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Moldova's foreign debt accounted for 1.97 billion dollars in late 2004, rose by 2.8 percent compared with late 2003, and represented 76 percent of the Gross Domestic Product. The private unguaranteed debt held the highest share in the total foreign debt - about 1.09 billion dollars, and grew by 20 percent compared with 2003, particularly due to the growth of commercial credits. In addition, the trade deficit reached a record level of about 790 million dollars in 2004 or 30 percent of GDP, and the current account deficit likely turned over six percent of GDP.

These figures certainly confirm the tendency of foreign deficits in the past years, with decisive "contribution" of private sector. Even more, the growth of foreign deficits justifies the fear of many economists over possible skidding in 2005 and explains somehow why talks with the International Monetary Funds are difficult.

The bulk of the current account deficit last year particularly had its origin in non-budgetary sector. We do not rule out that given declining interest in lei and leu appreciation trends, it will be difficult to stop the rise of foreign deficits. As the non-budgetary sector has no intention to calm down its "hunger of lei" (internal demand), the public budget should combat the excessive rise of current account deficit.

The announced declines of interest rates for lei, higher salaries, expansion of consumption credit, an eventual appreciation of leu will favour a dynamic of internal demand which is much higher that internal supply. The decline of interest rates would give an impulse to credits in lei in an economy caught by consumption fever. If reduction of taxes in 2005 fails a sufficient encouragement of budget collections, expansion of consumption will result in a huge foreign deficit and probably in slower efforts to curb inflation. Appreciation of leu verso dollar helped somehow a lower inflation in 2004 than in 2003, but it also deepened the foreign deficits.

The National Bank of Moldova (BNM) solicited indeed the commercial banks to reduce the interest rates for deposits in order to lower the interest rate for credits. On one hand, the reduction of interest rates would favour the access of domestic businesses and non-residents to credits, access which would bring many liquidities to economy, but it would also harden the effort of BNM to control inflation. Therefore, it seems to me that postponement of lower interest rates (at least now) is the best measure. BNM should be more cautious over reduction of interest rates, while commercial banks should pay more attention to eventual system risks.

The macroeconomic evolution this year will also depend on reduction of fiscal burden. As budgetary incomes drop at least at a first stage, some compensatory measures are required unless internal demand would grow and provoke rise of foreign deficits and eventual inflationary pressures. The compensatory measures may include higher taxes and duties, distribution of some spending and other savings to budget, as for example, through reexamination of some public contracts. It's worth to mention that government's efforts would be substantially assisted by reduction of debts (estimated at about 1.41 billion lei) of businesses to public budget and efficient combat of fiscal evasion, efforts which would support disinflation and would limit foreign deficits.

We have often been witnesses of accusations against BNM regarding the exchange rate policy, and some of them were justified. An appreciated leu can combat inflationary outbreaks, but foreign deficits will deepen and effects will not be late. When the leu appreciates including its face value the consequences are borne first by exporters who earn less from sales abroad.

In addition, a long appreciation of leu, with some fluctuations, erodes the economic stability in case of inadequate productivity incomes, causing high deficits at level of firm and national economy. To rely on appreciation of leu as a factor which contributes to reduction of inflation may be a very risky solution. Some people speak about imminence of a financial crisis provoked by an eventual "run of capital" which would make the leu break down.

Ultimately the actions of the government will be judged under its dilemma relations with BNM, and the choice of economic policy is very difficult, since it claims significant compromise and costs. Anyway, a good cooperation between government and BNM is needed, especially because the March 6 parliamentary elections will influence the economic juncture in 2005.