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Business Expert Magazine: Interview with Johan Mathisen, IMF Resident Representative in Moldova

1.       What’s your opinion about the developments in Moldovan economy throughout 2007? Which were the most notable trends, in your view? 

As you are aware, the IMF is an institutions that mainly focuses in its activity on macroeconomic developments. We have concluded that in 2007 appropriate monetary and fiscal policies were promoted. We think that public finances are good, the 2008 budget is appropriate, and NBM has set disinflation as its main goal. Growth has resisted remarkably well in face of successive economic shocks that had had an impact on the national economy: the wine ban, the doubling of energy prices, and drought. There are very few states that can show positive growth when dealing with such shocks.

We are witnesses that once the wine ban was lifted and a very advantageous agreement was signed with the EU the outlook is very positive and there is opportunity to speed up reform implementation. We think that in the future focus will be placed on promoting ongoing growth fuelled by private sector development supported by a modernized public administration. There is still the risk of maintaining high inflation once the credit and monetary base grow.

In general, Moldova feces issues characteristic of all states in transition: massive capital inflows, inevitable currency appreciation, but these are the reflection of better investment opportunities than in other states. Also, due to the appreciation of the national currency income will increase to increasingly converge with that in other states. We do not assess Moldova as a small income country fuelled mostly by remittances any more, but rather believe that this state is in its early stages of transition.

Indeed, the financial sector is underdeveloped, financial intermediation and crediting  levels are low, and the share of population holding bank accounts remains very low. Therefore, in the IMF program stress was placed on strengthening the financial market structure, including by establishing the National Financial Market Commission.

If we study the EBRD Transition report, the World Banks Doing Business report, or the competitiveness ranking of the World Economic Forum, we will see that the business environment in Moldova still remains weak. We have taken note of some positive initiatives of the Government such as the Guillotine process. We are pleased that Government has undertaken an ambitious privatization program. Indeed, the list of structural reforms is overwhelming.

In this context, we were disappointed by the recent development related to the heating service provision, which distract the authorities’ attention from undertaking other important actions. In the end, the undermining of the financial viability of the companies in this sector will benefit no one.

To conclude, in general, the Moldovan economy status is positive. There are correct macroeconomic policies in place. Certainly, the list for necessary structural reforms is very long there is a lot to be done. However, the beginning at least is a good one.

2.       Which were the three most important economic events in Moldova in 2007?

In our opinion, Moldovan economy was most marked in 2007 by (1) the banning and, eventually, (2) resuming wine export to Russia, as well as by (3) the signing of the asymmetric trade preference agreement with the European Union.

3.       How do you expect Moldova economy to develop in 2008? What are your projections? Which areas do you expect to have most growth and investment attraction potential in 2008?

We are optimistic about the macroeconomic parameters evolution in 2008. We think that inflation will be in the one-digit area and growth will be at least 7 per cent.

Moldova needs and has the necessary potential to attract investment in all sectors of economy. We anticipate the trend of FDI supply on the local market will continue, some of these being aimed to benefit from the autonomous trade preferences with the EU. Also, we expect local and foreign direct investment to be more and more channeled to the service sector.

4.       What are the IMF’s expectations for the development of Moldovan economy in 2008?

From the fiscal viewpoint, we believe that prudent policy will continue to be promoted and the deficit threshold of 0.5 per cent of GDP will be maintained. We anticipate that tax revenues will continue to have a positive trend, and budget expenditures will comply with the Program provisions, including the one on implementing a new social assistance system in September next year.

It will be necessary that monetary policy remains tight, to ensure disinflation and to resist pressure stemming from capital inflows that are increasingly channeled towards investments in Moldovan economy.