TRANSCRIPT OF THE PRESS CONFERENCE
by Edgardo Ruggiero on the occasion of the Article IV Mission arrival - Monday
October 18, 2004
This is our
usual press conference to introduce the mission. The team of the IMF will arrive
in Moldova tomorrow and start work on Wednesday, October 20. We will finish the
work on November 3. This is what we call Article IV Mission. This name refers to
one of the articles of the Articles of Agreement, or the statute of the IMF
basically, which says that for every country once a year there is a mission of
the IMF that reviews the economic situation. We are not going to discuss the
financing by the IMF of the National Bank at this point. We are not going to
discuss an economic program. As part of the mission work, we will also assess
the progress in implementation of the Economic Growth and Poverty Reduction
Strategy. As you know, this is a very important strategy that your government
has finalized and we, like all donors, are interested in how quickly the
strategy is implemented, and how well it is implemented.
This is a
general introduction to the mission. Let me spend a couple of words on where we
are now with the economy and reforms. As you know, the economy is growing at a
very good pace, more than 6% in the first six months of the year. By the end of
the year it will probably grow at 7% or more. It is just not possible at this
point to say how much it will grow. We will discuss it and will make our best
projections with the Ministry of Economy. Inflation, as you know, is still
around 10% and we will also discuss with the government what is the best
approach to try and reduce inflation from the current level. We will look at
things like the role of the fiscal policy in helping the National Bank to reduce
One thing we
think is very important are structural reforms for Moldova. At this moment, the
growth of GDP is very much a function of demand: external demand and internal
demand. You have external demand from Russia and all the countries in the former
Soviet Union and central Europe that are growing a lot. And then, what we
believe is the most important factor, is domestic demand generated by workers’
remittances. Sustained and long-term growth cannot be a function only of
consumption, and in this particular case, of remittances. We need a supply
response, we need the productive system to start responding to demand.
I want to
give an example of the official data for the first eight months of the year on
the industrial production. The branches that have registered an increase in
production are footwear, carpets, clothes, furniture, household appliances, food
and drinks. These are all responding to domestic demand. If you look at the
increase in imports, it is also related to demand that is fuelled by the
workers’ remittances. And while these industries were growing in the first eight
months of the year, others like drugs, pharmaceutical production, processing and
canning of meat, tobacco, were producing less than last year.
I want to
give you also another example of the problem. If you look at remittances in
2003, it was around $480 million. That’s 24% of the GDP, a very large amount. At
the same time, Foreign Direct Investments (FDI), that is the investments of the
rest of the world in Moldova, were only around $69 million. FDI in Moldova were
only 14% of remittances. That means that this economy is really growing because
of consumption which is fuelled by remittances, it is not growing because there
are people investing in Moldova from abroad. May be investments will come in the
next few months but, for the time being, they are still less than remittances.
What we need is structural reforms, which will make it easier for people to
invest, investments from both domestic sources and from abroad, and make it very
attractive for foreign investors to come to Moldova. The Ministry of Economy is
making a lot of proposals in this field and we are confident that there will be
a lot of improvement in the next few months.
QUESTIONS AND ANSWERS
happened and what is going on now with the EGPRSP? Do you think the government
is able to implement it by itself?
course, the government will be able to implement it by itself. They may need
some assistance in specific areas, to bring in people that have specific
knowledge about, for example, how to write a better law on attracting foreign
investments or they may need somebody to give the government an idea of how
other countries have done a good implementation plan. But the government is
perfectly capable to do this. Actually, I am glad that you mentioned the EGPRSP.
We expect to discuss the EGPRSP at the Board of the IMF and the Bank in
November. And as you know the Board of the IMF and the World Bank only endorse
the EGPRSP, they don’t approve it. Our role is not to approve the strategy.
the strategy’s implementation relies on external financing. If there is no
external financing we can call it born dead.
A. No, there
is a lot the government can do and the financing comes from many different
donors. As you know, we only give money to the National Bank, we do not give
money for projects. While the WB, UNDP, SIDA and many other organizations give
money for projects that are within the EGPRSP and many other projects, and they
are already lining up to fund some of the projects.
financing is hinged on the active program with the IMF or at least verbal
consent from the IMF?
that’s not the case. The WB has a program that will be discussed at the Board of
the WB. And this program, for at least the first year, is about projects:
investment in social sector or water and sanitation for example. They do have a
program that will go ahead even if there is no program with the IMF.
said that donors are willing to provide assistance. Does that mean technical
assistance or financing specific projects?
A. It will
be both because you need both. The government of Moldova will have to monitor
the implementation of the EGPRSP. There are people that have done this in other
countries and they know how to do it. May be the government wants to bring these
people here to Moldova to help.
Q. In the
introduction you referred to the fiscal measures that will be applied to reduce
inflation. That means that your assessment of the inflation is negative. Do you
think that these fiscal measures might result in the outflow of capital from the
banks and what specific fiscal measures are you referring to?
