HIERARCHY OF PRIORITIES
On Wednesday, February 7, the Resident
Representative of the International Monetary Fund in the RM Johan
Mathisen held a press conference, nominally in connection with a regular
visit of the Fund’s European Department mission to Chisinau (21 to 28
February). The publication of two documents – the first review of the
progress of the RM with the implementation of the program under the
Poverty Reduction and Growth Facility (PRGF) and the Memorandum of
Economic and Financial Policies for 2007 – was timed to coincide with
the event. The former reflects the IMF’s official view of Moldova’s
progress with the economic reform over the first nine months of the past
year and makes projections for up to 2008 and even for the longer term.
The latter – the Memorandum – sets objectives for this year and lists
concrete tasks the Government, the Ministry of Finance, and the National
Bank of Moldova undertake to fulfill over the period.
Both documents with all attachments are
available at www.imf.md. In this issue, the LP publishes the full text
of the Memorandum translated into Russian. In this context, we would
like to share with the readers some thoughts about, and comments on, the
commitments undertaken by the Moldovan authorities.
IMF Resident Representative in Moldova
Johan Mathisen deems demonstrative the mere fact the Memorandum
was published. Time has come for open politics.
The first thing that stands out is that
the program for this year is “ambitious” in the good sense. Due to its
targeted nature and the authorities’ efforts to fulfill their
commitments last year, the IMF Executive Board made a decision in late
2006 to increase lending to Moldova. It is not even about the amount of
loans extended to the NBM, but about the fact that the IMF takes a
positive view. As we have already stressed more than once, that would
improve the outlook for the inflow of necessary donor assistance from
the international financial institutions and individual states into our
country, as well as promote capital investment by private investors.
Last year, practically all the
commitments to the IMF regarding monetary and fiscal policies, as well
as structural changes were met. And in rather difficult conditions of
“external shocks”. The only macroeconomic indicator the IMF is concerned
about is the higher than projected inflation rate.
Therefore, the statement by the
authorities that in 2007 they would seek to achieve the inflation
objective of 10 percent stands out particularly in the Memorandum.
Moreover, it says that the authorities “are considering a move to formal
inflation targeting at some point”. Targeting is setting targets to
manage the growth of currency in circulation and credit the central bank
is guided by in its policies. Ways of targeting vary, depending on
whether the growth rate of one or several monetary aggregates are
limited and in what form the targets are set – in the form of a “fork”
(band) or a certain benchmark.
For the economic entities and
individuals, as well as for foreign investors, such a formal indicator
serves as a benchmark for making private decisions and taking action. It
is a major factor of higher predictability of economic development. In
the countries where inflation targeting is stable and tight enough, it
facilitates growth of long-term investment.
The Moldovan authorities believe they are
not prepared yet to introduce such an indicator. But they state in the
Memorandum that they take action to improve the monetary policy. In
particular, setting up “a joint advisory body” – the Committee on
Liquidity Management – is identified as a step to assist the attainment
of that objective. The body is already operational, co-chaired by the
First Vice President of the NBM Victor Cibotaru and Deputy Minister of
Finance Nina Lupan.
A statement that, beginning from 2008,
the budget law will no longer oblige the NBM to roll over government
T-bills (the value of which in the central bank’s portfolio amounted to
almost MDL 2.5 bn as of last year-end) seems to be an important aspect
to the issue of higher mobility and efficiency of the monetary policy
implementation. It is expected that domestic debt in the form of
rollover credit secured with government securities would be converted
into government securities proper, which would potentially broaden the
NBM’s capacity to manage the resource.
Over the past two years, the Ministry of
Finance repaid to the NBM the most recent credit of MDL 594 mln in
installments of MDL 118.8 mln. It will be repaying it in the same
installments until 2010. However, it is of very little help in the
central bank’s efforts to sterilize excess liquidity. We reported that,
in the fight for lower inflation, it has to attract amounts exceeding
MDL 1 bn from commercial banks, employing various mechanisms. Such
operations come at a price – direct annual costs can exceed MDL 150-200
mln if yield on the funds “diverted” from the market does not go below
the current 14-16 percent per annum.
