ADEPT | Gagauzia 2016 | Presidential 2016 | Elections 2015 | Bashkan 2015 | Gagauzia 2012 | Political Parties
2003 economic overview
|
|
In an interview to a TV channel at the end of 2003, Prime-Minister firmly stated that it was under the incumbent governing that GDP registered a steady growth three years in a row. The Government is indeed facing an economic upturn, however many economy-watchers rightly point that at least a part of the credit the incumbent Government has been so quick to assume, should be given to the previous two governments as well, which are said to have been the most efficient ones, and this despite some of their mistakes and failures. Playing with macroeconomic indicators so as to report an economic growth, which mainly refers to the soaring industrial output, keeping inflation under control (which nevertheless exceed by twice Government forecasts for 2003 and reached 15.7%), keeping consumption basket under control, did not allow the Prime-Minister to mock a really favourable economic environment. There is a risk that those positive achievements would be undermined by the numerous strategic mistakes the incumbent ruling has made, such as: administrative-territorial reform that garnered a rich harvest of criticism both from civil society and international institutions; attempts to “revise privatisation”, etc. The aforesaid as well as many other initiatives of the incumbent ruling are nothing but an attempt to redistribute the power and the private property in the country. In a related note, Prime Minister failed to mention that his governments’ failure to comply with IMF Memorandum provisions has led to the suspension of the foreign aid granted to the Republic of Moldova.
It is all-too-clear that there is indeed a high-level economic growth (as compared to other countries, including those in transition). A 6% GDP growth under a rather adverse environment (to say at least) is quite an achievement. However, this growth, as was the case in the last year, has duly raised some IMF and WB eyebrows, which seem to be the only ones willing to question those figures. Nevertheless, the data released by the official sources does not allow for comprehensive analysis, which would require in depth research based on international standards so as to reflect the real economic growth. Still there are at least two things clear for now — economic growth is still vibrant despite the worsening parity between economic sectors. In fact, economy does not work without measuring. This is the more important as the figures released by authorities serve as input variables in the decision-making algorithms used by the enterprises and individuals in general. The figures speak of government’s intentions, and also validate or invalidate the expectations of their end users. In conclusion, those figures either increase or decrease the credibility of economic policies.
It is worth mentioning that Moldovan economy, which is oriented mainly towards exports, is very much shaped by the international and regional economic trends. The great majority of Moldova’s trade partners have registered a significant economic growth in 2003 that brought about a surge in demand for Moldovan goods. At the same time, we should point that Moldovan GDP continued to grow throughout 2003 despite the 40% drop in investments and the 25% increase in consumer spending. Consumer spending has exceeded even the economic growth. It was mainly boosted by the money sent by Moldovans working abroad, reportedly 300 million USD. To a large extent they are sent via other channels than the banking ones and therefore may not be precisely estimated, however they are said to exceed the officially reported figures.
Therefore, economic growth was largely due to the surging demand in goods and exports, and the Government has nothing to do with it. That is exactly why, we do believe that Moldovan economy continued to grow throughout 2003 due to the “critical mass” of structural factors in the economic system necessary to overcome the economic crisis and not because Communists, who claim to be experts in macroeconomic policies, were in power. If we are to accept these terms, than one may say the macroeconomic scenario for 2003 is under pressure.
Besides good news, 2003 brought some bad news as well, namely worsening financial discipline, i.e. soaring debts of the big state run enterprises, which account for 40% of the budget revenues. Those enterprises have accrued huge debts especially on energy. Authorities uncertainty with regard to the imbalanced foreign trade and the danger of ending up with a doubled trade deficit estimated at 500 million USD — all indicate rather hard times ahead. In this respect we should mention the worsening international financial climate as well, that is why it is all the more important to keep a close eye on high trade deficit.
Another interesting thing is that throughout 2003 the Government failed to establish a favourable environment for the domestic producers that would have enabled it to capitalise on internal financial sources or to attract foreign investments for projects of paramount importance. Noteworthy, according to the Heritage Foundation’s economic freedom rating, Moldova has registered the lowest level of foreign investments in the region. All in all, direct foreign investments in the Moldovan economy hardly reached 60 million USD, that is 20 USD per capita (excluding Transdnistria). For comparison, in Romania foreign direct investments in the same period reached 2.2 billion USD, that is 100 USD per capita, whereas in Czech Republic 9 billion USD or 900 per capita.
