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Economic risks faced by Transnistrian region in 2016-2017 (RER #4, July 2016)

Eugene Romanenko, Eugene Romanenko,
Publishing date: Tuesday, 26 July 2016
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This is the 4th issue of the Regional Economic Review: Transnistrian region, which analyses the economic evolution of the region from Dniester’s left bank, explains the key macroeconomic and sector-level trends in the region and provides forecasts for key economic indicators for 2016-2017.

Key messages in this issue

  • The Transnistrian economy is still facing an unprecedented economic recession. Most of risks identified in the previous edition of the publication have materialized, while the other are likely to materialize in the near future. After a 20% slump in 2015, the Transnistrian economy is anticipated to shrink by 5-6% in 2016. If the recession of 2015 was caused by almost all sectors of the region’s economy, in 2016 it will be determined by two most problematic sectors: constructions and services. Hence, the compensatory growths in agriculture and industry expected for this year, which are expected to be impressive, given the low comparison base, will not be enough to ensure an economic relaunch in 2016.
  • Reduction in aggregate demand and growth in poverty rate are the main immediate risks for Transnistria. The economic recession will continue in 2016 in Transnistria mainly due to the expected continuous worsening of the three basic components of aggregate demand. First, the household consumption will decrease by -5%, due to the decline in salaries and remittances, especially from Russia, and the accumulation of arrears in the public and private sectors. Second, the public consumption in the region will shrink due to the major budgetary constraints (the budget deficit is estimated at almost 15% of GRP in 2016). Third, the corporate capital investments are expected to slump by almost -10-12%, due to firms’ reluctance in launching new projects, limited access to credit resources, and acceleration of capital outflow from the region.
  • The perpetuation of this economic recession shows that the main constraints are of domestic origin. Certainly, many culprits for the large-scale economic and social crisis in Transnistria can be assigned to the worsening economic situation in the neighboring regions (especially on the right bank of the Nistru river, Russia and Ukraine, coupled with the lower demand for region’s exports and national currencies depreciation of the main partners of Transnistrian enterprises). However, the crisis would be less dramatic, both in terms of duration and magnitude, if the region’s authorities were prepared better from fiscal, budgetary, monetary, and economic standpoints for such negative shocks. Particularly, the Transnistrian economy entered into the crisis with a serious budgetary and current account deficit, narrow tax base determined by the lack of a VAT system and a wide informal sector, large portfolios of non-performing loans at banks, old technical-material base at the main enterprises, and low international reserves coupled with a fixed exchange rate that has nothing to do with the economic realities.
  • The domestic vulnerabilities were aggravated by the electoral cycle in the region, associated with the proximity of “presidential” elections. It worsened even more the domestic political conflicts, especially between the “legislative” and “executive” powers, delaying the implementation of reforms and fueling some populist policies with additional major risks for the near future. The prevalence of political economy ideas over the economic policies was highly visible in the case of the policymakers’ resistance to the depreciation of the “Transnistrian ruble”. Thus, though its necessity is obvious from the economic standpoint (the currencies of the main trade partners depreciated, affecting the competitiveness of the main Transnistrian exporters), some policymakers were against the depreciation in order to protect the poor population.
  • The rationale for maintaining the exchange rate of “Transnistrian ruble” fixed at the current level is false. Despite its pro-poor allure, this policy actually harm the poor population, because the artificial exchange rate resulted in a severe foreign currency deficit in the region and expanded the black market, where the “Transnistrian ruble” depreciated by about 50%. In its turn, it caused an acute deficit of imported products, fueling the “food tourism” (import of foodstuffs for individual consumption), which caused a hidden inflation (the effective prices of foodstuffs increased, if taking into account the costs and the time taken to travel); in addition, the products imported by firms got more expensive, because they take into account the de facto rate, especially the one on the black market, rather than the official one. Taking into account the depreciation of the currency of Transnistrian exporters’ trade partners and the huge current account deficit (similar to the value of the region’s GDP value), the depreciation is inevitable, and delaying the controlled depreciation could provoke an uncontrolled collapse of the “Transnistrian currency” with serious economic and social consequences.
  • The main five risks for the following 2-3 years for the Transnistrian economy are primarily of domestic origin and need to be addressed through urgent policy interventions. They derive from the vulnerable banking and energy sectors, non-competitive industrial sector, inefficient public sector on the background of an excessive budget deficit, and limited economic opportunities that determined many people of working age to leave the region:
    • (1) The banking sector is threatened by the high concentration, “intoxication” with non-performing loans and decapitalization. Ultimately, this is related to the close inter-connections between political and economic circles, which affects the basic principles of risk management and allowed many banks to credit different enterprises that are currently finding it difficult to repay the loans. The problems of the banking system are already noticed from the perspective of lower liquidity indicators and capitalization.
    • (2) Some uncertainties hover around the energy industry from the region. If in 2015-2016 the energy supplier from the region supplied the right bank of the Nistru river with electricity, there is a probability that soon this opportunity will fade away or will narrow significantly. The constitutional authorities are under both financial and public pressure, which could make them give up on the Energy Supply Agreement, concluded in a non-transparent manner with the Transnistrean supplier, and identify alternative suppliers from Ukraine
    • (3) The amalgam of extremely severe budgetary and structural constraints, which the authorities must deal with, will lead to difficult decisions that could negatively impact the households, if not in 2016, then in 2017. It is mainly about the sizeable and extremely inefficient public sector. Almost 45% of the total number of employees from the region work in the public sector, which from any point of view represents an exaggerated proportion. We think that reforming the region’s public sector is inevitable, regardless the results of the autumn elections. This will impact significantly the incomes from salaries, and due to the lack of employment opportunities in the real sector, the emigration from the region will accelerate.
    • (4) The industrial sector will face more intensely the problem of low competitiveness, given the impaired technical base and insufficient fixed capital investments. Without a business-friendly climate, most exporters risk to be unable to compete on foreign markets, despite the energy subsidies.
    • (5) The continuous decrease in population is a major challenge, both on long and short term. It leaves the region with low labour supply and a shortage of labour force for potential new investment projects. Still, the most severe problem is that during the recent years, the employment rate decreased at a higher pace due to the worsening regional economic crisis. The decrease in the total and employed population will have a long-term impact on all social and economic areas of the region, especially a higher pressure on the region’s public finance system and lower domestic demand.


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Read the press release: Another year of economic crisis for Transnistria - 6% recession in 2016 (estimates)

This document is published within the Program “Support to Confidence Building Measures”, financed by the EU Delegation in Moldova and implemented by United Nations Development Programme in Moldova. Opinions expressed in this document belong to the authors and are not necessarily the opinions of the donors. Also, the authors are aware of potential risks related to quality of the statistical data and have used the data with due precaution.

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