MEGA, the XXII-nd edition: ”The economy and public finances in 2021: Risks, forecasts and policy recommendations for recovery”

Publishing date: Tuesday, 16 February 2021
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The year 2020 was marked by the overlap of two major crises (the Covid-19 pandemic and the drought), causing the most severe recession in the last 20 years. Gross Domestic Product (GDP) estimated for 2020 shrunk by about 6.5%, because of the repercussions of the coronacrisis and drought that undermined the agricultural production.

The restrictions imposed during the pandemic caused a sharp decline in sales, which determined companies to stop/postpone investments and cut on staff costs (reducing working hours and wages, technical unemployment and, to a lesser extent, personnel layoffs). This led to the contraction of consumption, which caused the boomerang effect on the private sector by lowering demand, and affected the national public budget through the under execution of revenues, especially from indirect taxes. Micro and small enterprises, in particular those that failed to diversify their markets and access foreign markets, were most affected. The most affected employees were those with low salaries, informally employed, mainly women, as well as the elderly and young people. 

The recession has been aggravated by two key vulnerabilities of the country: low competitiveness of the private sector and lack of vision and capacity of politicians to intervene effectively to combat the economic and social effects of the crisis. Low competitiveness caused a low level of preparedness of the private sector to face the crisis, in terms of lack or insufficiency of spare financial resources and limited access to finance, poor diversification of markets and suppliers, low technology utilization and low productivity, and management not adapted to crisis. This is supplemented by the relatively low level of labour incomes and high level of informal economy and employment compared to the countries in the region, which exposed a large part of the population to poverty risks. The second vulnerability is related to the quality of the governance process, which is traditionally inefficient and unpredictable, as revealed in the context of the crisis by the amorphous, delayed and insufficient reaction of the government to support the population and businesses in the context of such a dramatic recession. 

The support provided by the Government to counteract the economic implications of the epidemiological situation was the weakest in the region and, respectively, insufficient to cushion the effects of the crisis. Thus, the support package offered in 2020 was estimated at about 1% of GDP, which was the lowest in the region, where support amounted to about 5% of GDP on average. Such modest support was also due to the fact that the Government entered the crisis with a limited fiscal space, as the budget has been already approved with a deficit of over 3% of GDP, which was described in the previous edition of MEGA  as having an electoral connotation. Furthermore, the support was provided in a fragmented and poorly targeted manner. Thus, based on the data for 2020, out of the 320 million MDL planned for payments of wages or technical unemployment benefits, only 19% were capitalized and the average amount per application was only 59.2 thousand MDL. As for subsidies for interest on loans granted to companies for urgent needs, only 35.4% were assimilated in 2020 and the average amount per application was even lower, only 31.9 thousand MDL. Those amounts were not sufficient to offset or at least cushion the consequences of the crisis. Thus, their impact was insignificant. The way of handling the crisis from the perspective of the provided support should be analysed separately. In particular, it is a lesson learned for the future, suggesting that the Government should have had functional instruments for deal with future crises, and in the event of such shocks, the support should fast, well-targeted and should have acceptably offset losses, especially for the vulnerable groups.

We forecast a relatively high economic growth (+5.4%) for 2021, given a more favourable agricultural year, the revival of domestic consumption, and especially of the external consumption, as well as the low comparison basis. Obviously, the forecast also depends on the evolution of the pandemic, as it is based on the assumption of moderation of the crisis and gradual elimination of restrictions on travel and economic activity. Basically, the main growth factors in 2021 are agriculture, where gross value added is forecast to increase by 14.5%, which will boost final consumption (+8%), and the anticipated economic recovery in the region will also stimulate export growth by about 10% (higher than the growth rate of imports – with about 7%). However, that growth will take place against the background of declining investment activity, both in the private and public sectors. This denotes the low quality and sustainability of this economic growth forecast for 2021 and beyond. Therefore, if this uncertainty is maintained, also due to the political situation, we will see an increase in economic volatility for the coming years, which will also be quite slow, inertial, which does not involve generating decent jobs and enhancing the country's competitiveness. In this context, policies are needed to support the attraction of investments in technologisation of businesses and encourage businesses to make use of local raw materials for processing and export. 


