Analysis: Fall of Moldovan Leu

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Publishing date: Friday, 13 March 2015
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Executive Summary

Moldova was clearly in “false start” at the beginning of 2015. The turmoil on the foreign exchange market was just a high-intensity sequence in a systemic trend of depreciation of the Moldovan Leu (MDL). In turn, the ongoing depreciation of MDL, which started in the last quarter of 2014, shows a stagnant economy, while a weakened baking industry, affected by the explosion of suspicious transactions in recent year, will further degrade Moldova’s socio-economic prospects in 2015.

The systemic depreciation trend of the MDL was caused by a number of reasons – the reduction of USD and Euro transfers, fall of exports to CIS countries, population’s behavior – which became a genuine market maker and last, but not the least, several suspicious transactions in the banking sector.

However, the MDL depreciation is not the only liability for Moldova’s economy. The recession in the region, led by Russia’s and Ukraine’s economic decline, will further reduce remittances and exports. In addition, a weak banking sector – worn by numerous corporate raids and massive frauds, could also jeopardize economic growth.

Under these circumstances, the report estimates a 1-2% recession for Moldova in 2015 and an inflation rate that will exceed National Bank’s cap of 6.5%, going beyond the 7% mark.

In order to improve the economic situation and stabilize the Moldovan Leu, Expert-Grup recommends decision makers to urge the negotiations and to sign a new agreement with IMF, which will generate more relaxed relations with foreign donors and will facilitate additional external funding for Moldova.

Also, the NBM should gradually relax the monetary policy, in order to maintain the already weak growth prospects. Subsequently, the monetary authority could reduce the mandatory reserve rates for foreign currency deposits, therefore generating additional supply of dollars and euros, which would reduce the pressure on the national currency.

In addition, the government must undertake more efforts to exploit the free trade zone with the EU and boost exports. Also, it should strive to improve the competitive environment and fight more fiercely with the fraudulent transactions in the banking sector.

This report has been published with the financial support from Soros-Moldova Foundation / Program for Good Governance, within the joint project “EU-Moldova relations – monitoring progress in the Eastern Partnership in 2013” implemented by Independent Think-Tank Expert-Grup and Assocation ADEPT.


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Tags: Natalia Chitii

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