Deep Recession as Cost for Geopolitical Rebalance?

Christian Russu

Ongoing farmer protests reflect the general deterioration in the national economy, which is sinking deeper and deeper into an indefinite crisis. Against this backdrop, the banking sector is fit, but it is an “insidious plus” for the population and economic agents.

The past eighteen months were a shock for people and total uncertainty for businesses, except for few cronies who fulfil orders for the government and the banking sector. Many people were optimistic about improving the situation, based on high-profile promises on the backdrop of our historic achievements in European integration, political victories over the oligarchs and liberation from the bondage of an eastern neighbour with “imperial ambitions”. However, the reality is somewhat different, and a period of sobering up from heady slogans and rosy prospects is well underway. For farmers, many of whom have returned from abroad and invested under the current government, the sobering up has been extremely painful: the closure of traditional markets, sudden and rather aggressive competition with their Ukrainian counterparts, and a rapid shrinkage of the domestic market. As a result, large-scale agricultural protests have reached the capital. We can be proud that farmers’ associations have become a real force of principle, and that the authorities do not impede such protests and negotiate with the protesters in a civilised manner. This is indeed an achievement, albeit largely for mass media. After all, it is clear that the maximum results of the farmers’ struggle will be limited to subsidies, and only if wheedled out in Brussels. Partial covering of the losses does not solve the main question for farmers: what to do next? It is doubtful that people who invested their money and soul into their business would have time to protest if the authorities fought for them on foreign markets, restricted exports from Ukraine following the example of their Western neighbours, stimulated domestic consumption and acted in the interests of national producers. Instead, many domestic farmers face inevitable bankruptcy. The disappointing situation in agriculture largely reflects the overall situation in the country. A deep recession – this recent verdict of the National Bank is probably a single example of admission of the real situation in the country. The authorities are remarkably in no hurry to come out with such revelations, maintaining a taboo on an honest public dialogue and limiting themselves to grotesque explanations. Comparing our budget to a small Moldovan traditional pastry placinta sounds like an excuse for grannies, and apparently should discourage the authorities from demanding anything bigger. In reality, however, such messages demotivate the economically active population, who treat them as an admission of disablement. Was our “placinta“ in the economy as it is now, were there prospects for growth and development, where is the outcome from billions of dollars in grants, loans, aid and support from development partners? The answer will probably come only from the structures, which by coincidence, linked again to the implementation of the European legislation, retain a certain independence from the government. Thus, Head of the National Bank since 2018, Octavian Armasu, previously Minister of Finance in the government of the Democratic Party, recently shared the uninspiring information that the supply of foreign exchange resources on the Moldovan market is even excessive, but there is no demand for them. Our labour migrants keep sending remittances, international partners send money ostensibly to support and sustain the financial sector, the National Bank monitors macroeconomic indicators, but it seems that the diagnosis of “deep recession” is of a long-term nature. We can also recall Maia Sandu’s words about placinta and Andrei Spinu’s calls to save money in every possible way. They were heard. Our people cut costs to the bone or left the country. Imports have decreased, as well as consumption rates. A new wave of migration on the back of record inflation and falling incomes has made our economy even smaller and insignificant compared to other regional players. The imbalance between supply and demand of foreign exchange resources is only being held back by the National Bank of Moldova, which is buying up surplus currency, increasing its foreign exchange reserves to record levels and strengthening the Moldovan lei. The latter measures only hit the industry and exporters harder, further limiting the potential for economic growth. A critical analysis of activities by the National Bank raises a lot of questions. Why would our country need additional loans from external agencies to cover the budget deficit when the National Bank’s assets are breaking records? Why does the Government need to allot an additional MDL 400 million to the National Bank of Moldova to replenish its statutory capital, when its income is also a record? Why does the World Bank recommend the Government to pay attention to the agricultural sector and the car owners as an additional source for covering the budget deficit by changing the tax mechanisms and introducing VAT? Why do they praise the government for restoring the initial retirement age, which has been temporarily lowered, for not indexing pensions twice based on GDP growth? There are formal answers to all these questions, with references to legal requirements. Thus, it turns out that the net profit of the National Bank amounting to MDL 2,192.36 million (twice as much as in 2021) turned into a loss after the revaluation. According to the National Bank of Moldova, the culprit for this situation was the government’s monetary policy in 2022 with its negative impact on the bank’s profitability below the statutory minimum. For this and other reasons, the regulator not only does not intend to transfer anything to the budget from last year’s revenues, but on the contrary, with reference to the requirements of the external auditor, expects money (MDL 396.15 million) from the government within two months. In return, the authorities will receive a loan from the World Bank and the European Union. How far is it from our naïve offers of the National Bank to lend the budget? In our situation, the tail is wagging the dog. Our country had no such state of affairs before 2022, the time of geopolitical rebalance. It is becoming clear that besides commercial banks recording record profits amid the crisis, the banking regulator is also under tight external control and being used to divert funds for the benefit external. This can partly explain the fact that the management of the National Bank remains intact since Plahotniuk era, even though parliament has all the power and reasons to criticise it. By the way, it is difficult to criticise or question Octavian Armasu’s competence, as he was non-partisan even under the democrats. However, there is no need to say that the National Bank has been acting in the national interest for the last eighteen months. Obviously, this is a part of the price Moldova will have to pay for its geopolitical rebalance.