This week, the IMF visiting mission to Moldova will continue its work. The IMF staff mission headed by Nikolai Gueorguiev is here to look at Moldova’s progress in implementing the Economic and Financial Policy Memorandum signed with the IMF last January and to discuss short-term actions. The IMF mission is also having consultations with Moldova’s authorities on the government’s medium-term policy to promote economic growth.
This year, the style of work of the IMF visiting mission is
more active and democratic. Consultations are held with the
authorities, as well as with the opposition, civil society,
trade unions and employers – with all those who are
well-informed and can speak their opinion on the
government’s financial and economic policies both officially
and unofficially. It is presumed that the results of such
meetings will be reflected in the program of further actions
of the government and the NBM agreed with the IMF. In this
case it will be possible to say that the recommendations are
issued to the country with due account for its diagnosis,
and are not theoretical and abstract preventive recipes
developed by researchers.
Meeting with Moldovan journalists was among the first the
IMF mission had last week. The atmosphere was rather
optimistic. “We are at the very beginning of the mission but
we can already note that the government’s program measures -
agreed with IMF - are being broadly fulfilled,” informed
mission chief Nikolai Gueorguiev. According to him, the
macroeconomic situation in the country has even somewhat
improved in comparison with earlier projections. That is why
policy measures should be adjusted to the situation, “not
necessarily tightened. At the same time, the program targets
are not going to change”.
According to the IMF staff projections, the GDP growth in
2010 may be higher than the projected 1.5-2% while as far as
budget deficit is concerned “it is too early to say”.
Nikolai Gueorguiev noted that budget revenues in
January-February 2010 were low reflecting – in his view –
economic decline in 2009. The IMF experts explain the high
inflation of 8.1% on annualized basis by the effect of
external shocks due to increase in energy prices. (For the
period, the three-year NBM strategy envisages inflation of
5-6% plus/minus one).
Inflation
Nikolai Gueorguiev noted that inflation targeting is the
major NBM policy goal. For many national experts and
non-experts inflation targeting is an obscure and even a
dangerous policy goal. The IMF visiting mission chief tried
to explain in popular terms the meaning of inflation
targeting and why it had been introduced in Moldova. “The
idea of inflation targeting is to keep inflation within a
certain range in a given period. In this case, the main goal
is not to achieve a target by a certain date but rather this
goal should provide a market bench-mark, on the basis of it,
businesses make their plans”. According to Nikolai
Gueorguiev, this bench-mark works over a certain time
horizon, which is normally two years. “That is, two years is
the period in which monetary policy measures are expected to
achieve the intended goal”.
That is why the IMF experts do not say that the higher
current inflation in Moldova overruns the target. However,
if the NBM takes any emergency measures and tightens
monetary policy the target can be achieved but this will be
harmful for the economy, believes Nikolai Gueorguiev.
“For this reason in inflation targeting, central banks of
all countries try and achieve targets quite gradually. And I
think in Moldova, a compromise will be reached and there
will not be any tough requirement when in order to achieved
a planned target it will be necessary to withdraw liquidity
from the market, thus hampering credit to economy. The
economy needs medium-term targets. This is a new monetary
strategy of the IMF and it will take 2 -3 years to get it
going.”
Having been asked about major barriers to Moldova’s economic
growth, the journalists gave an unequivocal answer –
economic instability. The IMF experts are looking for
economic drivers. According to Nikolai Gueorguiev, external
demand will be the main driver of economic growth of
Moldova. “Therefore, maintaining competitiveness is
critically important. To this end the policy of
liberalization and deregulation should be continued.
In terms of medium-term development, another driver of
economic growth is necessary. And if we think that the first
driver of economic growth bases on migrant workers’
remittances and, of course, other financial flows that come
into the country, to support sustainable growth, and avoid
ups and downs it is good for the economy to strengthen
export-driven growth. Perhaps, it is easier to say than to
implement. However, other countries, east European countries
among others, were able to achieve success in this area”.
Credit
As international experience shows, banks need at least two
years to return to the previous level of crediting, says
Nikolai Gueorguiev. According to him, Moldova was fortunate
in a way, since it did not experience a financial crisis as
such. And only one bank went bankrupt while it was not a
strategically important bank. Therefore, the IMF experts
expect that lending in Moldova will recover at a faster
pace.
