In the Debt Pit: Moldova Increases Its Dependence on International Loans

In terms of figures By March 2018, Moldova’s total external debt exceeded 7 billion US dollars. It has increased by 3.3% from the beginning of the year and continues to grow. External debt of specifically the Government of Moldova is more than $ 1.7 billion as of August 31. For the current year, Chisinau has already “loaned” several hundred million – 20% more than in 2017. According to the data of the Ministry of Finance of the Republic of Moldova on the structure of the aggregate external debt, it turns out that Moldova is indebted to: - International Development Association (IDA) and IMF – 920 million dollars (this is more than half of the total debt); - The European Investment Bank – more than 200 million; - The International Bank for Reconstruction and Development (IBRD) – 89 million; - The European Bank for Reconstruction and Development – 68 million; - International Fund for Agricultural Development (IFAD) – 67 million; - The Council of Europe – modest 33 million. 329 million USD came to Moldova through bilateral loans. It is characteristic that almost half of this sum – 151 million – came from the poorest country of the European Union, Romania. Another 51 million accounted for the share of the Japan International Cooperation Agency, and 43 million – for Russia. Other “donors” include the United States, Germany, Poland, Austrian UniCreditBank and Commodity Credit Organization. Debts and obligations International loans are common practice. However, in the context of Moldova, it is worth remembering that the mentioned financial loans in most cases are not one-off, but parts of long-term and well-thought-out programs. According to their general principle, each new tranche comes only when the government of Moldova fulfills the necessary obligations. And since Chisinau has collected a lot of credits, the maneuverability of the authorities in terms of conducting an independent financial and economic policy is constantly decreasing. The larger the loans, the more serious Moldova depends on the requirements of international institutions, often associated with the need for unpopular measures of economy, which in the short term may affect the well-being of the population. Some experts believe that the total foreign debt of Moldova and its associated obligations indicate the loss of a part of the country’s sovereignty, not only economic. Meanwhile, Chisinau’s dependence on external infusions is only increasing. For today, the indicator of the state debt of the Republic of Moldova in relation to GDP is the highest on the whole European continent. The current situation raises serious concerns among local experts and politicians. It is widely believed that current trends lead to a repetition of the sad experience of Greece. In fact, the current account deficit in the balance of payments, which doubled last year and continues to grow, means that Moldova already lacks the funds that come from labor migrants and even through gratuitous grant assistance. The Moldovan economy is becoming more and more credit-addicted: already now a third of the revenues to the budget is made up of foreign loans. How the accumulated debts and interests will be returned is not clear, as there is no signs of a significant growth in the Moldovan economy. Suffice it to say that since 2009 the country has received more than nine billion dollars, and the government accounted for about five of nine. The funds received were spent irrationally: money for the most part “did not work” and was spent on current social payments. The economic basis has not been modernized, the need for new loans has not decreased, and the burden on the budget of the Republic of Moldova has increased with new loans – the rapidly growing national debt must be serviced. In the end, the lack of visible success in the economy prompted lenders to repeatedly postpone new credit tranches. The circle is closed. It is symptomatic that gratuitous assistance in the form of grants to Moldova is also declining. So, at the end of 2009 one dollar of credit accounted for more than five dollars of grants, then in 2014 it was two dollars, and in 2018 – only 40 cents. This speaks volumes about the loss of confidence in the Moldovan leadership by international grant institutions. Foreign partners are gradually realizing that gratuitous “donations” to the Moldovan economy, in the final analysis, do not have a proper practical effect, and quite often even end up in the pockets of officials. Because of the undermined confidence in Chisinau, international institutions are rapidly shifting from providing “free” money to net lending under very tough conditions for the implementation of specific reforms. The return of loans is hardly a less difficult issue for Moldova. In general, servicing the entire public debt in 2018 will cost the state budget 1.82 billion lei (8.6% less than in 2017), only 400 million lei (22.7 million dollars) is directly to repay the external debt. At the same time, 1.7 billion dollars of the external debt of the Moldovan government are equivalent to the entire revenue side of the budget of Moldova (this year it is 2.2 billion). Taking into account the decrease in the amounts allocated to repay the debt, it is completely unclear how the government plans to settle with its international partners. Bottom line It is interesting that even planned actions to return borrowed funds may not be implemented. In particular, the Ministry of Finance has in advance determined a number of unfavorable factors that could affect the servicing of public debt and change in its value. In the first place are currency fluctuations as the most serious risk that can create significant pressure on the state budget, given that foreign debt in foreign currency constitutes a significant share in the public debt portfolio. Another risk is the interest rate, which may increase when it is necessary to replace external financing with loans in the domestic market through the issue of government loan obligations with a short maturity. And this implies a frequent revaluation of its interest rate. At the same time, in the structure of Moldova’s external debt there are not only government obligations, but also non-guaranteed debts of the private sector, including enterprises and banks. So, in 2018 this indicator increased by 239 million (or 4.8%), reaching 5.21 billion dollars that is more than 72% of the total external debt. Interestingly, 2.68 billion of this amount account for the debts of non-financial organizations to foreign banks and partners. This means that Moldovan economic agents have to turn to foreign financial institutions in search of loans with low interest rates since Moldovan banks simply cannot adequately provide enterprises with affordable loans. The stolen billion does not bring more trust in the banking system of the RM. The sad picture of Moldova’s financial dependence on external donors is, first of all, an indicator of the general effectiveness level of the state power system built in the country. In the current situation, frightening figures with a lot of zeros is a “merit” of so many people and circumstances, that everyone’s personal contribution to the current situation is difficult to calculate. Anyway, every medal has two sides – who knows what the country would face without the loans granted to it? The answer to this question allows us to consider the provided financial support as an investment, even if it cost Chisinau a part of its sovereignty. At the current stage, we can only hope that the Moldovan government will be able to overcome the current crisis and offer a qualitatively new project called “Moldova” to the international donors. A project that will be attractive again for investors.