Moldova & IMF IMF Activities Publications Press Releases

Limba romana                                                                    

by Edgardo Ruggiero on the occasion of the Article IV Mission arrival - Monday October 18, 2004


This is our usual press conference to introduce the mission. The team of the IMF will arrive in Moldova tomorrow and start work on Wednesday, October 20. We will finish the work on November 3. This is what we call Article IV Mission. This name refers to one of the articles of the Articles of Agreement, or the statute of the IMF basically, which says that for every country once a year there is a mission of the IMF that reviews the economic situation. We are not going to discuss the financing by the IMF of the National Bank at this point. We are not going to discuss an economic program. As part of the mission work, we will also assess the progress in implementation of the Economic Growth and Poverty Reduction Strategy. As you know, this is a very important strategy that your government has finalized and we, like all donors, are interested in how quickly the strategy is implemented, and how well it is implemented.  

This is a general introduction to the mission. Let me spend a couple of words on where we are now with the economy and reforms. As you know, the economy is growing at a very good pace, more than 6% in the first six months of the year. By the end of the year it will probably grow at 7% or more. It is just not possible at this point to say how much it will grow. We will discuss it and will make our best projections with the Ministry of Economy. Inflation, as you know, is still around 10% and we will also discuss with the government what is the best approach to try and reduce inflation from the current level. We will look at things like the role of the fiscal policy in helping the National Bank to reduce inflation.  

One thing we think is very important are structural reforms for Moldova. At this moment, the growth of GDP is very much a function of demand: external demand and internal demand. You have external demand from Russia and all the countries in the former Soviet Union and central Europe that are growing a lot. And then, what we believe is the most important factor, is domestic demand generated by workers’ remittances. Sustained and long-term growth cannot be a function only of consumption, and in this particular case, of remittances. We need a supply response, we need the productive system to start responding to demand.  

I want to give an example of the official data for the first eight months of the year on the industrial production. The branches that have registered an increase in production are footwear, carpets, clothes, furniture, household appliances, food and drinks. These are all responding to domestic demand. If you look at the increase in imports, it is also related to demand that is fuelled by the workers’ remittances. And while these industries were growing in the first eight months of the year, others like drugs, pharmaceutical production, processing and canning of meat, tobacco, were producing less than last year.  

I want to give you also another example of the problem. If you look at remittances in 2003, it was around $480 million. That’s 24% of the GDP, a very large amount. At the same time, Foreign Direct Investments (FDI), that is the investments of the rest of the world in Moldova, were only around $69 million. FDI in Moldova were only 14% of remittances. That means that this economy is really growing because of  consumption which is fuelled by remittances, it is not growing because there are people investing in Moldova from abroad. May be investments will come in the next few months but, for the time being, they are still less than remittances. What we need is structural reforms, which will make it easier for people to invest, investments from both domestic sources and from abroad, and make it very attractive for foreign investors to come to Moldova. The Ministry of Economy is making a lot of proposals in this field and we are confident that there will be a lot of improvement in the next few months. 


Q. What happened and what is going on now with the EGPRSP? Do you think the government is able to implement it by itself?  

A. Of course, the government will be able to implement it by itself. They may need some assistance in specific areas, to bring in people that have specific knowledge about, for example, how to write a better law on attracting foreign investments or they may need somebody to give the government an idea of how other countries have done a good implementation plan. But the government is perfectly capable to do this. Actually, I am glad that you mentioned the EGPRSP. We expect to discuss the EGPRSP at the Board of the IMF and the Bank in November. And as you know the Board of the IMF and the World Bank only endorse the EGPRSP, they don’t approve it. Our role is not to approve the strategy.  

Q. But the strategy’s implementation relies on external financing. If there is no external financing we can call it born dead.  

A. No, there is a lot the government can do and the financing comes from many different donors. As you know, we only give money to the National Bank, we do not give money for projects. While the WB, UNDP, SIDA and many other organizations give money for projects that are within the EGPRSP and many other projects, and they are already lining up to fund some of the projects.  

Q. The financing is hinged on the active program with the IMF or at least verbal consent from the IMF? 

A. No, that’s not the case. The WB has a program that will be discussed at the Board of the WB. And this program, for at least the first year, is about projects: investment in social sector or water and sanitation for example. They do have a program that will go ahead even if there is no program with the IMF.  

Q. You said that donors are willing to provide assistance. Does that mean technical assistance or financing specific projects?  

A. It will be both because you need both. The government of Moldova will have to monitor the implementation of the EGPRSP. There are people that have done this in other countries and they know how to do it. May be the government wants to bring these people here to Moldova to help.

Q. In the introduction you referred to the fiscal measures that will be applied to reduce inflation. That means that your assessment of the inflation is negative. Do you think that these fiscal measures might result in the outflow of capital from the banks and what specific fiscal measures are you referring to?  

A. Obviously, there is a misunderstanding of what fiscal measures we are talking about. I am glad you asked this question as this gives me an opportunity to clarify this matter. From the fiscal point of view, there may be a need for a less expansionary fiscal policy. We are not talking about specific fiscal measures or administrative measures. We are talking about demand management. The budget sector is an important component of demand. And now, how much less expansionary the fiscal policy may have to be, is a matter of discussion with the government. 

