Real Economy, december 2018, special edition (#57)

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Publishing date: Friday, 28 December 2018
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Top 5 Positive and Negative Trends of 2018 and Top 5 Economic Challenges for 2019

The 2018 economic year was marked by the mix between some positive economic trends, which were rather shallow, and negative trends that evidenced profound developmental constraints. Even if at first sight we notice a positive and steady economic growth of about 4%, accompanied by moderate inflation and slight revival of private investment activity, the recovery rates are far too slow, taking into acount the low baseline, being insufficient for an actual convergence with the countries in the region. In addition, informal employment continues to grow and the agricultural sector – the most important employer of the country (in terms of share in total employment) – is stagnating, which indicates the poor quality of economic growth and its limited impact on improving the quality of life. Though the reforms in the financial and banking sector speed up, the level of financial intermediation continues to decline and banks continue to be more interested in crediting the Government than the real sector. Despite stabilisation of public finances in the context of increased budget revenues, the fiscal reform and infrastructure projects financed from public money will significantly weaken the Government's financial position and the budget deficit could grow substantially in 2019 with negative repercussions on economic growth.

The most worrisome trend of 2018 is the erosion of the anti-money laundering framework, which affected even more the relations between the Government and development partners. This is related to the Law on Voluntary Compliance and Tax Incentives (capital amnesty) and the Law which allows obtaining Moldovan citizenship against investments. Both laws have been promoted ‘as a package’ back in 2016, and approved in 2018, despite the multiple concerns expressed by the civil society and development partners. Besides their content, which contradicts the spirit of the Association Agreement and the Memorandum of Understanding with the IMF, the way these laws were promoted raised even more concerns. To be precise, they were promoted with minimal, if not no decision-making transparency, no substantive/real consultation with civil society, and the Law on ‘Capital Amnesty’ was promoted at a record speed (the draft law was registered with the Parliament on 24 July and adopted on 27 July 2018, automatically in both readings).

For 2019, the Government should consider a number of imminent challenges. Year 2019 will be influenced by parliamentary and local elections, which could destabilise the public finance system because of the multiple electoral policies, which started in 2018, with a negative budgetary impact both at central (e.g. infrastructure projects) and local (e.g. reform tax) levels. In this regard, a key challenge will be to maintain the stability of the public finance system at a minimal cost for the economy (continuing to massively finance the budget deficit on account of banking resources will further undermine lending and private investment). Therefore, essential budgetary moderation is necessary in order not to compromise the modest economic growth the country achieved over the recent years. Another major challenge is to improve the relations with development partners, particularly to resume the financial relations with the European Union and to fully implement the Memorandum with the IMF. In this respect, the Government needs to accelerate the main undertaken reforms and not to allow any derogation from the provisions and, particularly, from the spirit of the EU Association Agreement. Another major challenge results from expansion of the Ukraine's Nistru Hydropower Complex, which poses fundamental risks to the country's economic and energy security. The Modovan Government needs to take, hence, a stronger and more pro-active position in relation to the Ukrainian authorities in order to avoid these risks. 

Harnessing the EU Deep and Comprehensive Free Trade Area (DCFTA) was the most positive trend noticed in 2018, which needs to be further developed in 2019. During its implementation, trade with EU has been steadily growing and balancing out, offsetting fully the losses on the CIS market; it has generated real jobs, budget revenues, investment and overall economic growth. In 2019, authorities should make every effort to maintain this trend and make a more effective use of the DCFTA provisions (in particular, addressing the issues related to the access of products of animal and non-animal origin).

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Tags: Natalia Chitii

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