Desperate Attempts to Fix the Holes in Economy

Sergiu CEBAN

It seems that out of complete despair the ruling party together with the government, having no possibility to change the economic situation in the country, take the most desperate, high-risk steps

Amidst the tough domestic political situation, which will sooner or later settle down after several electoral laps, the growing economic crisis poses a much more serious danger. We cannot count on any magic solutions in the near future. The country’s economy was hit very hard in 2022 after a series of crises that led to a 5.9% decline in the economy and double-digit inflation. Majority of experts claim that the Moldovan economy is currently in recession, and all forecasts indicate that a very modest growth of about 2% will be recorded by the end of this year. There is a decrease in investments, production volume and general economic activity. Semi-annual statistics are not optimistic and clearly demonstrate the difficult situation in which the country’s economy is. The data provided by the customs authorities also confirm a significant drop in trade and economic indexes: exports fell by 22% in the first 6 months compared to the same period in 2022. Imports also fell by 5.2%, to 72.5 billion lei. Only re-exports, which have been steadily growing since the outbreak of hostilities in Ukraine, were positive. This year, it has already totaled 13 billion lei, showing an increase of more than 10%. Earlier, the European Bank for Reconstruction and Development has predicted that this year Moldova will register one of the biggest recessions in the region. According to the bank’s experts, the country’s GDP will decrease by another 1.3%, and possible growth can be expected only in 2024 – as per the most optimistic forecasts. In turn, World Bank analysts believe that the medium-term prospects for our country will depend on the government’s ability to mitigate the decline in purchasing power of households, while maintaining the momentum of the reform program aimed at elimination low productivity growth, persistent structural and governance flaws, a large amount of state-owned enterprises, stifled competition, unequal conditions and tax distortions. It is noteworthy that, according to the Ministry of Finance, in the first half of the year the state budget deficit doubled compared to the same period last year. Analysts say, the main reasons for this disproportion include again the decline in trade turnover and customs fees, especially in the last three months. As for VAT, negative indexes have also been recorded, which resulted in the revenue part of the budget. So far, the deficit has not exceeded the annual limit, but to what extent it will be possible to keep it within the established volume is a question. The national currency is in bad situation either. Many experts believe that Moldova may expect a sharp devaluation of lei in the near future. Today, according to all monetary criteria, the Moldovan lei is significantly overvalued, and the process of its gradual devaluation will allow to restore the economy by stimulating exports. However, taking into account the prolonged electoral period, the authorities will be able to take such an extremely difficult step in terms of social effect only in 2025, but in this case the economy stabilization will also be postponed for several years. The situation with the growth of internal and external debts, which together exceeded 100 billion lei, is also quite alarming. Given the constant crises starting from 2020, the state had to borrow additional funds from both internal and external sources. It was necessary to support the population and businesses, as the scale of the economy cannot cover the deficit. So far, the level of government debt does not exceed the controlled indexes (35% of GDP). However, the main question is whether the economic state of the country will allow it to continue to take large loans, pay its obligations and not slip into a technical default. The decline in the country’s appeal for foreign capital and the deterioration of the investment situation are of particular concern. Unfortunately, foreign investors view Moldova through the lens of depopulation and increased risks, declaring their readiness to move production to neighboring Romania and assuming various unforeseen scenarios, including the invasion of Russian troops. Foreign companies even have action protocols for this case. The impression is that foreign business is hanging on in our country from the last effort. The authorities expect a slight growth in the economy from agricultural production once the harvest season is over and farmers start selling their produce. But it is still unclear how justified these aspirations are in conditions when agricultural producers claim that the harvest is good but prices are quite low. The termination of the grain deal and the blocking/destruction of Ukrainian ports are unlikely to add some prospects, as Ukrainian farmers will look for ways to enter international markets by all means, and their crops will be partially settled in neighboring countries. Apparently, after the volumes of foreign aid failed to patch the budget holes, our officials ran out of creative ideas to improve the situation in the economy. Then the authorities turned to unpopular measures with an unpleasant political taste in order to find additional finances inside the country. Simply put, they decided to dig into the pockets of Moldovan business. Patent holders are the first to be affected. After the implemented reform, it is obvious that not everyone will be able to stay in this sphere. Experts say that the implementation of the new legislation will bring substantial income to the state from 60 to 130 million lei. In fact, the authorities are ready to sacrifice some part of small business in order to increase the revenue part of the budget at least this year. Another decision affected Gagauzia. It concerns the desire of the central authorities to assign the reimbursement of the value added tax to local entrepreneurs to the budget of the autonomy. On 31 July, 55 deputies from the PAS voted in favor of this amendment to the Tax Code during the first session. According to the deputies of the relevant parliamentary committee, this decision will save hundreds of millions of lei in the national budget, while the reduction of social items in Gagauzia does not bother anyone. At the same time, our government relaunched tax payment for customs procedures for economic agents from Transnistria. Apparently, the calculation of the export-import volumes from the left bank, which are under the full control of the constitutional authorities, shows that this decision will guarantee an additional financial inflow to the state budget, regardless of the political costs and the possible desire of Tiraspol to compensate its expenses by increasing the electricity price. It seems that out of complete despair the ruling party together with the government, having no possibility to change the economic situation in the country, are taking the most desperate steps involving very serious risks. As a result, in addition to the economic decline and inability to cover the budget deficit, the current regime may provoke an additional internal political tension, which reduces its chances of retaining all the power they have.