Profit: Mr Mirzoev, half a year has passed since the Moldovan government signed a new memorandum with the IMF. What can the "eyes" and "ears" of the IMF in Chisinau (the IMF mission) say about this period? Is the government sticking to the key macroeconomic parameters stipulated in this document?

    T.M.: I arrived in Moldova in December of 2009, in the middle of a difficult winter for crisis-hit Moldova. But despite a rather gloomy mood in the society, the authorities’ strong commitment to their ambitious reform program was impressive. As of end-March, all parameters of Moldova’s program with the IMF have been met and several badly needed measures have been implemented. These included passing a credible 2010 budget; marked improvements in the expansion of targeted system of social assistance; efforts to de-politicize setting of energy tariffs and make the energy sector more sustainable; improvements in the financial sector regulation; and a number of regulatory measures, notably trade liberalization.  

Meanwhile, the macroeconomic situation has improved markedly. There are now clear signs that the economy has begun to recover: exports and industrial production have been growing steadily, and retail sales increased as well, which signals an improved consumer confidence. We are optimistic about the government’s ability to maintain this positive momentum in the economy through sustained reforms.

     Profit: Judging by the results achieved in the first quarter of 2010, which traditionally is the most difficult for the Moldovan economy, can the IMF speak with optimism about such things as: 7% budget deficit to GDP, 1.5% GDP growth, 4-6% inflation and a stable exchange rate?

     T.M.: Based on the economy’s performance in the first quarter of 2010, I believe that most macroeconomic objectives in 2010 will be met comfortably. We now expect real GDP growth of 2½ percent in 2010—higher than originally projected. Alongside, the budget execution has been strong. The restraints on current spending have been maintained, accumulation of new arrears has been avoided, and old arrears are being gradually repaid. And with higher projected economic growth and continued reforms, we believe the budget deficit could even turn out to be lower than the planned 7 percent of GDP. But the impact of recent hikes in energy prices on inflation is likely to persist till about mid-summer before gradually receding.   

     Profit: It is obvious that during crisis Moldova cannot significantly and rapidly increase domestic consumption. Therefore, a stable situation on Moldova's traditional markets – Romania, Russia, Ukraine and Poland – is very important for our country. So, what are the chances that the economies of these states will recover from recession in the near future (or are there signs that they will recover), which could have a very positive impact on the Moldovan economy?

     T.M.: The recovery in Moldova’s trading partners will indeed be critical for Moldovan exports. IMF’s views on growth prospects in these and other economies were recently published in the World Economic Outlook. The 2010 regional real GDP growth projections are: 1 percent in the Eurozone; 2.8 percent in Central and Eastern Europe; 4 percent in the Commonwealth of Independent States. We also expect a gradual recovery in most of Moldova’s main trading partners with the 2010 real GDP growth projections of 0.8 percent in Romania, 4 percent in Russia, and 3.7 percent in Ukraine.

      Profit: In 2008-2009 Moldovan exporters had quite huge losses because of the strong national currency, the leu. Meanwhile, many Russian, Ukrainian and Romanian products became competitive on their domestic markets as well in Moldova after the national currencies of these states weakened by 20-30-40%. Given this situation, does the IMF believe that the National Bank of Moldova should also take some measures that would weaken the leu and boost exports?

     T.M.: Excessive defending of the leu exchange rate in 2008-09 was equivalent to implicitly subsidizing imports. And it happened at the time when the economy needed to rebalance away from imports and toward export orientation. As a result, the cost was high—about one third of the country’s foreign exchange reserves in the first half of 2009. At the end of 2009, the National Bank of Moldova took corrective measures and recovered a significant part of the lost reserves while improving the economy’s competitiveness.   

But weakening of the leu should not be viewed as the primary tool for stimulating exports because nominal depreciation alone cannot boost exports indefinitely. Eventually, it would lead to excessive inflation and macroeconomic instability.  

Instead, the country’s competitiveness should be viewed from a broader perspective. Moldovan exporters’ ability to produce and successfully compete in international markets in the long run will critically depend on a number of other factors where deep reforms are needed. These include the business regulatory environment; flexibility of the labor market and reasonable labor costs; efficient provision of public sector services; adequate infrastructure; access to finance; and so on. Therefore, to ensure a sustainable medium-term export growth, reform efforts should first and foremost concentrate in these areas.
 
