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BASA-press Agency interview with Thomas Richardson, Head of the IMF Mission to Moldova

BASA-press: Before the IMF Mission's arrival in Chisinau it was said that
"very interesting" discussions would be held with Moldovan authorities.
Was that really so?

Thomas Richardson: Indeed, discussions were interesting. Actually, each time we come to Chisinau we have interesting discussions. Especially when we conduct a review mission, as was the last one, when discussions are held to come to an agreement. 

We can tell that there is some impact on the economic policies of the upcoming elections. Of course, it is a good thing that the influence of politics and democracy has an impact on economic policies, but then again all of us have witnessed cases when politicians are tempted to undertake more populist actions to attract more votes in elections. The IMF tries to help any state to try to ensure some continuity of economic policies across the  electoral cycle. 

We work with the Government of the day in every country, whatever Governmentís in power. We try maintain the same advice, the same policy regardless of who is in power. And we hope that these efforts result in ensuring some stability of the country's economic policies. 

BASA-press: What do you mean when you say that the forthcoming elections have a certain impact on economic policies? 

Thomas Richardson: I do not see here any direct implications of the president's initiatives, because, for the most part, the ordinary population will not be affected directly by it. Some such pressure may be seen in the decision to apply the amendments to the law on wages, namely to increase wages in the public sector. 

We could see that there is a certain degree of nervousness about raising public utilities tariffs. First of all, it refers to the tariffs for electricity and centralized heating. It seemed to us that the authorities are somewhat reticent to increase these tariffs to the costs recovery level. 

The tariff for centralized heating is about 540 lei per giga-calorie, but the people pay 233 lei, the rest being covered by the Municipality Budget. Clearly, this is a rather populist measure. 

BASA-press: It's true if we compare the tariff with the production costs. However if we compare the tariff and the wages, the latter does not resist, as it's lower. So what do we do then? 

Thomas Richardson: For some people itís true and for others it is not. The Government has the challenge to develop and then to introduce targeted nominal assistance system, so that in the end the assistance goes to the people who really need them. I think that is the only way to proceed. 

I know that many international financial institutions and donors that provide support to Moldova provide the Government with assistance to develop and introduce such a targeted assistance system. Because it does not exist yet very well, it goes to the people who are not poor. We think that this is a problem. 

Thatís one reason why we do not insist that the tariffs paid by individual households fully cover the costs. Nevertheless, it is very important that the costs be paid, no matter who does it. "Termocom" itself was covering the costs until present, now the Chisinau municipality budget will cover a part of them for the city residents. And that is a very good thing. In some countries of the region these systems have collapsed. It happened so because the tariffs failed to cover the costs. 

BASA-press: Be it unintentionally or not, but the law on amending the legislation in force with a view to carry out president's initiatives was promulgated on the very day when the IMF mission finished its visit to Chisinau, which makes some think there were great concerns and lively discussions about these initiatives. 

Thomas Richardson: I wouldnít say that we reached an agreement on the Presidentís economic measures. I wouldn't put it that way. I didnít try to hide anything and I think that we were sincere enough during the press conference we held at the end of the mission. I would not want to give an impression that we were happy with some of the president's measures, including the tax amnesty. Frankly, we don't like tax amnesties anywhere. What we did reach some agreement on though was the measures that are to be taken  to compensate some of the risks that arise from the economic initiatives launched by the president. 

BASA-press: A business forum has been recently held, and earlier there was a forum of foreign investors, during which the participants focused on completely different issues than tax reduction, tax amnesty and capital legalization. How can this be explained? 

Thomas Richardson: During our visit we have found a lot of agreement with the president's initiatives among the business community, among Government officials, and the academics. 

But again, we have also noticed there is a fair amount of scepticism on whether the expected outcomes would really be very effective, though we have not been said it very openly. And I do not know whether people are reluctant to openly criticizing the measures or they are just not sure. Probably, these measures will be effected only if they are complemented by other broader reforms in the country, as, for instance, the judiciary reform is. 

BASA-press: I did not mean that businessmen opposed the initiative, but rather that they were concerned more about other reforms. 

Thomas Richardson: Clearly, they have been discussing deeper reforms for the environment, effective in the long run, such as the improvements of the regulatory framework, the judiciary reform that will have a greater impact than the reforms launched by the president. 

I have heard from lots of business people, both foreign and domestic, as well as from Government officials that the judicial system was not effective in protecting property rights. And as long as thatís the case, none of the Presidentís economic reforms will really have any significant impact. 

BASA-press: I always hear an economist saying that he planned the business at the beginning of the year starting from a certain exchange rate, and the fact that the Moldovan leu got lately stronger screwed up all his plans. Probably, exporters, who suffer losses, must have the same opinion. Do you think the current currency exchange rate is realistic? What should the National Bank of Moldova be doing to this end? 

Thomas Richardson: The National Bank should Ėas they are Ė concentrate on preserving a low inflation rate. Of course, they pay attention to other economic variables, too, like real economic growth, unemployment rate, interest rates, and also the exchange rate. But their goal is and it should be to achieve single-digit inflation. It does create some complications for them in terms of managing inflows of foreign exchange. The Central Bank's goal is to smooth out fluctuations in the exchange rate. 

The National Bank have shown that they are prepared to let the exchange rate move to the levels that the market sets. Last year, when were here, we discussed with journalists, the business community, Government officials and were telling that the Moldovan Leu might go as low as 14 lei per dollar. Now, it has moved in the other direction. It means that, actually, no one could predict with certainty where the exchange rate could go. However, in a more modern financial system there are opportunities to hedge the risks. 

The alternative is just to go completely at the other direction and set a fixed exchange rate regime, like they did in Bulgaria or Macedonia. But that poses very strong requirements on the budget to be able to adjust as the economic conditions change, so that a fixed currency exchange rate is kept. If the state is willing to give up monetary policy tools for the sake of fixing the exchange rate, then all the pressure falls on the budget. If we look at Bulgaria for the last few years, they had budget surplus of 2- 3% each year. 

The currency exchange rate moves around just as the gasoline does price. In the case of the latter, if you are worried about the gasoline price fluctuation, you chose to buy a smaller car that consumes less gasoline in order to minimize the risks. 

One of the main reasons for a flexible exchange rate is that it serves as a buffer against external economic shocks. 

BASA-press: Based on the discussions with the authorities, did you have the certainty that capital legalization and tax amnesty will be one-time events? 

Thomas Richardson: I am sure that the authorities understand the importance of making this a one-time event. Everybody we met, from the President to the Tax Inspectorate, understand very well that it can happen only once. Stronger tax administration is needed to prevent the accumulation of arrears in the future. 

BASA-press: What are the objectives of the new Memorandum on Economic and Financial Policies that was agreed upon during the last IMF Mission's visit? 

Thomas Richardson: The new Memorandum has still to go to the IMF Board of Directors; therefore I would prefer not to get into details regarding its content. It is based mainly on the text of the old Memorandum. The key objectives announced by the Government have been preserved. 

Actually, there are three, maximum four key objectives that lay the foundation of the agreement between the IMF and the authorities. 

The first is to preserve the economic stability. We mean, first of all, keeping inflation lower than 10%. Another key objective of the authorities is to reduce the degree of Government's interference in business, as well as to improve the business climate. Here I am speaking of the regulatory reform, the guillotine process. And yet another objective is to preserve the stability of the financial sector and develop the financial system.