Note #1 – January 2005

2004: EGPRS Started?
by Vladimir Golovatiuk

It was 1999 – the lowest point of GDP and population incomes downfall – when the Moldovan Government (as IMF and WB advised) began to think of the necessity of a Poverty Reduction Strategy for the first time. Later, the Government approved Preliminary Poverty Reduction Strategy twice (under D. Bragis, Dec. 2000 and V. Tarlev, Apr. 2001). But since it is not possible to overcome poverty without an economic growth, the next 3 years were spent to elaborate Economic Growth and Poverty Reduction Strategy (2004-2006). The Government approved it in June 2004; IMF and WB agreed upon it in autumn and the Moldovan Parliament has finally validated as a law it in December 2004. Clause 3 of that law charges the Government with the following:

“to bring programmes of economic and social development and action plans in correspondence with the goals, priorities and tasks stipulated by the Strategy within a monthly (!) period of the date the current law comes into effect;

to present yearly reports on realization of the Strategy to the Parliament”[1].

Thus, independently of the fact whether the Government presents such a report or not on realization of the Strategy in 2004, everyone can justifiably consider that year to be the start of the “new economic policy”. The more so since it has already been March 2004 when the President V. Voronin pointed out that “EGPRS has to become the main socio-economic document of the country, therefore all actions under fiscal, monetary, social policies has to fully correspond to the Strategy”.

Under the totals of 2004, Department of Statistics and Sociology presented – quite traditionally – information on the dynamics of GDP, industrial and agricultural sectors, on investments and foreign-economic activity, inflation, wages, etc. Can one judge on the economic policy innovations based on this data? Our opinion is that one can, although it can be hard: the statistical data is contradictory.

Thus, in 2004 GDP was MDL32 billion ($2,6 billion), having increased by 7.3%. Let us note that GDP forecast has repeatedly changed over the year’s course from 5% to 8-10%. Industrial output increased by 6.9% (while the CIS average is 7%). Agricultural output (in comparable prices) increased by 20.4%, but as compared to the unsuccessful previous year (-8% in 2003). Investments grew by 8%, which is not much more than in 2003 (7%). Export of Moldovan goods increased by 24.8%, but despite this trade balance deficit did not decrease, but on the contrary increased by 28.6% and reached $787,9 mil. And further increase of import by 26.5% is the cause of this.

One of the most difficult problems of 2004 – in conditions of growing population incomes – was to restrain inflation growth. The reference point was 10%, but inflation actually made up 12.5% (15.7% in 2003). It could be considered a success, taking into account the fact that the NBM purchased circa $280 mil (in dollar terms) from commercial banks in 2004, having issued into circulation more than MDL 3.4 billion, which is 40% of the total monetary aggregates, or 60% of lei monetary aggregates as of 2004. Throw-in of lei liquidity in such considerable volumes provoked intensification of inflation processes. Thanks to the sterilizing actions, the NBM succeeded in avoiding that, in 2004 anyway.

In the meantime, paradoxical situation has been developing. On the one hand, to conduct structural changes in the country’s economy and make its growth more sustainable the business acutely requires credit resources. And the banking system, on the other, disposes of financial resources that are not used. Yield rate of T-bills placed by the Ministry of Finance dropped from 19.7% in November 2003 to 14.9% in April 2004 and, further on, down to 8% at the end of the year. In January 2005 it stopped at 6.8% and dropped to 2.3% at the auction of February 15, current year. One can get an impression that the “communicating vessels” are disconnected: credit and deposit markets, as well as lei and currency ones function detached from one another and there is no connection between them. And this is not inherent in the market. But if one presumes that market participants – banks in this case – understand that directive methods and administration are still alive in the country’s economy, including banking system, they will not hurry to place available resources in credits, but will rather invest them in liquid T-bills that – in case of necessity – can be easily sold and banks will be able to execute just another administrative directive to credit a specific sector of the economy or a project.

Traditionally, the NBM remains to be the strongest player in Moldova’s market economy. But its maneuvers have also specific problems. In 2004 monetary aggregates increased from MDL 8.5 billion up to MDL 11.7 billion, or by 37.7%, while ready money volumes increased from MDL 2.7 billion up to MDL 3.4 billion, or by 35%. The economy’s monetization rate that characterizes economy’s supply with money grew from 31% in 2003 to 36.6% in 2004.

But relations of the business with banks are not unclouded. Resource base of banks grows, while crediting of the economy is less active. The total deposits increased by MDL 2.3 billion, while the crediting increased by MDL 1.4 billion. While volume of credits issued by commercial banks in MDL grows (25.2%), attracted lei deposits grew by 54%, including term deposits – by 75%. And, if in 2003 banks had problems concerning the lei liquidity, in 2004 they – on the contrary – accumulated excessive liquidity and the problem of efficient utilization of available resources became acute.

On the surface, general impression about the totals of 2004 is optimistic. Indeed, for the fifth year running GDP growth continued, export increased considerably, investments extended; in the conditions of the huge inflow of currency to the country it was possible to restrain inflation and provide for the growth of real incomes of the population. Moreover, monetary aggregates increase resulted in the increase of the economy’s monetization rate and volumes of crediting. Finally, NBM’s currency reserves grew by more than 55%, having made up $470.2 million, $126 million of which are credits obtained from IMF.

But it is symptomatic that the President of the country has been insistently emphasizing over the year’s course the necessity to provide for a new quality of growth, thus making clear his dissatisfaction with the results achieved. And there are grounds for that indeed.

