index.1.jpg (3032 bytes) Note 11 – August 2003 

Investments are needed
 by Galina Selari

The maintenance of sustainable economic growth is declared as a priority by the government. At the same time, it would be rather precipitate to assert that factors of sustainable development are already available in the country. There are too many alarming signs: external debt and problem of fulfillment of debt liabilities, aggravated as a result of "freezing" country’s relations with the IMF, scarcity of investments, both internal, and external, evident insufficient growth of new jobs and mass migration abroad of most active part of the able-bodied population. According to the Ministry of Economy it is essential to increase the volume of domestic investments by 15% - 17% and to attract not less than USD 80 - 90 million of external investments to ensure the expected GDP growth rates by 6-7%. 

The Investment Strategy of the Republic of Moldova, as it is known, was adopted at the beginning of 2002. It is too early to assess the effectiveness of its implementation, so put attention on current situation. At the beginning of the year 2003 in the Republic of Moldova were registered 2670 entities with foreign capital, from which only about 1.5 thousand or only half reported about their activity. Since the moment of registration the total volume of equity capital of the entities has reached USD 671 million, of which USD 414 million (62%) were allocated by foreign investors from 87 countries. At the same time only 14% of the total number of entities have the equity capital exceeding USD 500 thousand; entities equity capital of which does not exceed USD 10 thousand (70% of all entities) mainly prevail.  

In spite of the fact that the absolute values of foreign direct investments in economy has been increasing gradually - according to the National Bank data at the end of 2002 the total volume of foreign direct investments constituted about USD 720 million - Moldova is still among the countries with one of the lowest rate of investments per capita which is USD 31 only. 

Let's turn to the independent expert’s assessment. The World Investment Report for 2002, prepared by the UN Conference on Trade and Development (UNCTAD) used the share of foreign direct investments in the growth fixed capital formation as one of the indicators of effectiveness of state policy in attracting foreign capital. In general this figure constitutes about 25% for the countries of Central and South Eastern Europe and for Moldova it was more than 40%, so it needs some additional explanations. According to the report authors, this "leading" position reflects in Moldovan case just a very low GDP per capita level and a small size of the internal market. 

Other two indicators are used in the UNCTAD Report: Inward FDI Performance Index (the ratio of a country’s share in global foreign direct investment flows to its share in global GDP) and Inward FDI Potential Index (based largely on the structural economic factors – the rate of growth of GDP, per capita GDP, share of exports in GDP, telephone lines per 1000 inhabitance, commercial energy use per capita, share of research and development expenditures in gross national income, share of tertiary students in the population and country risk). Use of these indicators allows, on the one hand, to abstract from size of internal market (Inward FDI Performance Index) and, on the other hand, to range countries basing on their potential in the field of attracting foreign direct investments (Inward FDI Potential Index). 

According to the Inward FDI Performance Index Moldova is included in the group of countries with high index value (for the period from 1992 to 2001 it permanently was 1.7). It means that the country attracted more foreign direct investments that could be expected on the basis of relative GDP. According to the Inward FDI Potential Index the situation is, unfortunately, different. If for the period 1992 - 1994 the value of the index was 0.285 (46-th place among 140 countries), in 1998-2001 the value of the index considerably decreased and constituted only 0.194 (109-th place for Moldova, respectively). 

With regard to the both indicators, Moldova was among “front-runners” countries in 1992 - 1994, but because in 1998-2001 the result of significant declines in the Inward FDI Potential Index, the country is referred to the group of the “above potential economies”, which means that in order to attract foreign direct investments to the country further structural economic transformations and development of industrial potential are required. Thus, as the evident reserves for economic growth have been exhausted in Moldova well coordinated practical actions on modernization of the Moldovan economy contrary to formal optimistic forecasts take on special significance. Moldova is a small open economy. Joining the WTO and European or regional structures (Stability Pact for South Eastern Europe, Euro Asian Economic Community etc.) provides not only access to new markets, but also new opportunities in the field of realization of the investment projects, simultaneously increasing the requirements to economic and investment policy. Moldova took on the collective responsibility for creation and development of a favorable investment climate in the region as a whole, having signed within the framework of the Stability Pact the Declaration on Attracting Investment to South Eastern Europe, in July 2002.  