The Memorandum provides for another
channel through which the National Bank will be able to get funds from
the Ministry of Finance, in this case on a regular basis. As soon as
this year, under the concluded agreement, the Ministry of Finance must
pay for the services the central bank provides to it. As far as we
understand, this concerns the services of organizing weekly auctions for
placement of government securities, purchase of foreign exchange in the
open market, as well as servicing the public budget accounts transferred
from commercial banks to the NBM late last year. However, the National
Bank, in its turn, will pay at a certain rate for the balances in the
treasury accounts. It is assumed that, as a result of the
“commercialization” of relations between the two institutions, it is the
NBM which will benefit – it will be able to increase and maintain its
capitalization at, at least, 10 percent of total liabilities in its
balance sheet by means of those proceeds as well. Such a requirement is
set in the Memorandum and will be monitored by the IMF, along with other
indicators. In order to replenish the NBM capital adequately, the
government promises to inject at least MDL 250 mln in it before December
31, 2007. If the capitalization level is below the set threshold,
starting from 2008, the share of the NBM’s net income transferred to the
state budget will be no more than 50 percent. These measures are to
facilitate the increase in the real financial power of the central bank
and to enhance its capacity to pursue appropriate monetary policy aimed
to contain the inflation rate within the limits of projected indicators
and, in the future, targets.
Other activities envisaged and already
partly implemented at the Government level will contain uncontrolled
inflation. By way of reminder, draft law on public debt, state
guarantees, and state onlending was submitted to the Parliament last
August. Following the accounts of the state and local budgets, other
public finance – state social insurance and compulsory health insurance
fund accounts – will be transferred from commercial banks to the NBM. As
far as we know, commercial banks will be charged with carrying out
transactions at the order of those agencies, but at the end of every day
balances will have to be accumulated in the Single Treasury Account.
This will considerably reduce the volume of commercial banks’ liquidity
and, thus, will sterilize the money stock.
But that is not everything yet. Given
that “external shocks will have long-lasting effects”, says the
Memorandum, the authorities will have to tighten further their fiscal
policy. They undertake to contain the state budget deficit at 0.5
percent of GDP. In order to achieve the indicator, a number of measures
is envisaged for 2007, aimed to improve the balance of the state budget.
The most topical one is the statement
that the government will ensure that tariffs for natural gas and
electricity remain at full cost recovery levels for all categories of
consumers. It also promises to “gradually adjust heating and water
supply tariffs” for the same purpose (again, for all without exception).
To this end, legislation will be passed shifting responsibility for
setting heating and water supply tariffs from municipalities to the
national energy regulator. The government promises to compensate “the
most vulnerable” ones to protect them against the effects of such
In order to enhance the financial
sustainability of the social fund budget, the government will continue
the reform in the pension system for farmers aimed to strengthen the
link between contributions and benefits. The Memorandum promises that
work will continue in implementing the individual accounting system of
social insurance contributions in other areas.
Another comment on the topic of ensuring
the balance of public finance – the new Memorandum confirms further
progress towards the privatization of Banca de Economii. As was
promised, albeit with some delay, results of the tender, which lasted
for almost nine months, were determined to select a foreign company to
conduct an assessment of the market value of BEM. It has come to our
knowledge that Romanian branch of Deloitte Touche Tohmatsu was selected
as such an independent evaluator. The evaluation is to be completed by
September 30, 2007.
The Memorandum confirms another
“carry-over promise” to have approved by law the establishment of the
National Commission on the Financial Market (NCFM) before 31 March –
project known as “megaregulator”. The new agency will be established by
June 30 and be operational no later than September 30, 2007.
The Memorandum comprises many other
interesting promises, and we promise to continue scrutinizing them.