Strength Test: Will Moldovan Economy Sustain Early Election?

The longer lasts the political uncertainty in Moldova, the more talks there are about early election. In this regard, many experts turn away from political battles and look at the situation in the Moldovan economy, which shows disappointing symptoms. Will it be able to stay afloat, withstanding the pressure of another powerful electoral wave? Government talks about success The first quarter of 2019 is behind, and the news feeds are gradually being filled with official data on increasing financial performance and attracted resources. For example, the economic growth recorded by the National Bank of Moldova exceeded the figures of the last quarter of last year by almost 4%. The volume of Moldovan exports also increased compared to the same period of 2018, amounting to almost 476 million US dollars. There are some results of measures to improve the industry: according to the National Bureau of Statistics, the industrial output has increased in January-February. This doesn’t mean consistent growth, but probably the Industry Development Strategy for 2019-2030 developed by international experts will approve itself. Acting Prime Minister Pavel Filip shared information on the state budget in social networks: in the four months of this year, it has been replenished by 19 billion lei, which is also higher than last year. These data, according to the Prime Minister, confirm that “the engines of the economy are working in the right direction, and the reforms of the government are bearing fruit”. “Thus, we can invest more in social projects, pensions and salaries”, the politician noted. Other positive news is the new loan agreements of the European Bank for Reconstruction and Development with Moldova Agroindbank and Victoriabank. Eurobank will provide them with 5 million Euros each to promote trade with the EU. Interestingly, the EBRD loans will be supported by grants from the European Union. Head of the EU Delegation to Moldova Peter Miсhalko stressed the EU’s commitment to support the development of small and medium-sized enterprises in Moldova. In fact, given the actual EBRD’s control over both banks, as since last year it owns their majority stakes, the Europeans have found a way to directly help small and medium-sized businesses, escaping corruption schemes. The lack of external macro-financial assistance makes Moldova look for new donors. The authorities especially count on Turkey and China, as well as ‘investors’ who acquire Moldovan citizenship for money. Chisinau has already attracted significant funding from Ankara and Beijing for the implementation of the “Good Roads-2” program. The economic situation is developing according to negative estimates The above-mentioned positive trends in the Moldovan economy are in fact weak and poorly expressed against the background of worsening negative trends. RTA experts warned at the end of last year that the Government’s economic policy will force Moldova to take disadvantageous loans from its commercial banks and take unpopular measures: “otherwise, the country awaits a full range of consequences of rash actions taken by the ruling government – depreciation of the national currency, accelerated inflation and other ‘shock’ measures”. These disappointing predictions are beginning to come true. The tangible leap in prices and leu depreciation have already become an objective reality, and this is not the limit. The leading financial institutions, the IMF and the World Bank, meanwhile, have lowered Moldova’s economic growth expectations this year to 3.5-3.6%. And experts of the National Institute for Economic Research give even more pessimistic estimates, predicting an increase in GDP by only 2.5 %. “Given the political situation, we just assess the situation realistically”, emphasizes the head of the Institute Alexander Stratan. The election generosity of the Democratic Party in 2018, despite the bravura statement of the authorities, was not provided with real incomes and, as predicted, ‘drowns’ the budget of 2019. “First House”, “Good Roads”, increase of salaries and pensions, reduction of the tax burden resulted in a budget deficit of 2 billion lei for Moldova. The appeal of trade unions of university teachers to the government for financial assistance to ensure the payment of ‘increased’ salaries is revealing. In this situation, the authorities have to eliminate the deficit by borrowing. However, at the moment Chisinau is actually cut off from long-term and cheap loans that could be taken from external partners. Therefore, the government takes much more expensive loans from domestic banks. According to the former candidate for Governor of the National Bank of Moldova Vadim Brinzan, government loans in local banks signal two problems: first, the government is in a bad situation, and secondly, banks cannot find profitable investment projects. This is due, among other things, to the significant deterioration of the business environment. On the one hand, revenues from legal entities have increased over the past three years, which indicates effectiveness of the tax service in the fight against the shadow economy. On the other hand, without reciprocal steps in the form of government support and ensuring of macro-financial stability, entrepreneurs only lose profits with continuing or even increasing risks. It is not surprising that since 2016 there has been a trend  towards reduction in the number of enterprises. In 2018, 3 thousand less enterprises were established than old ones closed, and 10% less than opened in 2017. In addition, the tax amnesty failed miserably. It was used by only ten people who transferred about 1 million lei to the budget. This clearly did not pay off the severe criticism that hit Moldova for this reform from all sides: the IMF accused it of contradicting Moldova’s lending goals, and the US Embassy even said that it would “legitimize theft and corruption”. There is particular concern about the ‘cracks’ in the previously solid foundation of the Moldovan economy – regular remittances of migrant workers. According to the National Bank, the amount of transfers decreased by 7% compared to the first quarter of last year. The decrease in official transfers is due to several factors: they are expected to move into the shadow economy due to the recent changes in the tax laws and leaving of migrants for permanent residence abroad. That 2019 is electoral, and, therefore, costly year was known in advance. Last year was difficult for the Moldovan economy due to the lack of macro-financial assistance from the EU. Now the situation is deteriorating due to the additional burden in the form of costs for the election campaign and implementation of hasty social reforms. It is obvious that the authorities’ expectations for the resumption of financing from abroad did not materialize. The prolonged political turmoil is depriving Moldova of a chance for assistance of Western partners this year and for the next tranche from the IMF. The upcoming voting in local authorities and Gagauzia, and now possible early parliamentary elections will be a serious test for strength of the Moldovan economy, which it is unlikely to pass without heavy losses.