How can the economy be relaunched in 2021

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Publishing date: Monday, 25 January 2021
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  • A1 – Economie Generală ,
  • G – Economie Financiară
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The pandemic crisis will cause this year the sharpest decline of the Moldovan economy in the last twenty years. While at the beginning of the year the macroeconomic scenario predicted an economic growth by 3.8 per cent, the data used for the last budget rectification in August indicate an economic decline by 4.5 per cent.

Moreover, the latest statements of the authorities show a revision of the expectations according to which the economy will contract by 6.5 per cent this year, an indicator close to the previous estimates of 7.5 per cent by the Expert-Grup in the State of the Country Report. The actual data for the first half of the year indicate an economic decline by 7.2 per cent, the most affected sectors being those involving the population’s interaction and mobility, but also those in the informal economy (HoReCa, household activities, art, leisure and recreation activities, transport). In the second half of the year, as a result of this year’s drought, the economic sectors with the sharpest decline will also include agriculture, the figures for the first nine months of the year already showing a decrease in the agricultural production by 25.3 per cent.

The latest forecasts of the National Bank indicate a perspective of persistent disinflationary pressure until Q3-2022 against the background of the decrease in the aggregate demand. The anti-epidemic measures, the declining external demand, the negative cumulative fiscal impulse since the beginning of the year, the real appreciation of the national currency, and the unfavourable agrometeorological conditions, which have affected the volume of agricultural production, are the main factors contributing to the reduction of aggregate demand. The return of demand will take time, taking into account the uncertainty as to the evolution of the pandemic, the change of the population’s consumption behaviour, the difficulty of the labour market conditions and the risk of the continuous migration trend of the economically active population. Under the current conditions, the central bank has pursued a monetary policy of easing the conditions by successively reducing the base rate to the historical low of 2.65 per cent, but also the rate of the minimum required reserves in national currency to 32 per cent. These measures have led to reduced financing costs and have released several billion of liquidity for the economy, which have benefited, first of all, the state, which has been financing this year its budget deficit from the domestic debt in the amount of MDL 6 billion.

The business environment, especially SMEs, has been severely affected, including due to reduced adaptability. One of the recent surveys conducted in July with the participation of over 200 enterprises shows that only 13 per cent of respondents felt a positive dynamic or had a similar level of revenues compared to the same period of 2019, the rest being on a negative trajectory, including 40 per cent of companies that reported decreased sales of over 50 per cent. The local companies have been affected by the limitations imposed during the pandemic crisis and face challenges existing for a long time in their distribution networks. These challenges include administrative and mobility constraints, unstable supply chains, limited skills in accessing new markets, the underuse of IT solutions’ potential to streamline business, bureaucracy and government regulations that hinder business processes, as well as poor operational access to financing. A study on the Covid-19 impact reveals that according to the statistics for the first months of the pandemic, the missed sales amount to MDL 86 billion, which implies lost revenues to the national public budget in the amount of MDL 17.3 billion or 27 per cent compared to its level in 2019. The developments in this period have also been accompanied by changes in the structure of entrepreneurial activities. The activities in the ICT and the IT and telecommunications equipment trade sector have excelled the best by far in terms of growth during this period, but also the food retail, which has partially occupied the HoReCa market, at the opposite pole being the businesses providing services to the population, but also the non-food trade. Postponing strategic and current investments, reducing the rental and administrative costs, reducing staff costs, reducing the operation/production, as well as the attempts to enter the online market have been the most widely applied measures by companies in their struggle for survival.

The pandemic has left vulnerable the most active category of people in the economy – the employees. As shown in one of the presentations of the MACRO 2020 Conference, the current COVID-19 crisis does not seem to have a major impact on the groups that are traditionally regarded as vulnerable - the elderly or the women in rural areas. The employees have been hit the hardest this time, and their rehabilitation and economic reconversion is essential because the longer they stay unemployed, the more their professional relevance will decrease or they will eventually find themselves forced to emigrate. These findings are also substantiated by actual data. Thus, the NBS data show that in Q2, the employed population accounted for 821,5 thou persons, being less by 8,8 per cent compared to Q2 2019 (901,1 thousand). In Q2 2020, every tenth person aged 15 and over, or over 217 thousand people, said that the epidemiological situation in the country has had a direct impact on their relationship with the labour market. Of these, the absolute majority - over 92 per cent - is employed and 7 per cent are people who have become inactive in the labour market due to the pandemic. The impact of the pandemic on the situation at work has manifested itself mainly by: interruption/cessation of activity, work from home, the transition to part-time work, reduction of working hours etc. Another research of the NBS5 on the “The impact of the COVID-19 pandemic on the households” in Q2-2020 reveals that only a little over half of the households obtained income from work, about 1/4 obtained income from remittances, and over 90 per cent received salaries, pensions, and social benefits. At the same time, 17.0 per cent have mentioned reduction or loss of income from work, 8.3 per cent reported reduction or loss of remittances from abroad, and only 3.6 per cent reported delays in the payment of salaries, pensions, and social benefits.

The economic reality of the pandemic has increased the pressure on public finances. The data of the last budget rectification this year have shown that the state budget will lose MDL 7 billion in 2020, given that the expenditures will increase by 4.1 billion compared to the planned level, based on the natural need for the state intervention to limit the impact of the pandemic. Therefore, the initially planned level of the budget deficit of 3.6 per cent of GDP has been adjusted to 8 per cent. However, based on the latest information presented by the authorities, the latter expect an effective budget deficit of 6 per cent of GDP, which also indicates a chronic lack of capacity to absorb resources, especially related to capital investments and infrastructure projects.

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