ANALYST COMMENT – Moldova’s Funding Deal with IMF Gives Positive Signal to Foreign Investors, Intl Donors

The new economic programme aims to support macroeconomic stabilisation, economic recovery and increased social spending to protect the poor on the basis of a framework of economic and financial policies for 2010-12. The programmes also targets to reverse over time the widening fiscal imbalances that emerged in late 2008 and 2009, while increasing budget expenditure for investment and social protection.

The agreement is subject to approval by the IMF management and executive board, which could consider the request for the arrangements in January 2010

Moldova has been  hit hard by the global economic recession. Weak demand in trading partners has led to a severe downturn in exports and remittances, while foreign direct investment has fallen sharply. Poverty and unemployment levels are rising significantly, the IMF noted evaluating the situation in the country.

Moldova’s gross domestic product contracted by a real 7.8% year-on-year in the first half of 2009 compared to 5.4% growth a year earlier. The country recorded a 2.3% year-on-year deflation in September. Moldova's budget deficit reached 1.841 billion lei ($169 million/112 million euro) in the first eight months of 2009, compared to a 500 million lei budget gap a year earlier, the latest data from the Finance Ministry showed.

Besides the economic crisis, Moldova has been in political stalemate since the April 5 parliamentary elections won by the ruling Communist Party. Communists won 49.48% of the vote, which gave them 60 of the 101 seats in parliament, one seat short of the majority needed to elect the country's new president.

The country held new parliamentary elections on July 29 after the new legislature failed to elect a new head of state in two attempts. As a result of the vote, a pro-western four-party coalition, which controls 53 of the 101 seats in the parliament, was formed. The Communists got 48 seats in the chamber.

Following are comments of three Chisinau-based analysts polled by SeeNews:

VALERIU PROHNITCHI, EXECUTIVE DIRECTOR OF MOLDOVAN INDEPENDENT THINK-TANL EXPERT GRUP:

“The IMF memorandum is useful in two respects. First of all, it provides much needed resources for covering the short-term budget financing needs and replenishing currency reserves of Moldova’s central bank. Secondly, it is certainly a very positive sign for the foreign investors, in as much as it can be positive under current circumstances of the global financial crisis, and for other official donors as well.

Under normal conditions, the IMF or any other external support has to be used for funding projects with big economic impact. However, because of the ongoing crisis in Moldova, I am afraid that at least a part of the IMF funds will be inevitably used for paying wages and covering other social expenditures.

It [the financial aid under the agreement] is enough to cover only partially the 2009 budget deficit, but I think that other resources from other donors will be rapidly channeled as a result of reaching the agreement with the IMF. For 2010, the Moldovan government has to think about an austere budget.”

MARCEL CHISTRUGA, ECONOMIC ANALYST AT NON-GOVERNMENTAL INSTITUTE FOR DEVELOPMENT AND SOCIAL INITIATIVES

“If we talk about the benefits of the deal, it will certainly help the country cover the budget deficit and makes it possible to negotiate other loans from other international organisations and countries, like the EU.

The agreement would be a strong signal for the international community, in the sense of a reliable country that must be supported and finally invested in. It will create space for expansionary budget and/or fiscal policies that eventually should reduce interest rates and enhance domestic investments.

We don’t know for sure about conditions of the deal, as no details were made public yet. Usually the IMF imposes some restrictions on government expenditures, it may harden the work of the expansionary policies, in case the government will make them.

The other possible consequence is that wages of public employees will not increase to the level of the economy and may be some subventions will be cut off .”

IURIE GOTISAN, INDEPENDENT ANALYST

“The deal will bring back credibility in the country. It is a very good sign for foreign investors in the current economic and political situation and it will give the green light for other international donors, such as the World Bank and the EU.

Sometimes the IMF prescribes very strict policies under these deals. For Moldova, no conditions were released yet. May be there will be wage and pension systems reforms.

I think that the value of the deal is high enough, it’s about 10% of the Gross Domestic Product estimated for 2009. I think that around half of the funds will be directed to keep foreign reserves of the country’s central bank and the exchange rate stable. The other part of the funds could be used to cover the budget deficit and to finance strategic investment projects in the field of infrastructure, for example.”

(1 euro=16.3679 Moldovan lei)