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New investments are needed
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The maintenance of sustainable economic growth is declared as a priority by the government. At the same time, it would be rather early to assert that factors of sustainable development are already available in the country. There are too many alarming signs: the external debt and the problem of fulfilment of debt liabilities, aggravated as a result of “freezing” Moldova’s relations with the IMF, the scarcity of investments, both internal, and external, the obviously insufficient growth of new jobs and the mass migration abroad of the most active part of the able-bodied population. According to the Ministry of Economy, it is essential to increase the volume of domestic investments by 15% — 17% and to attract not less than USD 80–90 million of external investments to ensure the expected GDP growth rates of 6–7%.
The Investment Strategy of the Republic of Moldova, as it is known, was adopted at the beginning of 2002. It is too early to assess the effectiveness of its implementation, so let us look at the current situation.
At the beginning of 2003, in the Republic of Moldova there were registered 2, 670 entities with foreign capital, from which only about 1,500 or only half of them reported about their activity.
Since the moment of registration, the total volume of equity capital of the entities has reached US$ 671 million, of which US$ 414 million (62%) were allocated by foreign investors from 87 countries. At the same time only 14% of the total number of entities have the equity capital exceeding US$ 500 thousand; entities whose equity capital does not exceed US$ 10 thousand (70% of all entities) mainly prevail.
In spite of the fact that the absolute value of foreign direct investments in economy has been increasing gradually — according to the National Bank data at the end of 2002 the total volume of foreign direct investments constituted about US$ 720 million — Moldova is still among the countries with one of the lowest rates of investments per capita, that is US$ 31 only.
Let’s turn to the independent expert’s assessments. The World Investment Report for 2002, prepared by the UN Conference on Trade and Development (UNCTAD), used the share of foreign direct investments in the growth fixed capital formation as one of the indicators of effectiveness of state policy in attracting foreign capital. In general, this figure constitutes about 25% for the countries of Central and South Eastern Europe and for Moldova it was more than 40%, so it needs some additional explanations. According to the authors of the report, this “leading” position reflects in Moldovan case just a very low GDP per capita level and a small size of the internal market.
Other two indicators are used in the UNCTAD Report: Inward FDI Performance Index (the ratio of a country’s share in the global foreign direct investment flows to its share in the global GDP) and Inward FDI Potential Index (based largely on the structural economic factors — the rate of growth of GDP, per capita GDP, share of exports in GDP, telephone lines per 1,000 inhabitants, commercial energy use per capita, share of research and development expenditures in gross national income, share of tertiary students in the population and country risk). The use of these indicators allows, on the one hand, to abstract from the size of the internal market (Inward FDI Performance Index) and, on the other hand, to range countries on the basis of their potential in the field of attracting foreign direct investments (Inward FDI Potential Index).
According to the Inward FDI Performance Index, Moldova is included in the group of countries with high index value (for the period from 1992 to 2001 it was permanently 1,7). It means that the country attracted more foreign direct investments that could be expected on the basis of the relative GDP.
According to the Inward FDI Potential Index, the situation is, unfortunately, different. If for the period 1992–1994 the value of the index was 0.285 (46-th place among 140 countries), in 1998–2001 the value of the index considerably decreased and constituted only 0.194 (109-th place for Moldova, respectively).
With regard to both indicators, Moldova was among “front-runner” countries in 1992–1994, but because of the result of significant declines in the Inward FDI Potential Index in 1998–2001, the country is referred to the group of the “above potential economies”, which means that in order to attract foreign direct investments into the country, further structural economic transformations and development of industrial potential are required. Thus, as the evident reserves for economic growth have been exhausted in Moldova, well co-ordinated practical actions on modernisation of the Moldovan economy contrary to formal optimistic forecasts take on special significance. Moldova is a small open economy. Joining the WTO and European or regional structures (Stability Pact for South Eastern Europe, Euro Asian Economic Community etc.) provides not only access to new markets, but also new opportunities in the field of realisation of the investment projects, simultaneously increasing the requirements for economic and investment policy. Moldova took on the collective responsibility for the creation and development of a favourable investment climate in the region as a whole, having signed, within the framework of the Stability Pact, the Declaration on Attracting Investment to South Eastern Europe, in July 2002.
