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Interview with Johan Mathisen, Resident Representative of the International Monetary Fund (IMF) to Moldova

BASA-Press: What are the latest developments towards signing a new
Memorandum Agreement between IMF and the Republic of Moldova?

Johan Mathisen: As you know, we were able to reach an agreement in February with the government on the PRGF-supported program and we are now preparing to take these documents to our Executive Board that will take place probably in May and that will be the launch of the new 3-year PRGF-supported program. This will be probably phased out as semi-annual reviews as a standard approach to these PRGF arrangements. And in the program there are basically two broad categories of elements. One is a macroeconomic framework which has targets for fiscal and monetary policies and inflation. On the other hand we also have a list of agreements on policy reforms and with specific time frames, which we have in mind. On these structural elements, itís basically taking it from the EGPRSP as well as the EU-Moldova Action Plan. We are basically aligning the program with the key reforms which are already on the table and owned by the government. We are hoping to support the government in reform process and make sure that reform process, the momentum, keeps us moving ahead in reforming as planned.

How would you appreciate implementation of prior announced reforms? According to some critics it is not enough to merely adopt the laws to make them work.

Absolutely, and looking ahead it is clear that we are going to have a lot of challenging times. These are going to be difficult reforms. Just to take one example Ė the public administration reform, which is a very important reform but in country after country these are the reforms that are proving to be very difficult to implement. They have a lot of technical elements to them and they have to be done properly and they also have to be supported from within. You know, the civil servants themselves have to support this process otherwise they tend not to achieve the objectives so clearly, there going to be a lot of difficult and challenging times ahead of actually implementing the reforms.

You mentioned public sector reform, what other priorities do you have on the agenda in the field of reforms?

The kind of approach we have taken in our discussions with the government  - I would put it under two headings: one is - international best practices; and in some regard this is our competitive advantage. We have 184 member-countries and we work in all these countries, so we do have some experience in what tends to work properly and what are the modern practices. There are a lot of reforms that need to be done to that end. Just to give one example Ė the independence of the National Bank. In country after country we have seen that once the regulatory framework and other mechanisms are put in place to ensure that the central bank in a country is able to perform its functions independently, there will be direct benefits for the economy, such as lower inflation, as well as higher growth and more poverty alleviation. So, there are a lot of reforms in this context, to ensure independence of the National Bank, to make sure that the framework itís operating in follows what is the modern best practice.

Second heading - is the momentum we are seeing on the government side in terms of moving ahead on the legislative side, for example by trying to harmonize its framework with the European system. This is really driven by the EU-Moldova Action Plan and we are aligning the elements in the program with the things that are already ongoing under that umbrella. 

Just to give you another example Ė the corporate governance of state-owned enterprises. There is clearly a lot of work ahead of us to make sure that the framework that is in place in terms of managing the state-owned enterprises in Moldova is adequate. For example, ownership of these enterprises Ė to make sure that they are managed through a central unit in line with the strategic priorities of the government. I understand that there are a vast number of state-owned enterprises in the economy and they are an important segment of the economy. At the same time, they are really, to a large extent, managed by the line ministries, which might or might not be appropriate. But in any case there should be an assessment that if we have a need to move them away from the line ministries into the management of, for example, Ministry of Economy. Their financial reporting should be done on frequent basis; this is what we have seen in country after country where we have set up a system when an enterprise reports back on regular basis and also informs its owners, which in the last extent is the Parliament, of itís plans.

Under this context, have you discussed with the government the issue of privatizing state-owned enterprises that have proven to be inefficient?

The government has indicated to us that they are undertaking efforts to reinvigorate the privatization process. The government, as far as we understand, is in the process of assessing which enterprises and which sectors of economy should be under the domain of the public sector. This also goes back to other objectives such as poverty alleviation and growth - to make sure that these enterprises are run in the most effective way, to make sure the jobs are secure, incomes are secure and increasing, and have benefits for the wide economy. We are really encouraged by the efforts we are seeing on the government side to revive the privatization process. 

What are the macroeconomic projections for Moldova in the current year?

The key target is on macroeconomic stabilization and that means that our key target is inflation and we do expect that the inflation rate, which has been coming down, to continue coming down in Moldova. We are targeting an end year (2006) inflation rate at 9 percent. We do think this is an achievable objective, the last year it was 10 percent. At the same time this is going to be challenging because of the higher energy prices. So, this has to be coupled not only with continuation of the prudent fiscal policy, but also with a fairly tight monetary stance.

In what way will the economic growth be affected by the growth of prices on natural gas?

The high energy prices really worry us. It is what we call in economics - negative terms the trade shock. It means that the incomes in real terms are falling because you have to spend more income on energy costs. At the aggregate level we expect this to actually translate into lower growth than we saw last year. We expect the real GDP growth de decelerate somewhat from the last yearís level of 7 percent. Our target is a 6 percent growth in 2006, which is in line with the macroeconomic framework.

Recently, IMF released a report on the impact of remittances on Moldova's economy, what are the conclusions listed there?

