Moldova in the Grip of Inflation and Expensive Credits

Another acceleration in inflation has forced the National Bank of Moldova to raise its base rate sharply, potentially making borrowing more expensive for both businesses and households. However, the fight against rising prices risks putting an additional brake on an economy that is already struggling

Vladimir ROTARI, RTA: November began with two noteworthy developments for the country’s economy. First, the National Bank raised its base rate from 9% to 11% per annum. A few days later, official statistics recorded an acceleration in inflation to 10.8% year on year. Thus, following a brief period of relative stability, Moldova has once again found itself facing double-digit growth in consumer prices. The financial regulator’s response was entirely predictable: further monetary tightening, aimed at curbing inflation expectations and cooling domestic demand. Yet this creates a contradiction that the authorities will find increasingly difficult to ignore. Keeping prices in check requires tighter financial conditions and more expensive borrowing, whereas overcoming chronically low growth requires the opposite: affordable finance and fresh investment. October’s figures offer a clear illustration of the forces behind the current inflationary surge. Consumer prices rose by 2.7% in a single month, driven primarily by increases in the cost of services and fuel. These rises have a direct impact on transport costs, agricultural production expenses and logistics. Higher utility tariffs add to businesses’ operating costs while simultaneously reducing the disposable income of households. Gradually, the initial price shock spreads to other goods and services, fueling further inflation expectations. The energy reforms of recent years have clearly failed to make Moldova genuinely less vulnerable to fluctuations in resource prices. Objectively speaking, the country’s current energy independence strategy has been, and remains, driven primarily by political rather than economic considerations. The same perspective should be applied to the largest completed project in this field: the Vulcanesti-Chisinau high-voltage power line, which has no impact on the final price of electricity. Meanwhile, the government’s capacity to offset the effects of yet another price increase is even more limited than before. Under these circumstances, the National Bank’s actions follow a clear economic rationale. By raising the base rate, it seeks to curb lending, encourage saving and prevent inflation from spreading further. Leaving accelerating price rises unchecked would risk an even greater erosion of household incomes. Especially since, according to the NBM’s own assessments, domestic demand remains relatively resilient and is itself adding to inflationary pressure. However, the power of monetary policy has its limits. More expensive credit will not eliminate Moldova’s dependence on imports or make up for shortcomings in its energy infrastructure. In effect, the regulator is being forced to tackle the consequences of problems, many of which lie beyond its remit. The main difficulty is that curbing demand also weakens economic activity. For businesses, higher borrowing costs mean additional expenses when financing working capital, purchasing equipment and implementing investment projects. This is particularly burdensome for small and medium-sized enterprises, which often lack sufficient funds of their own. As a result, companies are left with little choice but to postpone modernization, scale back investment plans or simply pass their rising financial costs on to consumers through higher prices. Bank lending had already begun to increase even before the NBM’s latest decision. In the third quarter, the weighted average interest rate on new loans in the national currency reached 9.17%, resuming its upward trend after two quarters of relative stability. So far, this has not led to a decline in the overall volume of new lending, which has continued to grow. Nevertheless, further monetary tightening is likely to change the situation gradually. For Moldova’s economy, which suffers from a shortage of long-term private investment and needs technological modernization, high borrowing costs are particularly damaging. It is no coincidence that the European Commission’s report published on 4 November once again highlights Moldova’s limited investment activity, structural weaknesses in the economy and the need to improve its competitiveness. The government hopes to change this situation through the EU Growth Plan and the implementation of major infrastructure projects. However, it is difficult to argue that the more than €600 million received under the plan so far, representing roughly a third of the program’s total funding, has had any substantial impact. Overall, public investment, which in Moldova’s case is insufficient, and foreign financial assistance, most of which goes towards current consumption and meeting basic obligations, cannot fully replace private investment. Meanwhile, businesses assess the prospects for new projects based on borrowing costs, the predictability of tax policy, the availability of labor and expected consumer demand. A high base rate clearly has a negative impact on all these factors. However, expensive borrowing is a problem not only for businesses. Its consequences are no less significant for the state itself, which is having to raise substantial funds on the domestic financial market. I have highlighted this issue on several occasions. By the end of the first half of the year, the state budget deficit had reached 9.2 billion lei, with more than half of it covered through net financing raised by issuing domestic government securities. At the same time, the terms on which the government can raise funds are becoming increasingly unfavorable. At the October auctions, yields on six-month Treasury bills stood at 11.07%, while those on one-year bills were 11.7%. By 3 November, the corresponding figures had risen to 11.63% and 12.61%. Notably, this latest increase in government borrowing costs came even before the most recent base-rate hike. This suggests that the trend is being driven not only by the regulator’s decisions, but also by broader market expectations, the government’s financing needs and prevailing bank liquidity conditions. As a result, the authorities are having to refinance short-term liabilities on a regular basis, paying relatively high interest rates in the process. Domestic borrowing does help avoid some of the currency risks associated with external loans, but this limited advantage comes at the cost of a substantial debt-servicing burden. The more budgetary resources are channeled into interest payments, the less remains available for infrastructure upgrades, social programs and measures to stimulate economic activity. Moreover, the attractive yields offered on government securities intensify competition for financial resources between the Treasury and private borrowers. The situation is further complicated by the extent to which budget planning depends on external funding, whose amounts and timing do not always match the government’s initial expectations. The downward trend in external inflows, particularly grants, is becoming more pronounced. This was clearly illustrated by the assistance provided to cover utility bill compensation for households, which turned out to be far smaller than in previous years. Against this backdrop, the outlook for economic policy in 2027 appears contradictory. The government is simultaneously seeking to accelerate the country’s development, increase state revenues and meet its social commitments. Yet the approved tax changes provide for increases in certain rates and excise duties, which will place an additional burden on businesses and consumers. On the other hand, abandoning fiscal consolidation also carries risks, including persistently large deficits and a further accumulation of debt. The authorities have few easy options. This makes the efficient use of public spending and the ability to create favorable conditions for productive investment all the more important. According to the National Bank’s projections, average annual inflation will stand at 7.3% in 2026 and 6.9% next year. The annual rate is not expected to return to the target range until the third quarter of 2027. In other words, the period of elevated price pressures and relatively tight financial conditions could prove prolonged. At the same time, a slowdown in inflation will not mean a return to previous price levels. It will simply mean that prices are rising more slowly. The main risk for Moldova’s economy is that price stabilization could trigger a prolonged investment slowdown. Unless the government complements the National Bank’s actions with effective measures to promote economic development, Moldova risks missing an opportunity to make tangible improvements in the real economy and the population’s living standards in the foreseeable future.