Pandemic Economy: Moldova’s Advantages and Weaknesses

Vladimir ROTAR Moldovan economy is accumulating a range of problems that may “splash out” unpredictable consequences during the second half of this year The Moldovan economy is gradually coming to life after two months of exhausting quarantine: shops, markets and hairdressers have resumed work and public transport started to function. Catering establishments are expected to open in June. Lifting quarantine favorably affects the state treasury. If in April its receipts volume was significantly behind the previous year’s figures then by the end of May the difference was reduced to the minimum: 134 million lei per day against 138 million lei in May 2019. The positive dynamics are also confirmed by Prime Minister Ion Chicu: “Some sectors’ resumption  activity in May let us witness an improvement in the state budget.” There are other, at first glance, positive trends: inflation is gradually decreasing, prices are falling, the Moldovan currency leu has strengthened. Objective problems However, everything is not so smooth, of course. The decline in prices was caused, among other things, due to lower incomes that caused the decrease in population’s consumption. According to recent Expert-Grup polls, two-thirds of Moldovan companies forecast a drop in revenue of more than a third. The situation is similar among the population. According to iData’s study, almost 45% of the population of the republic experienced an income decrease during quarantine and 30% of them a significant decrease. Half of the respondents admitted that in case of work loss, the accumulated savings would not be enough for a month. Financial problems of citizens and economic agents are confirmed by banking statistics. In April, commercial banks were able to attract half the deposits amount if compared to the same month last year. The volume of loans issued fell by more than 20%. The expected drawdown occurred in the field of money transfers to Moldova, including cash one. This evidence the sharp volume reduction of foreign exchange transactions by individuals: according to the National Bank they decreased by almost 30%. The macroeconomic situation can be generally assessed as unfavorable. “At the moment, we have significantly reduced both imports and exports. This figure varies by period. But for the period starting from April 1, the decline in imports and exports consists of 20 to 30 percent,” Minister of Finance Sergiu Puscuta said. Credit assistance Under the current conditions, the authorities have no choice but to find additional reserves and attract credit assistance from abroad. In this regard, a significant problem was the Constitutional Court of Moldova ‘s decision on May 8, to declare as unconstitutional the 200 million euros loan agreement with Russia. This amount would be enough to cover almost a quarter of the current 16 billion lei budget deficit. Along with, experts consider impossible to cover without external funding the hole in the budget that formed this year. Thus, economic expert Veaceslav Ionita believes that the government has two ways: to continue seeking money in foreign markets or to reduce costs. According to him, first of all, one might cut back on capital investment and try to reduce subsidies. Next in line are current expenses but there are few opportunities for maneuvers. And finally, the last step is to pay salaries with delays, that is, in fact, to be credited from state employees. It cannot be said that Moldova has no success at all in the credit field. As early as April, the NBM received an urgent$ 233.9 million euros loan from the International Monetary Fund. Another loan of € 70 million was allocated by the Council of Europe Development Bank. According to the organization’s press release, the money will go to support the healthcare system and alleviate the crisis for small and medium-sized enterprises. In addition, great hopes are associated with 100 million euros macro-financial assistance from the European Union which should enter the republic in two tranches during this year. Yet, the second part of the loan is due to a number of political conditions that the Cabinet has to fulfill. At the same time, Ion Chicu mentioned another possible budget deficit covering source which is the 30 million euros second EU assistance tranche, agreed back in 2017 that would also require bills adoption as requested by the EU. The Prime Minister also announced that at the end of May negotiations will begin with the IMF on a new 3-4-year program. In addition to the help of Western partners, the government hopes to get the Russian loan anyway. According to Igor Dodon, he plans to discuss the possibility of negotiations on this issue restarting with Russian President Vladimir Putin while his June visit to Moscow. Besides lending abroad, the government is also considering the possibility of issuing additional government securities to the domestic market along with Eurobonds issuing to international financial markets. There are plans for state assets privatization. Forecasts are negative The Moldovan economy’s objective problems could not but affect the main international financial organizations’ tonality forecasts. Thus, experts at the European Bank for Reconstruction and Development believe that Moldova’s GDP will fall by 4% in 2020 due to pandemic. “Moldova’s trading partners’ weakening demand especially from free trade zones integrated into global supply chains, will lead to exports reduction. This is to be worsened by a likely reduction in remittances, which will affect citizens ’incomes,” the EBRD stated. The World Bank also significantly worsened its 2020 forecast for Moldova. The May report noted that we should expect an optimistic scenario decrease in GDP by 3.1% and a negative scenario decrease by 5.2%. Moldovan experts and politicians’ estimations are even more pessimistic: for example, the ex-finance minister Natalia Gavrilita believes that the real decline could reach 10-12%. These forecasts confirm the fact that national economy will suffer not only within COVID-19 crisis but also after it ended. At the same time, according to economists, the agrarian and construction sectors may suffer the greatest losses. Although the contribution to the GDP of these industries is not decisive, the share of the population employed in is high and amounts to about 28%. Do not forget that the agricultural industry has already been hit hard by the drought and crop failure effects. The situation with Moldovan migrants remains difficult since they are mostly unemployed and do not have clear job prospects at home or abroad in the nearest future. All this creates objective problems that so far do not “sparkle” too bright but threaten with serious consequences in the near second half of this year. In this sense, the vice-speaker of the parliament, Alexander Slusar’s forecasts, that “in the autumn crowds of unemployed and farmers will take on to Chisinau” may give out opportunistic alarmism and in the current economic conditions they are not so far from truth. Especially if there are political forces to undertake channeling and providing protests (and such forces will surely be found). The measures the government is taking do not seem either thought-out or effective. In addition, they clearly lack systematicity. That is namely why regular workers’ protests in certain areas do regularly appear. This is only the beginning: the further situation development will inevitably require even more rapid and sometimes radical government decisions to avoid the most apocalyptic scenarios both in the economy and in the state generally. However, the authorities continue to remain in the election campaign logic, so evidenced recent decision to allocate a one-time assistance to pensioners who have a pension lower than 3,000 lei. There is no place and special opportunities for such maneuvers in the current situation. Unless, of course, Chisinau succeeds attracting even more international assistance. So far, it seems, its potential for the current government to be almost completely exhausted.