On Wednesday, February 7, the Resident Representative of the International Monetary Fund in the RM Johan Mathisen held a press conference, nominally in connection with a regular visit of the Fund’s European Department mission to Chisinau (21 to 28 February). The publication of two documents – the first review of the progress of the RM with the implementation of the program under the Poverty Reduction and Growth Facility (PRGF) and the Memorandum of Economic and Financial Policies for 2007 – was timed to coincide with the event. The former reflects the IMF’s official view of Moldova’s progress with the economic reform over the first nine months of the past year and makes projections for up to 2008 and even for the longer term. The latter – the Memorandum – sets objectives for this year and lists concrete tasks the Government, the Ministry of Finance, and the National Bank of Moldova undertake to fulfill over the period.

Both documents with all attachments are available at www.imf.md. In this issue, the LP publishes the full text of the Memorandum translated into Russian. In this context, we would like to share with the readers some thoughts about, and comments on, the commitments undertaken by the Moldovan authorities. 

IMF Resident Representative in Moldova Johan Mathisen deems demonstrative the mere fact the Memorandum was published. Time has come for open politics.

The first thing that stands out is that the program for this year is “ambitious” in the good sense. Due to its targeted nature and the authorities’ efforts to fulfill their commitments last year, the IMF Executive Board made a decision in late 2006 to increase lending to Moldova. It is not even about the amount of loans extended to the NBM, but about the fact that the IMF takes a positive view. As we have already stressed more than once, that would improve the outlook for the inflow of necessary donor assistance from the international financial institutions and individual states into our country, as well as promote capital investment by private investors.

Last year, practically all the commitments to the IMF regarding monetary and fiscal policies, as well as structural changes were met. And in rather difficult conditions of “external shocks”. The only macroeconomic indicator the IMF is concerned about is the higher than projected inflation rate.

Therefore, the statement by the authorities that in 2007 they would seek to achieve the inflation objective of 10 percent stands out particularly in the Memorandum. Moreover, it says that the authorities “are considering a move to formal inflation targeting at some point”. Targeting is setting targets to manage the growth of currency in circulation and credit the central bank is guided by in its policies. Ways of targeting vary, depending on whether the growth rate of one or several monetary aggregates are limited and in what form the targets are set – in the form of a “fork” (band) or a certain benchmark.

For the economic entities and individuals, as well as for foreign investors, such a formal indicator serves as a benchmark for making private decisions and taking action. It is a major factor of higher predictability of economic development. In the countries where inflation targeting is stable and tight enough, it facilitates growth of long-term investment.

The Moldovan authorities believe they are not prepared yet to introduce such an indicator. But they state in the Memorandum that they take action to improve the monetary policy. In particular, setting up “a joint advisory body” – the Committee on Liquidity Management – is identified as a step to assist the attainment of that objective. The body is already operational, co-chaired by the First Vice President of the NBM Victor Cibotaru and Deputy Minister of Finance Nina Lupan.

A statement that, beginning from 2008, the budget law will no longer oblige the NBM to roll over government T-bills (the value of which in the central bank’s portfolio amounted to almost MDL 2.5 bn as of last year-end) seems to be an important aspect to the issue of higher mobility and efficiency of the monetary policy implementation. It is expected that domestic debt in the form of rollover credit secured with government securities would be converted into government securities proper, which would potentially broaden the NBM’s capacity to manage the resource.

Over the past two years, the Ministry of Finance repaid to the NBM the most recent credit of MDL 594 mln in installments of MDL 118.8 mln. It will be repaying it in the same installments until 2010. However, it is of very little help in the central bank’s efforts to sterilize excess liquidity. We reported that, in the fight for lower inflation, it has to attract amounts exceeding MDL 1 bn from commercial banks, employing various mechanisms. Such operations come at a price – direct annual costs can exceed MDL 150-200 mln if yield on the funds “diverted” from the market does not go below the current 14-16 percent per annum.

The Memorandum provides for another channel through which the National Bank will be able to get funds from the Ministry of Finance, in this case on a regular basis. As soon as this year, under the concluded agreement, the Ministry of Finance must pay for the services the central bank provides to it. As far as we understand, this concerns the services of organizing weekly auctions for placement of government securities, purchase of foreign exchange in the open market, as well as servicing the public budget accounts transferred from commercial banks to the NBM late last year. However, the National Bank, in its turn, will pay at a certain rate for the balances in the treasury accounts. It is assumed that, as a result of the “commercialization” of relations between the two institutions, it is the NBM which will benefit – it will be able to increase and maintain its capitalization at, at least, 10 percent of total liabilities in its balance sheet by means of those proceeds as well. Such a requirement is set in the Memorandum and will be monitored by the IMF, along with other indicators. In order to replenish the NBM capital adequately, the government promises to inject at least MDL 250 mln in it before December 31, 2007. If the capitalization level is below the set threshold, starting from 2008, the share of the NBM’s net income transferred to the state budget will be no more than 50 percent. These measures are to facilitate the increase in the real financial power of the central bank and to enhance its capacity to pursue appropriate monetary policy aimed to contain the inflation rate within the limits of projected indicators and, in the future, targets.

Other activities envisaged and already partly implemented at the Government level will contain uncontrolled inflation. By way of reminder, draft law on public debt, state guarantees, and state onlending was submitted to the Parliament last August. Following the accounts of the state and local budgets, other public finance – state social insurance and compulsory health insurance fund accounts – will be transferred from commercial banks to the NBM. As far as we know, commercial banks will be charged with carrying out transactions at the order of those agencies, but at the end of every day balances will have to be accumulated in the Single Treasury Account. This will considerably reduce the volume of commercial banks’ liquidity and, thus, will sterilize the money stock.

But that is not everything yet. Given that “external shocks will have long-lasting effects”, says the Memorandum, the authorities will have to tighten further their fiscal policy. They undertake to contain the state budget deficit at 0.5 percent of GDP. In order to achieve the indicator, a number of measures is envisaged for 2007, aimed to improve the balance of the state budget.

The most topical one is the statement that the government will ensure that tariffs for natural gas and electricity remain at full cost recovery levels for all categories of consumers. It also promises to “gradually adjust heating and water supply tariffs” for the same purpose (again, for all without exception). To this end, legislation will be passed shifting responsibility for setting heating and water supply tariffs from municipalities to the national energy regulator. The government promises to compensate “the most vulnerable” ones to protect them against the effects of such decisions.  

In order to enhance the financial sustainability of the social fund budget, the government will continue the reform in the pension system for farmers aimed to strengthen the link between contributions and benefits. The Memorandum promises that work will continue in implementing the individual accounting system of social insurance contributions in other areas.

Another comment on the topic of ensuring the balance of public finance – the new Memorandum confirms further progress towards the privatization of Banca de Economii. As was promised, albeit with some delay, results of the tender, which lasted for almost nine months, were determined to select a foreign company to conduct an assessment of the market value of BEM. It has come to our knowledge that Romanian branch of Deloitte Touche Tohmatsu was selected as such an independent evaluator. The evaluation is to be completed by September 30, 2007.

The Memorandum confirms another “carry-over promise” to have approved by law the establishment of the National Commission on the Financial Market (NCFM) before 31 March – project known as “megaregulator”. The new agency will be established by June 30 and be operational no later than September 30, 2007.

Alexander TAKII

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