Johan Mathisen: Moldova’s outlook for further cooperation with the IMF is good

The International Monetary Fund is satisfied with its cooperation with Moldova, as well as with the strides the Republic has made in addressing the economic challenges of externalities, IMF Resident Representative in Moldova Johan Mathisen said in a statement. Recent years were specific for the country, he said, that is why growth should be supported by further diversification of economy and structural reforms.

Visit of the IMF’s review mission, which is to take place in November, will bring clarity to many issues concerning both, macroeconomic indicators and budget planning. The National Statistics Bureau said in the past eight months inflation totaled 7.3%, prompted largely by a 2.2% hike in consumer prices in August.

The Fund specialists focus first and foremost on the inflation and budget indicators. High inflation rate in Moldova is still a concern for the IMF. In Mathisen’s opinion, there are some discrepancies in the calculations of increase in inflation made by the Government and the Fund. According to the IMF, the inflation rate that stabilized at year-beginning exceeded the limit today and reached 13.5 percent in August (versus August 2006). It is higher than in the neighboring countries of the region. According to Mathisen, a serious discussion with the government is coming, in order to understand to what extent the inflationary processes depend on tariff increases and to what extent, on the pressure of imports.

“Moldova will not become a country one can invest in confidently until it ensures low inflation rate and economic stability,” he made clear.

The IMF expert noted the two sides of the same coin – on the one hand, vulnerable groups of the population are affected by inflation; on the other, growing consumer prices allow producers covering production costs, serving as a peculiar incentive for economic development. The Fund is just as concerned about the government policy aimed to contain prices for socially-sensitive goods and lower the inflationary pressure. “If necessary, the IMF mission will recommend its ways of containing the inflation within the 10-percent limit,” promised Mathisen.

The actions of the National Bank of Moldova (NBM) to level off the negative impact of the foreign exchange overhang on the economy do not cause any concern yet, Mathisen said. The Fund takes a favorable view of the NBM’s efforts to maintain the leu. The situation whereby the domestic currency and the exchange rate appreciate is typical not just for Moldova. The dollar has depreciated by a total of 8 percent on the world market. So it would be rather difficult to predict the future exchange rate, said Mathisen, while acknowledging that low foreign exchange rate lowers the competitiveness of the domestic economy.

Economists doubt more often that only the leu appreciation can help oppose the growth of prices. Thus, the government policy becomes increasingly contradictory. On the one hand, it fights against inflation by pumping money out of the economy and reducing money supply. But, at the same time, it intends to immediately inject money via growing social expenditure and pubic investment. Local experts point out that the situation could improve if the government fought against the inflation not by the monetary means alone. For example, the cabinet could start improving the investment climate and encourage output growth; it could deal with market monopolies, as well as pay attention to the natural monopolies’ pricing.

The 2007 budget outlook is not bad, noted Mathisen; the IMF has pointed out a steady increase in the fiscal revenue, despite the natural calamities. But compensatory measures should be taken, which, in the opinion of the experts, should reaffirm the government’s objective to guarantee growth and social focus of the 2008 budget.

Such measures, according to the regular IMF report on Moldova issued last week, should include: drastic downsizing of the public employment and improvement of the tax administration by delegating some functions of the Center for Combating Economic Crimes and Corruption to the Chief State Tax Inspectorate. With a view to ensuring efficient operation of the megaregulator, more powers should be granted to it – in particular, the IMF insists on complete delegation of the right to issue and revoke licenses to the National Commission for Financial Market.

The western experts are also concerned about the budget indicators being balanced. Answering the question about his view on the economic liberalization campaign, Johan Mathisen did not conceal the fact that the Fund is especially concerned about the capital legalization launched in Moldova. Jointly with the government, urgent measures were taken to amend the law on prevention of and combating money laundering and financing of terrorism, as well as the law on capital legalization. As regards the domestic effect, in the opinion of the expert, one cannot expect much from capital legalization. And application of the zero-rate income tax is a matter of budget capacities. Losing a portion of revenue presumes that either it will be covered from a different source or that expenditure would be cut.