Moldova will have to report to the IMF on how it spent the $236m received from the IMF. The IMF expects that the authorities would use the funds “in a responsible and transparent manner”. Rodgers Chawani, the IMF Resident Representative in Moldova, spoke about this in an interview with NewsMaker. He assessed the prospects for economic growth and explained why in Fund’s view the pension age must not be decreased and named the main problems that will have to be tackled by the Moldovan government.

A Rationale Approach

Have the $236 million allocated to Moldova already arrived in the country? Will the IMF indeed not monitor its distribution in any way?

Let me start by the bigger picture. As you know, in early August the Board of Governors of the International Monetary Fund approved an allocation of US$650 billion to all member countries, which is an unprecedented amount in the history of IMF. The IMF Managing Director Kristalina Georgieva called it a "shot in the arm" for countries that are undergoing a difficult time. On August 23 the funds were transferred to the National Bank of Moldova.

Moldova will decide for itself how exactly to use these funds. However, the IMF is interested in that member countries spend the money transparently, rationally and responsibly. The annual and quarterly financial reports of the IMF already provide information on SDRs (a unit of account used by the Fund – editor’s comment). And the IMF plans to publish detailed reports on the use of the allocated money.

But what does “rationally and responsibly” mean? What would be the IMF's advice for Moldova on how to spend the money? What are the priorities, in your view?

Member countries are sovereign entities and will decide themselves on how best to use the SDRs. We hope that the decision is prudent and well-thought. At the same time, we believe that it would be good to channel this money towards combating the pandemic and laying the foundation for subsequent economic recovery.

Economic recovery means support for business, some kind of direct payments to entrepreneurs. But will this contribute to economic growth? Maybe it is worth investing in infrastructure projects that will create jobs?

Thank you for this question. The pandemic has really hit both businesses and households hard. We would have appreciated if fiscal policy were able to do more and minimize the destructive effects of the pandemic and improve the well-being of the population.

Beyond this response, the country has other needs as well, and you are right on the need to address infrastructure gaps and create more jobs. But these objectives cannot be achieved using the one-time SDR allocation. Therefore, there is need for a new program for Moldova that could be supported by the IMF and other external partners.

Will the new program include the same conditions as discussed last year with Mr. Chicu's government? Or would you rather consider that some adjustments are in order?

Here is how we see it. The Moldovan people voted for a new parliament which appointed a new Government and this Government has requested a new program with the IMF. In this context, the IMF will focus on supporting the post-pandemic economic recovery, improving governance and institutional reforms to foster sustainable income growth.

By the way, the problems the country faces have not changed. In particular, the rule of law and anti-corruption frameworks are ineffective. Public spending is inefficient. The business environment is unfavorable. There are large gaps in infrastructure due to under-execution of projects. State-owned enterprises rely more on government support and the energy sector lacks competition. And we are dealing with the pandemic on top of it all. These will be the main issues for the discussions on the new IMF-supported program during the next mission.

Controversial Issues

Let's discuss two most sensitive topics on Moldova's agenda that might be reflected in on the new IMF-supported program - pension age increase and the so-called 'Billion [Recovery] Law'. IMF's position is widely-known. But people do not understand why it is not possible to reverse the raise of the retirement age, or to repeal the Billion Law.

This is a good question. Let's start with the pension reform. People have every right to hear both sides - those who are for and those who are against the reform. The main problem that the IMF sees is that lowering the retirement age would put pressure on maintaining an adequate and financially sustainable level of pensions and will put pressure on public debt.

In Moldova, over the last 30 years, the number of people over the age of 65 has grown from 8.5% to 12.5%. At the same time, life expectancy has also increased from 67 to 71 years. The rapid ageing and widening of life expectancy implies that a pensioner needs several more years of support from the government.

So, if the retirement age is lowered, two problems immediately arise. First, the number of employees who contribute to the pension fund would decrease, resulting into lower contributions. Secondly, it will increase pension expenditure on the part of government at a time when mobilizing revenue is a serious challenge. This will undermine the sustainability of the system and put pressure on public debt. In our view, there is need to balance the economic and social considerations when debating the lowering the retirement age.

