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?
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
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
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
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:
Mirzoev was born on June 5, 1976 in Tajikistan.
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.
assumed his position as the IMF’s Resident
Representative in Moldova on December 7, 2009.
been pleasantly impressed by the kindness and
hospitality of the Moldovan people, and the beauty of
enjoys his stay in Chisinau, and is still exploring