JOHAN MATHISEN: IF PROGRAM GOALS ARE INTACT THE IMF WILL CONTINUE TO FINANCE MOLDOVA

Chisinau-13.04.2007/12:06:02/(BASA-economic)

BASA-press Agency's exclusive interview with Johan Mathisen, IMF Resident Representative to Moldova (translation)

BASA-press: Mr. Mathisen, what do you think of the authorities' recent initiatives on fiscal reform that would directly affect Moldova’s program with the International Monetary Fund?

Johan Mathisen: We consider it is paramount that any changes of the monetary and fiscal policies are consistent with preserving macroeconomic stability. I stressed this in our press statement issued on Thursday, too.

As I said repeatedly, the anchor that keeps our program with Moldovan authorities in place is the reining of inflation by using prudent monetary and fiscal policies. What really counts for us is the fact that if there are any changes operated to the macroeconomic framework, the meeting of the targets related to monetary indicators and budget deficit of maximum 0.5% of GDP, should be taken into consideration.

As I have already noted in the press statement, more fundamental steps, of a more general nature, namely enhancing market competition, developing financial market, reducing corruption in the judicial system and other such steps, are likely to be more important than just these recent initiatives for such reforms.

It means that additional investment flows, both local and foreign, will come only provided that the judicial system improves, as well as other reforms are carried out, such as the recent establishment of the Competition Agency, which, in order to be successful, must be independent and autonomous. Also, is important to have a financial system that intermediates piopulations’ savings efficiently.

BASA-press: They say that these initiatives have been discussed for some time now and had not been launched several months earlier, as it was initially planned, because the IMF opposed to that. Is that true?

Johan Mathisen: This is a question you should ask the authorities about. What I can say is that our interest in these proposals relies on two motives. The first is that, as representatives of the international community, we are lending money to Moldova. It means that any changes of the macroeconomic and fiscal framework in this case question Moldova's capacity to reimburse the loans.

Another important reason why we are interested in this matter is the fact that there is a program with Moldova comprising specific indicators, which has been developed with a view to maintain a low inflation rate. And, of course, to ensure a faster economic growth and poverty reduction.

I would also like to add that Moldova, as any IMF member, is entitled to ask for consultancy regarding any initiative it wants to launch.

We are trying to acquire the best practices from all IMF member countries and replicate them in other countries.

We established a very close and efficient dialogue with the Government.

BASA-press: Do you think the announced initiatives affect somehow the objectives laid out in the Memorandum on Economic and Financial Policies signed by the National Bank and the Government?

Johan Mathisen: Let's refer first to the proposal to reduce the income tax for economic entities to zero.

We have reached an agreement with the Government that budget deficit should not exceed 0.5% of GDP. Any changes, any lowering of the income tax rate would be a potential loss of revenue for the budget. From the macroeconomic point of view, this step would have an effect similar to increasing wages. Difficulties appear if you reduce revenues, increase expenditures and at the same time try to maintain the preset budgetary deficit. In particular, if we take into account the fact that one of the key objectives stated by the Government is to enhance capital investments.

But please understand me correctly: we think that lowering income tax rates in order to attract investments is a welcomed step.

However, there is one "but". Namely, this step should be carried out in such a way that the fiscal system affords it financially. We fear that increasing expenditures for wages, reducing income received from taxes will lower capital investments.

BASA-press: Is there a "but" in relation to the legalization of capital or fiscal amnesty?

Johan Mathisen: As I said, we are still analyzing the details. But we do have comprehensive international experience in what regards such proposals. And, generally, experience shows that the outcomes of implementing such initiatives are both positive and negative.

There are three reasons of concern when we speak of fiscal amnesty. Concerns arise in any country, Moldova is no exception. One is loosing budget incomes. The second is being fair with all taxpayers. And third, the implications for fiscal revenues in the future. I mean, paying taxes in the future.

When we speak of losing income to the budget, international experience shows that generally, the best practice in this regard is this: write off the debts that cannot be collected, namely, the debts of the companies that do not exist anymore. As to the fiscal arrears that could be collected, international practice suggests to establish a debt management system that would make possible the payment of a part of it. Hence, if you cancel a part of the arrears that could be collected the budget will loose income.

If we take on one hand an economic unit that honored its obligations to the state and paid taxes, was disciplined, and complied with the legislation, and on the other hand, another economic unit that was incapable to pay taxes to the budget, it is the latter’s debts you pay off. At this point businessmen may ask themselves to what extent this amnesty is fair.

And, thirdly, it was noted that in some countries such initiatives undermine fiscal discipline in the future. Some countries have unfortunately repeated these steps several times. As soon as taxpayers understand that there might be another amnesty in the future, there willingness to observe legislation wears off.

From our experience, we can say that there should be two prerequisites for such an initiative to be successful. Firstly, it should be an one-time thing that will never repeat again. The second condition is strengthening fiscal management.

If fiscal arrears are cancelled then the capacity to impose observance of fiscal legislation should be strengthened in the future.

The implementation of the tax inspectorate reform strategy, in my opinion, and I think it is the IMF’s opinion too, is absolutely essential.

There are many organizations such as MONEYVAL that might say more about the capital amnesty initiative. It is essential that Moldova maintains a close dialogue with such organizations in order to ensure that such initiatives will not have negative repercussions for the economy.

It is essential for the new draft law on preventing money laundering to anticipate the capital amnesty initiative. To this effect, the IMF Legal Department provides technical assistance to Moldova. We are maintaining a close dialogue on the draft that is being worked out. We encourage authorities to make progress in this regard.

BASA-press: These initiatives have been launched shortly after a visit of an IMF technical mission to Chisinau. Did the mission discuss the initiatives?

Johan Mathisen: The details of the talks are confidential. This information stays with the experts and Moldovan authorities.

Generally, we welcome the initiative of lowering the corporate income tax provided that the fiscal framework can afford it. So, the discussion stays at whether the country is able to honor such costs without undermining the fiscal framework for this year and the years to come. And it is important not to experience consequences regarding Moldova's image abroad.

BASA-press: It was said that these initiatives will be widely discussed by the upcoming mission and Moldovan authorities. Will they discuss to what extent these initiatives are covered financially or their advisability in general?

Johan Mathisen: This will be one of the main topics of discussion when the mission arrives on April 25. The mission will update the information on the implementation of the program until that point in time. The data on program evaluation will be presented on March 31. Half of the discussions will focus on these issues, and the other half on the perspectives, monetary and tax policies, structural steps that are to be taken during the next six months of program implementation.

The objective of lowering inflation below 10% and having a budget deficit of 0.5% of GDP will be preserved. The mission will take into account the proposals made and the recent salary increases in the public sector, and the wish expressly stated by authorities to increase capital investments.

BASA-press: In the past, did the authorities' actions that brought about expenditure increase, led to suspension of IMF financial program?

Johan Mathisen: I cannot comment on what happened in the past. I do not know the details. What I can say though is that if the program objectives stay intact, then the IMF expects to maintain its commitments to Moldova.

I will stress again, that the deficit level of 0.5% of GDP and inflation under 10% should be maintained for the Fund's program to continue.

I think we will have interesting discussions between the mission and authorities.

BASA-press: From what we see, the IMF relations with the Government are very good lately.

Johan Mathisen: Of course. I can confidently confirm this. From my experience, I can tell that the degree of the authorities' commitment and ownership is much higher than in any other country I’ve worked in.

BASA-Press