Signing of the agreement with the International Monetary Fund has raised people interest towards to the role of this organization in a country like Moldova. Together with Johan Mathisen, IMF Resident Representative in Moldova, let’s try to clarify this question: what can the Fund really offer to our country?

“Same as any other member-state of the IMF, Moldova enjoys the right to solicit financial support. In order to place an official request for the funds the government of any country needs to first formulate substantially concrete plans for the future and stipulate such in the so-called “Memorandum”. As a rule, the Memorandum serves to outline perspectives for the forthcoming 6-months period. In our specific case, financing was requested under specially designed PRGF facility targeted towards poverty reduction and economic growth. This mechanism envisages access to IMF-supported financing during a term of 36 months. “Disbursement of tranches is expected to take place once every six months after the approval of the mission report and having the Memorandum for the forthcoming period in place”, says Johan Mathisen.

“It is worth noticing that for Moldova loans are extended on a very favourable terms. The IMF releases funds to countries featuring different levels of development. Thereat, proceeds from crediting more developed countries allows the Fund to render loans to less developed counties on preferential terms”, says our interlocutor.

We could only add to that that the rate on the loan currently extended by the IMF is below the rate of return on deposits in USD or Euro in any of the first class bank. Hence, Moldova does not bear any real costs on paying out interest on these loans; quite the contrary, at the background of minimum risk and overhead charges, Moldova has a chance to make a pretty penny out of it.

It is hereby worthy to explain that the IMF disburses these loans onto the account of the National Bank of Moldova to replenish country’s foreign exchange reserves. These loans cannot be used for any other purpose. Or better say it should not be used for any other purpose. This condition could only be fulfilled straight-out if the National Bank will abstain from crediting the government. (Currently, the IMF requested that the Moldovan authorities in addition to entering this statement into the Memorandum pass it through the Law of the National Bank as well. That should cut off any temptation with the government to acquire credits “at the expense of money printing machine” so as to get hold of foreign exchange through readily available national currency.)

“While offering financing to the central banks of certain member-states the IMF acts as the International Central Bank. The loans are made available in convertible currencies called SDR (Special Drawing Rights). These funds should sustain the foreign reserves of some or the other country at the required level”, - says J. Mathisen.

“The main rule applied by the IMF to that end is to firstly assess what time period of imports could be covered by the reserves available with the NMB. The standard period is usually three months. Answering to your specific question on the need to increase the reserves, the answer is yes, it is necessary to booster the reserves so that they could cover more lengthy period of import. This measure is important for better preparing the economy for all sorts of possible critical situations”, says J. Mathisen.

The issue of the sufficiency of foreign reserves became rather pressing during the recent months. Following embargo introduced by Russia on wine and canning products exported from Moldova, the foreign exchange proceeds have reduced here. Although at the moment we far from overestimating the significance of this factor for the domestic foreign exchange market we still treat it as a “challenge”. In order to have adequate response to this “challenge”, the market and its players need time so as to assess the situation and get readjusted with due account for the new realities.

Under such a situation foreign reserves play the role of a “shock absorber” helping to cope up with external shocks affecting primarily the stability of the national currency.
The foreign reserves are replenished at the expense of means extended by the IMF in cases when the central bank of a country does not have sufficient domestically available sources to build up such. Sufficient level of reserves is a certain pledge of financial solvency of a country. This factor is of prime importance for its creditors, business partners as well as to domestic and overseas investors. Just get into these shoes yourselves, dear readers: wouldn’t you feel much at ease discovering information on growing foreign reserves of the NBM? Especially when you feel uncertain about the future outlook of the national currency?

“Here in Moldova the most frequent question we get is about the projects we intend to finance”, says my interlocutor with a smile. “I believe the majority of the “Logos-Press Economic Review” readers are well aware of the fact that the IMF is financing the NBM exclusively and that the scope pursued is to replenish foreign reserves. Naturally, Moldova has other important uses for the external financing, but this is outside our profile. The IMF does not extend funds to finance economic projects; its loans cannot be used to directly support the budget of a country”.

Talking about the priorities – the funds extended by the IMF by itself is a less important fact. What is really important is its confirmation (availability and implementation of a program) of the fact that the Moldovan authorities are “observing the rules of the game”. Assessment made by IMF missions is equivalent to auditor’s statement. If it exists and if it is positive – it serves as a signal to other international creditors. Primarily, for the World Bank, EBRD, other financial institutions as well as to the so-called donor-countries and solid foreign investors.

It is also worth noticing that for the private rating agencies availability with a country of a successfully implemented IMF-supported program serves as last but not least argument when conferring higher rating score. These ratings are influencing choices made by the potential or already acting private investors. Domestic commercial banks are using these ratings to estimate the cost of externally borrowed funds. Lately, too many times we hear sighs of regret from our local financiers: “A bank’s rating cannot be higher than that of a country. Low rating means high cost of externally borrowed resources; rates common for the countries with good financial standing are doubled or even tripled for us”.

Besides, it is worth mentioning as a special case that we do need the reputable international audit and not just for the outer world but also to bring in order our own “household”. Evidently, in the long run this has more value than the loans and ratings building up the image of the country.

A good quality auditing implies that in addition to highlighting “wrong” one would be told how to do “right”. As a rule, though, for an extra pay. It is time we start valuing the fact that the IMF is eager to render us advise, within the framework of its competencies, as technical assistance, which means - practically free. However, in our country same as in the rest of the world, there are debates on to what extent these recommendations are good.

Johan Mathisen while answering to this question mentioned that the IMF same as any other similar stricture cannot be considered impeccable. “The things that cannot withstand testing against practice are subject to changes. Perceptions shared by the economists on what is “right” and “wrong” are updated and sometimes new ideas are replacing the old ones. This is a normal process underlying accumulation of expertise and improvement of knowledge. We, at the IMF are trying to generalize and digest the practice of many so as the others could avoid making same mistakes and apply positive experience in their own countries”.

Just to remark that during the recent years the IMF became more flexible in the approaches it takes to solving different issues and tends to discuss a whole range of possible models. Which is most important, the IMF is trying to avoid dogmatic approach in its relations with different countries. Our interlocutors making part to those who participated in preparing new Memorandum and had numerous discussions with the IMF missions visiting Moldova are confident that “representatives of the Fund could be persuaded and over-persuaded, provided one could come up with reasonable arguments”.

Passing through the “IMF school”, both in the country and abroad, in the past years was a significant number of leading specialists from the NBM, Ministry of Finance, Ministry of Economy and Trade as well as from the National Bureau of Statistics. It all helps to build up common grounds. Lately the IMF is offering teaching programs (unfortunately short-term ones) for the members of the Parliament. Within the framework of this initiative members of our lawmaking body had a chance to attend Vienna course in April of the current year.

“This year we are planning to hold in Moldova special seminars for journalists and civil society”, promised Johan Mathisen. – “Training is just one of the possibilities. I believe that more appealing to our Moldovan colleagues is a chance offered by the IMF to invite to the country leading experts-economists eager to discuss different issues and share their expertise and knowledge. And what is really important not just on anything but rather on the topics chosen and favored by our Moldovan colleagues”.

PS: On May 10th, the first tranche ($19.9m), granted by IMF, was transferred to the NBM’s account.

Alexander TAKII

Source

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* Excerpt from a national Russian anthem