The key indicator – GDP – grew by 7.3%, or MDL 4.4 billion. MDL 3.9 billion of them (88%) was ensured by the growth of households’ final consumption, which, in its turn, was conditioned by the growth of the available income of the population. Thus, according to the statistics, average monthly available income per one person in Q3 of 2004 – as compared to Q3 of 2003 – increased by 14.5%. At that, “other incomes” within the available income increased by 59.4%. Due to this component (“other incomes”) formed mainly of workers’ remittances from abroad, 78% of the available income growth was provided and the increase of final consumption, and based on this – GDP growth. The IMF mission has also acknowledged this in October 2004: “the economic growth was mainly conditioned by the consumption increase that is due to the monetary inflow from abroad”.

The Government basically agrees with this, having mentioned in EGPRS: “the economic growth that could be observed recently was mainly based on the labor force export. Incomes from the citizens working abroad stimulate internal consumption growth… We are to realize the transition from the model of growth based on the inflow of labor migrants’ incomes and consumption towards the model of balanced growth”.

One should not though oversimplify the situation. Our opinion is that the fact per se that the main GDP growth is due to the final consumption growth is not a negative indicator of economic growth. Our goal is to build up a socially-oriented economy and only that model of economic growth that contributes to the growth of welfare of our citizens is acceptable. The point as we see it is different.

On the one hand, monetary remittances received by Moldova’s inhabitants from their relatives working abroad lead to the increase of demand for consumer goods and services. The total volume of currency transferred to the country in 2004 is estimated at $1 billion. It is practically equal to 70% of the country’s industrial output, about 100% of agricultural output, about 70% of the total retail trade, including unorganized trade and it is 9(!) times more than the total trade stock.

It is obvious that capacities of Moldova’s economy as regards volume, structure and quality of goods and services do not fully allow satisfy this increased consumer demand.  Today’s realities are such that huge inflow of currency to the country invariantly causes growth of import. A rather high correlation between the currency inflow increase and the import growth can be observed. Thus, in 2004 currency inflow raised by $300-400 million and import increased by $370 million. Hence, the consumer demand based on the currency transfers from abroad transforms into the demand for import.

In this connection, some experts’ assertion seems incorrect that “the major part of these funds is used to pay off trade balance deficit”. They interpret the trade balance as being primary, while the currency inflow from abroad, which forms the demand for import, just defrays the resultant gap. In reality, it is the monetary aggregates transferred from abroad and not unused by the domestic economy that form demand for import and, therefore, conditions on it. Importers forecast solvent demand and direct their steps where there is such demand and it is growing. And this is good. What would inflation and prices in Moldova be if import had not increased over the last 6 years by $700 million?

Economic growth in Moldova is linked to consumption and some experts perceive signs of instability in that, having in view unreliability and insufficient predictability of this factor of growth. Although admitting that the economic model based on the inflow of labor incomes of Moldovan citizens from abroad does not contribute to sustainable growth in the true sense of the word, our opinion, nonetheless, is that the fact of the matter lies in the different dimension.

If we just extrapolate the current tendency, we can come to a conclusion that Moldova’s economy will acquire characteristics of a subsistence economy – becoming a “large canteen” where all dishes are imported or, at least, imported in form of semi-product. It is obvious that it is a dead-end track for the country. Growth of final consumption due to the import increase without the corresponding changes in the economy and growth of export leads to growth of the trade balance deficit, which, in its turn, diminishes GDP formed in the country’s economy.

It turns out that, on the one hand, final consumption favors GDP growth and, on the other – through the increase of import and, consequently, trade deficit – diminishes its volume. Over the period since 2000 trade balance red ink averages at 28%, and over the last two years – 1/3 of GDP practically. Thus, it is this value, by which the excess of import over export diminishes GDP formed in the Moldovan economy.

Prima facie, a paradoxical situation is developing. Moldovan citizens working abroad participate in formation of other countries’ GDP, but – sending money to their relatives in Moldova – also thereby diminish Moldovan GDP.

This implies that the problem does not lie in the currency inflow per se, but in the scanty internal production, in slow reformation and restructuring of the Moldovan economy, in the monostructural character of the country’s export and the lack of investments.

It would be naïve though to think that it is easy to transform the currency remitted to Moldova into investments. It has already been the beginning of 2004 when M. Lupu, Minister of Economy correctly observed that even if Moldova receives over the current year “$1 billion from Moldovan gastarbeiters – this is not the factor that will determine investments volume to the economy”.

In Russia that also has currency inflows the situation is similar to the Moldovan one but only in its form, while the essence is different. There, increasing currency inflows to the country relate to the favorable world oil market situation and several tens Russian companies-exporters are beneficiaries-recipients of currency. The Russian Government created a stabilizing fund that accumulates currency from oil sale at the price higher than specific level and such excessive money supply can not affect negatively either inflation, or trade balance in the country.

The situation in Moldova is different: thousands of families are recipients of the money from abroad. Of course, $1 billion is an impressive amount. But taking into account the fact that, first, about 300 thou families are its recipients, then there is less than $200-300 a month on average for each of them and, second, this money are of utilitarian nature (for food, medical treatment, education, purchase of dwelling, etc.), then, it becomes evident that it is not an investment resource.

As it is known from macroeconomic theory and practice, it is absolutely not important how and through which channels the money got to the country’s economy. The main thing is that the money is here. Once used for purchase of goods and services, they will then – through different mechanisms of capital mobility – settle and start working in the sector, for whose development the state created the most favorable conditions.

That is why, the main problem in Moldova now is to improve relations between the state and the business, to recognize the leading role of the private sector in the economy’s revival and employment expansion and the state’s responsibility – in improvement of the quality of governance, creation of a comfortable legal environment for both the business and the population, an efficient judiciary system, social infrastructure and social assistance on needs.

The Economic Growth and Poverty Reduction Strategy (2004-2006) has denoted all these reference points. The main thing now is to proceed from rhetoric to actions. And this is what is principal for the new Government.