Opinion: Soaring Inflation Wrecks Moldova

Home / Comments / Opinion: Soaring Inflation Wrecks Moldova
The April inflation rate in Moldova was the highest in Europe, outpacing even the indicators of the warring Ukraine
These days, the global economy experiences unprecedented challenges and risks. Experts openly express their concern that stagflation no longer can be contained – due to a deadly combination of rising inflation, slowing growth and mounting unemployment. The situation is extremely unstable, and the forecasts are regularly revised only downwards. A few examples are enough to illustrate the general state of the world economy. For example, the Standard & Poor’s 500 Index has a 17% drop since January, marking its worst start to a year since the 1940s, and on May 18 its one-day drop of 4% was the biggest since 2020. Price hikes in the UK are at their highest in forty years and, according to some observers, may have “apocalyptic” ramifications for the rest of the world. The big shock comes from China which analysts are also not optimistic about. The war in Ukraine and inflation hit Europe the hardest. A recent study by the European Bank for Reconstruction and Development shows that economies in most of the countries on the continent will decline more than previously predicted. Moldova, according to EBRD experts, is one of the most affected countries. After the recovery growth of GDP by nearly 14% in 2021, the economy is expected to struggle around the zero mark this year. The reason is that Moldova’s fragile institutions can hardly withstand the pressure of the flow of Ukrainian refugees and the reformatting of trade and economic relations in the region, while inflation remains high due to energy prices. Recall that April inflation in Moldova was the highest in Europe. Overall, average consumer prices in April 2022 jumped by more than 27% y-o-y. According to the National Bureau of Statistics, the increase for food products was more than 30%, for non-food products – more than 19%, for services rendered to the population – 34%. The head of the National Bank of Moldova, Octavian Armasu, noted that prices were strongly affected by higher energy and food costs. Among the reasons that led to a sharp rise in inflation he also cites the high share of food products in the minimum consumer basket, a small and open economy, as well as its imbalance which emerged in the past in the form of unadjusted tariffs. Meanwhile, the National Bank projects even higher inflation of 31% in the third quarter of 2022. “According to our estimates, inflation will peak in the third quarter of the year, to be followed by a downward trend. The uncertainties are quite high, there are risks of new shocks, and there are tariff adjustments,” Octavian Armasu says. Prime Minister Natalia Gavrilita also commented on the inflation rates. She noted that one should not compare inflation in Moldova with that in other countries. “We are poorer than any other country. We need to look at the structure of consumption, consumer price indexes to understand consumption per household in Moldova. If the income is lower, if the family is poorer, what do they spend the money on? More on food, energy resources. The consumption structure is dominated by those products that have mostly increased in price,” said the Prime Minister. In particular, the gas price in Moldova is seven times higher in 18 months: from $167 in 2020 to $1,129 in April 2022. The price of fuel is rising steadily. Gasoline has already crossed the threshold of 30 lei, with diesel fuel approaching that level. Consequently, the price for district and intercity routes is now much higher. There are foodstuffs that have doubled in price – for example, potatoes. Prices for meat products are expected to rise in summer. In addition, the national currency is gradually devaluing: the dollar has already stepped over the psychological mark of 19 lei. Another problem is the National Bank’s foreign currency reserves, which have been depleting for the fourth month in a row. If at the end of last year they amounted to $3.901 billion, by the beginning of May they dropped by more than half a billion. International financial agencies offer a helping hand in this situation. For example, the IMF decided to immediately allocate about $145 million to Moldova and to increase the total amount of financing by $260 million. The relevant bill is already approved by the government. Also, Moldova will receive a loan from the EBRD for the purchase and storage of natural gas in the amount of 300 million euros. Another 20 million euros will be taken by our country as a preferential loan from Poland. In general, according to IMF calculations, Moldova’s public debt to GDP will reach 40% this year. International support can mitigate some of the most urgent financing problems. But with high annual inflation, economic stagnation, disrupted import and export chains and remittances, the risks are very high. The main one is that in order to survive external shocks the country borrows so much that no resources are left for domestic intensive development. Meanwhile, the Ministry of Finance has already announced new, deeper changes to the state budget law to manage the raging crisis.