Transnistrian Economic Review is a quarterly publication about the main economic and political developments in the eastern districts of the Republic of Moldova.
Key messages of this edition
The economies on both banks of the Nistru River began to distance themselves from the point of view of their structures. Thus, starting with Q3:15, when the Economic Convergence Indicator (ECI) reached the highest level of 97%, a divergence process may be noticed. In Q1:16, ECI was 95.1% and decreased by 1.9 p.p. compared to the values recorded in Q3:15.
The main causes of structural divergence between both economies relate to the constraints the Transnistrian companies and population face, whose situation is getting worse at a higher pace compared to the right bank of the Nistru River. Particularly, the increase of economic uncertainty in the region has reduced the investment activity: in Q1:16 the capital formation decreased by 15% y-o-y (we estimate that on the right bank of the Nistru River the decline was 3 times lower). As for the foreign trade, both economies experiences harsh slumps, although imports dropped more in the Transnistrian region, due to the dramatic reduction of households’ incomes.
While both economies face severe economic and social problems, the Transnistrian economy has virtually no mechanisms of adjustment to economic shocks. While on the right bank of the Nistru River, the economic shock was, at some extent, cushioned by the floating exchange rate regime (25% depreciation of MDL in 2015), the Transnistrian economic situation was aggravated by administrative fixing of “the exchange rate of the Transnistrian ruble" to the US dollar, and by the less diversified foreign trade. As a result, in 2015, the Transnistrian economy contracted by 20.2%, while the economy on the right bank of the Nistru River - by 0.5%.
One of the most important decisions that the regional authorities should adopt in 2016 relate to the policy dilemma between depreciating the "Transnistrian ruble", on the one side, and increasing the restrictions on the circulation of foreign currency, on the other side. Given that the foreign currency reserves in the region are not enough to cover even one week of imports (about 11-12 million USD), and the demand for foreign currency in the region exceeds several times the supply, maintaining the "Transnistrian ruble exchange rate" fixed against USD becomes impossible without the rise of "black FX market" and major losses for exporters.
On the eve of the presidential elections, the authorities may opt for administrative measures (restrictions on foreign currency circulation in the region) rather than economic measures (gradual and controlled depreciation). In this context, we emphasize that administrative measures will not solve the fundamental cause of the problem - low and continuously shrinking competitiveness. Therefore, the right option should be the gradual depreciation of "the ruble”, while improving the business climate, increasing investment in infrastructure and implementing the economic provisions of the EU Association Agreement.
This issue was developed under the "Support to Confidence Building Measures" Programme, funded by the European Union and implemented by the United Nations Development Programme. Opinions expressed in this document belong to the authors and are not necessarily the opinions of the European Union or the United Nations Development Programme. The authors are also aware of possible risks related to the quality of statistical data, which were used with outmost caution.