Stumbling Tranche. What Is Wrong with the Moldova-IMF Agreement?

Marina Dragalin Agreements with the International Monetary Fund may cost Moldova too much The ‘unfreezing’ of international assistance has undoubtedly become one of the most notable achievements of the new leadership of Moldova. Money from abroad came in handy: rapid ‘economic intelligence’ immediately after the transit of power revealed the deplorable state of the state treasury, impoverished by elections and ‘transformations’ of the Democrats. Suffice it to say that the implementation of the law on wages alone requires an additional 1 billion lei. In general, the financial hole in the budget, according to the Minister of Finance Natalia Gavrilita, is estimated at billions lei. It is clear that the internal reserves of the country will not be enough to fulfill all the obligations of the state and not to cut social expenditures. Therefore, the new ruling coalition initially made the restoration of relations with financial donors as one of its policy priorities. First of all, this refers to the IMF, which enables support from the EU and other partners. This goal was achieved quite quickly: already in July, immediately after the assessment missions of the Fund, it became known about the tranche of 46.5 million dollars before the end of the year. As usual, the success had its ugly side in the form of a package of IMF requirements that Moldova will have to fulfill in the near future. They are kept secret, but it is easy to guess that in the environment of the ‘sinking’ economy Chisinau could hardly dictate its conditions. Most likely, vague statements about “stabilization of public finances” and “quality management of the banking sector” hide unpleasant surprises for the residents of Moldova. That there are pitfalls in the agreement with the Fund is clearly evident from the first changes in the tax policy (according to the government, agreed with the IMF), which have already caused a massive public outcry. The National Bank on the direct instructions of IMF officials raised the basic rate from 6.5 % to 7.5 %, which affected the lending to small businesses and participants in the Prima Casă program. VAT for hotels and restaurants doubled, and the tax amnesty was curtailed overnight. Traditional IMF recommendations to reduce social payments and raise tariffs, which are already openly spoken about by officials, are also frightening. The terms of the agreements with the IMF are once again harsh for Moldova, which is confirmed by a new discord in the ruling coalition on relations with the Fund. The government of Maia Sandu, which has to justify unpopular measures in the economy, on the one hand blames the previous regime, and on the other – insists that only cooperation with the IMF can delay the budget collapse. At the same time, socialists of Igor Dodon joined the criticism of the government, considering the agreement with the Fund “not meeting the national interests”. “After the restoration of relations with external financial partners, it is important not to forget about the national interest. Agreements with these institutions should be seen as a tool to improve the living standards of citizens, not for the sake of agreements themselves. And if these agreements do not allow us to achieve these goals, they need to be re-negotiated and revised,” President Igor Dodon said. Moreover, at the end of July, the President publicly stated that the government had been mistaken in agreeing to toughen tax measures. He promised never promulgates any of the relevant bills until it is put for public debate. Advisor to the President, former Finance Minister Ion Kiku went even further and at all criticized the attitude of IMF officials to Moldova, saying that they put forward inadequate conditions. In his opinion, financing from the IMF “will have the most serious consequences for the country’s economy”. In this sense, words of the former Deputy Prime Minister, economist Alexandru Muravschi, that Moldova must bargain with the IMF till the end otherwise “a new mission will twist it round its finger” sound like an ominous warning. Now many Moldovan politicians are calling for a revision of the requirements of the agreement with the IMF, but so far it seems unlikely. The best that Chisinau can hope for is the change of conditions after the negotiations on the new agreement in 2020. Nevertheless, heavy criticism from both society and coalition partners can really make the government change its mind, even in the face of the threat of another freezing of tranches. Meanwhile, the amount involved is 100-150 million US dollars, which, according to preliminary calculations, Moldova will lose due to the termination of budget financing from the IMF, WB and EU. At this point the government obviously does not know how to compensate for such losses, and therefore continues to comply with the requirements of the IMF. The amendments to the Tax Code, which were agreed in July, will come into force in January 2020. This week, the deputies at the special session should adopt changes to the budget and fiscal policy in order to have time to send the documents to the IMF Executive Directors (in September, they must make a final decision on the tranche). In general, Chisinau is acting correctly: holes in the country’s budget need to be plugged, and Western loans are quite suitable for this. However, in strategic terms, Moldova may lose much more. The implementation of the IMF’s requirements has already led to widespread social outrage and discontent in the ruling coalition, part of which fairly considers cooperation with the Fund an obstacle to real growth in the welfare of citizens. Now the government is quickly spending the credit of trust from the society alongside the growing disappointment of the population – and this in itself creates fertile ground for a new round of political crisis. In such a situation, the Sandu-Dodon coalition should seriously consider whether the price of ‘tasty’ IMF loans for Moldova will not be cutthroat.