This week, the IMF visiting mission to Moldova will continue its work. The IMF staff mission headed by Nikolai Gueorguiev is here to look at Moldova’s progress in implementing the Economic and Financial Policy Memorandum signed with the IMF last January and to discuss short-term actions. The IMF mission is also having consultations with Moldova’s authorities on the government’s medium-term policy to promote economic growth.
This year, the style of work of the IMF visiting mission is more active and democratic. Consultations are held with the authorities, as well as with the opposition, civil society, trade unions and employers – with all those who are well-informed and can speak their opinion on the government’s financial and economic policies both officially and unofficially. It is presumed that the results of such meetings will be reflected in the program of further actions of the government and the NBM agreed with the IMF. In this case it will be possible to say that the recommendations are issued to the country with due account for its diagnosis, and are not theoretical and abstract preventive recipes developed by researchers.
Meeting with Moldovan journalists was among the first the IMF mission had last week. The atmosphere was rather optimistic. “We are at the very beginning of the mission but we can already note that the government’s program measures - agreed with IMF - are being broadly fulfilled,” informed mission chief Nikolai Gueorguiev. According to him, the macroeconomic situation in the country has even somewhat improved in comparison with earlier projections. That is why policy measures should be adjusted to the situation, “not necessarily tightened. At the same time, the program targets are not going to change”.
According to the IMF staff projections, the GDP growth in 2010 may be higher than the projected 1.5-2% while as far as budget deficit is concerned “it is too early to say”. Nikolai Gueorguiev noted that budget revenues in January-February 2010 were low reflecting – in his view – economic decline in 2009. The IMF experts explain the high inflation of 8.1% on annualized basis by the effect of external shocks due to increase in energy prices. (For the period, the three-year NBM strategy envisages inflation of 5-6% plus/minus one).
Nikolai Gueorguiev noted that inflation targeting is the major NBM policy goal. For many national experts and non-experts inflation targeting is an obscure and even a dangerous policy goal. The IMF visiting mission chief tried to explain in popular terms the meaning of inflation targeting and why it had been introduced in Moldova. “The idea of inflation targeting is to keep inflation within a certain range in a given period. In this case, the main goal is not to achieve a target by a certain date but rather this goal should provide a market bench-mark, on the basis of it, businesses make their plans”. According to Nikolai Gueorguiev, this bench-mark works over a certain time horizon, which is normally two years. “That is, two years is the period in which monetary policy measures are expected to achieve the intended goal”.
That is why the IMF experts do not say that the higher current inflation in Moldova overruns the target. However, if the NBM takes any emergency measures and tightens monetary policy the target can be achieved but this will be harmful for the economy, believes Nikolai Gueorguiev.
“For this reason in inflation targeting, central banks of all countries try and achieve targets quite gradually. And I think in Moldova, a compromise will be reached and there will not be any tough requirement when in order to achieved a planned target it will be necessary to withdraw liquidity from the market, thus hampering credit to economy. The economy needs medium-term targets. This is a new monetary strategy of the IMF and it will take 2 -3 years to get it going.”
Having been asked about major barriers to Moldova’s economic growth, the journalists gave an unequivocal answer – economic instability. The IMF experts are looking for economic drivers. According to Nikolai Gueorguiev, external demand will be the main driver of economic growth of Moldova. “Therefore, maintaining competitiveness is critically important. To this end the policy of liberalization and deregulation should be continued.
In terms of medium-term development, another driver of economic growth is necessary. And if we think that the first driver of economic growth bases on migrant workers’ remittances and, of course, other financial flows that come into the country, to support sustainable growth, and avoid ups and downs it is good for the economy to strengthen export-driven growth. Perhaps, it is easier to say than to implement. However, other countries, east European countries among others, were able to achieve success in this area”.
As international experience shows, banks need at least two years to return to the previous level of crediting, says Nikolai Gueorguiev. According to him, Moldova was fortunate in a way, since it did not experience a financial crisis as such. And only one bank went bankrupt while it was not a strategically important bank. Therefore, the IMF experts expect that lending in Moldova will recover at a faster pace.