Western companies do not view Moldova as an attractive place for diversifying their capital, which on the contrary seems rather fertile for the Russian capital. Out of the total 700 million USD direct foreign investments in the last ten years, Russian companies account for 40%, whereas Spain the second in the list, accounts only for 10% and is represented only by one strategic investor. Thus, poor institutional capacity and inadequate legal framework define Moldovan business climate. A special attention should be given to the state capacity to guarantee businessmen’s private property and personal security. Due to the aforesaid the flow of foreign investments in the Republic of Moldova has been rather meagre, whereas the illegal exodus of capital from the country has reached an alarming scale, and this despite the difficulty to precisely estimate the financial outflow. According to some unofficial sources, in monetary terms the volume of international drug smuggling via our country has by far exceeded foreign direct investments in Moldovan economy.
At the same time not enough steps have been taken to slowdown the economic crisis in agriculture and processing industry. Nevertheless the steps to be undertaken are quite obvious: abolishing state monopoly on agricultural acquisitions and establishing agricultural exchanges, especially in the Euro-regions Moldova is part to. In addition, one should not have an agricultural policy as such, without having an appropriate rural policy targeted at reducing the number of people directly employed in agriculture by fostering rural industry and services sector in the rural area. Insufficient funds accrued to the state budget has lead to underspending in the socio-economic field. In this respect, it is not clear why does the incumbent ruling insist on over-spending and keep engaging in over-protectionist social policies when the funds available at the moment could barely cover the existing needs?
In addition, the new territorial division that the incumbent ruling enforced in 2003 garnered a rich harvest of criticism from international organisations, which contributed with more than 500 thousand USD to the previous 1998 reform. Given the worsening relations with foreign donors, enforcing a new administrative-territorial division was yet another reason to limit and even suspend the crediting. It is worth mentioning that the Memorandum on the economic and financial policy signed by the Moldovan Government and IMF provided for a raft of measures aimed at perfecting public funds management. However, these measures could have been enforced only within the framework of the local public funds system at the county level, the only mechanism able to ensure a full transparency. Reduced geographical and economic scale of the administrative-territorial units would certainly result in a diminished fiscal basis and its growing dependence on the central budget. Going back to the old administrative model would require more funds than the current state budget could afford to spend.
Corruption that has turned into a quasi-cultural and socially accepted norm throughout 2003 has had severe repercussions on Moldovan welfare and economic development. Great many economists view corruption as a factor undermining the economic growth. It is known for a fact that a high level of corruption brings about economic slowdown by plunging investments. The same reasoning holds true in the case of Moldova. A country as tiny and as poor as Moldova is not an attractive market and very few investors venture in placing their capital in its economy. Besides economic ones, corruption brings about also wide-scale social repercussions. For instance it was estimated that the bribes paid annually in Moldova exceed by far the public spending on science, education, healthcare and culture. According to some unofficial data the bribes paid in 2003 to various governmental structures and public officers are estimated a 1 billion Lei, i.e. 30% of the revenues to the state budget. This and many other repercussions undermining the economic system, make the 5% GDP growth forecasts quite unrealistic. Under those circumstances even a 4% increase is a wishful thinking.
Many analysts have pointed the effects of the Transdnistrian conflict on the Moldovan economy. For them Transdnistria is the “black hole” of the Moldovan economy, which proved to be quite prodigious for legalising illegal money, for fiscal and customs evasion, as well as for economic embezzlement. A fiscal and customs mechanism of legalising illegal income has been put in place via direct involvement of Transdnistrian, Russian and Moldovan banks. Each year dozens of millions of USD coming from CIS are wired to Transdnistrian banks via Moldovan private banks. Such schemes are nothing but money-laundering. Given Moldovan decision-makers’ irresponsibility and their obscure policies towards Tiraspol, Transdnistrian conflict-watchers believe that settling it via federalisation of the Republic Moldova is the least acceptable option viewed from the European integration perspective. If the economic breakthrough had not been short to come, then sooner or later people to the left of Dniester would have settled the conflict themselves, being lured by the high living standards of the other side and even would have put an end to the Tiraspol Mafia clan.
If we are to believe official statistics, stabilisation and even boost of the economic growth marked 2003. However, the most important problem was not solved, namely those two trends have had no impact whatsoever on the lives of ordinary people. Poverty has reached unprecedented levels in the Republic of Moldova with 75% of the population living on less than 2 USD per day and 50% on less than a dollar. According to some official data 40% of the population live below the subsistence level. Huge discrepancies in the citizens’ income illustrated by the great number of citizens on the verge of poverty, and worsening social and economic indicators in the context of a weak public administration, should urge the Government to better distribute the income thereby keeping away from tearing down social cohesion, especially when it comes to a population uncertain of the abilities of its political class and disillusioned in what has it been able to deliver out of the electoral promises made.
