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Reflections on the state budget for year 2004
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The state budget, approved in the third and final reading by the Parliament was declared to be aimed at enforcing the Government work plan, in reality it has proven Government’s incapacity to translate Communist Party ideological message and political options into a clear budgetary policy.
First and foremost this is a political document, thereby the Communist majority in Parliament undertook a raft of measures to consolidate its repressive and administrative apparatus. The 2004 budget has ended with an excessive funding of the law enforcement forces, seen by the Communist governing as a means for improving the socio-economic situation in the country by means of “blackjack”, rather than by passing and enforcing laws able to prevent various forms of corruption and embezzlement. Populist promises made during the electoral campaign have once again dashed against dire economic straits. Previously such promises have been tempered by the dead hand of financial isolation brought up by the frozen relations with international monetary institutions.
Next year budget provides for an 80 million USD debt to be restructured via the Paris Club. At the same time, there is no effective debt restructuring agreement and apparently this would not be secured this year either, given that Chisinau’s relations with international monetary institutions, especially IMF and World Bank are not exactly in good terms. Therefore we might expect that being confronted with growing shortage of foreign funds, Communists are likely to go against their doctrine and accept privatisation to be continued. Out of the total budget revenues, around 500 million Lei are expected to come from privatisation. However, this amount could be secured only if economic and infrastructure units are efficiently privatised. Some members and supporters of the ruling party have set their heart on those units, but because of shortage of funds they prefer to postpone privatisation. This refers in particular to the North and North-West electricity distribution networks as well as to some winery and tobacco units.
The document also provides that 80 million USD, or 22% of the forecasted budget revenues, shall be used for servicing the foreign debt. Given that a country’s long-term foreign debt in USD terms is the main criteria for assessing a country’s risk rating, a number of international rating agencies scored Republic of Moldova very low, especially on financial-grade rating, viewing it as a country posing a threat in terms of attracting investments, business climate and servicing foreign debt. In this respect, we might claim that international agencies decreased the rating because of the growing foreign debt, which at the moment is worth 1.62 billion USD (!), i.e. 90% of the country GDP for 2004. Governmental debt accounts for a great proportion thereof, worth 840 million USD, i.e. 52% of the total foreign debt.
We should not forget the internal debt as well, namely public debt, which has lately rocketed ahead at its fastest pace reaching 3 billion Lei, or 200 million USD. If disbursement of foreign credits is not resumed, internal borrowing might as well turn into a classical financial pyramid, thus jeopardising financial and banking system of the country. Although it went through a number of onerous situations, financial and banking system has avoided a wide scale system risk, and consequently a major crisis. Under those circumstances, mention should be made that similar to the way international monetary institutions impose a set of requirements for the Republic of Moldova to comply with, domestic state structures should proceed alike with their debtors. Generally speaking, Government should approach the issue of state enterprises’ management in a more consistent manner, especially in cases when such a solution as privatisation is not at hand. In this respect, it is worth mentioning a recent Government resolution on freezing debts worth some 500 million Lei. Government didn’t even go into the trouble of assessing what would be the likely outcome of such a decision. Even in the short-run, it might have disastrous repercussions on the state budget.
Indeed, a wide range of enterprises would capitalise on such a fiscal philanthropy. It should not come a surprise then, that the list of the said debtors was not made public, nor were the details of freezing the debts. However, it’s a quite easy guess which enterprises would enjoy the Government goodwill. There is no doubt that the aforesaid resolution comes as rather handy to certain high-rank officials in Government, or Parliament for that matter, who stay behind those enterprises and tinker with the law to their personal will.
If freezing historic debts is not coupled with paying back current debts, in a year or so Moldovan economy would be on the verge of collapse. The debt would be so great that it would bear the risk of suffocating state budget, as well as private enterprises. This national scale debt “bomb” might explode one day bringing about the worst financial crisis ever. And the repercussions of such an explosion would reach us regardless of how well we try to “hide” behind a relatively balanced budget. Under the given circumstances, all the implications of such economic measures must be weighted carefully, so as not to risk the alleged “victories” scored by the incumbent Government for a short lasting “bubble”.
Another very interesting, though quite annoying aspect — as it stands now in the state budget, the revenues exceed by 340 million Lei the expenditures. This might lead us to the conclusion that next year budget would no long bear a deficit, but rather a profit, which is to be used for servicing external debt. It’s a good thing for the Government to pursue such an honourable objective as securing budget balance, especially via reducing administrative spending and directing the resulted savings at economic development. However, such an objective is not exactly in line with local officials’style, who prefer instead to rise taxes and fees to be paid by business.
The 2004 budget provides for a 22% income tax for legal entities, the same as last year. And this despite the fact that last year Minister of Finance publicly stated that he would decrease the income tax for businesses via various fiscal levers to 15%, whereas for natural entities to 10% and 15% respectively, however those intentions never materialised. Further, those quotas were concealed by the Government being unable to explain IMF representatives how would it cover for the loses incurred by decreasing the income tax. Moreover, although many called Government to decrease the taxes, several members of the ruling party stated that by means of this budget, Government sought to carry on and preserve the stability of fiscal rules, as frequent changes in legislation as a rule destabilise fiscal system and boost financial embezzlements. The message behind those statements is that fiscal burden on real economy would not be reduced, as was requested by businessmen and several opposition parties.
Therefore, post-soviet management stereotype, i.e. high taxes bring high revenues, was meticulously observed in this budget as well. In reality though, one may easily prove that even if the corporate and income taxes on natural entities are reduced by 10%, whereas VAT by 5 points, the state budget will still not be affected. Further, such initiatives might be strong incentives for boosting economy and considerably reduce the level of shadow economy.
Despite its social character, the current version of the budget is a follow-up to the fiscal and budgetary policies of the previous years. Therefore, one of the theoretic principles of the economic policy, i.e. budget is a financial reflection of the state policy, hasn’t yet gained grounds in the Republic of Moldova. This year macroeconomic indicators at the core of 2004 and cited by Prime Minister hаve excited the entire Cabinet of Ministers. Metaphorically speaking, there’s only one step to go from extasy to agony.