Moldova may come out of the crisis in a much better shape than before, especially if we talk about the business environment and initiated reforms
 

Perhaps, it is difficult to predict how long the economic downfall will last and when the recovery of the world economic will start.  The International Monetary Fund experts suppose that regional economics will recover only partially by 2010. In case of Moldova, recovery will depend, largely, on implementation of decisive remedy measures and consistent efforts to insure macroeconomic stability.  The most painful problems of the national economy are the decrease of export and import volumes, a lower flow of remittances and the need to recover the tax base.  “IMF is willing to support Moldova to overcome the current crisis and solve associated problems”, confirmed Johan Mathisen, Resident Representative of the Fund in our country.

 Corr.: Are there any political risks in Moldova? 

J.M.: IMF is dealing with macroeconomic stability and implementation of actions for stabilization of the conditions in member countries.  We do not consider political aspects and take no part in political processes; however, politics indirectly affects, for instance, investment prospects of the country.    

Corr.: Prior to 2005 IMF led a hard policy in respect to Moldova.  It was criticizing our government and provided practically no funds.  Why, when you were appointed, the Fund has dramatically changed its attitude to the country, in particular, funding been released? 

J.M.: One should not exaggerate my role in this process.  At an initial stage macroeconomic policies, which are implemented by authorities, are important for IMF.  I was not in Moldova before 2005, so I will not comment on the events of that time.  Approximately a year and a half ago, the situation in Moldova has changed dramatically: power started to manifest itself in a different way.  Since declaration of independence, the level of state and private investment in Moldova was significantly less than in other countries with low per capita income. It was 15-20 percent of GDP.  It was certainly insufficient to insure consistent economic growth.  Since 2006 a growth of the private and state owned sector was registered.  It amounted to already one third of GDP last year.  While in 2005 overall investments amounted to US$500-600 million, they have grown up to $2 billion in 2008.  Currently, Moldova pertains, to a greater extent, to the group of countries with transition economies.  Last year, the imports of the country have grown from $3 billion to $6 billion.  The remittances of Moldovan citizens working abroad have certainly contributed to this; however, a great part of the imports was conditioned by foreign direct investments and loans.  Thus, over the last year, the offer of foreign currency has increased in the country.  The hard currency reserves of the National Banks of Moldova have also increased from $0.5 billion to $1.8 billion.  Prior to this, the Leu that was depreciating in respect to foreign currencies until, gradually, it became stronger in 2005.  Other the last years, the state of the budget has become more stable and the level of internal debt has decreased.  Additionally, the level of public investment has grown from 4 percent to 8 percent, although we need not forget that GDP has grown, practically, twice.  It is for these reasons, that IMF came to the conclusion that implementation of macroeconomic policies in Moldova was satisfactory. 

Corr.: Is IMF ready to provide loans to Moldova in easier conditions? 

J.M.:  The process of reforming its loan providing system is not yet complete in the IMF.  We hope that conditions will not be worse than those employed earlier.  Do not forget that the quota for Moldova, as well as for other countries, has been increased.  This means that the percentage of funds which the country may obtain from the Fund is bigger.  The ceiling of loans, which the IMF member country may access, when a program exists, was increased.  The changes of the conditions for provision of loans consist in the fact that the probability that the country will not obtain a loan has decreased.  In other words, these conditions are even closer to the needs of the country.  Loans are provided only if a program exists, that is, a package of measures, which authorities intend to carry out.  In the future, this procedure becomes much simpler for the country, since the number of items of the memorandum has become lower.   

Corr.: Taking into account the positive attitude of IMF to Moldova, why aren’t other international financial institutions investing in our country? 

J.M.: Why are you saying this?  Actually, the growth of foreign capital coming into the country over the last two years speaks of the reverse.  The European Bank for Reconstruction and Development and the World Bank have significantly increased their loan project portfolios.  The same trend is true for other international financial institutions. 

Corr.:  World Bank has revoked a project because the tender was not carried out in a certain manner.  The US development fund, Millennium Challenge Corporation, says that we have a high level of corruption… 

J.M.:  It is better to talk directly to the representatives of the World Bank and the US Development Fund in respect to these particular cases. 

Corr.: Why aren’t private Western investors investing in our country? 

J.M.:  In 2008, the foreign direct investments amounted to 11 percent of GDP.  Moldova’s problem is a different one.  Initially, the investments were low and, as a result, there was no basis for sustainable economic growth.  Currently the situation is different.  If we consider the global volume of foreign direct investments per capita or as part of GDP, the figure is comparatively small, as compared to the one of neighbor countries.  On the other hand, over the last few years, the growth rate of foreign investments has significantly grown and has exceeded the respective indicators of neighbor countries. 

