Moldova Poised for an Investment Boom?

The major investment surge promised by the authorities in the near future is, in practice, accompanied by measures aimed at tightening fiscal policy and increasing the tax burden

Seven months ago, the new PAS government led by Alexandru Munteanu declared the launch of a major investment cycle as its primary objective, which was expected to ensure tangible economic growth. Even specific figures were cited: attracting around €4 billion in foreign investment and achieving additional GDP growth of 3-5%, including through increased domestic consumption. At the beginning of the year, even international financial institutions offered relatively optimistic forecasts, pointing to a scenario of moderate economic recovery in the country. However, a downward revision soon followed. The IMF lowered its growth forecast from 1.9% to 1.5%. Inflation is rising again, as is the budget deficit. According to objective indicators, there has so far been no success in reversing this negative trend. If last year growth was supported by the agricultural and construction sectors, then under current conditions of rising energy prices, it is unlikely that farmers and construction companies will make a significant contribution to the economy. A certain degree of positive momentum this year has been sustained through public spending, which has been directed, among other things, toward subsidizing energy purchases. Of course, a significant portion of these expenditures is covered by external financing, albeit on concessional terms. In other words, the state budget is directly dependent on inflows of loans from the EU and would not be able to function without them. This explains the government’s desire to radically improve the country’s investment climate. The logic is straightforward: investment is needed not only in the public treasury but also in the private sector, in order to generate higher budget revenues in the future. The authorities’ statements about ongoing work must, in some way, be backed up by action. Image-building events such as the first investment conference “Republic of Moldova – European Union”, attended by senior European officials, are therefore an essential part of the toolkit. It provides an excellent opportunity to exchange pleasantries, display wit, and indulge in mutual self-congratulation. Maia Sandu claims that an increasing number of private investors, development banks, and EU partners are interested in participating in Moldova’s “economic success”. Alexandru Munteanu quips that the country is not merely “preparing” but is already “becoming part” of the European economy, warning investors that they risk missing the “best moment” to enter the market. It is evident that the event’s script had been prepared months in advance. Marta Kos responds that she “sees our potential and progress”. She reports that the conference featured letters of intent and investment partnerships totaling more than €1 billion. Given that the main leitmotif of the forum is not the economic component but the well-worn geopolitical slogan of European integration, it can be assumed that even the “letter of intent” from the outgoing Cypriot EU presidency, which is preparing to formally open the first negotiation cluster on Moldova’s accession to the European Union, should also be regarded as a formal contribution to the event’s success. However, once the conference is over, the informational noise will quickly subside. And the need to maintain a high level of Euro-optimism and expectations of a near-term investment boom requires a permanent effort. This is why the ruling party came up with what it considers a brilliant idea: to repeat a move once implemented by the Communist government led by current Member of Parliament Vasile Tarlev. The measure in question is the introduction of a so-called “zero rate” on reinvested profits, or the deferred taxation of corporate profits. The authorities present this as a revolutionary reform aimed at shifting the country from a consumption-oriented tax system to an investment-driven model. It sounds both attractive and modern. The country is adopting advanced European Union practices, namely the Estonian model. Entrepreneurs will no longer have to worry about their earnings being immediately taxed at 12% corporate profit tax. Instead, they will be able to channel all available funds into business development and not concern themselves with taxation until the moment profits are distributed. In essence, the idea is to allow businesses to grow using their full retained earnings, thereby reducing incentives to conceal income, avoid formal payroll practices, or pay salaries “in envelopes”, and so on. All of these objectives were pursued back in 2008 by the cabinet led by Tarlev. Moreover, his reform was regarded by the IMF as an example of tax competition in Eastern Europe. In other words, eighteen years ago, Moldova, under the Communist government, now often criticized by pro-European parties, was actively attempting to compete for capital and investment in the region. The pro-European parties that came to power in 2012 abolished this regime and reinstated the standard corporate income tax. The most obvious drawback of the Communist reform was a noticeable decline in budget revenues, which, amid the 2009 crisis, did not allow for an objective assessment of the initiative’s overall impact. Can our country “enter the same river twice”? It is probably possible, especially given that the timelines for implementing the reform remain undefined and, for now, it exists merely as another instrument of political messaging, with no tangible impact on current budget revenues. On the other hand, the current government is much more decisively oriented toward tightening fiscal policy and expanding the tax base. It is planned to move away from the Communist legacy of a “complex” tax framework and return to a supposedly simple and uniform VAT rate for all. Following the adoption of the Tax Code in 1998, the country’s regulatory framework has indeed changed numerous times, taking into account political, economic, regional, and even international circumstances. Such a context-driven nature of policy decisions does not necessarily have to be seen in a negative light. At one point, in order to stimulate the process of national reintegration, tax exemptions were officially introduced for residents of the eastern districts. At that time, Chisinau demonstrated that it did not intend to impose parallel taxation on enterprises on the left bank, instead allowing them to use national trade mechanisms. In addition, reduced VAT rates were used to support entire sectors of the economy during difficult periods: from energy and agriculture to specific consumer goods such as bread, milk, and pharmaceuticals. Was this justified state intervention to stimulate production and improve citizens’ welfare, or a departure from market principles and a manifestation of corruption? Should the hotel and restaurant sector have been supported during the COVID-19 pandemic? The answers may vary, but the key criterion should always remain the state’s ability to defend the interests of its citizens, rather than demonstrating adherence to abstract international standards or acting as a “model student” for European officials. The current regime, under the banner of “equality” and procedural simplification, is firmly intent on establishing a unified VAT rate next year. Naturally, this would be set at the maximum level of 20%, with no exceptions. In addition, citizens and businesses will have to accept that the state will reach even deeper into their pockets. As is known, VAT on online commerce will be introduced from October 1, and from January 1, 2027, it is planned to extend VAT to automobiles as well, while maintaining excise duties. Moreover, a levy on energy efficiency has already been introduced, as well as a tax for the creation of strategic fuel reserves. The motives are quite clear. The growing holes in the budget have to be plugged somehow, and this is less a matter of the will of domestic officials than a requirement imposed by European partners, for whom it is important to ensure the repayment of loans. Everything comes at a price. In general, the situation resembles yet another attempt to burden citizens, when the promise of a “bright future” tomorrow translates into taking even more from them today. It can be assumed that the population will take the authorities’ assurances at face value, given what one would not do for the long-awaited accession to the EU. Parents are willing to sacrifice their present for a better future for their children, although over the past two decades many have come to realize that it is preferable to build that future outside the country. The situation is different for entrepreneurs, especially foreign investors. The question is whether they will perceive official assurances of unequivocal success in European integration as an objective advantage for doing business in the country. Will this generate an investment boom? Rather not.