Moldova & IMF IMF Activities Publications Press Releases

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"ECO" WEEKLY NEWSPAPER, May 25, 2005 issue

Edgardo Ruggiero, Resident Representative of the International Monetary Fund in Moldova:

All prerequisites exist for a new cooperation program between the IMF and the Republic of Moldova


Question:  During  a recent press conference in Chisinau, the new IMF mission chief for Moldova made it clear that the negotiations on the new cooperation program with the Moldovan government have yet to be initiated. In your opinion, both in optimist and pessimist terms, when does the new program can be signed? What are the basic conditions that will be put forward before the new cabinet of ministers and the National Bank of Moldova? 

Answer: It is difficult, at this stage, to talk in optimist and pessimist terms. Let me try to elaborate on this. All the prerequisites are there for a new program and the next mission that will come in June this year will verify what has the government done in the period between the IMF missions, and what are the steps that need to be taken in the future. It is possible that there will be a mission in September, which will start negotiations. I think this is a very likely scenario.  

Then, how long will it take to finalize the program? At this point it is difficult to say. It depends on many factors. But the important thing is that the elections are over, and we can sit down around the table and discuss with the government about macroeconomic management and structural reforms, and hear the government views on these.  

With regard to the conditions that will be put forward, we do not call them conditions. At the beginning we discuss with the government the elements of the macroeconomic management and structural reform. And these becomes measures in the macroeconomic program. The funds from the IMF are disbursed on the basis of implementation of agreed measures.  

But the most important measures for releases of funds are what the public usually does not see. These are quantitative performance benchmarks. People do not see them, not because they are not made public (they are in the documents), but because most of the discussions in the public view are about other things: about pre-shipment inspection, for example, that was discussed a few years ago.  

These quantitative indicators have to do, for example, with the budget deficit, with the NBM credit to the government. We discuss these indicators and review their implementation and performance.   

As you know, the National Bank has the monetary program, the Ministry of Finance has the budget, and we are interested in ensuring that the numbers included in these documents are consistent and ultimately lead to lower inflation and economic growth. This the core part of our work. We call this financial program. 

Question: How do you assess the economic component of the government’s program? Does it correspond to the objectives of economic reform and liberalization? Are there any concerns? 

Answer: The government has adopted a number of plans: the EGPRSP, the EU - Moldova action plan, the Moldovan Village program, and then the government program Modernization of the Country – Welfare of the People. All these documents have one thing in common and that is that they are inspired by the idea of market liberalization. For example, in terms of structural reforms and business environment, there is emphasis on the guillotine approach, the establishment of one-stop-shop of business registration, the reduction of licenses needed to do business. All these objectives, if implemented, will lead to improvement of business environment.  

Now, I will not talk about concerns, but I will talk about challenges for the government: 

·        The first challenge is to prioritize, because there are a lot of ambitious objectives. If we read the government program, right from the beginning it says “courage and luck will favor us.” What is behind this motto of the government program? I believe it is a recognition that the program is ambitious and that luck usually helps people that set themselves ambitious objectives. It is important to prioritize, because there is only a limited amount of administrative capability, there is only so many laws that can be written, so many regulations that can be changed. So, there is an administrative constraint. Another constraint is financial constraint, because many of these programs involve investments and expenditures;  

·        Another challenge is to resist calls for excessive tax exemption and reduction of tax rates. It will be important to continue to fit fiscal policies in the framework of the medium term expenditure framework. It is also important to resist calls to establish large subsidy programs. Subsidies are very easy to establish but are very difficult to eliminate.  

·        On the structural side, the agenda is very large and it will be a challenge to focus on essential priorities. For example, in last year there were several calls for protection of domestic producers in some sectors. These calls for protection may continue. It is up to the government to analyze the situation in these sectors and decide what steps to take.  

Question: More experts noted that besides the economic reform there is a need in a wide structural reform of central and local government. What does the IMF suggest in this regard?   

Answer: We also think that this is very important and we agree with what the government wants to do in terms of the civil service reform. But we believe that it will be very important to invest time in the planning stage of this reform and to have a functional review of ministries and agencies. And on that basis to decide where to reduce employment in the civil service. This is not easy to do, it is very difficult. In fact, international financial institutions and bilateral donors are working with the government to help them reduce civil service. Both the UNDP and the World Bank are sending experts in the field of civil service reform.  

Civil service reform is not easy. What needs to be done is to review the roles, responsibilities and functions. After this review of roles, functions and responsibilities is done, a comparison should be made of the current situation with the requirements of modern market economy. This is difficult and it takes time. And again, we go back to the courage of this government to try and implement this reform. 

This is not just about the reduction in personnel, but also about reform in the central government’s philosophy. And this is what the government is saying.   

The public usually focuses on the reduction in personnel by X percent. And this X percent is arrived at by examining at the level of government committees what the government should achieve and what are the functions that the civil servants should perform in the modern market economy.     

