Economic Policies on September 1–30, 2011

Macroeconomy

Economy is on a “rise wave”…

Data provided by the Ministry of Economy for the first half of 2011 indicate an economic growth of about 7.5 percent, so that almost all sectors of domestic economy made progresses. The industrial production increased by more than 9 percent in January-June 2011 (compared with the similar period of 2010). The rise of production was due to the growth of extractive industry by more than 20 percent and processing industry by over 11 percent. On the other hand, the energy sector regressed by more than 3 percent.

Investments turned over 4,809 billion lei (about 424 million dollars), and increased by about 32 percent compared with the similar period of last year. The investment activity reveals an orientation towards business development objectives, in particular, towards acquisition of modern equipment and hardware, and this fact indicates the modernisation of economic system in general. Even more, the external trade advanced well enough. Exports of goods increased by about 65 percent in the first half-year compared with the similar period of last year. At the same time, the exports developed more than the imports compared with the similar period of last year. Therefore, the economy could grow by more than 7 percent in 2011, if it keeps the current trends.

However, the consumption troubles the accounts, the way the IMF representative in Chisinau has also noted, and all know that our economic growth model is built on an abundant consumption, rather than on production. Indeed, this is something normal. One cannot change in two years a model developed in tens of years. The risk of such an economic model is the very fragile instability and non-sustainability, or this is not lasting. On the other hand, statistics reveal that the economic growth for the first half-year was higher than expected — more than 7 percent. Services, exports and private consumption reported the highest rises.

Services along with the trade have the lion’s share in terms of contribution to GDP, with more than 65 percent. As a rule, these economic sectors are tabulated as most capable to integrate business. Therefore, our country has most of small and medium service providing and trade businesses. In addition, these sectors do not require massive investments to develop. Even more, such investments are recovered the easiest way. Or, most of investors including domestic prefer this area of activity. In order to develop a production activity, one needs long-term credits for low interest rates and stable rules of game. So far, Moldova cannot bluster in this regard. Or, foreign investors hold funds, compared with domestic businesses, but economic and political instability and biased juridical system trouble them.

Finally, all these are volatile components of the growth, which depend on what happens outside, respectively on available current return for consumption. Did one expect this economic growth recorded years in a row (except for 2009) to improve living standards as well? Unfortunately, it does not happen so. Even more, the real salary decreased, while the too large spending of over 60 percent for foodstuffs and housekeeping in consumer basket is an additional proof that the population of our country is poor since much earning covers basic needs.

Public funds

Budget — “in the homestretch”…

According to the law, the state budget and its other components should be submitted to the Parliament by October 1. However, they were not delivered yet. Both the state budget and the budgetary-fiscal policy are to be debated by Government. Unquestionably, the voting of the budget for 2012, including the budgetary-fiscal policy which will fuel debates is directly proportional with the evolution of political situation. Not all AIE components agree with the budgetary-fiscal policy and hot discussions are expected between AIE-ruled ministries. Indeed, the non-voting of the budget is in connection with the non-election of president. Or, in legal terms, the Parliament will be dissolved, though almost none of political forces wish such a conjuncture, except for the Party of Communists. Altogether, the budget law is an important annual document which guides all policies and activity of governmental institutions and others, so that the approval of the budget before the end of the fiscal year is more than indispensable.

Risk of entering 2012 without a budget…

If early elections take place, the budget will unlikely be voted. This is the most pessimistic scenario indeed. However, if one remembers, the budget and the budgetary-fiscal policy for 2011 were approved in March 2011, and this fact did not produce serious problems to lose control on situation. But operating with an estimate of expenses and incomes for a past year is inappropriate, as the country has other financial requirements, another rate of investments, etc. In addition, those from outside, such as IMF, WB, EC, would not like the absence of a compromise. However, the opinion of some economistsRO that the approval of the budget would be an “honour issue” for the Ministry of Finance and Government, especially after the late approval of the budget for 2011 is right.

Practice of distributing expenses on political criteria…

The state budget is first a political and then an economic document, so that expenses will be distributed on political criteria as long as they are allotted on group or party interests. Or, according to a head of the specialised parliamentary commission, the Parliament is first of all a political organ which discusses and settles political dissentions, and then other issues. However, the weight of political component in allotting expenses and capital investments is now less visible than during the communist rule. Anyway, it is pretty important so far on background of a heavy political polarisation.

