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General criteria

The Parliament has recently passed the 2007 state budget law in two readings. The draft law proposed by Government is built on a 4% growth of GDP, up to 46.6 billion lei or 3.5 billion dollars, a 10.5% inflation rate, an exchange rate of 14.1 lei per dollar and a 15% rise of exports and a 12% advance of imports. According to the draft law, state budget revenues will exceed 12 billion lei (more than 912 million dollars), while public expenses will account for 12.1 billion lei (917.5 million dollars). The budgetary deficit will be about 73 million lei (nearly 5.5 million dollars) and it will be financed from internal and external sources and revenues expected from privatisation.

Distribution of expenses...

Being a political document first and then economic, this draft budget is trying to conciliate a potential crisis in economy with possible social pressures of an electoral year, as general local elections will take place in 2007. It is actually a normal thing for the ruling force to do its best via budgetary policy in order to boost its chances of re-election in local communities. Perhaps these circumstances have made many persons affirm that the 2007 budget has a strong social nature. Expenses for education, healthcare and social protection were increased by about 600 million lei. We think that this is generally a good fact but if comparing the rise of these expenses with the growth of the 2006 budget and the GDP rise, there is actually no effect.

This was done in the detriment of other strategic goals such as effective poverty reduction by sustaining small and medium businesses or efficient and reasonable distribution of funds. Unfortunately, the small business does not enjoy the attention of governance and the social sustenance policy is based in continuation on principle of social categories, not real incomes of beneficiaries despite rhetoric. This increases the number of illegalities in society, which may be more dangerous than poverty on long term. How to explain the growth of expenses for public order and national security by about 31%? This is an excessive financing of force structure. Or, the Government sees the improvement of socio-economic condition in country with the help of cudgelling and not by adopting and implementing measures capable to prevent the corruption or tax evasion.

Some opposition lawmakers demanded arguments during plenary debates on budget regarding the allocation of 300 million lei to the Academy of Sciences of Moldova. The budget of the Academy of Sciences has grown threefold in the past years and this is a positive fact at a first glance. But most of money was spent on salaries of academicians, arrangement and reconstruction of buildings and less for research, renovation and completion of scientific equipment, which is really in a deplorable state and the undersigned has realised this fact.

In general, we think that the budget still has many shortcomings as regards the expenses (which count for about 26% of GDP and this is a low share if making a regional comparison). As for example, it should include very consistent expenses for standardisation and better competitiveness of Moldovan goods for foreign markets. Some parameters evoked the fact that the 2007 budget could lack resources because of bad situation in external sector of economy. But a country like Moldova, which receives about one billion dollars from emigrants a year, cannot lack finances, but rather allocates them inefficiently. We cannot expect a spectacular rise of foreign trade since several millions lei are allocated to the export stimulation fund, while tens of millions of lei are spent to reconstruct memorials, stadiums and pensions.

The Government should be aware that in the current economic conjuncture the public budget, which is administrated by state at central level or at local level, should ensure the financing of production of public goods. The 2007 budget foresees too little funds for subsidising of farmers - about 240 million lei or 0.5% of GDP. This is a very low amount, given the share of agriculture in GDP formation (approximately 20%) and labour force in this sector (more than 40%). In addition, if this amount was distributed to all producers proportionally to owned fields, nearly 100 lei (!?) would be paid per hectare. These are derisory means compared to the total cost of agricultural works of farmers. It is not effective to allocate subsidies to all and it is not hard to imagine what agricultural farms enjoy the Government's support.

As regards incomes…

The 2007 budget foresees incomes in the amount of 25.7% of the GDP, by nearly 10% more than the 2006 budget. We think that one part of the rise of revenues will be due to taxes on higher salaries and contributions on other incomes. We mean the profit tax of enterprises and the corporate tax: VAT and excises, many of which will remain at the level of 2006. But one question appears here: is the rise of incomes feasible? It is very hard to us to say how the incomes planned for the 2007 budget will grow, given the unfavourable situation in production sector (especially in industry), foreign trade and, not the last, in agriculture. However, we think that we will have higher incomes only when the budget will be based on taxes and fees from productive sector of national economy, not on collections for excises and VAT for imports.

Macroeconomic indicators are under question…

There are some uncertainties related to macroeconomic indicators on which the budget was built. The budgetary deficit is not high; it is even minimal, more than 0.1% of GDP. But the Government must be very careful not to let the deficit go up, since the economic growth could be unrealistic if the industrial production continues the recession of this year (it dropped by more than 7% in 9 months of this year compared with 2005). The intensity of investments in fixed funds which would support the production is very low, a 10% rise only is expected, while capital investments should be between 20% and 25% for a real advance in production sector.

The 10.5% forecast for inflation is discussable. We think that the latest rise of administrative prices (for transportation, acquisition and delivery of natural gas, etc.,), associated with the growth of inflation and the advance of internal demand, will overturn the ambitions of the Government and the National Bank of Moldova (BNM) in their effort to stop the inflation below 11% in 2007. The forecasted exchange rate anticipates a nominal depreciation of the leu, which would direct to a stronger rise of external imbalances. Let's hope that remittances of Moldovans working abroad would not decline next year and would stop the growth of foreign deficits. The BNM would probably welcome a moderate depreciation of the leu, which would not support a rise of foreign deficits, but not a high depreciation capable to fuel a higher inflation.