Q. What do you mean by saying a less expansionary fiscal policy? Does that mean that you will discuss the reduction of subsidies in agriculture or to certain social groups? 

A. That is a second level of discussion. The first level, we will look at the overall macroeconomy. For example, we will look at different components of the demand and see how much the government is contributing to the overall demand. If we think it is a bit too much, we will discuss and bring it as an issue to the government. And then if the government agrees and they will say, “ok we will cut our deficit by this amount,” the government will also have to tell us where it can cut expenditures. We can only make some suggestions to them. We cannot be too specific. Of course, when we make suggestions we look at what is inefficient expenditures for example. And some of them, some subsidy schemes are not efficient because the borrowers never repay, the loans may go to selected people, the loans may create corruption.  

Q. Can you give an example of inefficient subsidy? 

A. No, not at this point. You probably know more than me. 

Q. You are the best person who can tell us about this because you have a comprehensive approach. 

A. We will discuss these matters with the government and, you know, we are in a way jumping the gun here. Because there may be no need to cut expenditures, we do not know at this point. It is something we have to discuss with the government.  

Q. What do you think about Moldova’s external debt situation and the discussion during the World Bank and IMF annual meeting on reducing the poor countries debt? Why this discussion was inefficient? This the CIS 7 initiative. 

A. This is something that everybody would have liked to be brought forward, continued and finalized and bring some results. By the end of the day, we are left with the usual channels for debt reduction. Unfortunately, the CIS 7 did not bring the results that some of you and us would have expected. But there are many opportunities for countries to get debt reductions, a temporary respite to pay the debt. As you know, for the last two years at least, we have been trying to help the government to go to the Paris Club. But we never finalized the financial program so it was not possible to go to the Paris Club. But you also know that the government has been able to buy back some of its external debt at big discounts and they are engaged with bilateral creditors for rescheduling. So the government is following another route.  

Q. But the biggest debt is owed to the multilateral creditors and the WB in particular. What are we going to do with this debt? 

A. I guess you have to talk to the WB. But if now Moldova gets money from the WB for budget support for example, this money has to be repaid within 40 years, the interest is 0.5 percent and there is a 10 years grace period. This is very cheap money. The previous loans had different interest rates but the new loans have very low rates.  

Q. But we are paying based on commercial rates now. 

A. No. The loans that you now get from the WB are repaid at these rates.

Q. In your view, how does Moldova meet its external debt obligations? Sometimes, what you say differs from what Moldovan officials say.  

A. I don’t think it differs. Moldova has made a very clear choice of rescheduling the external debt to selected creditors and at the same time not paying the principal but they are current now on interest payments.  

Q. Why the EGPRSP endorsement has been postponed? Is it because of the disagreement between the WB and IMF or the quality of the paper? 

A. It’s neither disagreement between the IMF and the WB nor the problem of the quality of the strategy. It is just that both the IMF and the WB were engaged in a review of the procedures of the IMF and the WB on how to assess the strategies of different governments. It is a general review, it has nothing to do with Moldova specifically. And just what happened is that the strategy of Moldova was finalized very close to this review. This is what caused delays. These are technical delays. The substance does not change absolutely. In particular, the government does not need to wait for IMF and WB endorsement of the strategy. They can in summer already implement the strategy. I think this is the most important thing. This is the strategy of the government, the government is implementing it and the fact the IMF and the WB have not endorsed it in August and will endorse it probably at the end of November really does not change much. Six months from now you will look back at the delay and will say that really it was nothing.  

Q. Our readers are waiting for good news. Could you tell us if there will be a mission coming by the end of this year to negotiate on the financing program? And the second part of the question refers to the nominal appreciation of Moldovan leu and budgeted exchange rate of 12.7. Is this exchange rate a realistic one? 

A. With regard to the first part of the question, this mission will write a report and will present it to the Board of the IMF at the beginning of the next year. There is obviously not going to be any mission to discuss financing before than.  

With regard to the second question of nominal appreciation, I cannot tell you at this point if 12.7 is the right exchange rate. We are not supposed to. But what I can tell you is that we already discussed with the government and will discuss during this mission about the pressures on the exchange rate.  

Q. What are the formal and informal barriers to creating a favorable investment climate? 

A. I can quickly go to the formal and then I can try to give you some examples of informal barriers. The privatization program is not really going fast. The government could simplify the regulations regarding entry and exit from economic sectors. Anything that has to do with registration and liquidation of enterprises, everything should be made simpler in this area. The operations of the enterprises should be made simpler. The licensing, standardization, certification systems should be reformed. The customs reform should be accelerated. The government should think strategically about the State Tax Inspectorate and its role in helping enterprises rather than collecting due taxes from them. The government should have an organic policy regarding the development of small and medium enterprises. They should have a liberal trade regime. For example, if you look at the latest package of increases and reduction of custom duties, those are designed to protect certain sectors. The moment your protect certain sectors, you put other sectors in a disadvantage. These are formal restrictions, and the government is thinking about these restrictions and try to come up with a policy of reform.  

Informal restrictions are those that you are familiar with: the exports of wheat, the export of sunflower seeds last year, scrap metal, some restrictions on imports. These are informal restrictions. They are not written anywhere. May be what is accepted here as normal, is viewed by some foreigners as corruption. So, may be the foreigners also need to understand the current system a little bit.