Moldova & IMF IMF Activities Publications Press Releases

                                                                                                                     In Russian

Logos Press Weekly Economic Magazine, No. 3 (643) - January 27, 2006


During February 1-10 an IMF mission will be visiting Chisinau, this time its aim being to continue consulting with Moldovan authorities during the development of a new program with IMF. As far as we know, negotiations will be focused on the Memorandum on Intentions developed by Moldova independently and presented during the December mission to Chisinau. On the other hand, one can judge, to some extent, about the IMF position on key issues by the final overview of the December mission entitled „Concluding Statement of the Mission” ( About 1/3 of the document deals with the direct overview of the last year and the other 2/3 are statements on desirable, in the opinion of IMF experts, actions of Moldovan authorities in 2006 and in the mid-term perspective. Thus, the exchange of opinions on the conditions underlying an agreement on a new program with IMF in Moldova, has started already.

IMF Resident Representative in Moldova Johan Mathisen

We have not managed yet to obtain permission to read the Memorandum drafted by Moldovan authorities, however the newly-appointed IMF Resident Representative, Mr. Johan Mathisen, has agreed to discuss key issues included in the Concluding Statement.

I have counted 15 recommendations in the Concluding Statement that are based on the analysis of the situation as of the end of 2005. Hence, we would like to comment with the assistance of the IMF Resident Representative at least some of them, to make the internal logic of this document even clearer.

In the beginning, we asked on purpose the IMF Resident Representative in Moldova whether the lender’s approach towards issues to be agreed upon with the borrower prior to signing a new program agreement has changed. We asked this question, since prominent members of Government have stated to press last year that, in their opinion, in future IMF could focus exclusively on monetary policy and macroeconomic aggregates rather than come down to issues regarding practical actions of the Government. Mr. Mathisen answered that IMF has developed a single approach to the interaction with the authorities of member states and the Republic of Moldova is no exception. ‘Any IMF program focuses on two aspects – macroeconomic issues and structural reforms’.

The IMF Resident Representative has referred to the text of the Concluding Statement developed by the December mission, where recommendations on macroeconomic policy implementation are linked to practical actions of Moldovan authorities. The same – rather concrete – nature of recommendations is characteristic of the comments of the IMF mission on changes in the financial sector. Therefore, let us say that it is axiomatic that IMF deems it necessary to discuss all issues that affect, in one way or another, macroeconomics and the financial policy of the country. This rule is true not only at the stage of drafting a new agreement, but also at the stage of further monitoring of Program implementation. It seems that, in case there are differences in approaches to settling issues, they should not be kept secret but rather agreed upon during negotiations. On the other hand, we do not know about any notable stumbling block in the way of signing a new agreement.

Let us start from the opinion of IMF experts that economic growth in Moldova is ‘likely to slow marginally in 2006 and over the next several years, given the impact of higher energy prices and emerging tightness in labor markets’. When commenting on this statement during out meeting, Johan Mathisen has expressed satisfaction that Moldova has managed to close a gas supply deal under rather good conditions. However, the new gas price not being final in the mid-term perspective, it is a risk factor and it should be taken into account. Moreover, this country does not use its own energy resources and thus cannot vary them, depending fully on energy import. Therefore, the IMF representative explained, objectively, the increase of gas prices and of oil products – even to a greater extent – do create a negative environment for Moldovan economy.

However, the overall decrease of growth because of the factors mentioned above is not fatal. Moldovan authorities cannot prevent the external increase of energy prices, but they do have possibilities to provide for internal economy development incentives. In particular, IMF experts consider that the significant slowdown of economic growth can be avoided by encouraging investment, primarily in the private sector. “I am aware that earlier were developed good strategies in this respect, they are included in EGPRSP and in the EU-Moldova Action Plan. I think that it is necessary to move purposefully in the chosen direction’, says Johan Mathisen. The Concluding Statement of the December mission also states rather mildly the desirability of further improvement of the business environment and ‘clarifying the role of Government in the economy’.

