Breath of fresh air for economy in recovery - economic commentary

Chisinau, 9 November /MOLDPRES/- Commentary by MOLDPRES State News Agency:

Approval of a new three-year agreement for Moldova by the International Monetary Fund's Executive Board on 7 November and the first installment amounting to 36 million dollars provided immediately after the programme’s approval represent a breath of fresh air for economy in recovery. An economy which was suffocating in a regime of austerity one year and a half, imposed by the lack of a foreign budgetary support.

Half a year ago, Finance Minister Octavian Armasu said that the draft budget for 2016 “is based on concluding a cooperation programme with IMF, having a major importance of ensuring the short and medium term budget sustainability. The lack of such a programme might jeopardize getting foreign budget support, which amount is estimated at 4,679.5 million lei in the draft state budget”, of which 2.59 billion lei – grants.

The agreement has been signed. “Due to this programme, the population gets a very clear guarantee on behalf of the government and international partners: reforms necessary for the country have financial support and political will, so the situation will change for better. This is the most important message sent by IMF, the premier said.

Moldova will get two very important things for the further course of the economy by approving the agreement. Firstly, one of credibility that gives safety to foreign partners, investors, as well as citizens that there is a more secure and stable financial and economic environment. Secondly, financial factor. After IMF money of the first installment going to budget, the 45 million dollars will be released by World Bank, other 55 million euros – expected from EU.

After 7 November, the Moldovan government has the capacity to fund all projects. It means it will have money not only for wages, pensions, other social payments, but also for the infrastructure projects and development projects, what matters more.

The new programme with IMF does not mean only regaining credibility or financing. The Memorandum of Economic and Financial Policies signed by the Moldovan authorities is a commitment on economic, financial and social policies due to be implemented next three years. The government will be obliged to carry out the ample agenda of structural reforms, especially, in the financial sector. Yet, some reforms are very tough, unpopular. The IMF does not tolerate failure to meet the commitments. Moldova was convinced of it, given the previous agreement when because of failure to implement certain actions, the last installment worth 70 million dollars has not been given.

The Economic and Financial Policies Programme assumed by the authorities is to be published next period, but the communiqué issued by IMF reads a brief review of the programme.

What are the main goals? Settlement of urgent problems related to quality governance and stability in banking sector. The programme is focused on successful rehabilitation of systemically important banks and radical improvement of the regulatory and supervisory framework of banks, as well as the management of crisis situations by banks, including by changing the implementation and sanctions regime. A key priority of the programme is getting out of crisis, so that the banks could resume in normal regime the financial intermediation activity.

The situation is not simple at all. Three banks holding 64.7 per cent of assets of banking sector are under intensive surveillance “until the current problems in these banks are solved”. The financial institutions face problems related to the level of bad loans.

“Given the accumulation of debts and arrears in the energy sector, the main short-term priority was restoring financial viability of enterprises in the energy sector and ensuring greater transparency of decisions of the regulatory agency”, the programme also reads. The debts and arrears stand at billions of lei. As a result, we could not avoid tariff adjustment.

The IMF believes that the way of converting in public debt of the state guarantees issued when granting emergency loans to insolvent banks contributed to strengthening the position of central bank without imposing a heavy burden on priority budget expenses for short and medium term.

The programme will protect the budgetary and fiscal sustainability by anchoring the annual budgets in a robust medium-term framework focused on revenue mobilization, expenditure prioritization, eliminating arrears in public sector, reforming tariffs for public utilities and monitoring the activity of state enterprises, the IMF also said.

Yet to be seen what reforms are to be carried out, its terms and sectors. After publishing the memorandum, we will know what is going to do. The government declares it is determined to respect the terms and commitments, the same as it did during the period of preparing and negotiating the agreement.

(Reporter V. Bercu, editor L. Alcază)