Question: What is your view on the budget process? Monthly statistics show that the state budget revenues are always higher than the planned amount. Is it normal that the amounts on the revenue side in the annual budgets developed by government are below the feasible revenues that can be received? Is there any risk that the surplus of received resources could be used for other purposes than those stated in the budget law? 

Answer: The budget is prepared on the basis of certain macroeconomic assumptions. If this macroeconomic variables change, then the revenue change. What we have had in the last few years is that growth has been higher than what was budgeted; increases in wages were higher; imports were higher, inflation was almost every year higher than planned. Now, all these variables have an impact on fiscal revenue. More imports means more VAT and excise revenue. Higher wages mean more personal income taxes and social security contributions. Higher inflation means higher VAT receipts and higher income tax collection.  

And then, there is improvement in tax administration and customs that also have an impact on revenues. But when you are referring to the discrepancy between projections and actual collection, the change in economic assumptions is very important.  

I think the risk that the surplus could be used for other purposes than those stated in the budget law is minimum because there is annual budget and there is a budget revision. The allocation of this additional revenue is decided when there is a revision in the budget. The Chamber of Audit also controls the budget. And that control is very specific and detailed. So, I do not think there is possibility to allocate money to different purposes.

I think that the public is confused and does not have a clear understanding where the money is spend. It may be difficult for the average person to read the budget document and to understand what this process means. That is why it is important to improve transparency both in the budget document and the budget process.  

Question: How do you assess the European integration trend? Can the current government move towards economic indicators imposed by the member’s status? What should the government do in this respect? 

Answer: The government should implement the EU - Moldova action plan that, as it has said many times, is one of its priorities. The implementation of this action plan will significantly advance the approximation of Moldovan legislation, norms and standards to those of the European Union. And will build the foundation for further economic integration. And this integration will be based on the adoption and implementation of economic and trade related rules that are inspired by European legislation.  

This will result in the development of trade with the European Union, investments and growth. But again, it will take a lot of time and administrative resources to implement this action plan.   

As regards the economic indicators, this is not an issue that is being discussed now. The inflation and budget deficit target that the member countries have to stick to, is not a target to be followed by neighbor states. At this point, it is mostly a matter of changing domestic legislation to make it more in line with European principles.   

Question: What could be the costs of local businesses if Moldova will come considerably closer to the EU? Are Moldovan companies prepared to compete openly with the European undertakings?   

Answer: Let me give you the example of Romania. As Romania is becoming closer to the European Union and the country grows, the local wages increase, so that companies located in Romania whose competitiveness is based on lower wages,  leave Romania and look for other markets and countries. A few years from now, this can be a problem also for Moldova if it becomes very close to the European Union. For the time being, it is an advantage to be closer to the European Union because there are investors from Poland or Romania for whom it is no longer convenient to produce in those countries, and they may come to Moldova or other countries. In the short to medium term, for Moldova, there are just opportunities rather than problems to be closer to and advance in relations with the European Union. In particular, once there is a successful implementation of EU action plan, there may be facilitation for Moldovan enterprises to sell their products in the European market.    

Question: What is your view on the high level of some economic indicators: inflation rate and trade deficit; what are the risks in the short and medium term? 

Answer: Inflation has increased in the last few months. Let us see what are the factors behind inflation, but not before saying that initial stimulus towards higher inflation may come from factors outside the control of monetary authorities. These could be changes in administrative prices, increases in wages, higher energy prices and remittances.  

But, at the end of the day, what determines inflation in the medium term is the amount of money that is injected in the system. So, we will discuss with the National Bank, the Ministry of Finance, and in general with the authorities ways to bring the inflation back down and reduce money supply.      

The problem is that high inflation poses a potential threat to macroeconomic stability by creating inflation expectations. In Moldova we are not yet there, but it will be important to monitor the situation and make sure that measures are in place to bring inflation back to the objective that is in the macroeconomic program of the government. What I want to underline is that it is important to change the upward trend of inflation. 

As regards the trade deficit, to the extent that the trade deficit is financed by other inflows in the balance of payment, by itself it is not a serious concern. At this point, there is a lot of remittances in the balance of payment, so the trade deficit is financed. The concern arises in the situation when the trade deficit reflects poor export performance. This has not yet been the case in Moldova, but looking to the medium term, it will be important to strengthen the foundations of the economy, to diversify the export base, so that you have a vibrant private sector that is able to compete effectively with other countries. 

I am not saying that the government should ignore the trade deficit or that IMF will ignore it. But from the financial situation of the country as a whole, this trade deficit is being financed in the balance of payment. The government can reduce its trade deficit through structural reforms that will make easy for private sector to become competitive, and the foreign investors to come here with the objective to produce and then export.  

Question: Generally, what are the main macroeconomic risks that the government should eliminate so as the growth is not compromised/slowed down? 

