2020 was marked by the Covid-19 pandemic, which caught the Republic of Moldova unprepared The repercussions of the virus have amplified the underlying vulnerabilities related to the state of the country.
Already at the beginning of 2020, before the onset of the pandemic crisis, the economy of the Republic of Moldova had begun to slow down, the budget deficit was already increasing, and a number of key macroeconomic indicators (e.g. exports) were in decline. In addition, the country entered the pandemic with a low level of competitiveness (86th place out of 141 states according to the 2019 Global Competitiveness Report – similar to Ukraine, Tunisia, Sri Lanka and Lebanon) and economic freedom (87th place out of 180 states according to the Heritage Foundation 2020 Index of Economic Freedom – along with Belarus and Samoa), and with a high level of corruption (120th place out of 180 states according to the Transparency International 2019 Corruption Perceptions Index, along with Sierra Leone, Niger and Pakistan). According to surveys, the majority of companies were unprepared for the pandemic, entering the crisis without (or with low) cash buffers and internal governance poorly adapted to crisis management, a low level of technological endowment, limited capacities to manage digital tools and a low level of diversification of suppliers and sales channels. All of these vulnerabilities, which have contributed to the country’s decline from one year to the next, have increased substantially with the onset of the pandemic. Thus, the crisis caused by the Covid-19 pandemic undermined the competitiveness of the private sector because of restricted access to raw materials, markets and capital/ financial resources, as well as through the decline in labour productivity. At the same time, the quality of the democratic process, the legislative process and public policy- making in general has deteriorated.
Moldova continues to lose external competitiveness and fails to converge with its neighbours and other countries from the Central and Eastern Europe.
The analysis of the country’s scores according to the most popular international indexes that are relevant for assessing the state of the country (GDP per capita,1 Global Competitiveness Index, 2 Human Development Index 3 and Corruption Perception Index 4) reveals that Moldova’s position worsened compared to other ECE countries5 and stagnated in comparison with its neighbours (Romania and Ukraine). The only positive improvement that could be observed was with respect to GDP per capita, where some marginal convergence has occurred. It reveals the poor quality and sustainability of the economic growth that Moldova has registered during recent years, because it did not allow the country to improve its external competitiveness. During the Covid-19 crisis, the country’s development gap compared to the ECE region will most likely continue to widen and this will generate significant medium- and long-term risks (e.g. failure to compete for foreign direct investments, emigration of the working age population, poor integration into international supply chains and globalization/regionalization processes etc.).
The Covid-19 crisis also revealed the chronic deficit of public trust in government, which worsened amid the social and economic repercussions of the pandemic, in parallel with an inefficient and inadequate anti-crisis response from the Executive.
Low confidence in government has always been a problem in Moldova. Many opinion polls show that most citizens believe that things in the country are going in the wrong direction, and that the main state institutions (political parties, government, Parliament and the justice system) are the least trusted by the public. This further undermined the effectiveness of pandemic mitigation measures: people almost completely ignored basic personal protection requirements, such as wearing masks and physical distancing, which further aggravated the pandemic situation, creating a vicious circle. Moreover, the measures introduced to mitigate the economic and social repercussions of Covid-19 were neither sufficient nor effective. Invoking a rapid increase in the budget deficit, the Government failed to develop a comprehensive anti-crisis programme for both companies and the population. Except for unemployment benefits (which benefited only a limited number of people), a postponement of tax payments for a few months, a moratorium on state inspections and a mechanism to subsidize loan interest payments of companies facing urgent needs (which was not popular among SMEs), the Government failed to provide any vision or more substantial measures to compensate, at least in part, the losses incurred by companies and the population in the context of the pandemic. The figures serve as proof: they show that the total intervention accounted for about 0.4–0.5 per cent of gross domestic product (GDP), which is about five to six times less than the anti-crisis programmes implemented by other states in the region.
In addition to the pandemic, 2020 was also marked by drought, which highlighted another major vulnerability of the country – increased exposure to climate shocks.
