Moldova & IMF IMF Activities Publications Press Releases

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InfoMarket.MD News Agency, issue as of 09.09.2005

Commentary by "InfoMarket.MD"

    Moldova’s external trade balance – will the deficit rise, or does the Moldovan economy have the “Dutch Disease”?

    For the first time since independence Moldova’s balance of foreign trade for seven months of 2005 (January-July) exceeded exports. According to the National Statistics Department imports of goods in this period reached $1194.7 mil. (a 29.9% growth since the beginning of the year), exports -- $595.2 mil. (10% growth). It is easy to calculate that deficit amounted to $599.5 mil., with an increase of $220.7 mil. or 1.6 times since the beginning of the year! That’s surely a precedent. But is it so unexpected? Experts say no.

    Former Prime Minister of Moldova, Director General of «Rompetrol Moldova»
    Ion Sturza
    in his interview to «InfoMarket.MD» named the situation as a “flourishing Dutch Syndrome”:

    [Dutch Syndrome (or Dutch disease) is the situation when considerable inflow of external resources (whether it is payment for oil, transfers or foreign aid) leads to a rise in the exchange rate which can negatively affect the exports sector.]

    - A country with the Dutch syndrome is either a parasite on exports of natural resources or, as is the case with Moldova, on money coming from guest workers, says Sturza. – The country is developing at the expense of foreign factors, not the growth of the real sector of the economy. In Moldova 70% of the budget comes from customs revenues, and unfortunately there is no real growth of internal corporate revenues.

    It is true that monetary transfers from Moldova’s Customs Service to the state budget account for 70% of all revenues of the state. In the above seven months of this years the customs have transferred to the budget 3.4 bn lei ($274 mil.), or 23% above the figures of the previous year or 27% more than planned for this period. Until the end of the year this agency plans to receive 5.08 bn lei ($404 mil), i.e. 61.42% of the country’s state budget planned for 2005 (8.27 bn lei). In reality this percentage is likely to be bigger.

    - A big flow of money is coming to Moldova from our guest workers abroad, – says Ion Sturza, but this flow for different reasons can stop. If any sharp changes in the world, the 1998 situation can take place again. In that year daily revenues in the budget fell tens times totaling only 1 mil lei. In the similar situation some tough measures must be taken by the authorities. Currently the authorities feel comfortable with these revenues; they have a budget surplus, and they use money for social purposes. But little attention is paid to the real sector development in the country. The economy in turn is overheated with noncommercial transfers and in this situation it is hard to take its temperature. The situation makes everybody appeased but it can change any minute, and it is beyond the government control. And if a crisis happens, authorities must be ready to take severe actions, cut expenses, and undertake political responsibility for these decisions. If currently daily revenues in the budget reach 25-30 mil lei, they can fall to 2-3 mil. And when the economy is used to 25-30 mil, I am afraid it can collapse and the authorities must be ready for this.

    Edgardo Ruggiero, IMF Resident Representative in Moldova is not so categorical:

    - Yes, the trade balance deficit in Moldova is quite large, but in the balance of payments (which is a broader concept), it is fully covered by remittances, he said in an interview to InfoMarket.MD news agency. He also underlined that, because the balance of payment is fully financed, from the point of view of financial balance of the country and exchange rate pressure, there is no reason for concern.

    The rising trade balance deficit is at least partly impacted by the growing money remittances, but this may also show loss of competitiveness of Moldovan goods. We want to investigate and discuss this issue with the authorities and see what are the measures that can improve the export possibilities of Moldovan producers, said Edgardo Ruggiero and added - obviously higher oil prices also had an impact on the trade deficit, and prices on other energy resources, particularly gas are expected to go up in 2006. But this is something the authorities cannot control. The only solution is to ease the conditions for Moldovan exports, particularly by improving the efficiency of local producers and by no means through restrictions.

    To the question whether he agrees that Moldova is having a Dutch Disease, Edgardo Ruggiero replied that as in the case of any disease, one should take into account how high is the economy’s overheat temperature:

    - It is necessary to look at what is the proxy for higher temperature – the exchange rate appreciation or more money supply. There was a nominal exchange rate appreciation in 2004. It did not happen this year, though until March 2004, large inflows of remittances had an impact on inflation and Moldovan leu appreciation. Yes, we can say that at certain points of time there were symptoms of Dutch Disease, but in the last months there was a decrease in the exchange rate pressure and inflation. And we hope that this trend will continue. Yes, at certain points of time, Moldovan economy had the symptoms of Dutch Disease, but if you have a disease, that does not mean that you are having it all the time.

    Speaking about how remittances’ flow can change in the near future, Edgardo Ruggiero assumed there will be a change in the geography of Moldovan working migrants, moving from Russia to Western Europe countries, with a higher average level of remittances per person to Moldova.

    Coming back to what could the government do to improve the economic situation in general and reduce the trade balance deficit, the IMF Resident Representative in Moldova said that it is necessary to further improve the customs administration, improve the system of VAT refund for export transactions and reduce regulations. He also believes that final and efficient implementation of the guillotine principle will have a beneficial effect on the business environment:

    - The gap between exports and imports could increase, especially if the energy prices continue to grow. Moreover, 2005 is a difficult year for Moldovan exports due to Russia’s restrictions on certain Moldovan goods. And if the authorities will be able to remove at least this obstacle, the trade balance will improve, thinks Edgardo Ruggiero.

    And true, exports from Moldova increased by only 10%. But this growth could have been bigger but for the Russian restrictions. And from the opposite side there are growing prices for energy resources – all conditions for a sharp increase in balance of foreign trade. Alas, forecasts in this respect are far from being optimistic.