Top 5 of the most risky electoral policies before parliamentary elections and recommendations for the new government

The year 2019 will be influenced by two contradictory phenomena: the fever of electoral initiatives and policies, which, most likely, will be followed by some unpleasant adjustments during post-election period. Increased intensity of populist and electoral policies as the elections approach is not a new phenomenon for the Republic of Moldova or for other countries. However, the impetus of policies and promises with an obvious negative budgetary impact made by the government over the recent months raise concerns in the context of increased budget deficit and loans taken by the Government from banks. In addition, these measures were taken an ad hoc, being promoted outside the government’s strategic planning framework. Therefore, their implementation would require a reallocation of public financial, institutional and human resources in political interests, whereby other areas, depriving other sectors and areas of reform.

Among many such actions launched recently, we have identified the most obvious 5 electoral actions involving the most imminent risks:

1. Grant of one-off support to the pension beneficiaries.
2. Increase of salaries in budgetary sector.
3. Fiscal reform.
4. ‘Prima Casa - 1, 2 and 3’ programs.
5. Temporary exemption from customs duties for Moldovan exports to the Russian market.

Although they seem beneficial at first sight, their effects will be neutral or even negative for the economic growth and the wellbeing of the population in the long run. In particular, although the provision of one-off support of MDL 600 for the pensioners will be a direct benefit to a large category of people with low incomes, this will not solve the problem itself. Support is to be granted one time, which means that the well-being of the beneficiaries will not improve in a sustainable manner. Additionally, the Government will have to identify about MDL 360 million through budget amendment, implying higher loans from banks or reallocations from other areas, perhaps equally important. This measure, along with higher salaries in the budgetary sector, which similarly were not initially planned, being rather ad hoc adopted, on the one side, and the tax reform, on the other side, exposes the public finance system to the risk of excessive growth of budget deficit. The reason is that the budgetary commitments increase amid narrowing of the tax base: the tax reform is expected to cause forgone revenues of about MDL 2.2 billion in 2018-2019, the most affected being the State Social Insurance Budget, the tax position of which has already been weakened during the last years by population ageing and informal employment. ‘Prima Casa’ program, although provided as a beneficial mechanism for people who cannot afford a mortgage loan on market conditions, is subjected to at least two risks: (i) the risk of granting loans to beneficiaries who actually would not be able to fulfil their payment obligations at time point in time, which will have a negative impact on the State Budget, because the Government will cover half of the bankruptcy loans, and (ii) the risk of distorting the market of banking credits by inducing banks to allocate long-term lending resources in the real estate sector, depriving other sectors of ‘long money’ with negative implications on investment activity (some banks actively participating in this program, have their long-term liquidity indicators already approaching the minimum allowable limits). At the same time, the temporary exemption from customs duties for Moldovan exports to the Russian market will have a neutral impact on domestic producers due to the fact that this measure is limited in time (until 30 June 2019) and, at the same time, it does not tackle the real barriers of access on this market (administrative barriers, applied subjectively and selectively nature).

As a result, after the elections the future Government will have to cope with the increased budget deficit along with the slowdown in economic growth. Our forecasts suggest a slowdown in economic growth in 2019 to 3.5% amid worsening economic conditions in the region, as well as the slowdown in investment activity. At the same time, the budget deficit could reach 3% of GDP, which would require more loans from banks, further depriving the real sector of bank loan resources. Moreover, in order to cope with fiscal imbalances, the future government could resort to higher taxes and/or major optimisations in public sector, having a negative impact on economic growth. In order to tackle these risks and promote systemic reforms with long-lasting impact, the publication provides recommendations to taken into account in the activity program of the new government.

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