Since we have touched upon the IMF ‘competence framework’, let me note that in the latter case its suggestion fall outside the framework of structural reforms and touches upon a more delicate area, i.e. the institutional plane, philosophically speaking. Still, this fragment of the IMF Statement states no novelty – our local ideologists of developing liberal market economy have been talking and writing about the need to define the role and authority of the Government and, in a wider sense, of all state authorities. However, as IMF experts know too well, changing the mentality of politicians and economic leaders is more difficult than making formal changes to politics and economy. Perhaps it is the main challenge in the way of necessary changes that are partially traced in various strategies. One should take it into account at all times.

Let us get back to concrete recommendations spelled out in the latest Concluding Statements. In the following paragraph IMF experts recommend that ‘the monetary authorities should aim for inflation in the single-digit range’. Out authorities have already achieved half of this goal by stating that they would aim at reining inflation at the 10% mark and they have managed to do so in the last year. Still, there are also suggestions regarding inflation stability over longer periods of time. ‘The more self-organized and flexible (responsive to challenges) the economy of a country is, the less the inflation fluctuation amplitude is’, says Johan Mathisen. IMF has suggested that in future the fluctuation of the inflation rate should be less significant than during 2004 and 2005.

Certainly, even the MDL exchange rate is more stable than inflation, which is calculated based on a number of commodity items and thus is, presumably, more inert to changes.

Inflation rate are paid so much attention not only because of its relevance for macroeconomics. ‘Inflation is, after all, effectively a tax on people’s holdings of domestic currency’, reasonably note IMF experts. It should be also mentioned that it is an additional tax, cutting down real current income of individuals and economic agents.

‘Achieving single-digit inflation in an environment of strong foreign exchange inflows’, IMF experts state, ‘will demand continued sterilization efforts by the National Bank, as well as tight fiscal policy’. Here we would like to argue a bit with IMF experts, i.e. shift accents a little in the above quote. I can prove that internal causes of inflation in Moldova are not only the exchange of foreign currency received from abroad into MDL by individuals, but rather the increasing income from customs taxes received by the state budget from the importers of goods.

Probably it is not a bad thing that due to resources collected by border customs the state has the possibility to finance social programs. However, every measure needs to be reasonable and appropriate, and this principle should be complied with. Therefore, one cannot argue with the IMF suggestion to the Moldovan Government to implement a prudent tax and budgetary policy. IMF experts appreciate as positive budget execution without deficit. On the other hand, they suggest that it would be advisable to take a closer look and analyze the quality and composition of public expenditures that have increased during the last two years from 33% to 37% of GDP. It might mean, as we have understood from explanations given, a warp towards excessive pressure on the private sector.

Therefore, acknowledging a number of positive aspects in the 2006 Budget Law, IMF experts note the planned significant wage increase in the budget sector. In their opinion, it reduces the resources for greater investment development contributing to economy growth, namely in building and repairing roads and other infrastructure projects. It is hard to argue with that. However, the comment in the Concluding Statement that the increase of wages in the budget sector ‘could limit the possibility of cushioning the blow of higher energy prices for vulnerable groups’ is disputable, in our view, since a significant part of budget workers are ‘vulnerable groups’ themselves. Thus, we could suggest IMF experts to look into more detail: it is one thing when wages of teachers are increased and quite another – when expenditures for the Government machinery are increased, whose staff could and should be reduced resolutely.

We could continue the analysis of comments and suggestions made by IMF, but the restrictions on the length of a newspaper article makes us postpone this exercise for a later date.

It seems that representatives of state authorities will be able to clarify certain aspects during negotiations with the members of the mission arriving to Chisinau next week and IMF suggestions will be amended accordingly. After all, as we have been convinced after talking with Johan Mathisen, IMF experts just want to help Moldovan Government, within the limits of their authority, to overcome more effectively existing problems and to tackle strategic tasks. The only thing that could prevent successful negotiations and collaboration is the lack of clarity about the reasons underlying somebody’s opinions and actions.

Alexander TAKII