Johan Mathisen after acting for more than three and a half years as Resident Representative of the International Monetary Fund in Moldova was transferred to the IMF's European Department. Before leaving Moldova J. Mathisen agreed to answer the "LP's" correspondent questions. We hereby offer the first part of this discussion to the attention of our readers.

- I believe that at the moment the IMF, same as all citizens of Moldova, is concerned about the succession.   Succession of legislative power, government, management of the National Bank.   

J.M.: One of the assignments specified upon my move to a new job was to help streamlining the cooperation between the IMF and the Moldovan authorities. For me this is so much crucial as we at the IMF also have changes at the managerial level that was prior responsible, inclusively, for the relations with your country. Still, for us the change of individuals does not imply change in the line of policy. The specifics of the Fund is such that its policy remains unchanged, transparent and predictable. In relation to each country the Fund’s policy is bearing on the well-known grounds. We are using same approaches to the assessment of the situation; we give similar recommendations and apply same instruments.

- In view of the global crisis, I believe, we see a lot of changes.

J.M.: The reasons underlying the crisis bear on different grounds. And therefore methods of fighting against it are different. In the countries, let us call them conditionally Western, the efforts were targeted towards injecting finances into the private sector of the economy. But one cannot just pick up and transfer this experience into the developing countries, such as for example Moldova. Manifestations of crisis here have different reasons and hence different instruments should apply.

- Could one say that countries that find themselves at different stages of economic development experience crises that are different by nature?

J.M.: No, not at all. There are more similarities than differences. Therefore we consider that these are one type crises. On the other side, we see that in the developing countries there is more fragility and that their positions and institutes are not as robust as such in the developed countries.

- Upon the onset of the active manifestation of the global crisis, Moldova had a rather good financial standing. Moldovan banking system, as mentioned by many as well as by the IMF staff, featured positive trends amongst the developing countries by its compliance with the international standards of managing and avoiding risks.

J.M.: We do recognize that Moldova was rather prepared for encountering the crisis. The shocks experienced during the previous two years, i.e. embargo on exporting wine products to Russia and severe drought, made the authorities give a serious thought to risks and take care of measures that could mitigate such. But these were not sufficient before the new challenges and one should understand that.

- When this winter the National Bank of Moldova began selling foreign currency using for the purpose international reserves accumulated during last year – do you think this was feasible? Shouldn’t it be the case that the international reserves are only used in case of briskly growing demand for the foreign currency in the domestic market? More so that used for the intervention this time were the resources purchased earlier by the NBM in the domestic foreign exchange market.

J.M.: There are short-term shocks and there are also permanent impact factors. The methods of responding to such should be different. When there was a crisis bound to banning import of Moldovan wine products – this was a single-time shock. By then, we considered it fully justified to use international reserves as “safety cushion”. But when we talk about a shock that have acquired lengthy nature then we recommend to smoothly depreciate the exchange rate of the national currency rather than making attempts to maintain it. There are different sets of instruments for responding to short- and long-term impacts.

- I agree. But is the answer to the question about existence of excessive demand for the foreign currency this winter fully unambiguous or it was rather a speculative demand triggered by the political situation in the country. For such countries as Moldova (and you mentioned earlier that the developing countries are distinguished by “fragility”) even negative expectations rather than real factors could produce a lengthy and serious effect onto the situation. More so in such a flexible market as foreign exchange one. Shrinking inflow of foreign currency as well as the recession was our reality. The question is whether the response of private players in the market was adequate to the degree of impact produced by real factors.

J.M.: Let us consider the situation in Moldova at the background of the countries in the region. Not the Ukraine but Romania, Bulgaria and others where they use the floating exchange rate of the national currency. All these countries lived through the collapse of demand. Primarily it affected the volumes of import. As a result the volume of import dropped down and accordingly, the trade balances improved. And still depreciation of the national currency took place in all of these countries. If this is not done, the exchange rate appears to be overestimated. And then we have a situation which facilitates maintenance of demand and high interest to import. This is risky. We believe that under conditions of long term crisis serving as “safety cushion” for the economy of the country is the exchange rate of the national currency rather than the international reserves. While the international reserves serve as a resource which prevents the exchange rate from collapsing overnight.

- Should one go along with such logic, still a question remains – down to what level it is feasible to devaluate the exchange rate of the national currency?

J.M.: Probably it would be more rational to allow for gradual devaluation with due account for the actual signals sent by the economy rather than being guided by the subjective expectations and interests of the individual market players. The pattern of action attempted by the NBM in December-March shows decisive opposition to devaluation of the exchange rate of leu. But same obviousness way following April elections the NBM allowed the exchange rate of the national currency to shape independently based on the market demand and supply. By then the verbal interventions and the condition of uncertainty if not totally disappeared – at least became more habitual and the population’s reaction to these factors became more adequate.

Let us imagine what would have happened if the National Bank of Moldova would have left the national currency without its support in January. Probably the devaluation would have been much below the rates that it actually deserves. As it appears now, even in the EU countries that did not manage to join the Euro zone the exchange rates of their national currencies hit the “bottom” and for certain time period appeared to be substantially undervalued. During the last three-four months the national currencies of Czech Republic, Hungary, Poland and some other Central European countries showed a reversed move towards appreciation against the US dollar and Euro.  

Excessive undervaluation of the national currency is also posing threat to the economy of the country. Especially when talking about a small country falling into the category of “developing”.

In case if the exchange rate of the national currency is devalued sharply even for a short period, say for six month or one year then even in such short time period one could expect rather serious disturbances to take place. Here I do not refer myself to just social consequences for that part of households that gets its main part of income in the national currency. It is most probable that we would have witnessed to large number of takeovers amongst the acting enterprises. Attraction of foreign investments into the national economy through a method “buy it for almost nothing” could be an interesting prospect for some. But I believe it would be more rational to ask people of this country whether they are prepared for such development of the situation. In this senses the issue of leu exchange rate is of course a political one.

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The International Monetary Fund stands ready to offer to the Republic of Moldova financial assistance required for surmounting the negative consequences of the global economic crisis.   To that end, the Fund’s representatives will be prepared to initiate negotiations with the Moldovan authorities as soon as the new government of the Republic of Moldova is formed, said Johan Mathisen, the resident representative of the IMF in Moldova. When answering the question on the terms of offering such assistance J.Mathisen said that Moldova could receive the first tranche at the beginning of 2010 provided we manage to agree on the conditions and approve one of the new programs proposed by the IMF before the end of the current year. The effective term of the PRFG expired on 4 May 2009.

Alexander Takii

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