Will the Moldovan Economy Survive 2019?

A month and a half after the elections, the main intrigue remains the ruling coalition. Fortunately, the formation of the parliamentary majority pleases with plot twists. Against the background of political battles, economic issues have temporarily receded into the background. Although they shouldn’t have – last year, many experts warned that 2019 will be a tough year for the Moldovan economy. Judging by the first wakeup calls, their forecasts were correct. Growing number of challenges Last year, in an attempt to make an electoral ‘breakthrough’, the ruling Democratic Party adopted a number of various programs and measures of social support: “First House”, “Good Roads for Moldova”, increase of salaries and pensions, reduction of tax burden. Back then, there were concerns that the generosity of the Democrats is unprovided with real revenues of the treasury and a heavy burden will fall on the budget of 2019. Today, the ACUM bloc openly warns about the gaps in the main financial document of the country. According to them, at the time of the budgeting process, the revenues were overvalued by about 2.5 billion lei (since actions of the authorities led to their reduction). Besides, 2 billion lei spent on financing election projects are not covered in the budget. But the main problem is the external financing of the European Union, which the government strongly relied on: most of the budget deficit of 5.6 billion lei was planned to be covered by EU money. Meanwhile the expectations of Chisinau have not been met: in 2018, the authorities could get only 8% of the planned amount, and expectations from this year are clearly not better. If the ruling coalition is really composed of the PDM and the PSRM, it is pointless to count on the resumption of macro-financial assistance from the European Union. And this is a very significant loss – judging by the statements of the ACUM leaders, the EU was ready to provide the country with at least 200 million Euros in the next six months. The current situation means that the government will either have to look for new sources of financing or adjust the budget by at least 7.5 billion lei. In this case, the first to be reduced, obviously, will be the payments, pensions and programs, which Democrats were bragging about before the elections. Economic balancing of Chisinau So far, the authorities are trying to avoid shock scenarios and are actively attempting to expand the geography of international donors. Therefore, Moldova is trying risky ways to attract Turkish investors and holds forums for businesses from China and the United States. Chisinau has particular hopes for the attraction of finance for the “Good Roads-2” program, the first stage of which brought a lot of political dividends to the PDM. The government plans to allocate about 150 million dollars for it this year, and at least half of the funds should come from external sources: the European Bank for Reconstruction and Development, the World Bank, and the governments of China and Turkey. Moreover, despite the barely disguised discontent of the EU and the threat of losing visa-free travel, Chisinau has found another promising way to replenish the budget that is through the Moldovan citizenship. According to the program approved in the summer of 2018, anyone can get it by transferring at least 100 thousand Euros to the Long-term Development Fund or by investing a quarter of a million Euros in a strategically important business. Last week, the first holder of the ‘passport for investment’ was announced. It is likely to be followed by many others – at least until Brussels runs out of patience. In addition to targeted measures, the government is taking steps to revive industry and agriculture. The first is evidenced by the Industrial Development Strategy for 2019-2030 developed by international experts, the second is the declared intention to diversify the agro-complex and shift from traditional low-profit areas to products with higher added value. It is symptomatic that, despite all the problems, the authorities are reluctant to seek assistance from the IMF, a three-year program of cooperation with the IMF for $ 178 million ends this year. Probably, it’s all about the reluctance to fall into the trap of harsh conditions (including political), which if fulfilled can significantly affect popularity of Democrats and further pump up the protest potential. In general, the current actions of the government in the economy look reasonable and well-judged in tactical terms, but have no strategy behind. The political logic still much prevails over economic, and chaotic actions of Chisinau seem to be nothing more than an attempt to find a balance between electoral needs and expectations of international donors and scarce domestic resources. So far, the authorities somehow perform these pirouettes (although sometimes with significant costs, as in the case of Turkish teachers), but the room for maneuver narrows at a catastrophic rate. The main problem is that Chisinau is not at all concerned about ensuring the long-term self-survival of the Moldovan economy. This means that sooner or later Moldova will inevitably face a choice of two scenarios: full dependence on external donors or substantial cuts in public spending.