture, which has a GDP contribution of only 15–17%, but which involved over 33 percent of the economically active population of the country, without big added value. We have an industry that is incomparable with that of the countries in the region, in fact one based more on food and processing and that’s it.

The polarization between center and province is enormous…

An important factor which negatively affects the economic development is that we have an enormous economic polarization between cities and district centres, or better to say between Chisinau and peripheries. For example, over 50 percent of the country’s GDP is gained precisely in Chisinau. Here the best human resources and infrastructure are concentrated. At the same time, in municipality and adjacent localities are inhabited by less than 25 percent of the country’s population. Moreover, more than 80% of foreign investments and 60% of local ones are also placed in Chisinau. A similar situation concerns the size of income and wages, since there are areas where the average salary is well below 50% of average in the country. Thus, we have a deplorable regional economic conjuncture, and if regionally and structurally the resource allocation will not be changed, then the quality of economic growth will remain the same.

The application of radical measures is imminent, even if they are unpopular…

Without radical and structural interventions we can not expect anything good. Of course, in short term, these are painful and unpopular, of course, with undesirable social effects, but in medium and long term they can give great results. Several countries in Central Europe, like Slovakia or Poland, have now some impressive economic developments, resorting years ago to deep reforms. Because what was done here us so far have been an ad-hoc approach, rather than systemic. If, for example, statistics show that services predominate in gross domestic product by over 60 percent, then this is to focus on. It’s necessary to perform radical reform of transport services, supply, infrastructure, because, ultimately, these would be the key to sustainable development. Overall review of all expenditure policies, because a lot of money, very many are directed in non-priority areas and objectives. There are several areas were one should go with the axe, otherwise we risk to continue to wallow in nice figures, but without structural economic effects.

Public finances

Ministry of Finance presented to Government the draft law on state budget for 2011RO and the draft law amending and supplementing some legislative acts, resulting from fiscal policy for 2011.

National public budget revenues are expected to amount to 31 billion lei, increasing by 12.6% over the previous year, and expenditures of about 32.6 billion lei, with 3.3 billion more than in 2010, with a deficit of 1.9% of GDP. The share of social expenditures in the public national budget will rise to over 70%.

State budget revenues will be about 19.9 billion lei, up by 11% compared to 2010. Preponderant part of the state budget revenues, about 78%, will be created by tax revenues. The grant entries for supporting the budget and projects financed from external sources will amount to 2.106 billion lei, by 8% more than external finance in 2010. The share of indirect taxes in total state budget revenues is going to increase by about 17%, up to 14.32 billion lei.

State budget expenditures in 2011 is estimated at more than 20.35 billion lei, with an increase of over 8% compared to 2010. Social expenditures are planned at the level of 42.2% of total expenditures, compared to 44.1% of last year. At the same time, economic costs will increase up to 14.7% of the total, compared to about 12% in 2010. For existing social assistance program the draft budget for 2011 provides means worth 360 million, with over 75 million more than last year. The project provides for allocations to increase salaries. This year the capital investments in construction will be doubled, up to 1.88 billion lei. The money will be allocated in priority to transportation and road industry, housing and public utilities.

State budget deficit planned for the current year will be about 1.227 billion lei, which will be covered by the issuance of state securities, loans from World Bank and International Monetary Fund and funds from the sale and privatization of public assets. Government plans to achieve in 2011 out of privatisation revenues worth 280 million lei.

According to the draft, the 2011 budget was established based on economic growth of 4.5%, up to 82.1 billion lei, an inflation rate of 7.5% and an average exchange rate of 12.4 lei per 1 USD.

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