“In fact, addressing this issue we always come up against
the dilemma which one came first? Egg or hen? Which one
comes first: financial crisis or economic crisis? It is
because the economy suffered from an external shock. At both
domestic and external market, demand for goods and services
remains low. And banks are afraid to lend to businesses
because they think that things do not look that promising
for businesses. On the other hand, businesses need credit to
develop, invest in equipment and increase their
competitiveness. That is why we believe that these facts
have accounted for credit being and a low level or even
going down during the last 15 months.
Today attempts are being made to break the vicious circle.
External demand is demonstrating signs of recovery, exports
start growing, and it is the driver that will pull up the
entire economy. The prospects for businesses are improving,
and in the nearest future banks will provide credit to them
more readily. Thus, the vicious circle will transform into a
virtuous circle. Companies will increase output while this
will increase banks’ confidence in lending to them. All this
is for short term. It is a typical picture of lending cycle
being resumed.”
Sources of Growth
What is necessary to do in order to “start up” the economy?
There are no limits here, considers Nikolay Gueorguiev, in
case of prompt measures and policies the country has a big
range of choices.
“There is such a process, which we name detection, discovery
of a product, i.e. discovery of what can be produced and
sold with high profit. And, of course, the best to deal with
such tasks is the private sector; the state is not very
successful in this. Thus, Government policy goal is to set
free the initiative of the private sector. This is the first
task which
presumes
maximum liberalization and deregulation of the economy. The
second task is to create necessary infrastructure, so that
this initiative could be realized.
If we take a look at other countries of the world, which are
big exporters of industrial products, we will see that they
don’t have any advantages from the point of view of
resources. They were not big exporters 100 years ago. At the
same time, we can see a very wide range of price and quality
combination. On one side is Japan and Germany having high
price – high quality. But the newcomers in this process,
which have been able to get to the international markets,
offer a little bit higher quality at a reasonable price, and
this combination of price and quality makes them more
attractive in comparison with competitors”.
Fiscal Policy
IMF experts were answering in a diplomatic manner to
journalists’ questions on whether the assistance to Moldova
will be provided in case political power changes: “Our
assistance is based on the Memorandum. In case the economic
program of reform continues, than the assistance will
continue be provided”. At the same time, they underline,
that the important role in stabilization of the economic
situation in Moldova belongs to the fiscal policy. Namely,
implementation of measures, stipulated in the program of the
Government, on reduction of current expenditures, which does
not lead to economic growth, - while the execution of
capital investment is liberalized in State budget. “Of
course, high current expenditures are attractive from a
political point of view, -says Tokhir Mirzoev, permanent
resident representative of the IMF in Moldova, - but they do
not serve as a driver of economic growth, they are more, to
say, eating the activity of the country. That is why we have
to change the approach to fiscal policy”.
The Opposition Is Counting Between The Lines
Recently, the mission had a meeting with the opposition.
Members of parliament, who participated in the meeting, also
noted the general positive atmosphere of the discussion,
however, they considered that the IMF experts are too
optimistic, evaluating the situation in Moldova. In
particular, the experts of the Fund note the growth of the
internal demand in Moldova, but “the total volume of sales
includes the utilities as well, whose tariffs were
significantly increased, including, based on the devaluation
of the national currency, - the ex-minister of the economy
says. – On the other side, if sales are growing, why there
is a significant underperformance of VAT? May be it is
caused by the insufficient administration of this tax?”
Members of parliament consider the growth of budget revenues
for Q1 of 2010 by MDL 600 mln declared by the Government
doubtful, too. “If we take a look at the structure of the
budget revenue growth, we see that MDL 300 mln of MDL 600
mln are customs duties and VAT on imported goods. If we
deduct from this amount the increase in excise rates and MDL
300 mln were received by the budget as income of National
Bank. But, actually, these financial resources are
designated to cover the inflation”.
Igor Dodon also pointed out the decrease of investments
within the period of this year. In particular,
investment in statutory capital of Moldovan enterprises
decreased in January-March by 24,4% in comparison with
the same period of 2009. We should not expect any
recovery this year, as the major part of the donors’
assistance, intended for investments, will start to be
received in the Republic not earlier than the next year.
And this year, the IMF is allocating financial
assistance for consumption. This also poses a risk, as
the external debt of the Republic is increasing, which
is not supported by income growth from investments, the
deputy considers.
By Irina Astakhova