     Profit: What should the government of a poor country do to make investments in its economy in the conditions when foreign investors are in no hurry to invest in it? Should it sell/privatize state assets and invest the funds in the economy?

     T.M.: A strong and sustained commitment to structural reforms will be critical to improve the country’s competitiveness along the lines outlined above. This, combined with resolution of the political uncertainties, should provide a major impetus for foreign investment.  

To enable many of these reforms, a fundamental shift in the fiscal strategy is needed. Specifically, the government needs to continue restraining current expenditures—including through optimization of the public sector and by abstaining from public wage hikes that are out of line with the economy’s productivity—and strengthen tax administration. These efforts will create space for increased spending on badly needed infrastructure investment and poverty reduction. This is the cornerstone of the authorities’ program with the IMF. 

Alongside, privatization of state assets should proceed once market conditions improve. Loss-making public companies drain fiscal resources from other priority areas and should be privatized, restructured, or—if all else fails—closed. Most enterprises that do not make losses should also be privatized to allow the government to focus on its priority areas and to provide resources for large infrastructure investment needs.

     Profit: The NBM has recently allowed banks to give credit in foreign currency not only to importers but also to exporters. Yet, some analysts say that the decision is discriminatory when it comes to companies that do not deal with export. What is the fund's opinion on this issue? Can the central bank's decision be viewed as an impetus for all companies to try to produce goods for export, which is very important for the Moldovan economy?

     T.M.: The past practice of allowing importers in Moldova to borrow in foreign currency, while prohibiting exporters from doing so, has led to accumulation of foreign exchange risks and the development of mostly import-dependent non-traded goods sectors, such as retail trade and construction. It also led to increased dependency on the exchange rate and contributed to the economy’s inflexibility to adapt to external shocks. The flaw of this policy, which was masked by large inflow of remittances, was exposed by the present crisis. 

In this context, the recent change allowing exporters to also borrow in foreign currency is a step in the right direction, and should support the ongoing rebalancing of the economy. Going forward, financial sector regulation should be vigilant in preventing re-accumulation foreign exchange risks in sectors without foreign exchange revenue.

     Profit: The decision to allow only exporters and importers to take credit in foreign currency is viewed as discriminatory because of the wide gap between the rate on credit in Moldovan lei (18%) and foreign currency (11%).  In IMF's opinion, how long will this gap continue to exist?

     T.M.: An economic agent without foreign currency income taking a foreign currency loan also undertakes an exchange rate risk. Excessive accumulation of such risks threatens both economic and financial stability of the country. Managing such risks by financial sector regulators is crucial to avoid painful boom-bust credit cycles in small open economies like Moldova’s. In this context, the interest rate differential between leu and foreign exchange loans quantifies the exchange rate risk associated with foreign currency lending. The high spread is also due to the Moldovan economy’s weak export capacity, underscoring the need for urgent structural reforms.

     Profit: In November 2009, the IMF signed a three-year memorandum with Moldova's new pro-European government. Now it is clear that not all the clauses of the memorandum will be fulfilled given the fact that a new early parliamentary election seems unavoidable either in 2010 or 2011. Does this mean a new round of negotiations with Moldova's new government is looming?

     T.M.: IMF’s assistance to Moldova is conditional on implementation of economic reforms. Deviations from the agreed measures would indeed call for discussion of potential corrective measures. But I am personally confident in the authorities’ commitment to keep their economic reform program on track despite the political factors. 

Profile of Tokhir Mirzoev: Tokhir Mirzoev was born on June 5, 1976 in Tajikistan. He graduated from the Technological University of Tajikistan; received his Masters degree in economics from the Central European University in Budapest, Hungary; and a Ph.D. in economics from the Ohio State University in the USA. He assumed his position as the IMF’s Resident Representative in Moldova on December 7, 2009. He has been pleasantly impressed by the kindness and hospitality of the Moldovan people, and the beauty of the country. He enjoys his stay in Chisinau, and is still exploring Moldovan wines.