Will the year 2003 be a turning point? First, it is necessary to recognise, that the last two years, by virtue of circumstances, have not brought constructive changes in the investment policy. There were adjustments to the legislation, initiatives on strengthening methods of government regulation in economy, etc. However, the implementation of some important, though politically complex, intentions in the field of structural reforms has been slowed down. No noticeable results in the improvement of the investment climate, in the elimination of the separation of the banks and the real sector and in the reduction of the shadow economy have been attained. Inappropriate management has complicated the relations with foreign investors and international organisations.
This year, nevertheless, is characterised by livening up of the dialogue between authorities and civil society, in particular with the representatives of business circles both Moldovan and foreign (January — the Moldovan-Bulgarian economic forum, April — the Moldovan-Russian economic forum, June — first session of the Moldovan-American committee on economic and investment co-operation, July — the Moldovan-Israeli businessmen’s forum).
In the common opinion of the participants of all these meetings, Moldova has many advantages, which could attract foreign investors: the geo-economic location, which opens the opportunity of export both to CIS countries — the interest of western investors — and to Eastern and Western Europe — interest of eastern investors (Russia and China); well educated (81% of the population in able-bodied age have secondary education, for the countries with low and average level of income this indicator constitutes about 50%), trained and wage competitive labour force; bilinguism; Moldova feels itself comfortable in various cultural environment, both in the East and in the West.
Unfortunately, these advantages have not been fully explored so far, as President V. Voronin put it, “these advantages have to be recreated and money has to be invested into them”.
So, again, there appears a problem with the quality of investment climate in Moldova, as the criterion of market reforms maturity, confidence of business circles in steady property, judicial system, etc.
Strange, though, the Republic of Moldova, perhaps, is the only CIS country, which does not have the Law on Investment Activity and, as a consequence, the state policy in the field of attraction of internal investments is not precisely determined. Probably, this fact explains the low volume of internal investments. It is impossible to consider the sum of 1.5 billion lei (2002) sufficient for the sustainable development of the country’s economy. According to the latest data of the Department of Statistics and Sociology, in the first half of 2003 the investments amounted to 897.8 million lei (about USD 63 million), although this is 30% higher as compared with the same period of 2002, it is evidently not enough. According to the sources of investments, self-funding (including individuals’ resources) constituted 75%, foreign investments — 16% and only 5% was the investments on account of the state budget. It is clear that foreign investors will not invest in an economy in which local businessmen do not want to invest.
The drafting of the Law on Investment Activity, which is to even the rights of local investors with those of foreign ones, started in 2001 and the terms of its adoption still have not been determined. However, the country has some regional experience: it is the Law on Investments and Investment Activity in the Territorial Autonomous Unit Gagauz Yeri (2001). In contrast to the Republic of Moldova’s Law on Foreign Investments (recognised by the independent foreign experts as one of the best among similar laws of CIS countries), the law of Gagauz Yeri does not make any difference between foreign and local investors. On the territory of Gagauz Yeri all investing agents have incentives stipulated by the Moldovan legislation, as well as additional ones according to the local law. Therefore, today, Gagauz Yeri, in a sense, can be appreciated by potential investors as an oasis in the Moldovan investment environment.
Businessmen, local as well as foreign, wish for a transparent market with predicted rules. They are eager to work to make the Moldovan market one of the most favourable in the region. The first words of the new Minister of Economy Marian Lupu concerned the same matter: “We should win back the confidence of both international donors and the Moldovan business circles in the consistency and predictability of our state economic policy. Without this, our main task — attraction of sizeable foreign investments — can not be accomplished”.