The adoption of the 2021 state budget gave rise to controversy and concerns against the background of non-transparent approval process, lack of consultations and approval of measures with electoral connotation. The Government submitted the draft Tax/Customs Policy and the 2021 draft State Budget Law to the Parliament on 1 December 2020. No genuine parliamentary debates were organized to this end, while the document openly promoted political clientelism. All these actions took place while lacking resources to cover the expenditures, and both the Law on Public Finances and Budgetary and Fiscal Responsibility and the Parliament Rules of Procedure were utterly violated. An example in the same vein is the distribution, through Annex 7 to the State Budget Law, of over 350 million MDL with a rather discriminatory and dangerous political discretion. Besides being a bad example of deliberate power abuse in the state, the Parliament itself gave an extremely threatening signal to the rule of law, where the abuse of the majority is legalized, having swept out all the endeavours of good governance and management of budget resources made since 2009. Even more severe is the fact that given the pandemic and the associated crisis, all amendments made by the Parliament do not respond to any of the current issues of the country, namely increased unemployment rate, issues faced by the health and education systems, and by the real sector.

Pandemic developments and political instability are the main economic risks in 2021. Growth could be well below the baseline forecast if another pandemic wave follows, possibly caused by the new strain of Sars-Cov-2 virus. In that case, we can expect a much slower growth (possibly 2-3%), against the background of continued decline in production, exports, investment and consumption. In addition, the current liquidity crisis faced by the real sector, caused by restrictions applied in the context of the pandemic situation, could turn into chain bankruptcies for employers and job losses for employees, causing the snowball effect on the economic crisis. The second risk derives from the unstable political situation, which can have two ramifications. In the event of early elections and the uncertain situation after the elections, for most of 2021, the Republic of Moldova will not be governed by a stable government with a full mandate. This will affect the Government's ability to respond to the crisis and, respectively, to support economic recovery, especially against the background of a relatively high budget deficit (estimated at over 5% of GDP). In the event of voting the Government proposed by President Sandu, the Republic of Moldova will have a Government without clear support from the parliamentary majority, which could lead to institutional sabotage by the Parliament by launching various populist initiatives, with major risks to the public finance system and macroeconomic situation (some similar actions have already taken place with the adoption of the laws that provided for the reduction of the retirement age and the repeal of the "one billion law" in December 2020). On the one hand, these risks fuel uncertainty, which will cause a reduction in private investment, and, on the other hand, they affect the Government's ability to implement the measures needed to support companies and the population, as well as to support economic recovery. 

As a derivative of political risks, another major risk in 2021 is the financing of the budget deficit. We forecast that in 2021 the overall NPB revenues will rise by 4.1% y-o-y in nominal terms as per the main scenario and 3.7% y-o-y as per the alternative scenario. As for the expenditures, they should increase by approximately 11.3% y-o-y as per the main scenario and by -4.23 % y-o-y as per the alternative scenario (reduced deficit). According to the main scenario, such developments should result in an estimated budget deficit of 6.79% of GDP. In case of the scenario of lowering budget expenditures, which directly depend on foreign sources of funding, the budget deficit will not exceed 4.56% of GDP. The epidemiological situation determined also that the planned deficit level does not fit into the budget and fiscal rule stipulated by the Public Finance Law, i.e. 2.5% of GDP calculated without grants. Out of this amount, the deficit relating to investment projects financed at the expense of external loans will make up 10.3 billion MDL. The State Budget deficit will be covered from foreign sources of funding, net receipts of external loans for budget support (1.4 billion MDL) and the implementation of projects financed from foreign sources (IMF, EU, WB, EBRD) – approximately 8.01 billion MDL. Among the domestic sources one can mention the issuance of state securities and the financial means derived from the privatization of public assets (of which the amount of 1.4 billion MDL comes from the net issuance of state securities on the primary market).

