In early July, Moldova launched talks with the IMF on a new cooperation program. An impressive amount of $ 550 million is at stake. This money is like oxygen for the republic now. The main thing is not to pay heavily for it, as the neighboring Ukraine did.
The previous program of Moldova’s cooperation with the International Monetary Fund was completed this year, and was overshadowed by several scandalous episodes, such as a sharp increase in the VAT rate for the HoReCa sector and adjustments in gas and electricity tariffs. None of that, nevertheless, stopped Prime Minister Ion Chicu from defining those agreements between Chisinau and the Fund as a “breakthrough”, arguing that the agreements lacked commitments to increase taxes, reduce social spending and other conditions undesirable for the population.
In April, the National Bank of Moldova received another IMF emergency lending in the amount of $ 233.9 million to handle the coronavirus and the pandemic consequences, and early in July, negotiations began on the Fund’s new three-year program for Moldova. Within its framework, a substantial amount of 550 million dollars is allocated for our republic, which will be used to support the budget and replenish foreign exchange reserves, recover from a pandemic, implement reforms, etc. The memorandum of cooperation will be discussed at the IMF Council in September. As Igor Dodon noted, if talks are successfully completed, the first tranche in the amount of 100 million will arrive in the country in September.
The Moldovan authorities are optimistic about the prospects for further cooperation with the IMF. Vice-speaker Alexandru Slusari, who took part in a recent discussion with the organization representatives, described the new cooperation program as “unique”. Meanwhile, of course, the general public is not yet aware of the details of the negotiations and of the specific conditions set by the Fund for Chisinau.
In this sense, it is useful to recall the experience of Moldova’s eastern neighbor, Ukraine, which recently also reached an agreement with the International Monetary Fund. On June 10, a new stand-by lending program for Ukraine was approved for $ 5 billion for a period of 1.5 years. The first tranche of the loan in the amount of 2.1 billion will be used to cover the budget deficit, and the remaining four will be received if all the requirements set by the organization are met. Curiously, the previous program, approved in December 2018 and designed for 14 months, was not fully implemented: in that case, Kyiv received nothing but the “starting” tranche.
To continue cooperation with the International Monetary Fund, the Ukrainian leadership had to make big concessions. Even before the negotiations started, two laws had to be adopted at Fund’s requirement to make discussions of a new cooperation program basically possible. The first empowered the Ukrainian National Bank by providing it with broad regulatory instruments in the country’s banking sector. The Kiev authorities tried to somewhat speculate on this bill, arguing that it primarily secures impossibility for the Ukrainian PrivatBank to return to the notorious oligarch Igor Kolomoyskyi. Therefore, mass media eventually labeled this law as “anti-Kolomoisky”. However, in fact, its meaning is much broader – the NBU, being controlled by the Fund, may now decide to close any bank or appoint its temporary administration. Moreover, challenging this in a Ukrainian court will not be possible.
The second, no less controversial law concerns the opening of the land market. With great difficulty, including through President Volodymyr Zelensky’s personal support, Kyiv managed to push the bill through the Verkhovna Rada. The document provides for the sale of land to private ownership: until 2024 – only to natural persons who are citizens of Ukraine, after 2024 – also to foreign citizens (after the referendum). Though, in fact, foreigners will be able to purchase Ukrainian land right away, because of Zelensky’s concurrent bill on the second citizenship.
Both laws were proposed for adoption during the time of President Petro Poroshenko, but the then-authorities chose to delay the process, which is why the previous IMF program for Ukraine was not fully implemented. Since then, the country’s economic situation has even more deteriorated, which, most likely, forced the new presidential team to take unpopular measures.
However, the two laws is only part of the story. The memorandum of cooperation spells out a number of other of Ukraine’s obligations, many of which will lead to a further drop in the living standards of the population. First, it is planned to increase the tax burden on businesses and the population with a simultaneous moratorium on any measures to liberalize tax legislation. This condition was especially disappointing for Ukrainian business, which was expecting relief in the course of the tax reform previously promised by Zelensky. Secondly, Ukraine will have to take a number of tough social measures: the implied increase in the retirement age, the educational system “optimization” (namely, closing some schools and dismissing staff), an increase in heating and gas tariffs (and, in general, aligning them with the “market” conditions – that is, with the prospect of an increase depending on the market environment) with a simultaneous increase in fines for the failure to pay. Of particular note is the medical reform, which provides for a sharp reduction in medical funding and introduces payment for some public medical services.
No wonder the Memorandum of Economic and Financial Policies with the IMF and the draft Letter of Intent with the IMF, approved by the Ukrainian Cabinet on May 20, was concealed from the public for a long time. Their publication provoked blasting criticism of the authorities from almost all opposition forces, and Yulia Tymoshenko-led Batkivshchyna even accused the country’s leadership of “surrendering its sovereignty”. And the head of the pro-presidential Servant of the People political party fraction in the Verkhovna Rada, Davyd Arakhamia, said that the IMF’s requirements for obtaining new loans are “extremely difficult and in many ways unacceptable.”
Against this background, the optimism of the Moldovan authorities on the new program of cooperation with the Fund evokes justified skepticism, especially since Moldova and Ukraine in many ways have similar financial and economic situation. The COVID-19 pandemic has sharply increased the already considerable budget deficit, which was planned to be covered exclusively with external credit and grants. Moldova has already rebuffed a Russian loan of EUR 200 million (and the new negotiations will not necessarily be successful). At the same time, unlike Ukraine, Moldova is on the verge of electoral processes that force its authorities to live “beyond their means,” spending money on social payments and infrastructure projects for PR purposes. And this is not to mention the weakness of the current ruling coalition, which nearly lost its parliamentary majority the other day.
Moldova really needs the promised more than half a billion dollars, and this naturally further weakens the negotiating positions of the Moldovan representatives. Yes, the government managed to complete the previous program more or less “without losses”. But even then experts expressed the opinion that the most severe conditions would simply be included in the new agreements. Therefore, the leadership of Moldova today needs to treat the ongoing negotiations in the most responsible way, and, despite all the unfavorable circumstances, reach an agreement that would allow obtaining credit funds without the need for shock measures in the socio-economic sphere. After all, this is the very example when it is better to learn from other people’s mistakes.
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