Remittances come in the focus in many countries not only in Moldova, although Moldova is receiving a lot of remittances in terms of GDP and the size of the economy. But itís in many countries and there is a lot of discussion about the impact and the size, about the future trends and so forth. We, as economists, tend to focus on the economic issues, i.e. related to migration of labour and sending home money. But, first of all, it is important to highlight the social dimension of this phenomenon, because remittances are very often the case when the heads of the households have left their home for working abroad and sending money to their dependents. It has clearly a very strong and positive social function in terms of consumption, education and housing for the dependents left back home. At the same time, we also see separation or splitting up of families.

Going back to the economics of remittances, it is clear that in some sense it has been the source of growth for Moldova. But, looking ahead, it is not clear whether they will continue to be the source of growth in Moldova, because other countries that have reached such a level of remittances, reported a subsequent stagnation in remittances, and in terms of economy it grows very sharp for the first few years and then flattens out. So, we would expect that to also happen here unless there is a massive movement of labour back to Moldova.

And problems?

It is quite clear that remittances are posing a challenge in the macroeconomic sense on all fronts. One is on the fiscal side, because, as remittances grow and to a large extent are used to finance consumption, imported goods, the tax revenues that are associated with these imports grow strongly. So, there is a challenge in terms of not getting used to sit and relax, seeing these remittances growing stronger and expecting they will do so in the future. In fact, the revenues in the future will not grow as much as they did in the past. That clearly makes it important not to continue to rely on this growth in the future.

Second - a large segment of the working population leaves abroad and there are social consequences in terms of the fiscal side: the schools, orphanages have a fiscal cost. There is also cost for the pensions. Now you have a pay-as-you-go system here and, as labour moves abroad, there are fewer and fewer that would actually contribute to the system, so you might in the future end up with bigger imbalance between the pensioners currently receiving pensions and those that contribute.

Third - remittances also pose a challenge on the monetary side, because a large chunk of these inflows comes in as remittances and goes out as imports. But there is also a part that is financing domestic goods and services, such as construction of houses and education. The foreign exchange that comes in has to be sterilized to achieve the monetary objectives. So, it is a challenge because, as you sterilize, the cost of doing so goes up by itself. At the same time, maybe we should also allow for some more flexibility of exchange rate to accommodate this kind of inflows. Of course, some of it might be offset by the high energy prices, which might make this job a little bit easier in the future.

Finally, I would like to emphasize that it has a structural dimension. The remittances pose, I would say, almost an opportunity, because here you have a source of income that is coming from abroad. Currently it is going into education, housing and consumables. But in some way it could also be shifted (we have seen it in some countries more successful than in others) into investments, which would translate into an economic growth in the future. This really comes down to making sure that the business environment is such that there is a possibility of channelling this income from abroad into staring up business, cutting red tapes, so businesses can grow and incomes can grow and they will be the source of income in the future.

How could these inflows be channeled into investments if the difference between interest paid on bank deposits and loans is so big at the moment?

Itís a challenge in many countries of turning remittances which are now to large extent (I guess, also in Moldova) by-passing the financial system, since they are coming in as cash transfers and then staying outside it. There is a lot of effort in many Latin American countries, for example, to make sure that these are actually incorporated in the financial system.

But this brings out a larger issue and that is financial intermediation in Moldova and development of the banking system. Because when you look at the banking system as such in Moldova, it is clear that we have a long way to go in terms of its development. There are many news reports about scandals and other things Ė and it is clear that the real losers in terms of underdevelopment of the Moldovan banking system are the Moldovan banking consumers, because they are not receiving, nor have the opportunity to use, the services that in other countries have been developed.

I am no expert in what exactly is available today but such things as mortgage services, for example, I understand are not fully developed. Also Internet banking, which is a very prominent service. The Moldovan banking consumers are basically loosing out on using these services. But on the other side, it is costly to use banksí services: high fees and high interest rates. So, you are loosing out by not being able to use services because they are not there or they are not fully developed, while those that are there are costly.

It is not to say that the news reports about these scandals should be kept under lid. I am a firm believer that the only way out of this is transparency and allowing the large international providers of banking services to enter the Moldovan banking system. We have seen it in many countries that once foreign banks or international large banks come in, they bring in know-how, bring in technology and bring in capital, and they disburse growth in terms of services and also competition. Itís like car industry, if we take another example. You can block foreign entrance in terms of car production to come into the economy and you could try to develop your own car industry, to sell your own cars. But you could end up, as in many countries that have tried that route, with cars that are very costly, do not have the same range of uses and quite frankly, funny looking cars. The other possibility you have in trying to build your own car production is to open up and let the big international producers come in and help supply the market.

Mr. Mathisen, what else would you add to conclude this interview?

I would like to emphasize that I have been here three months and had a lot of discussions with the authorities, as well as with the donorsí community. There seems to be a lot of good will both on the government side, and on the donorsí side here. I think, this could be a very good time to take advantage of this good will of the international community, as well as of the momentum that is going on in terms of the implementation of reforms. This seems to be a very positive time for Moldova.