Skyrocketed prices on food in 2003, including on bread, has taken many aback. Citizens were outraged by the new prices. Indeed, skyrocketed prices affect each one of us. However, when it comes to food, it is the poor who suffer the most. According to official statistics food accounts for 70% of the consumer spending in the poor families. And bread is, as we all know, one of the basic products, which is in demand regardless of the price fluctuations. Having said that, the increase in bread prices has pushed the poor ones even further into the verge of poverty.
In 2003 National Bank of the Republic of Moldova pursued a restrictive monetary policy as it did in the previous years, by strengthening the “holly pillar” of the national economy, i.e. Moldovan Lei. At the same time, National Bank policies have had also an adverse impact, namely inhibited economic and investment activities. Because of the high interest rates bank credits were inaccessible for funding investment projects, whereas a lot of jobs were cut. Such a policy might be effective on a short term, given that the first risk any economy should eliminate is taking inflation under control. In the long run, however, once macroeconomic stabilisation is secured keeping inflation under control should not be a top priority any longer, instead sustaining economic growth and fighting unemployment should become a priority. By introducing regulatory measures, such as norms prohibiting and limiting the free exchange of the Lei and other currencies, and by toughening the monitoring requirements over foreign currency transactions, National Bank only boosted the outflow of capital from Moldova. Indeed, Moldovan economy and its business climate in general are not among the most luring locations for placing investments, and by its actions National Bank has helped even further the capital “exodus”. Why is capital exodus so crucial for any economy? Firstly, because it generates such phenomena as: surging unemployment, shut down of companies unable to keep up with the competition because of obsolete technology, lack of highly-paid jobs, depreciation of assets on the financial and monetary market, state incapacity to deliver social promises and to secure budget revenues. These and many other negative factors have drawn back Moldovan economy.
Poverty Reduction and Economic Growth Strategy completed at the end of 2003 with the financial support of World Bank would not be enforced, unless foreign aid is provided. Coupled with the worsening situation in agriculture, it is hard to imagine how Moldova would stay afloat without any foreign aid. Other donors condition their assistance programs on a Memorandum with IMF. Unless it manages to secure funds for this year, the Government would have to resort to loans from National Bank. However, besides domestic policies that are to be financed there are also foreign debts to be paid. It would be almost impossible to restructure them without an agreement with IMF in place. In the absence of preferential foreign credits, the only way the Government would be able to comply with its foreign obligations is to resort to National Bank foreign currency reserves. However, using up the reserves would easily boost inflation and speculations on the national currency. These would ensue in skyrocketed prices, national currency depreciation, and of course more expensive imports. Those risks would be slightly diminished by the money wired by the Moldovans working abroad. However one should not overlook the scenario when people hunching an out of scale increase in prices would hold on to their currency, which in turn would wield a heavy pressure on the exchange rate. The internal debt is already too high exceeding 200 million USD, and even if the Government manages to stabilise the external debt, it would to do so on the expense of the internal one. If the economic crisis is too severe it might end up having a wide-scale social and political impact.
And last but not least, it is worth mentioning the uncertainty on the regional and international financial markets, as well as the unfavourable Euro-USD rate, which more or less have affected the domestic market. Euro appreciation against USD has had a negative impact on exports that have become non-competitive as a result. Bankers also fear the inflating effects of the said phenomena especially after Euro has crossed the critical 1.25 USD per unit rate. More expensive imports and excises in Euro have skyrocketed the prices, tendency likely to perpetrated in the future. Given this bleak international economic outlook, Moldova would face even more challenges to boost its economic recovery. Therefore it would be harder to export, whereas external funding of our deficits would become more complicated.
In its last country report IMF forecasted a lower GDP growth in 2004 then the previously registered 5%. There are other facts to back up such forecast. Private consumption and consumption demand would not be able to boost an economic growth. There are also concerns with regard to the saving process that is crucial for economic growth. It was determined by the fact that several banks dropped the interest rates on deposits to a level even below the inflation rate. Another tendency is the fact that people prefer cash to bank accounts, and this because of shadow economy and low trust in banking institutions. For instance, payments in cash account for 22% of the total transactions in Moldova, as compared to 5% in Western Europe and 3% in USA.
Regardless of the state of negotiations with IMF and WB in 2004 (a pre-election year and a year full of political and economic surprises) the Government would have to focus on restructuring, it would have to communicate to the people why it is important and why the time is not on their side. In general, Government should have more transparent economic policies and a more articulated communication policy. It should stake its future on catching the economic recovery wave. Loosing the momentum by engaging in reckless actions would complicate the economic situation even further. Anyway, the country would face tough challenges, like reducing trade balance deficit, decreasing inflation, etc. The Government would have to be more careful in correcting its foreign debt. In this respect, controlling internal absorption (of consumption and internal investments) is essential, whereas wage policy has a key role to play in keeping a decent level of social justice.