Slowing Growth Rates of Moldova’s Economy: Before a Breakthrough or Failure?

The fifth part of the Moldovan economy is “unaccounted”, and economy grows only due to consumption. This is the conclusion of the Friedrich Ebert Foundation experts and the Expert-Grup independent center, presented in the analytical State of the Country Report 2017. The International Monetary Fund has improved its forecast for the growth of the Moldova’s economy in 2018 from 3.0% to 3.8%. The IMF report on the results of the third assessment of the implementation of the Cooperation Program with Moldova notes that GDP will reach 163 billion lei by the end of the year compared to the previous forecast of 160.1 billion lei. However, improving the IMF’s forecast in general does not indicate positive prospects for the Moldovan economy, but rather the opposite – in 2017 its growth was 4.5%. Thus, this indicator is much lower this year. It can be expected that favorable conditions in external markets will stimulate exports, but the contribution of net trade to GDP growth will remain negative, since imports have traditionally been growing faster. Taking into account the parliamentary elections scheduled for February 2019, it is obvious that short-term economic growth will be artificially created by increasing government spending, the lion’s share of which will be required to maintain the road fund. The Moldovan authorities also hope to give impetus to economic development by granting citizenship to large investors, having planned to attract investments worth 1.3 billion Euros. In 2018, the current political instability in Moldova, coupled with strong dependence on external infusions, had a direct negative impact on the economy. Thus, in June the European Commission postponed the first tranche of EU macro-financial assistance to Moldova because of the decision of the Supreme Court of Justice to cancel the election results in Chisinau. The Commission reminded explicitly that macro-financial assistance is conditioned by “the successful implementation of certain economic measures and fulfillment of political conditions”. In this regard, the main risks for the positive dynamics of the country’s GDP are toughening conditions for further foreign financing of the Republic of Moldova, currency pressure, political instability and an unfavorable geopolitical situation. At the same time, unemployment remains at 4.1% in the country, and the gainfully occupied population migrates to work in other countries. At the same time, remittances from abroad were and remain one of the engines of the growth of the Moldovan economy. The explanation lies on the surface: the inflow of cash increases domestic consumption and stimulates the growth of economic indicators. The volume of money transfers from abroad to Moldova for the first half of 2018 increased by 16% compared to the same period last year and amounted to about 640 million US dollars. Russia is still on the top in the rating of countries where from migrant workers transfer money (slightly less than 30% of the total amount of transfers), followed by Israel, Italy, the United States, Germany and the United Kingdom. Remittances of more than a million Moldovan migrant workers in recent years accounted for 17%-30% of Moldova’s GDP and traditionally has been the main “engine” of consumption and, consequently, the growth of the national economy. Since the end of 2014 there has been a sharp decline in the volume of transfers, as well as the volume of transfers from Russia in Russian rubles. By the way, up to 2014 the share of Russia in the structure of remittances to Moldova was about two thirds. According to experts, the expected increase in remittances will be a positive factor only in the short term. In the medium and long term, such a model of economic development based on increased consumption and population “welfare” will, in fact, lead to an expansion of the “swelling” deficit in the balance of payments. Veaceslav Ioniţă, expert IDIS Viitorul, believes that remittances of Moldovan citizens working abroad, even if they remain at a sufficiently high level, no longer play an important role in conditions where exports exceed the funds received for the third consecutive year. At the same time, their significant volume has already led to formation of large monetary reserves in banks. The economy is not able to absorb these funds. As a result, they are placed in banks in the form of deposits, and foreign currency replenishes the reserves of the National Bank of Moldova. The overflow created pressure on the foreign exchange market and affected the appreciation of the leu. The strengthened national currency hit exporters, so the NBM was forced to apply its regulatory function to the market. The Central Bank bought the currency and issued lei to the market, which it had to buy back, as the country’s economy cannot use such a leu volume. Only in the first quarter of 2018, lending to the economy declined by more than 500 million lei compared to the previous year. Thus, the existing model, in which the welfare of a significant part of the population is provided not by the state but by direct foreign exchange earnings in the form of remittances, already hinders development of the domestic economy and can lead to new problems in the foreseeable future. Continued growth of excess liquidity was observed in 2018, reaching a record level of 9.6 billion lei. This growth was due, for the most part, to a permanent decrease in the loan portfolio in the banking system. The average weighted interest rate on loans in national currency provided by Moldovan banks declined in May 2018 to a new historic low of 8.63% per annum against 10.26% for the same period last year. For the first time, the interest rate on loans in national currency fell below 9%, according to the data released by the National Bank of Moldova. All the above factors combined with the growing internal political instability ahead of the parliamentary elections in Moldova are expected to have a negative impact on the influx of external public and private injections. Moldova’s chances for stable development without cardinal recovery of the entire political system and the restructuring of its economic basis are still illusory. In a sense, the republic and its citizens remain hostages to the existing “traditions” of political life and, as a consequence, no less specific economy.