Extreme climate phenomena (droughts, frosts, hail, floods) are becoming more common in the Republic of Moldova, being a clear effect of global climate change, in parallel with poor environmental management (including corruption, weak institutions, failure to curb illegal deforestation, poor management of natural resources and water bodies, etc.). The neglect of environmental issues in recent years, manifested by sacrificing environmental goals in favour of economic ones, or in favour of vested interests (advocacy and lobbying), is a good example of the political myopia that politicians in the Republic of Moldova have long shown. The effects of this neglect of environmental objectives, and the constant undermining of environmental governance and the related institutional framework, are increasingly being felt by both the economy and the country in general. The 2020 drought is a case in point. Also in relation to this crisis, the government has not shown a vision and firm actions to immunize, in the short-term, the agricultural sector against such shocks, and, in the medium and long-term, no measures were undertaken to strengthen the current environmental institutional framework and governance. Thus, after several protests, farmers were provided with tax facilities and subsidies in order to compensate them, at least in part, for the losses incurred because of the drought. At the same time, the government ignored the more fundamental issue of how to increase the resilience of the agricultural sector (e.g. through implementation of modern irrigation systems, reorientation of farmers towards more drought-resistant crops, stimulation of intensive agriculture with increased added value, elimination of anti-competitive arrangements among intermediaries of agricultural products, and facilitation of farmers’ access to markets). No firm actions have been taken to ensure more sustainable and efficient environmental management (e.g. strengthening the Environment Agency, the environmental departments of the Ministry of Agriculture, Regional Development and Environment and other relevant institutions in the field; combating deforestation and ensuring a substantial increase in forest areas; more efficient regulation of the exploitation of water resources, etc.). Continual neglect of these issues will further weaken the state of the country, with increasingly serious repercussions for the agricultural sector, public finances and the environment.
The way in which the authorities responded to the two major crises of 2020 (the Covid-19 pandemic and drought) reveals a fundamental vulnerability of the country: a low sense of statehood among politicians, government and society in general.
By this we mean the sense of belonging to a country, a feeling which arises from a common desire for the nation to prosper in the long run. This fundamental weakness of the state of the country is revealed by the current weak management of the country, which is often inconsistent, unpredictable, influenced by vested interests and lacks a vision and systemic approach to priority development issues. A stronger sense of statehood would unite the government, politicians and society in the fight against Covid-19, help in efforts to mitigate the effects of the drought and, in general, ensure cohesion on issues that are critical for the long-term development of the country (e.g. a real fight against corruption, the development of a functional market economy sys- tem, the integrated and sustainable management of natural resources, etc.). Added to this problem is the capture of the policy agenda by politicians whose horizons of interests and priorities are limited to elector- al cycles. An eloquent example here is the dominance by politicians or high-ranking officials (the country's president, the head and some members of the executive) of the role of communicators on the management of the pandemic, despite the fact that none of these officials are experts in health issues or public communication. This has generated public disapproval, further weakening the relationship and trust between citizens and the authorities/the state.
Against the background of the impact of both the Covid-19 pandemic and the 2020 drought, the state of the country in the coming years will be significantly undermined by worrying economic developments.
It is already clear that there will be an economic decline in 2020, and the developments we can expect in 2021 are uncertain. Most likely the pandemic will continue during 2021, constraining the process of global economic recovery. In this context, the economic outlook for the Republic of Moldova is quite bleak. According to forecasts, in 2021 the economy will not manage to recover to the level before the crisis. The economy is forecast to shrink by 7.5% in 2020, as a result of two overlapping crises: Covid-19 pandemic and drought, making it a worse crisis compared to the recession of 2009. The most affected sectors are agriculture, where the gross value added (GVA) will decline by 33.8%, followed by transport (-16.7%) and the industrial sector (-8.2%). It will undermine investment activity and exports, which will also be declining this year. Additionally, the budget deficit could reach a worrying level of 10% of GDP, limiting significantly the room for manoeuvre for the government. Nevertheless, according to our baseline scenario, the economy is planned to revert to positive growth in 2021 (+5.7%), due to the low comparison base (low economic growth in 2020), but also assuming that the Covid-19 pandemic will gradually fade away, allowing the economy of Moldova, and in the region, to breathe easier. A more detailed forecast is presented in the report.
Another impact of the Covid-19 crisis is related to the deepening of inequalities, which even before the crisis posed important challenges to the state of the country.
