Moldova’s external trade balance – will the deficit rise, or does the
Moldovan economy have the “Dutch Disease”?
For the first time since independence Moldova’s balance
of foreign trade for seven months of 2005 (January-July) exceeded
exports. According to the National Statistics Department imports of
goods in this period reached $1194.7 mil. (a 29.9% growth since the
beginning of the year), exports -- $595.2 mil. (10% growth). It is easy
to calculate that deficit amounted to $599.5 mil., with an increase of
$220.7 mil. or 1.6 times since the beginning of the year! That’s surely
a precedent. But is it so unexpected? Experts say no.
Former Prime Minister of Moldova, Director General of «Rompetrol
Moldova»
Ion Sturza in his interview to «InfoMarket.MD» named the situation
as a “flourishing Dutch Syndrome”:
[Dutch Syndrome (or Dutch disease) is the situation when
considerable inflow of external resources (whether it is payment for
oil, transfers or foreign aid) leads to a rise in the exchange rate
which can negatively affect the exports sector.]
- A country with the Dutch syndrome is either a parasite on exports
of natural resources or, as is the case with Moldova, on money coming
from guest workers, says Sturza. – The country is developing at the
expense of foreign factors, not the growth of the real sector of the
economy. In Moldova 70% of the budget comes from customs revenues, and
unfortunately there is no real growth of internal corporate revenues.
It is true that monetary transfers from Moldova’s Customs Service to
the state budget account for 70% of all revenues of the state. In the
above seven months of this years the customs have transferred to the
budget 3.4 bn lei ($274 mil.), or 23% above the figures of the previous
year or 27% more than planned for this period. Until the end of the year
this agency plans to receive 5.08 bn lei ($404 mil), i.e. 61.42% of the
country’s state budget planned for 2005 (8.27 bn lei). In reality this
percentage is likely to be bigger.
- A big flow of money is coming to Moldova from our guest workers
abroad, – says Ion Sturza, but this flow for different reasons can stop.
If any sharp changes in the world, the 1998 situation can take place
again. In that year daily revenues in the budget fell tens times
totaling only 1 mil lei. In the similar situation some tough measures
must be taken by the authorities. Currently the authorities feel
comfortable with these revenues; they have a budget surplus, and they
use money for social purposes. But little attention is paid to the real
sector development in the country. The economy in turn is overheated
with noncommercial transfers and in this situation it is hard to take
its temperature. The situation makes everybody appeased but it can
change any minute, and it is beyond the government control. And if a
crisis happens, authorities must be ready to take severe actions, cut
expenses, and undertake political responsibility for these decisions. If
currently daily revenues in the budget reach 25-30 mil lei, they can
fall to 2-3 mil. And when the economy is used to 25-30 mil, I am afraid
it can collapse and the authorities must be ready for this.
Edgardo Ruggiero, IMF Resident
Representative in Moldova is not so categorical:
- Yes, the trade balance deficit in Moldova is
quite large, but in the balance of payments (which is a broader
concept), it is fully covered by remittances, he said in an interview to
InfoMarket.MD news agency. He also underlined that, because the balance
of payment is fully financed, from the point of view of financial
balance of the country and exchange rate pressure, there is no reason
for concern.
The rising trade balance deficit is at least partly impacted by the
growing money remittances, but this may also show loss of
competitiveness of Moldovan goods. We want to investigate and discuss
this issue with the authorities and see what are the measures that can
improve the export possibilities of Moldovan producers, said Edgardo
Ruggiero and added - obviously higher oil prices also had an impact on
the trade deficit, and prices on other energy resources, particularly
gas are expected to go up in 2006. But this is something the authorities
cannot control. The only solution is to ease the conditions for Moldovan
exports, particularly by improving the efficiency of local producers and
by no means through restrictions.
To the question whether he agrees that Moldova
is having a Dutch Disease, Edgardo Ruggiero replied that as in the case
of any disease, one should take into account how high is the economy’s
overheat temperature:
- It is necessary to look at what is the proxy for higher temperature
– the exchange rate appreciation or more money supply. There was a
nominal exchange rate appreciation in 2004. It did not happen this year,
though until March 2004, large inflows of remittances had an impact on
inflation and Moldovan leu appreciation. Yes, we can say that at certain
points of time there were symptoms of Dutch Disease, but in the last
months there was a decrease in the exchange rate pressure and inflation.
And we hope that this trend will continue. Yes, at certain points of
time, Moldovan economy had the symptoms of Dutch Disease, but if you
have a disease, that does not mean that you are having it all the time.
Speaking about how remittances’ flow can change in the near future,
Edgardo Ruggiero assumed there will be a change in the geography of
Moldovan working migrants, moving from Russia to Western Europe
countries, with a higher average level of remittances per person to
Moldova.
Coming back to what could the government do to improve the economic
situation in general and reduce the trade balance deficit, the IMF
Resident Representative in Moldova said that it is necessary to further
improve the customs administration, improve the system of VAT refund for
export transactions and reduce regulations. He also believes that final
and efficient implementation of the guillotine principle will have a
beneficial effect on the business environment:
- The gap between exports and imports could increase, especially if
the energy prices continue to grow. Moreover, 2005 is a difficult year
for Moldovan exports due to Russia’s restrictions on certain Moldovan
goods. And if the authorities will be able to remove at least this
obstacle, the trade balance will improve, thinks Edgardo Ruggiero.
And true, exports from Moldova increased by only 10%. But this growth
could have been bigger but for the Russian restrictions. And from the
opposite side there are growing prices for energy resources – all
conditions for a sharp increase in balance of foreign trade. Alas,
forecasts in this respect are far from being optimistic.
