index.1.jpg (3032 bytes) Note 12 – September 2003 

The Budget with many unknown variables
 by Anatol Gudim

At the beginning of September the Government website, www.moldova.md, published the draft state budget of the Republic of Moldova for 2004. This is a good example of “glasnost”. Moreover, since this draft will be presented to the Parliament only in October and then legislators will discuss it, all of us who are now called “civil society” have the opportunity to take part in this process. 

At first sight, optimism of the 2004 budget is astounding. The budget is envisaged to entail no deficit. As before, it is notable for its “social orientation” – 38.7% of all expenditures will be directed to social assistance, healthcare, education, science and culture. Besides, 340 mil MDL are envisaged for raising wages of budget workers. There is an intention to reduce the tax burden: income tax is planned to be cut down from 22 to 20%, social fund payments – from 29 to 27%. Agriculture is not forgotten. 30 mil MDL are allotted to form a fund to subsidize agricultural producers. 

All this occurs against the background of positive macroeconomic reference points of the next year – 5.0% GDP growth, low inflation of 4.5% and a national currency exchange rate of 15,2 MDL/1 USD. 

Where could one get these revenues? Most of them (65.0%) – as before – will be provided by VAT and excises. Non-tax collections are estimated at just 421.5 mil MDL. Unlike in the budgets of European countries land and real estate tax collections are quite paltry – only 4.2%. Moreover, the Ministry of Finance hopes to obtain donor grants (289 mil MDL) and the proceeds from privatization – 304 mil MDL. 

Upon examination of the draft one starts feeling an involuntary sympathy with its authors, the Government and, in the end, the country’s life during the next year. It contains too many “unknowns”. The main questionable issues are as follows:

·    Will the country enjoy external financial support? Who will give money and how much? How are old debts to be paid? There are 371.9 mil MDL (24.5 mil USD) foreseen for these goals, which is 3 times less than the impending payments;

·    How effective for economic activization will tax rate reduction turn out? Will it not destabilize budget revenues?

·    Will it be possible to reduce the shadow economy (according to the Department of Statistics, it provides no less than 1/3 GDP), especially in its most significant “strongholds” – alcohol, tobacco, fuel, medicines, real estate and export-import operations?

·    What will be possible to privatize? “Moldtelecom”? Northern electric power distribution networks? Wine factories? “Zorile” or “Viorica”? It was not possible this year;

·    Do we still have to increase expenditures for maintaining the state apparatus? Shouldn’t we still this year bring into effect Iovv’s plan to reorganize Government structure and functions? After all, the apparatus of some branch ministries “devours” more money per year than enterprises “under their jurisdiction” bring into the state budget! What state apparatus quality are we talking about when only 14 out of 32 new raions have presented draft raion budgets to the Ministry of Finance on term (1st of August)?

·    How can wages be raised when wage arrears are already estimated at 176.5 mil MDL (12.7 mil USD) having grown over the last month by 23.9 mil MDL? What are the sources of finance (211.7 mil MDL) for social compensations to some categories of the population (invalids, war veterans, families with many children, etc.)? This year most of these means were provided by the European Commission, USAID and other donors.

Everything indicates that there were difficulties in designing the draft. Its social orientation is due to poverty. Other countries make up “budgets of development”, while we allot only 90 mil MDL for investment (1.7% of expenditures!), 66 mil MDL for scientific research (including 3,2 mil MDL to the Academy of Sciences, which is less than the cost of maintaining some ministries). 

The initial variant of the 2004 budget is a child of the Ministry of Finances. The participation of other state bodies, including the Ministry of Economy, was minimal. It is interesting that the Ministry of Finances is found within the state budget structure in the honorable section 1 – „Servicii de stat cu destinaþie generalã” (together with the Parliament, Presidential apparatus and State Chancellery of the Government), while the Ministry of Economy, as a poor relation, follows all branch ministries in the final section 19 – „Alte servicii legate de activitatea economicã”. 

In the meantime, one would expect the participation of the Ministry of Economy to be decisive during elaboration of the philosophy and main allocations of the budget for 2004. For the sake of the cause the Ministry of Finance that manages the technique of budget design and execution quite well needs a partner and an opponent. 

To tell the truth, one should admit that it was the Ministry of Economy that placed itself in such a humiliating position. It was as early as spring when the Ministry (by 31st of March, as coordinated with the IMF and WB) was to finish the work on the Economic Growth and Poverty Reduction Strategy for 2004-2006. In this case, the budget for 2004 would represent an instrument to realize this strategy in the first year and would be linked with the solution of key problems of this mid-term. 

Since there is still no Economic Growth and Poverty Reduction Strategy (discussion with civil society is promised in autumn) and the state budget for 2004 was made up autonomously, two paths of development are possible:

  1. The Parliament will discuss and approve the budget quickly (and formally), aware of so many “unknowns” that it will inevitably have to introduce multiple amendments during execution of the budget in 2004 (as in 2003);
  2. Consideration of the budget will last till the end of the year and it will be already the 2004 Q1 when it will be approved. In this case, one would be able to discuss the realities and unclear positions of the budget with the autumn missions of the IMF, WB and other donors, and perhaps take more determined actions to launch the “second wave” of reforms in the country and the practical participation of the Republic of Moldova in European integration processes.

Naturally, the second variant is more preferable. But its realization requires the united creative work of the Parliament and Government, rather than the Ministry of Finances alone. One thing is clear: we are in for a very difficult year financially. 

The paradox is that the country’s threatening budget problems intensify against the background of the sprightly GDP growth rate: +2.1% in 2000, +6.1% in 2001, +7.2% in 2002 and no less than 7-8% in the current year. The forecast for 2004 of both the Government (+5.0%) and external experts (+4-5%) is still optimistic. No one is talking about a default yet. Perhaps in fact, it may pass us by once more and we will experience the viability of the old slogan “There are no such fortresses the Bolsheviks cannot storm” again?