Corr.:  The Ministry of Economy and Trade of the Republic of Moldova states that Moldova is one of the most advanced countries of the region as far as the business environment is concerned and it is ranked fifth in the World Solvency Rating.  Do you agree that we have created the most favorable conditions for doing business and for attracting foreign investment?   

J.M.: I do not want to comment on individual statements of Moldovan authorities.  It is easier for me to discuss the conditions of doing business in the country.  The evaluations of the business environment certainly show improvements; however, they have not reached expected levels.  If we compare Moldova not even with Western Europe, but only with South-Eastern Europe, we see that the country is lagging behind in respect to these indicators.  Still, as compared to its more eastern neighbors, such as, Ukraine and Russia, Moldova appears better. 

On the other hand, the data of the respective ratings of the world financial solvency were not a surprise to us.  You know, the results depend much on the methodology of these ratings.  In this case, the focus was on the situation of the budget, debt to GDP indicators and several other indicators.  It is true that Moldova has good macroeconomic conditions and the debt has decreased.  Now, let us consider another indicator of the rating: the low level of the dependence of the banking system on GDP: is this a sign of stability of underdevelopment?  In fact, it is both.  The low level means that it is stable.  But it is so low, that it is difficult to say that the country is developed.   

The banking system of the country is weakly developed and it is weakly integrated into the European financial system; hence the low impact of the financial crisis.  Actually, the impact of the world crisis is felt less by banks and more in the real sector of the economy. 

Corr.: Which are the economic risks of our country? 

J.M.: IMF has posted a report on economic risks of low income countries on its website.  Moldova proved to be rather vulnerable in respect to all possible external shocks.  In particular, let us consider the high level of foreign investments.  On the one hand, it is good that money is invested in the economy.  On the other hand, if during the crisis the investor wants to withdraw his/her funds, this is a sign of vulnerability.  Or, let us consider, for example, the high level of remittances.  It is good that the country is receiving funds, however, their flow has obviously decreased during the crisis.  To say nothing of the high energy dependence… On the one hand, it is good that there is one source, a large and stable partner, on the other hand, it is bad.  These are the risks of Moldova related to world economy.  But the greatest and the most urgent problem faced currently by the country is the decrease of state budget revenues, which depend, largely, on imports.  Over the last months, the trade demand have noticeably dropped, which conditioned decreased state budget revenues and other related consequences.   

Corr.: May one of the consequence be a “revolution” of state budget employees? 

J.M.: Due to decrease of the flow of remittances, slowing down of imports and lower revenues of the budget, Moldova is getting close to the income levels of 2007.  One may imagine how painful it is for authorities to acknowledge this.  However, the experience of other countries of the region, which have undergone even more difficult conditions than the ones of Moldova, shows that it is possible to restructure the budget package in such a way, as to fit even into this rigid framework. 

Corr.: What is to be expected on the Moldovan labor market? 

J.M.: Moldova is subject to impact of seasonal labor market.  Moldovan itinerant workers travel to all countries of the region.  Most of them go to Russia, which was also affected by the crisis.  Over the first quarter of this year GDP of Russia has dropped 9.5 percent.  The greatest shock has occurred in the building sector, where further decrease is expected throughout 2009.  This means that the demand for labor force from Moldova will certainly decrease.  Most of the workers, for which employment abroad was important, may no longer count on this resource.  Once they are unable to find work abroad, the labor force offer in the local building sector will dramatically grow.  And, since offer and demand always meet somewhere, when labor force offer in the sector is greater, salaries must drop.  If the attempt is made to maintain salaries at the same level, the consequence may be that people will simply find no jobs.  The balance in these circumstances may be reached only through lower salaries.      

Corr.:  Is the building sector of Moldovan economy sustainable? 

J.M.: When analyzing the conditions of the entire region, IMF found that the crisis has affected to a greater extent the real sector of the economy, in particular, the building sector.  Obviously, its consequences will conduct to difficult problems in the building sector of Moldova.  As compared to other countries of the region, the weight of building in Moldovan economy is less significant.  It is not quite ethical to say this in an interview to your magazine, but the loud statements about the building boom in Moldova sound absurd when we consider the very low basis.  What is believed here to be an impetuous growth of the building sector over the last two years, has been occurring in other countries for decades.  Moldovans are happy that transfers from workers from abroad have increased and investments have grown.  However, when comparing these indicators with the ones of other countries of the region, we see that their global volume is lower in Moldova.  Still, we should not overlook the fact that the impact of the crisis on the building sector will be as painful as the one in other sectors of the economy.   

Corr.:  A way out of the crisis is the development of infrastructure.  The World Bank attempted to implement an investment project for building three roads in the amount of 90 million euros.  The project was revoked and thus the building sector of the country has lost 1.3 billion lei, that is, one eighth of its total volume. 

