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Negotiations with IMF and Moldova’s external debt
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A working mission from the International Monetary Fund (IMF) visited Moldova in May. The results of the government’s negotiations with the IMF mission may be generally described as useful, and most of recommendations by IMF experts are relevant. Fiscal measures such as the introduction of a 4-percent single tax for small and medium-sized businesses, as well as the reintroduction of the corporate profit tax like the single tax for enterprises but of 12 percent, not of 18 percent as in force until 2007 seem to be actions capable to compensate the income deficit of the state treasury (for more details, see the chapter Economic Policies of the current issue). In fact, these are some common measures, since both IMF and authorities indicate an economic recovery, as for statistics, and many sectors of economy report growths. So, most of them are even welcome.
On the other hand, though official statistics are optimistic (particularly regarding the industry), one should not forget that the productive sector is flying so far, with many companies facing difficulties to recover after the crisis. Even more, the industry covers about 12 percent of GDP, while some sectors reported a decline yet in the 1st quarter. One should acknowledge that Moldova is facing relatively serious difficulties to attenuate the shocks (in particular, those coming from outside in terms of effects of some crises, etc.). But for the most of part, these difficulties have origins in the development level, too, structural and institutional features which are incompatible with the current market rules. The large share of foodstuffs in the consumer’s basket (more than 35 percent) explains why the depreciation of leu fuels the inflation quickly. The relatively large share of foreign trade in domestic economy was a trump for its capacity to resist to the impact of the international crisis.
The recovery of production accompanied by larger budgetary collections pushed the Government and IMF to increase the economic growth forecast. However, vulnerabilities are pretty serious when a growth model is based on consumption (fuelled by remittances and filled by imports) and a quick-rise crediting, foreign loans and often speculative investments. By updating some economic indicators, IMF experts are expecting lower spending for certain sectors, particularly after the crisis, worrying but warning the Government that some problems related to budgetary-fiscal adjustment could occur. A relatively high growth speed was observed the last years, but the fiscal consolidation has to make serious steps so far. One should not forget the small budgetary collections of Moldova which count for about 38–40 percent. State-run companies are very inefficient.
The situation summoned the Government to reduce the spending in some areas. For example, the reduction of subsidies in agriculture revolted many farmers. Of course, the budget is poor, but the country has a huge fiscal evasion as well, which is formally estimated at 15 percent of GDP, and these funds, if collected at least half of them, could go to diverse activities including the agriculture. This is a proof that state institutions fail their missions or are very corrupt. One should not forget the regional development, Moldovan villages which are in a deplorable condition.
The Moldovan economic policy does not control these factors and this hardens the structural and institutional reformation, so that it would be very hard to achieve the desired results without radical actions. These measures are bitter on a short term and have undesired social effects, but they could bring amazing results on a medium and long term.
Nevertheless, the IMF expects a recovery of Moldovan economy and a positive evolution of macroeconomic indicators, even compared with the previous forecasts. In addition, Moldova as an emergent economy has competitive advantages of being close to eastern markets, including Russia, as well as to the European common market. Concomitantly, Moldova is enjoying an increased attention from donors, who direct important financial resources to help implementing reforms, particularly in the framework of European bids of the country.
External debt and its consequences…
One should admit that the crisis hit Moldova in a wrong moment, particularly because fiscal collections are very small (38–40 percent) compared with GDP, and external disequilibrium, trade deficit, current account deficit, external debt seem “to break out” of acceptable limits. However, it seems that they do not scare authorities very much, especially compared with neighbouring countries. If Moldova succeeds the fiscal consolidation, improves the allocation of resources through investments in sectors dealing with exports and replaces the imports successfully, its rating will grow, and thus the foreign funding costs will decrease.
The overall foreign debt, which includes the public debt administrated by Government, of monetary units (banks, financial institutions) and of nongovernmental and private sector, amounted to 4,778,000,000 dollars in early 2011. Thus, the overall foreign debt counts for about 82 percent of GDP, given Moldova’s GDP of 5.8 billion dollars in 2010. It seems to be pretty satisfactory, despite speculations on this issue and a relative rise in 2009 and 2010.
Statistics reveal that the overall foreign debt increased by more than 10 percent in 2010 alone. However, one should not forget that Moldova got in 2010 the largest financial inflows, grants, foreign credits from donors such as the IMF, the World Bank, the European Commission etc. Thereby, the rise is something normal. Elsewhere, the solvency of a state is measured by the size of the foreign public debt (of Government) compared with GDP, rather than of the overall external debt, and it increased by more than 40 percent in one year, but amounts to 1,116,000,000 dollars or nearly 20 percent of GDP. This rate is more than acceptable if compared with the public debt of Greece, Ireland, Portugal (EU member states which face serious troubles), which counts for 120–140 percent of GDP, or Romania’s public debt of 40 percent of GDP, with this country being carefully monitored by key international financial institutions in general and IMF in particular.
Therefore, speculations that not even our grandchildren will be able to pay off our debts are senseless. Even more, the current overall external debt is comparable to the one recorded in late 2009. It is even smaller. In addition, foreign debt payments in the period concerned were fully reimbursed to external creditors. Hence, this issue should not raise so much concern. It was earlier noted that the external debt has increased particularly due to some agreements and crediting from financial institutions, etc.
In 2010 we were just witnesses of an unprecedented opening of international creditors, and this fact is excellent since it provides more credibility to foreign investors willing to place their funds. Or, the former government did not enjoy such an attitude from foreign funders. On the other hand, this accumulation of debts is likely a world phenomenon, which spread after the international economic or financial crisis. Countries facing now problems related to the external debt and budgetary pressures to serve these debts owe more than 100 percent of GDP, compared with Moldova’s debt.
Finally, the external debt is not the most relevant indicator with direct tangencies with the external competitiveness of the country. Some countries have much larger debts compared with GDP than Moldova does. There should be some critical limits for the external debt to challenge a potential economic recession and hit the external competitiveness of the country. Or, in the current conjuncture, Moldova is capable to return these funds, without being obliged “to tighten its belt” too much.