One of the arguments of the opponents of raising the retirement age is that the wages are low, and therefore, for many, pensions are at least some kind of increase in income. Maybe it is worth increasing wages so that people are not that eager to retire early? Or increase contributions to the Social Fund in order to pay decent pensions?

Of course, there are many points of view, and there are ongoing discussions about this. I would not want to go deeper into these topics, as they will be discussed by our team with the Moldovan authorities when working on a new IMF-supported program. In any case, the solution to this issue is a balancing act between benefits and disadvantages while ensuring that all views are taken on board.

Let's move on to the so-called Billion Law. I am sure that this topic should be widely discussed. NBM should have a strong balance sheet and adequate financial buffers in order to implement its mandate fully and in a sound and efficient manner. The balance sheet of the NBM was hit by the massive liquidity support that was provided to the troubled banks. The Law on Securitization has aided the NBM’s cashflows and capital position, allowing it to fulfil its mandate of maintaining price stability. Repealing the Securitization Law risks undermining the institutional and policy autonomy of the NBM, a precondition that is necessary for successful implementation of its mandate.

Some experts say that the National Bank is sitting on a pile of money, although it could be used to develop infrastructure so that the money would work. At some point, ex-President Igor Dodon proposed it. Maybe it is worth investing these funds?

The law says that the main role of the NBM is to ensure price stability. We will not support any actions that would reduce the NBM's ability to achieve this goal. This has always been our position. Since Moldova has some outstanding credit with the IMF, this would be regarded as a misuse of foreign exchange reserves. NBM activities undertaken at the direction of government would lead to a decrease in its capital and reserves position. At the same time, the impact on inflation and exchange rate would lead to macroeconomic volatility and financial stability concerns. This would make it more difficult for the NBM to ensure price stability and further undermine confidence. This is why we maintain that the financing of the state budget should not come at the expense of central bank’s autonomy. The benefits of this approach are there for all to see now. Thanks to the good buffers and improved capacity at the NBM, banks have weathered well the impact of the pandemic.

Could there have been another solution instead of the Billion Law? For example, to leave liabilities with the NBM.

As I understand it, this was the best solution at the time. There were no real alternatives. Here is what is important. Efforts must focus on identifying those who were responsible for the fraud, hold them accountable, and make efforts to recover the funds and assets.

Tasks for the Government

You have already met with Prime Minister Natalia Gavrilita, Ministers Dumitru Budeanschi and Sergiu Gaibu. Do you think that the new Government, and its financial and economic component in particular, is capable of implementing the new Fund-supported program? For instance, Mr. Gaibu and Mr. Budeanschi before joining the government were experts, they were working outside the public system.

What I can tell you is that we had a good and productive working relationship with with Prime Minister Gavrilita, when she was the Minister of Finance. We trust that under her leadership of the economic management team, the Government will be able to deliver the program objectives. Yes, there are ministers who used to be independent experts and have not worked in the civil service, we stand ready to support them to work towards a common objective for the benefit of the country.

What do you think about this year's Moldova's economic outlook? Can we expect growth? Are there any short-term measures that would ensure better outcomes?

The Moldovan economy is recovering. However, the recovery is fragile. There are risks that might hinder the recovery. First, domestic and external demand may not grow as fast as we expect. Secondly, the reluctance of a fairly large share of population to be vaccinated may lead to new variants and a worsening of the epidemiological situation, with possible lockdowns derailing the economic recovery. Third, people with vested interests may hinder the reforms. But in general, we expect that the reform-minded government should come up with a robust policy mix and a package of measures to minimize the above risks and lay foundations for a recovery.

The authorities have already requested an IMF-supported program, and if the program is agreed upon, it will also contribute to this agenda. Of course counting on the support of other external partners.

You mentioned people with vested interests who have lost power and can do harm. What exactly do you mean?

During any transition, when serious reforms are underway, there are always forces that are trying to stop them. And we must consider such risks for Moldova as well.

Are there any short-term measures for the authorities that could be applied, say, within a month and earn quick results?

We believe that fiscal policy should support and target the most vulnerable populations to the pandemic. And this is where the SDR allocation that Moldova received from the IMF helps.

Monetary policy should ensure that credit and liquidity flows smoothly so that those who want to start a business or develop a business can have easier access to financing.