Obviously, there is a misunderstanding of what fiscal
measures we are talking about. I am glad you asked this question as this gives
me an opportunity to clarify this matter. From the fiscal point of view, there
may be a need for a less expansionary fiscal policy. We are not talking about
specific fiscal measures or administrative measures. We are talking about demand
management. The budget sector is an important component of demand. And now, how
much less expansionary the fiscal policy may have to be, is a matter of
discussion with the government.
do you mean by saying a less expansionary fiscal policy? Does that mean that you
will discuss the reduction of subsidies in agriculture or to certain social
A. That is a
second level of discussion. The first level, we will look at the overall
macroeconomy. For example, we will look at different components of the demand
and see how much the government is contributing to the overall demand. If we
think it is a bit too much, we will discuss and bring it as an issue to the
government. And then if the government agrees and they will say, “ok we will cut
our deficit by this amount,” the government will also have to tell us where it
can cut expenditures. We can only make some suggestions to them. We cannot be
too specific. Of course, when we make suggestions we look at what is inefficient
expenditures for example. And some of them, some subsidy schemes are not
efficient because the borrowers never repay, the loans may go to selected
people, the loans may create corruption.
you give an example of inefficient subsidy?
No, not at this point. You probably know more than me.
are the best person who can tell us about this because you have a comprehensive
We will discuss these matters with the government and,
you know, we are in a way jumping the gun here. Because there may be no need to
cut expenditures, we do not know at this point. It is something we have to
discuss with the government.
do you think about Moldova’s external debt situation and the discussion during
the World Bank and IMF annual meeting on reducing the poor countries debt? Why
this discussion was inefficient? This the CIS 7 initiative.
This is something that everybody would have liked to be
brought forward, continued and finalized and bring some results. By the end of
the day, we are left with the usual channels for debt reduction. Unfortunately,
the CIS 7 did not bring the results that some of you and us would have expected.
But there are many opportunities for countries to get debt reductions, a
temporary respite to pay the debt. As you know, for the last two years at least,
we have been trying to help the government to go to the Paris Club. But we never
finalized the financial program so it was not possible to go to the Paris Club.
But you also know that the government has been able to buy back some of its
external debt at big discounts and they are engaged with bilateral creditors for
rescheduling. So the government is following another route.
the biggest debt is owed to the multilateral creditors and the WB in particular.
What are we going to do with this debt?
I guess you have to talk to the WB. But if now Moldova
gets money from the WB for budget support for example, this money has to be
repaid within 40 years, the interest is 0.5 percent and there is a 10 years
grace period. This is very cheap money. The previous loans had different
interest rates but the new loans have very low rates.
Q. But we
are paying based on commercial rates now.
A. No. The
loans that you now get from the WB are repaid at these rates.
your view, how does Moldova meet its external debt obligations? Sometimes, what
you say differs from what Moldovan officials say.
A. I don’t
think it differs. Moldova has made a very clear choice of rescheduling the
external debt to selected creditors and at the same time not paying the
principal but they are current now on interest payments.
the EGPRSP endorsement has been postponed? Is it because of the disagreement
between the WB and IMF or the quality of the paper?
neither disagreement between the IMF and the WB nor the problem of the quality
of the strategy. It is just that both the IMF and the WB were engaged in a
review of the procedures of the IMF and the WB on how to assess the strategies
of different governments. It is a general review, it has nothing to do with
Moldova specifically. And just what happened is that the strategy of Moldova was
finalized very close to this review. This is what caused delays. These are
technical delays. The substance does not change absolutely. In particular, the
government does not need to wait for IMF and WB endorsement of the strategy.
They can in summer already implement the strategy. I think this is the most
important thing. This is the strategy of the government, the government is
implementing it and the fact the IMF and the WB have not endorsed it in August
and will endorse it probably at the end of November really does not change much.
Six months from now you will look back at the delay and will say that really it
readers are waiting for good news. Could you tell us if there will be a mission
coming by the end of this year to negotiate on the financing program? And the
second part of the question refers to the nominal appreciation of Moldovan leu
and budgeted exchange rate of 12.7. Is this exchange rate a realistic one?
regard to the first part of the question, this mission will write a report and
will present it to the Board of the IMF at the beginning of the next year. There
is obviously not going to be any mission to discuss financing before than.
to the second question of nominal appreciation, I cannot tell you at this point
if 12.7 is the right exchange rate. We are not supposed to. But what I can tell
you is that we already discussed with the government and will discuss during
this mission about the pressures on the exchange rate.
are the formal and informal barriers to creating a favorable investment
can quickly go to the formal and then I can try to give you some examples of
informal barriers. The privatization program is not really going fast. The
government could simplify the regulations regarding entry and exit from economic
sectors. Anything that has to do with registration and liquidation of
enterprises, everything should be made simpler in this area. The operations of
the enterprises should be made simpler. The licensing, standardization,
certification systems should be reformed. The customs reform should be
accelerated. The government should think strategically about the State Tax
Inspectorate and its role in helping enterprises rather than collecting due
taxes from them. The government should have an organic policy regarding the
development of small and medium enterprises. They should have a liberal trade
regime. For example, if you look at the latest package of increases and
reduction of custom duties, those are designed to protect certain sectors. The
moment your protect certain sectors, you put other sectors in a disadvantage.
These are formal restrictions, and the government is thinking about these
restrictions and try to come up with a policy of reform.
restrictions are those that you are familiar with: the exports of wheat, the
export of sunflower seeds last year, scrap metal, some restrictions on imports.
These are informal restrictions. They are not written anywhere. May be what is
accepted here as normal, is viewed by some foreigners as corruption. So, may be
the foreigners also need to understand the current system a little bit.