Key messages of this edition
- Despite internal and external constraints, in 2015 the economy fell by only 0.5%, which was close to the baselinescenario of the Expert-Grup forecast (-0.8%) for the given year. The only factor that has cushioned the economic shocks of 2015 was the floating exchange rate regime, which made the currency to depreciate by about 25% during 2015, allowing the Moldovan economy to adjust more easily to the existing constraints. In fact, this has discouraged imports and mitigated, to some extent, the shocks upon exporters, which resulted into an increase in net exports (if we exclude the net export from the GDP equation, it can be observed an economic recession of -4.8%). Additionally, the net export dynamics was also determined by the cooling consumption amid dramatic drop in remittances and real wages, which led to a drop in imports.
- The severity of the current recession should not be measured by the magnitude of GDP decline, but rather by the resulting perpetuation of uncertainty, imbalances and slow economic growth over the coming years.The last year left a visible mark on the Moldovan economy, that is going to last for the next, at least, 5 years. Moreover, unless key reforms will be speeded up (especially, in the banking, energy and justice sectors), the Republic of Moldova risks entering a prolonged period of mediocre growth for the next 10 years. We have identified three key constraints that are going to undermine the economic growth and development of the country in the near future:
- 1. The bank frauds amounting at 12% of GDP, the bankruptcy of 3 major banks and their fiscal implications. The conversion of state guarantees offered for the emergency loans granted by NBM to the failed banks implies that the recuperation of the respective bank frauds was transposed, at large, on the taxpayers. It will force the Government to increase the tax burden and to maintain the budgetary austerity, with negative effects on investments, consumption and, respectively, economic growth.
- 2. Freezing or even losing the external assistance, followed by refraining from public investments in infrastructure and the outflow of FDI will undermine the long-term competitiveness of the Moldovan economy, which depends a lot on the quality of infrastructure and technological transfer.
- 3. The competitiveness of the Moldovan economy will be also be undermined the fact that the productivity growth, during the last years, was persistently slower than the wage growth. Moreover, this gap expended over time.
- Under the baseline scenario, in 2016 we anticipate a slight economic recovery, of about 2.0-2.5%. This growth, although positive, is not sufficient to address domestic macroeconomic imbalances and it is about three times lower than the level required to ensure convergence with countries in the region. About half of this recovery is to be driven by the compensatory growth in agriculture after a difficult agricultural year in 2015. Another impetus could be determined by tempering inflationary trends, which will have a positive impact on real economic growth and will motivate the NBM to gradually ease monetary policy. And finally, the statistical factor will also be relevant: with a low comparison basis (economic recession in 2015), it is relatively easy to record a positive economic growth in 2016. Nevertheless, we do not exclude a pessimistic scenario, according to which the Moldovan economy could stagnate in 2016 since the internal and external constraints of 2015 might generally persist in 2016.
- The fiscal-budgetary framework will remain problematic in 2016-2017. The main constraints are related to economic activities, amorphous consumption, constant lack of access to external financial assistance, increasing costs of servicing the public debt and the over-indebtedness risk as a result of converting emergency loans of failing banks into government securities. In response, on the side of budgetary expenditures, the government will keep public investment in infrastructure frozen, with repercussions on the competitiveness of the Moldovan economy in the long run; on the side of budgetary revenues, the tax burden will growth, fueling the risks for tax evasion. Although fiscal consolidation efforts are welcome, more focus is needed on increasing the efficiency of tax collection and administration, along with promoting fiscal policies based on empirical evidence.
- The main vulnerability of the Moldovan economy remains the problems in the banking sector. Given that certain frauds in the banking system have caused most of the problems Moldova is facing, it is necessary to urgently develop and implement a comprehensive plan on reforming the banking system in order to eliminate the revealed systemic constraints. Among these, the most important relate to the transparency of the beneficial shareholders of banks, more efficient identification of concerted activities, strengthening banking supervision and monitoring instruments and adjusting the institutional and normative framework on the management and prevention of bank crises. To this end, it can be observed a certain activation of both the authorities and the donor community, which should continue and even speeded up.
Also read the press release: Moldova's economic growth in 2016, strongly affected by the banking fraud (forecast)
This document is published with the financial support of the Global Partnership for Social Accountability, World Bank. Opinions expressed in this document belong to the authors and are not necessarily the opinions of GPSA or the World Bank.