J.M.: I won’t comment on this specific transaction, but I will speak in general terms.  Americans and Europeans try to increase investments in the economy through projects which contribute to development of infrastructure, in particular, roads.  Moldova’s problem is that in conditions of lower revenues of the state budget, low development of the securities’ market, the state cannot find means for funding projects.  It is significant, particularly this year, to implement projects similar to the one you have mentioned.  The excess labor force on the Moldovan labor force market confirms that the country needs investments even more than over the previous year.  Such investment projects are needed at least for the duration of the crisis.  Thus, is it twice as important to secure funding from the World Bank., since funds are limited in the country, while people need jobs. 

Corr.: Overcoming crisis is possible by strict saving of resources (cutting down expenses) or by dramatically challenging development (increase of expenditures).  Which way is suitable for Moldova?    

J.M.:  In reality, there is only one way and it is confirmed by the macroeconomic theory: in case of crisis the country needs investment.  Crisis calls forth decrease of demand.  Thus, to get out of the crisis, economic growth should be enhanced.  The budget package may include lower taxes, thus companies will have more funds for development.  The demand in the state owned sector may be increased by raising salaries to the budget remunerated employees and thus promoting consumption.  It is also possible to increase investments in infrastructure, in building of roads.  IMF experience in many countries shows that the third way is the best as opposed to manipulations with taxes or salaries.  For example, if we  decrease taxes by one million lei or increase salaries with the same amount, or invest the same amount, the greatest gain is achieved when applying the third option.  Unfortunately, Moldova’s problem is that it wants to invest, but it is slow in carrying out its desire.  The reason for this is the sharp drop of revenues of the state budget.  Thus, the country has difficulties not only with investments, but even to maintain the right pace in meeting planned expenditures.  In an economic context, Moldova needs to find a means to redirect cash flow from salaries towards investment.  This is easy to say and difficult to do, since when we say salaries, we mean real people and one cannot take money from some people and give it to others.  During crisis time this is even more complicated.  Having a well established structure of revenues and expenditures in the society, it is not possible to restructure the system overnight.  It is for this very reason that the most realistic way is the third one, that is, foreign investment.  In economic terms, attracting investments for other aims only prologs the crisis.    

Corr.:  Over the first quarter of current year Moldova exceeded the revenue plan, fulfilled investment programs, maintained the free leu, paid pensions and salaries, has funded healthcare and science.  Why are you saying that terrible things will happen to us unless we take loans? 

J.M.:  The answer is plain and direct.  The outcome of the first quarter is a big growth of the budget deficit, which, apparently, will be funded by issuing state bonds.  We are speaking here about the way a country is funding its cash needs.  The statistics of last weeks shows that the interest rate on shares has grown from 11-12 percent to 24 percent.  Any country, any person may fund anything they want, but it depends on the price one has to pay for it.  It may happen that the interest rate on any loan will show a big growth.  Hence, the country is unable to fund such a high deficit (IMF has projected for this year a deficit of 10.5 percent of GDP) on its own.  Therefore, it will need to look for external funding to cover a part of the deficit. 

Corr.:  In case of crisis, banks and the building sector are the first to be affected.  The banks have increased their reserves, building sites become more active.  Apparently, our government has its own vision on how to overcome the crisis…  

J.M.:  We see the effect of a shot following five minutes.  Yes, countries which are integrated in the world economy tighter than Moldova, countries with a high level of foreign investments were affected practically at once, while the crisis influenced banks instantly.  However, in Moldova the financial side of the crisis was limited; thus, the crisis affects the real sector.  We see a strong downfall of exports, suspension of trade relationships, decrease of money transfers and an excess of labor force.  The real impact of the crisis will, probably, be noticeable in summer.   

I am forking in this country for three years already and when the word “crisis” is pronounced in respect to Moldova, everybody recalls the year of 1998.  But we should make a clear distinction between what took place in those years and what is happening today.  Consequences of this crisis may have a significantly lower impact than in 1998.  Everything depends on the ability of the authorities to successfully implement a package of stabilizing actions.  In particular, it is worthwhile to be aware that expected revenues of the state budget this year will decrease down to the levels comparable with 2007.  Thus, the government will have to operate corrections in the planned figures of the budget package for 2009.  As IMF representative, I hope that the authorities of Moldova, as IMF member state, will realize and correctly assess these indicators and will choose those policies, which will make for country’s stability.  In this case, the crisis should serve as a catalyst to carry out internal reforms.  In order to curb crisis, investments need to be attracted, both internal and foreign.  To achieve this, more active structural reforms should be carried out in the country and the business environment should be improved.  Authorities need to have a strong will to implement economic transformations and then to actually implement them.  In such case, Moldova, finally, will come out of the current situation in a much better shape than prior to the crisis, especially in way of business environment and initiated reforms.  The choice of the way to do it belongs to the Moldovan people. 

                                                                                                                      Corr.: Svetlana Boldisor