“In fact, addressing this issue we always come up against the dilemma which one came first? Egg or hen? Which one comes first: financial crisis or economic crisis? It is because the economy suffered from an external shock. At both domestic and external market, demand for goods and services remains low. And banks are afraid to lend to businesses because they think that things do not look that promising for businesses. On the other hand, businesses need credit to develop, invest in equipment and increase their competitiveness. That is why we believe that these facts have accounted for credit being and a low level or even going down during the last 15 months.
Today attempts are being made to break the vicious circle. External demand is demonstrating signs of recovery, exports start growing, and it is the driver that will pull up the entire economy. The prospects for businesses are improving, and in the nearest future banks will provide credit to them more readily. Thus, the vicious circle will transform into a virtuous circle. Companies will increase output while this will increase banks’ confidence in lending to them. All this is for short term. It is a typical picture of lending cycle being resumed.”
Sources of Growth
What is necessary to do in order to “start up” the economy? There are no limits here, considers Nikolay Gueorguiev, in case of prompt measures and policies the country has a big range of choices.
“There is such a process, which we name detection, discovery of a product, i.e. discovery of what can be produced and sold with high profit. And, of course, the best to deal with such tasks is the private sector; the state is not very successful in this. Thus, Government policy goal is to set free the initiative of the private sector. This is the first task which presumes maximum liberalization and deregulation of the economy. The second task is to create necessary infrastructure, so that this initiative could be realized.
If we take a look at other countries of the world, which are big exporters of industrial products, we will see that they don’t have any advantages from the point of view of resources. They were not big exporters 100 years ago. At the same time, we can see a very wide range of price and quality combination. On one side is Japan and Germany having high price – high quality. But the newcomers in this process, which have been able to get to the international markets, offer a little bit higher quality at a reasonable price, and this combination of price and quality makes them more attractive in comparison with competitors”.
IMF experts were answering in a diplomatic manner to journalists’ questions on whether the assistance to Moldova will be provided in case political power changes: “Our assistance is based on the Memorandum. In case the economic program of reform continues, than the assistance will continue be provided”. At the same time, they underline, that the important role in stabilization of the economic situation in Moldova belongs to the fiscal policy. Namely, implementation of measures, stipulated in the program of the Government, on reduction of current expenditures, which does not lead to economic growth, - while the execution of capital investment is liberalized in State budget. “Of course, high current expenditures are attractive from a political point of view, -says Tokhir Mirzoev, permanent resident representative of the IMF in Moldova, - but they do not serve as a driver of economic growth, they are more, to say, eating the activity of the country. That is why we have to change the approach to fiscal policy”.
The Opposition Is Counting Between The Lines
Recently, the mission had a meeting with the opposition. Members of parliament, who participated in the meeting, also noted the general positive atmosphere of the discussion, however, they considered that the IMF experts are too optimistic, evaluating the situation in Moldova. In particular, the experts of the Fund note the growth of the internal demand in Moldova, but “the total volume of sales includes the utilities as well, whose tariffs were significantly increased, including, based on the devaluation of the national currency, - the ex-minister of the economy says. – On the other side, if sales are growing, why there is a significant underperformance of VAT? May be it is caused by the insufficient administration of this tax?”
Members of parliament consider the growth of budget revenues for Q1 of 2010 by MDL 600 mln declared by the Government doubtful, too. “If we take a look at the structure of the budget revenue growth, we see that MDL 300 mln of MDL 600 mln are customs duties and VAT on imported goods. If we deduct from this amount the increase in excise rates and MDL 300 mln were received by the budget as income of National Bank. But, actually, these financial resources are designated to cover the inflation”.
Igor Dodon also pointed out the decrease of investments within the period of this year. In particular, investment in statutory capital of Moldovan enterprises decreased in January-March by 24,4% in comparison with the same period of 2009. We should not expect any recovery this year, as the major part of the donors’ assistance, intended for investments, will start to be received in the Republic not earlier than the next year. And this year, the IMF is allocating financial assistance for consumption. This also poses a risk, as the external debt of the Republic is increasing, which is not supported by income growth from investments, the deputy considers.
By Irina Astakhova