Will be the year 2003 a turning-point? Meanwhile, it is necessary to recognize, that the last two years, by virtue of circumstances, have not brought constructive changes in investment policy. There were adjustments to the legislation, initiatives on strengthening methods of government regulation in economy, etc.. However, the implementation of some important though politically complex intentions in the field of structural reforms has been slowed down. No noticeable results in the improvement of investment climate, in the elimination of separation of the banks and the real sector and in the reduction of shadow economy have been attained. Inappropriate management has complicated the relations with foreign investors and international organizations. 

The present year, nevertheless, is characterized by livening up of dialogue between authorities and civil society mainly with the representatives of business circles both Moldovan and foreign (January - the Moldovan-Bulgarian economic forum, April - the Moldovan-Russian economic form, June - first session of the Moldovan-American committee on economic and investment cooperation, July - the Moldovan-Israeli businessmen’s forum). 

In the common opinion of the participants of all these meetings, Moldova has many advantages, which could attract foreign investors: the geo-economic location, which opens the opportunity of export both to CIS countries – the interest of western investors - and to Eastern and Western Europe - interest of eastern investors (Russia and China); well educated (81% of the population in able-bodied age have secondary education, for the countries with low and average level of income this indicator constitutes about 50%), trained and wage competitive labor force; bilinguism; Moldova feels itself comfortable in cultural environment, both in East, and West.  

Unfortunately, the effective use of these advantages hasn’t been fully realized so far, as the President V. Voronin put it, “these advantages have to be recreated and money has to be invested into them”. So, again, there appears a problem with quality of investment climate in Moldova, as the criterion of market reforms maturity, confidence of business circles in steady property, judicial system, etc. 

Strange though, the Republic of Moldova, perhaps, is the only CIS country, which does not have the Law on Investment Activity and as a consequence, the state policy in the field of attraction of internal investments is not precisely determined. Probably, this fact explains the low volume of internal investments. It is impossible to consider the sum of Lei 1.5 billion (2002) sufficient for sustainable development of the country’s economy. According to the latest data of the Department of Statistics and Sociology in the first half of 2003 investments amounted to Lei 897.8 million (about USD 63 million) even though it is 30% higher as compared with the same period of 2002 it is evidently not enough. According the sources of investments, self-funding (including individuals’ resources) constituted 75%, foreign investments – 16% and only 5% was the investments on account of the state budget. It is clear, that foreign investors will not invest in the economy, in which local businessmen refuse to invest.  

Drafting of the Law on Investment Activity, which is to even the rights of local investors with those of foreign ones, started in 2001 and the terms of its adoption have not still been determined. However, the country has some regional experience: it is the Law on Investments and Investment Activity in Territorial Autonomous Unit Gagauz-Yeri (2001). In contrast to the Republic of Moldova’s Law on Foreign Investments (recognized by the independent foreign experts as one of the best among similar laws of CIS countries), the law of Gagauz-Yeri does not make any difference between foreign and local investors. On the territory of Gagauz-Yeri all investing agents have incentives stipulated by the Moldovan legislation, as well as additional ones according to the local law. Therefore, today, Gagauz-Yeri, in a sense, can be appreciated by potential investors as an oasis in the Moldovan investment environment.  

Businessmen, local as well as foreign, wish for a transparent market with predicted rules. They are eager to work to make the Moldovan market one of most favorable in the region. The first words of Mr. M. Lupu in the capacity of new Minister of Economy (august 2003) are concerned the same matter: “We should win back confidence in state economic policy consistency and predictability of both international donors and Moldovan business circles. Without this our main task – attraction of sizeable foreign investments - can’t be solved”.