MOLDOVA CLOSE TO PREFERENTIAL LENDING RESUMPTION AS NEVER BEFORE

Commentary by Alexander Tanas, INFOTAG economic observer

Part 1 of 2. PREFERENTIAL CREDITING IS 10-15 TIMES BETTER THAN BEFORE.

Prime Minister Vasily Tarlev has stated Moldova had met all commitments stipulated in
the supplements to the Memorandum signed with the International Monetary Fund. This
means the republic has closely approached to a moment when the IMF, and then the World
Bank, European Union, and donor countries may resume lending.

To the lawmakers' credit, they have managed to meet the deadline, November 15, to adopt
a whole number of important laws - on insolvency, on free economic zones, and on
financial establishments. Besides them, the Parliament passed in the first reading a law
on money laundering, whose importance was also emphasized by the IMF.

The bill on the 2002 State Budget - which has already been passed in two readings and
which foreign experts complimented as one drafted by the Government with a high social
responsibility - is also opening a door for Moldova to receiving new external credits.

Like people, countries sometimes come across critical periods crucial for their
subsequent lives. For Moldova, this November and December are exactly a period in which
the republic is to make very important and responsible steps that all the same need to
be made, sooner or later. A hesitation would simply put off things till a later time,
and this would complicate the realization of accords with the International Monetary
Fund, World Bank and European Union.

Many people could not comprehend the stance of the Government which had dragged for so
long the fulfillment of conditions indispensable for starting a preferential lending by
the IMF and World Bank.

Only very recently, Moldova used to receive credits from the IMF and WB on the same
conditions as other member states, including developed nations. It is unlikely that in
1993 through 2000 our creditors sincerely believed in Moldova's ability to repay loans
plus 6-7 percent annual interest.

Most probably, the Fund and Bank realized that in case of failure Moldova would have to
be placed on the list of countries that have to fight poverty. This means the lending
would be continued, but on different conditions - soft and long-term ones.

But when an opportunity appeared to obtain loans under 0.5-0.75 percent p.a. interest
rates to be repaid in 30-40 years, instead of 8-10, the Government began to show
hesitation and uncertainty as to its ability to meet the Memorandum conditions.

What could the Government doubt about? If, say, about the expediency of privatizing the
energy complex, then these doubts seem unfounded. Over last 10 years, this has been one
of the most inefficient sectors, having all negative features: netting operations which
misled everybody and hid the traces of debts worth millions; debt repayment by using
Budget money, which was indeed very profitable for certain groups of people; talentless
management which in most cases ended in fiascos; and, finally, state racket.

There is only one way out of the crisis in that economy sector: heating and
electricity shall only be available to those who pay for them. All other schemes mean
there must be a do-gooder.

Part 2 of 2. OPTIMISTIC SCENARIO IS WORTH ABOUT $40 MILLION

Experts say some Moldovan statesmen doubt about the expediency of sticking to
supplements to the Memorandum. But Moldova has no other variants. They could be looked
for, had it not been for the urgent need to repay external debts. Moldova desperately
needs a respite in payments, and the preferential crediting can provide for such a
pause, during which new and cheap loans could be used for reimbursing old and expensive
ones. Otherwise, the republic will have to again sacrifice the fairly fragile financial
stability by depreciating the leu against the US dollar.

Moldova is not Russia, which announced a default proudly, having a clear-cut
super-objective - to resume external payments within a year. Maybe, Moldova will also
acquire such a potency, but not within a year or two, but minimum 5-8. This republic
will simply not survive as a state if it has to repay to creditors 72 percent of its
2002 Budget revenues.

At the last moment, the Government has managed to do everything in order to begin
receiving means from the IMF, WB and EU in November-December. According to the
optimistic scenario, Moldova may get about $40 million by the end of this year. This sum
may potentially include: $5 million as an addition to the World Bank's SAC-II
arrangement; $15 million from the first tranche within the new SAC-III program; EUR 10
million from the European Union; $4 million as a grant from the Dutch Government.

So far, only the World Bank has stated that Moldova is "very close" to receiving the
above-mentioned $5 million promised yet to the Dumitru Braghis Government as a
compensation for the late 2000 icing disaster. And the receipt of the rest directly
depends on the IMF.

IMF Resident Representative in Moldova Mr. Hassan Al-Atrash stated in his interview
with the Banking and Finance magazine (November 2001 issue) that, technically, the
European Union and Dutch Government may remit this money to Moldova yet in 2001.
However, for this they need a letter of confirmation from the IMF stating that Moldova
really meets its commitments.

As for the Dutch grant, an other analogous document will be needed - a letter from the
World Bank saying that the Bank would not object to providing the grant to Moldova.
Certainly, such a letter can appear only in case of successful negotiations between the
World Bank and Government on the draft SAC-III.

Even the most pessimistic variant of developing relations with the IMF, WB and EU rules
out a default announcement by Moldova. It is obvious there will be no default in
November-December 2001, or in the first half of 2002. And the National Bank of Moldova
(NBM) stands a reliable guarantor here. Its currency reserve presently constitutes $215
million, of which net currency assets exceed $70 million.

Of the $30 million which the Parliament ordered the NBM to provide to the Ministry of
Finance for external payments in 2001, the central bank has, so far, furnished only $14
million. If the situation keeps on developing by the optimistic scenario, the National
Bank will not need to pay the external bills, as new loans or the Dutch grant may be
used for this.

It is no less important for Moldova to avoid, in November and December, taking
decisions 'unpleasant' for the IMF and World Bank which could cause their doubts about
the expediency of new lending. Unfortunately, the Parliament's intention to introduce in
2002 the VAT and customs duty on cigarette imports may alert the creditors. Even in the
Government there exists no consensus about such a step which some Cabinet members call
discriminatory with regard to cigarette importers.

In 2001, the importers pay only the excise -- $3.5 per 1,000 cigarettes. According to
preliminary data, the new excise may be $5.5. Together with the VAT, legal cigarette
imports are going to become unattractive. Moldova already has a sad experience: in 1999,
when taxes were too high, the cigarette imports brought only 24 thousand lei to the
Budget. In 2000, a better-thought imports taxation yielded over 90 million lei of Budget
revenues.

Experts presume that the "good intention" to build up revenues though higher taxes will
only stimulate cigarette smuggling. Higher-tax adherents refer to the inequality of
rights existing between the importers and local cigarette producers. Now, the business
conditions will be equaled, but nobody dares to guarantee that this equality will be
favorable for the State Budget.

If the optimistic scenario is realized in November-December, the IMF, WB, EU and Dutch
money will substantially strengthen the financial stability in Moldova and, essentially,
will expand the authorities' possibilities of working out new state super-tasks. The
years-long absence of such tasks in Moldova had perverted the power class, and it could
only be able to resolve its own problems and satisfy its own interests.