At the level of companies, inequalities have increased between small and medium- sized enterprises (SMEs), most of which were poorly prepared for such a shock, and larger enterprises, which are more resilient thanks to their technological endowment, liquidity reserves and long-term contracts with suppliers and customers. At the level of the population, the labour market and income indicators show that women, young people, people with a low level of education and those with low incomes were most affected by the Covid-19 crisis. In the absence of adequate response policies, the Covid-19 crisis has deepened the economic and social inequalities in the Republic of Moldova, which has major repercussions for the state of the country: increasing the poverty rate and social tensions; negatively affecting the competitive environment, with a negative impact on the welfare of consumers/ the population; and, last by not least, the stimulation of a new wave of migration that could take shape after the lifting of international restrictions on movement.
The Covid-19 crisis and the inefficiency of anti-crisis measures could stimulate a new wave of migration that will aggravate the demographic situation and lead to the loss of the demographic dividend.
A possible increase in the emigration of the working-age population, after the elimination of international restrictions on movement, could be generated by the intensification of people's interaction with the healthcare system in the Republic of Moldova, which is weak and has previously led to emigration. Emigration could also be caused by the closure/restructuring of businesses, which will remove a significant part of the working-age population from the economic system. In a context of deepening inequalities, limited economic opportunities and inefficiency/ lack of anti-crisis policies, this category of the population, which is also the most mobile, will become even more inclined to emigrate, further aggravating the demographic situation. This, in turn, could lead to the final failure of the second demographic dividend mentioned in the previous editions of the State of the Country Report, expected to be generated by the approach by the largest cohort of the population born during the demographic explosion of the 1980s to the age with the highest productivity and economic potential.
The Republic of Moldova urgently needs both an anti- and a post-crisis strategy, with a short- and long-term vision, and firm measures, focusing on the most vulnerable.
First, it is necessary to increase the financial envelope for anti- and post-crisis measures. Resources have to be identified both internally (monetary easing by reducing the mandatory reserves norm given the favourable inflationary environment, as well as increasing the issuance of T-bills, taking into account the low level of indebtedness of the country) and externally (improving relations with development partners, enhancing the coordination of external assistance and is- suing of Eurobonds). According to the most modest calculations, these measures could allow the mobilization of about €1 billion, which will be enough to compensate for the losses caused by the pandemic and to ensure a rapid recovery in the post-Covid-19 period. Second, urgent and bold measures are needed to compensate for the losses suffered by companies and the population as a result of the pandemic. The support measures must aim at directly and immediately compensating 70–80 per cent of the lost income of employees, and fully guaranteeing loans contracted by companies for urgent purposes (e.g. paying wages and/or suppliers). In addition, there is a need for a radical change in the approach of the institutions that regulate the business environment (e.g. the Tax Inspectorate, the Nation- al Food Safety Agency etc.). The emphasis should be on providing advice to companies rather than on controls and fines. In this sense, a training programme is needed for officials of these institutions, who need to switch from regulators to business consultants. Third, state programmes are needed, possibly co-financed by development partners, which would allow for a faster post-crisis recovery. These programmes should target five priorities: (i) digitalization of businesses (grants and subsidies for the development of online marketing and sales platforms, electronic payment instruments and training of employees to manage effectively digital mechanisms); (ii) training employees and the unemployed in order to make the labour market more flexible and to accelerate the reallocation of the labour force from the companies/ sectors most affected by the crisis to those that will be able to survive, or even grow; (iii) training, consulting and support actions to facilitate the access of SMEs to markets; (iv) grants and subsidies for processors using local raw materials, which will also support domestic raw materials producers, as well as boosting the creation of added value in the economy; and, (v) subsidies and state guarantees for loans aimed at increasing the level of technological endowment of companies and the orientation towards high value-added economic activities (e.g. advanced processing of local raw materials). These measures should target mainly the most vulnerable groups in the context of the crisis: SMEs, but also women, young people, people in rural areas and those with the lowest incomes.
This publication is produced by the Independent Think-Tank EXPERT-GRUP, in partnership with Friedrich-Ebert-Stiftung (FES). The views and opinions expressed in this document are those of the authors and are not necessarily shared by the FES and EXPERT-GRUP.
EXPERT-GRUP does not express collective opinions. The publications of FES are not for sale unless FES gives its written consent.