The fiscal policy will be the apple of discord like last year. This will happen after multiple rises of taxes and fees introduced by law following potential price rises. Fiscal policy measures will not please for sure, since they come in an unfavourable economic condition, while the productive sector did not recover yet from economic crisis. If considering just the budget collection chapter, one may observe that the share of indirect taxes VAT, excises, customs fees in state budget incomes is expected to grow by about 20 percent, up to over 16 billion lei. Thus, more than 78 percent of budget collections will come from indirect fiscal taxes: customs fees, excises, VAT, etc. This is one more proof that the economy is preponderantly consuming. Or, these taxes do not exceed 40 percent of overall budget revenues in a functional market economy.

Prices and inflation

Temporary price fall brought deflation in August…

Statistics reveal that the Consumer Price Index (CPI) in August was 99.9 percent compared with July 2011, and 109.2 percent compared with August 2009. Consumer prices rose by 4.8 percent this year (in August 2011 compared with December 2010). Therefore, a deflation of 0.1 percent was recorded for August. Medium consumer prices dropped in August compared with July because food prices decreased by 0.8 percent, while prices of manufactured goods and tariffs for public services increased by 0.4 percent and 0.2 percent respectively. Prices of fruits and vegetables decreased much in August, while prices of meat and sausages, as well as cheese increased.

Prices of most of manufactured goods and tariffs for public services were constant in the period concerned. However, prices of fuels rose by 2.3 percent (including bottled gas by 10.3 percent), tobacco by 2 percent, building materials and jewels by 1.3 percent each. Given the beginning of a new academic year, tariffs for education in institutions of higher learning increased by 4.3 percent, home rent by 1.1 percent and interstate railway passenger transportation services by 4.6 percent.

Banking system

Share of non-performing credits falls down — a recovery of the system…

According to NBM accounts, the share of non-performing credits in the total of credits on banking system was about 9 percent in early September, by 8.5 percent less than in the similar period of last year. It is worth to note that the share of non-performing credits doubled in 2009, up to 16.4 percent on system, and increased up to 17.4 percent in the first half of 2010. Their share further decreased in the second half-year, down to 13.33 percent in late 2010.

Many bank officials described the stabilisation of the non-performing credit portfolio as the No.1 accomplishment of the banking system in 2010. As well, NBM governor said that banks will need some years to reach the level of non-performing credit portfolio recorded before the economic crisis. According to the Association of Moldovan Banks, the share of unfavourable credits in the total of loans is maximum 5.5 percent in European countries. It notes that consumer and mortgage credits are an important source of unfavourable credits, and these loans had a fulminating dynamic the last years. As of August 31, 2011, the share of consumer credits in the total of credits was 8.5 percent, while real estate, building and development loans accounted for 12 percent.

Foreign trade

Exports seem to be main engine of economic growth…

As well, official statistics reveal that Moldovan exports turned over 181 million dollars in July 2011, by about 5 percent more than the precedent month and by over 54 percent more than in July 2010. Exports of goods to the European Union (EU-27) turned over 588.5 million dollars (by over 64 percent more than in January-July 2010), covering about half of all exports (49.5 percent in January-July 2010). CIS member states absorbed nearly 40 percent of Moldova’s exports (38.7 percent in January-July 2010), which is equivalent to about 468 million dollars. Exports of goods to this area rose by 67 percent, compared with January-July 2010.

Imports in July 2011 turned over about 415 million dollars, by 0.7 percent less than in June 2011, and by over 32 percent more than in July 2010. Imports in January-July 2010 turned over more than 2.79 billion dollars, by 40 percent more than in the similar period of the precedent year. Imports from the European Union (EU-27) amounted to about 1,256 billion dollars (by over 40 percent more than in January-July 2010), covering 45 percent of all imports (almost same share as for January-July 2010). Imports from CIS accounted for 895 million dollars (by over 42 percent more than in January-July 2010), and covered 32 percent of all imports (31.5 percent in January-July 2010). The trade balance deficit for the period concerned accounted for about 1,609 billion dollars.

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