Moldova & IMF IMF Activities Publications Press Releases


Weekly Newspaper "Chisinau Observer"

Thursday, September 26, 2006

Thomas Richardson:
“There is no such thing as free lunch”

One has to pay for reducing the inflation

Yesterday in the Government Building took place a press conference on the performance over the previous six months in implementing macroeconomic policies and structural reforms agreed in the Memorandum on Economic and Financial Policies (MEFP) for 2006 signed in May by Moldovan Authorities and the IMF. The results have been assessed by the IMF mission headed by Mr. Thomas Richardson. Usually, IMF staff hold the Press Conference by themselves, but this time the Prime Minister Vasile Tarlev participated being “assisted” by Mr. Leonid Talmaci, Governor of the NBM and the Mr. Mihail Pop, Minister of Finance. Mr. Tarlev expressed his satisfaction regarding the cooperation with the IMF. According to his words, both the IMF experts and the Government have the same view on the current problems and on the way of solving them. The Prime Minister was pleased that the mission will recommend to the IMF Executive Board to increase the financing for Moldova from $118m to $163m. This proposal will be approved by the IMF in mid-December this year. “Money is never enough, - said Mr. Tarlev. –But we have to be realistic. Too much money is also not good…but no one is actually giving any”.

The mission reviewed the Government’s performance, noting that in general it accomplished it’s commitments. According to Thomas Richardson, the macroeconomic situation in the country has just a small deviation from the Memorandum, signed by the IMF with the authorities in May 2006. Even though, Moldovan economy faces external shocks, the financial situation is stable and there are no premises for its worsening. The mission also expressed it’s content regarding the budget for 2007, which has already been approved in two lectures.

During their visit in Moldova, the experts hold discussions with the Government concerning the changes in the Memorandum, taking in to consideration the difficult situation Moldova faces. These changes will reviewed by the Executive Board in mid-December this year and it’s a secret by then. At the question “Which was the main issue discussed with the Government ?” Thomas Richardson answered to the “CO” journalist:

- I’d say that inflation rate is a very serious issue, as far as it’s important for the investors, but also for the whole society. The inflation level registered in Moldova, at 14.4 – if I’m not mistaken (September this year compared with October previous year), is one of the highest rates in the FSU countries. Of course, this is partially a result of the two fold increase of the gas prices during this year. Moreover, the monetary and financial factors played their role. That is exactly why we believe is appropriate to tighten the monetary and financial policy in Moldova. We raised the issue of increasing the interest rates for state securities and BNM certificates. They have negative value in real terms at the moment. I mean if to subtract the inflation increase from the interests received, you get less value from the securities, because the inflation “eats” everything. That’s why we believe it has sense a smooth belt-tightening of the monetary and financial policy. Everything depends on the interest rates, on the reward the BNM is ready to pay for securities it issues. The NBM must sterilize more money. It has to be ready to pay those interests that dictate the market, and withdraw money from circulation. This is the way the monetary policy is working anywhere in the world. Of course, the interest rates on credits for commercial banks will also increase, but not too much - reasonably. It’s obvious, that the demand for credits will reduce then. The reduction of lending is just a indirect result of our recommendations. There will be less money in circulation. In consequence, the inflation will decrease gradually.

- It’s a contradiction then – until now we spoke about reducing the interest rates for credits, in order to finance the economy. Now – it’s vice versa, the interest rates will go up and the lending will be reduced?

- It’s necessary to scale the level of interest rates versus the inflation. We think that the competition on the banking market is not high enough yet, there are not so many foreign banks in Moldova. When more foreign banks will come in Moldova, the competition will increase, they will fight for their clients, as a result all the banks will work more effectively. From this perspective, the interest rates will decrease for the clients. All this refers to the private financial sector. The National Bank, instead. is responsible for controlling the total money supply, the broad money. What will really happen on the market, depends on the competition between banks. If there will be a competition, this will slow down the interest rates increase. Once the inflation will step back, the interest rates will go down. Note, that the inflation rate increased from 10 percent up to 15 percent within one year. The level of interest rates, instead didn’t rise that much. That’s why we see this significant increase in lending. On one hand, this is positive, on the other hand it has a negative macroeconomic impact.

- Not everyone agrees with you. Many people consider that the inflation should be set free and the market will regulate it all by itself. As our economy is not well developed and the enterprises are not strong enough, then the tightening will lead to bankruptcy of some economic agents.

- Many countries face this problem, where there are supporters of a less tight monetary financial policy, when more lending is available. Over the 60 years of IMF activity, we saw in many countries, that as soon as we let the inflation go highly up, the economic growth regresses right away. This idea doesn’t help – there is no such thing as “free lunch”. If you print more money, you get a higher inflation, but consumption doesn’t increase. What we get is – the investors get scare, because they fear of losing money, they always try to avoid a high and uncontrolled inflation. Moreover, - the level of poverty is another factor that deserves to be considered. Inflation is by nature a kind of tax on money people have in their pockets. This means, the most poor people just loose their money. That’s why we believe that inflation increase is not the a solution.

Irina Astahova