Answer: I will talk about the challenges that a government in Moldova has: 

·        The first one is to ensure macroeconomic stability. Moldova has achieved a lot here in recent years. In recent past we had resurgence in inflation and this needs to be reversed. Again, we are talking about trend. And here, there is a role for both adequate monetary and fiscal policies. 

·        The other challenge is fiscal sustainability. The fiscal picture in 2004 was better than expected. The tax revenue was in excess of expectations. The key now is to continue to manage the expenditures in a way that will not compromise medium-term sustainability. The important is not to use the increases in revenue for costly programs. Not to establish programs that imply expenditures that are difficult to change in the long-term. Again, the government agenda is very busy: EGPRSP, the European Union action plan, Moldovan Village program. All these actions imply expenditures, so it will be important to prioritize what are the first expenditures that will have to be taken.  

Question: A recent IMF report on the financial system in Moldova highlights a number of risks posed by the state interference in the operations of Banca de Economii (the second largest in Moldova), both for this institution in particular, and for the banking system as a whole? Will the IMF bring up the issue of privatization of this bank? 

Answer: We have not yet discussed this specific matter with the government in the context of the new program because we have not started negotiations on the program. In general, we think that it is up to the government to decide what enterprises to privatize or not. What is important is that privatization is done in a transparent manner. There are many examples of countries in the world that have public enterprises. The important thing is that they need to be managed with an economic objective in mind, and in a way that does not impeach on the economic rights of other operators in the market.   

Question: Generally, what is the IMF’s opinion on the privatization process in Moldova? More officials argued that railway transport, civil aviation and power generation sectors should remain under state property, since they represent strategic and vital sectors for economic security. What is the IMF’s stance?  

Answer: It is obvious that in the period 2001-2004 the privatization process slowed down. However, there are some positive signs. In December 2004, the privatization committee decided to have an inventory of the state property. This is the first step towards deciding which enterprises will remain under state property, and which ones will be privatized. Some enterprises can be privatized immediately, at a symbolic price, while others can be sold for good money, or the government may decide to restructure and then to privatize them.  

Also, as you know, in the EGPRSP (section 6.6. on industry), as a priority action there is the acceleration of privation of industrial enterprises. Once these objectives are implemented, we hope to see acceleration of privatization.  

I do not view privatization as important because the budget collects money. In my view privatization is more important because it brings strategic investors to the country with knowledge with regard to new production techniques and market access.   

The government should decide what are the strategic sectors and what should remain under the state property. The important thing is that this state ownership is exercised with  economic principles in mind.  

There are many models that can be followed. Let us leave, for example, the production area and talk about education. In America, for example, there is mainly a private model, while in Europe is mostly public provision education. What is important is that in either models the principles of fair competition between public and private providers is respected.  

Question: The economy of Moldova remains fairly exposed to external risks: huge debt; remittances that have an impact on the domestic economic developments, but can drain out all at once; large dependence on a single export market, etc. Can the IMF contribute through its tools and programs to the mitigation or elimination of these risks? What should the government do to benefit from the IMF’s support in this respect, and especially for external debt restructuring? 

Answer: You suggested that remittances may drain out all at once. This will not happen. It is very unlikely. Moldovan migrants have very strong attachment to the country. Therefore, they remit the money, and they will continue to do so. Assume there is an economic crisis in Moldova. What likely is going to happen is that migrants will transfer more money to Moldova, to help their families in Moldova. This will help macroeconomic management.  

The conditions under which the remittances could dry up if some countries decide to block migration for seasonal or temporary migrants. But at this point it is pure speculation. I do not think there is any vulnerability associated to remittances.  

But there are other vulnerabilities. Moldova is a small open economy with large debt. An economy with these conditions is a vulnerable economy. How can the IMF help? We help in three different areas: 

·        we give technical assistance;

·        we continue the policy dialogue on macroeconomic and structural reforms;

·        we provide balance of payment support to the NBM.  

Technical assistance is that the public usually do not see. For example, we have given in the past and we continue to give technical assistance to the Main State Tax Inspectorate, the Ministry of Finance on transparency of budget and budget process; to the National Bureau of Statistics on the elaboration of price indices and national accounts statistics. We have also given substantial amounts of technical assistance to the NBM. And this technical assistance is free.  

One important impact of what the IMF does, when we give financing to a country, is that our financing plays a catalytic role, sending a signal that good macroeconomic policies and structural reforms are in place. So, more money is given by donors in the form of grants and low interest rate loans to the government.  

The money we give to the National Bank is at 0.5 percent interest rate; repayment over 10 years and the first payment is due 5.5 years after the borrowing. This is very cheap money.  

Another way the IMF can help is that after there is a program with the IMF, the government might initiate the restructuring of its external debt through the Paris Club [provided certain conditions are in place].