It has always been a problem for Moldovan business to get a loan on good terms. Banks are still reluctant to lend to legal entities, targeting individuals in their loan offers. How could this trend be reversed?

When we look at the lending market, there is a reasonable explanation from both the demand and supply sides. The demand for loans decreased due to the low incomes. But now household consumption is picking up, and people have started taking loans again. Supply is also increasing, although this is a difficult time for banks to make lending decisions. There is always risk that borrowers would not be able to repay the loans, and it is very difficult to calculate how great the risk of indebtedness is, because no one can guarantee profitability during crisis. If you look at the numbers, credit is growing; however, one needs to look at the sectors where there are problems and work to support these particular areas.

Safeguarding the National Bank

What is your opinion of the situation at the National Bank of Moldova and in Moldova's banking system? What further reforms are needed there?

From our point of view, the NBM has stepped up its efforts with supportive monetary policy by reducing its policy rates and reserve requirements. The NBM stepped-up sales of foreign exchange and reduced its footprint in the market. At a time when fiscal policy was shy, the central bank remained the most active institution in supporting the recovery. There are still several areas where reforms are needed. There is need to preserve the hard-won gains that the bank has achieved in recent years, including transparency of bank shareholders, banking supervision and regulation, and resolution frameworks. We are convinced that having a fully instituted management in line with professional, integrity, and procedural requirements is critical for the NBM.

Also, NBM officials dealing with supervision need to be protected from the risk of being arrested for carrying out their official duties.

I would like to note that the focus should not only be on banks, but also on the non-bank financial institutions, because risks in this sector are growing due to a sharp increase in lending. Also, the insurance market needs to be cleaned.

Could you give an example of specific measures that need to be implemented in the non-bank financial sector?

The previous IMF-supported program focused on rehabilitating and strengthening banking sector’s regulation. The same should be done for non-bank financial sector. Oversight needs to be improved and legislation should be strengthened to ensure the proper level of supervision. This is important, given the growth of lending in the non-banking sector and the recent build up in vulnerabilities, as sooner or later there will be a risk of an increase in the share of bad loans.

Do you see any risk of a complete change in the management of the National Bank of Moldova, given that Octavian Armasu was appointed by the previous authorities? And could this lead to instability in the NBM's work?

I would not like to speculate on that issue.

Let's talk about inflation then. The NBM is also in charge of it. What do you think about current inflationary processes in Moldova and all over the world? What can be done to reduce the impact of rising inflation on the population?

Globally, inflation has picked up more recently. The unprecedented monetary and fiscal support in response to the pandemic have helped to limit output losses but triggered inflation concerns. Food prices have risen to their highest level since 2014, including because of adverse weather events. In addition, oil and metal prices have increased surpassing pre-pandemic levels amid a rapid pickup in demand and lagging supply.

From a policy response standpoint, we continue to believe that the priority should be on securing the recovery including through monetary accommodation. This has to be coupled with closely monitoring inflation and financial stability risks.

Inflation has picked up in Moldova, also mainly driven by higher food prices and core inflation. To a lesser extent, it was influenced by the increase in fuel prices and regulated prices. The situation warrants close monitoring, and we welcome the tightening bias by the NBM as a step in the right direction, since the underlying indicator for long-term inflation (core inflation) has also picked up. Monetary policy should continue to be guided by inflation developments. All these issues will be part of the forthcoming mission discussions with NBM.

And will the money that Moldova received from the IMF not contribute to the growth of inflation? Certain payments to population will surely follow.

The Ministry of Finance and the National Bank have a joint liquidity management team that estimates in advance the impact of the planned actions on the overall liquidity position. There is capacity to forestall any inflationary pressures. However, we must not lose sight of the urgency of fiscal policy to fight the pandemic. This policy mix only serves to underline the need for coordination, as the interaction between fiscal and monetary policies will improve going forward.

You have been the IMF Resident Representative in Moldova for a year now. Could you name three things that have surprised you in a good way in Moldova? And something that you would immediately fix?

I will remember the very warm welcome, the beauty of Moldova, as well as the events of Friday, August 27, which showed how the people passionately want change for their country.

What I would like fixed immediately? Since I am originally from Africa, I would be happy to see an African restaurant in Moldova, which, I think, would go perfectly well with the Moldovan wine.