Moldova's Economy Is Slipping into Crisis

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The lack of growth, high inflation, a record budget deficit and lots of other negative aspects are prompting a disappointing conclusion – the country's economy is definitely plunging into severe and protracted crisis
The armed conflict in Ukraine leads to severe economic losses not only for the entire region, but also for the world as a whole. The soaring fuel and food prices have affected the most vulnerable segments of the population in low-income countries. Overall growth is projected to slow from an estimated 6.1% in 2021 to 3.6% in the next two years. Rising commodity prices and increasing price pressure have prompted a high inflation forecast for 2022. The World Bank expects GDP to shrink by 4.1% this year in all emerging market economies and developing countries in Europe and Central Asia. This is worse than the recession triggered by the COVID-19 pandemic. It is expected that only in Eastern Europe the gross domestic product will fall by 30%, while the warring Ukraine may lose almost half of its economy. Decline in the emerging markets, including our country, is also expected. “The magnitude of the humanitarian crisis unleashed by the war is staggering, and the results of our analysis are very gloomy,” emphasizes Anna Bjerde, Vice-Chairman of the World Bank for Europe and Central Asia. The International Monetary Fund also gives chilling forecasts. According to its latest report, economic growth in Moldova this year will be only 0.3%. The IMF notes that the republic may be among the countries most severely hit by the conflict, and not only because of its geographical proximity to the war: it's about the country's close economic ties with both Ukraine and Russia. In addition, Moldova is heavily dependent on Russian gas, for which there is no viable alternative yet. The other day, the National Institute of Economic Research also presented a forecast for 2022 in the new issue of the traditional study “Moldovan Economic Trends”, according to which GDP growth will be less than 1%, and inflation will rise to almost 20%. “2022 is a year of great challenges for the Moldovan economy, which are both of regional and global nature. The year began with rising inflationary pressure and a break in production chains. The military conflict between Ukraine and Russia will only worsen the situation. The global political and economic order is under attack, and against this background the energy and food security risks are growing,” the study says. According to a number of external experts, Moldova is already leading in Europe in terms of inflation with an indicator of 22.2%. The government has recently approved amendments to the state budget law for the current year. The deficit has increased by 4.25 billion lei, reaching a record 19.4 billion lei – 7% of GDP. As Finance Minister Dumitru Budianschi noted, the increase in the budget balance will be used to finance economic and social anti-crisis measures to reduce the impact of the energy and the refugee crises. Another effect of the war in Ukraine was an increase in unfavorable loans in the banking system and a significant reduction in deposits in national and foreign currencies. The tendency towards decrease in bank deposits is a symptom of uncertainty and anxiety of the population. Part of the lei deposits was withdrawn to purchase foreign currency. Another factor was a significant increase in prices and, accordingly, an increase in spending by the population and economic agents. According to the data of the National Bank of Moldova, the prices for vegetables went up the most (by 65%) and eggs (by 44.2%), while vegetable oil, bread, meat, fruits and dairy products raised in price by more than 20%. The price of utility services and passenger transportation has soared by almost a third. Among non-food products, energy and fuel are noticeably more expensive – up by 44.8%. The fuel situation is critical. Petrol in Moldova is more expensive than in other CIS countries. The maximum cost of gasoline and diesel fuel published by NARE continues to set records. And all this as we approach the sowing campaign. The country’s sowing of crops came under threat. The authorities are planning to partially reimburse the cost of diesel fuel for farmers. The National Fund for Agricultural and Rural Development will allocate funds to partially compensate excise duties on diesel fuel used by agricultural producers. In addition, farmers are asking for reimbursement of VAT on pesticides and mineral fertilizers due to the sharp rise in price of all resources of the production cycle and logistics. According to expert Veaceslav Ionita, the economic situation will continue to worsen, and Moldova is in for another shock caused by electricity prices and food problems. “Unfortunately, the increase in prices at the international level has not reached us yet. This is the first aspect emerging in our country. The second aspect has to do with Ukraine. 50% of the food we import comes from Ukraine and Russia. Ukrainian producers are from the cheaper segment. On the one hand, products will grow more expensive, on the other hand, they will disappear from the market”, the expert explains his forecast of price growth by June. “After that, I want to believe inflation to go down. We haven’t had this kind of growth since 1993, but it’s the international context plus the war. In June, inflation is likely to go down, and by the end of the year we could reach 20% inflation. But it’s when everything will be fine,” Veaceslav Ionita stresses. Until the situation is stabilized, the authorities are trying to redirect and expand exports. Thus, the cancellation of quotas for the export of Moldovan products is being discussed with the European Union. The head of the EU delegation to Moldova, Janis Mazeiks declared a complete openness in this matter. “It is quite obvious that Moldova has also suffered economically, as far as the war in Ukraine is concerned. There will be incentives to redirect Moldova’s exports to EU markets. We are ready to further open our market for agricultural products grown in Moldova, provided they meet sanitary norms,” the diplomat said, noting that facilitating the export of Moldovan products to the European market is one of the measures to support our country. In the current circumstances, foreign aid remains, in fact, the only source of hope for balancing the situation. Moldova’s severely weakened economy has lost its appeal to unbiased investors. The Moody’s Investors Service rating agency, for example, even changed its outlook on the Moldovan government’s ratings from stable to negative, which indicates Moldova’s limited economic stability. In this context, the IMF’s decision to increase financial assistance to our country and the 660 million euros collected at the recent donors’ conference is encouraging, although in the long run this will only increase the credit pressure on our economy.