Given the unprecedented repercussions of the pandemic crisis and drought, the Government should urgently implement a comprehensive package of support measures for companies and the population, which would also support the economic recovery in 2021-2022. The package should be based on 3 key elements: (i) areas of support should be relevant, well targeted and create sufficient prerequisites for a quality economic recovery; (ii) measures should be anchored in a realistic resource framework; (iii) the implementation of the package of measures should be based on active and clear communication with its beneficiaries, as well as on efficient interaction with other relevant public institutions (e.g. National Bank of Moldova, State Tax Service, etc.).

1. Areas of support. In the immediate term, the measures should address the most pressing issue generated by the coronacrisis – liquidity shortage within companies. The aim of these measures should be to avoid the chain bankruptcies, as well as to maintain and even encourage entrepreneurship. To this effect, the following measures should be taken:

a. Simplification of bureaucratic procedures necessary to obtain support for companies and employees. Thus, in the immediate future there is a need to facilitate the disbursement of resources already allocated under the existing support instruments to companies and employees. This involves speeding up the examination of applications for support and relaxation of conditions to obtain that support. In order to avoid potential abuses or fraud by beneficiaries, that simplification should be followed, after a certain period of time, by state controls which would ensure the verification of the use of received resources. 

b. State guarantee of loans taken out by companies to pay wages or other urgent payments to avoid bankruptcy. This could complement the existing instrument at the time of subsidizing interests on such loans, which is not yet actively used by companies. In order to avoid potential abuses or moral hazards, the share of loan guarantees, as well as that of subsidies for interest coverage could be 70-80%, with a certain own contribution by the economic agent. 

c. Subsidising the reduced working time. The Government could provide subsidies that would compensate, at least partially, the lost income of employees whose working hours (and wages, respectively) were reduced. The share could be 70-80% to avoid fraud or moral hazard and to ensure that viable and potential jobs are preserved. 

d. Support measures should target the most vulnerable groups – companies and employees who, according to surveys and data, proved to be the most affected by the crisis. In terms of companies, these should refer to micro and small enterprises, enterprises with limited or no access to foreign markets, and companies in the transport, hotels and catering and domestic trade sectors. In terms of employees, these should primarily refer to those with low incomes, informal employees, young people, elderly people and women. 

e. Grant and consultancy programme for companies that process local raw materials, implement new technologies and focus on selling and exporting products with a higher level of processing. This measure is also needed during the period of economic recovery, in order to ensure conditions for a more sustainable and qualitative economic growth. For this support measures, the promotion of digitization of businesses should be regarded as a cross-cutting priority. 

2. Framework of resources. To ensure the credibility and feasibility of that programme, it should be based on a clear resource framework. In this regard, around 1 billion EUR could be mobilized and allocated for measures mentioned above. These resources can be mobilized based on the following competitive advantages of the Republic of Moldova: relatively well developed relations with the donor community, low indebtedness of the state budget and local budgets, low inflation rate and high level of liquidity and capitalization in the banking system. The main sources of funding can be:

a. Foreign assistance (about 150-200 million EUR), mainly from EU, IMF and World Bank resources. At the moment, this is one of the areas with the greatest untapped potential by the Government of the Republic of Moldova. For example, in the midst of the 2020 crisis, when the budget deficit increased to 6% of GDP and the real sector faced an unprecedented liquidity crisis, the Government managed to attract 2.5 less non-reimbursable financing from donors compared to planned levels. In this regard, there is a need to set up a coordination unit for foreign assistance focussed on combating the effects of the pandemic, which would ensure a smooth communication between donors and the Government and, respectively, a faster disbursement of funds. 

b. State securities (about 300 million EUR). The acceptable level of domestic government debt, in parallel with the abundance of liquidity in the banking system and a low level of inflation, low NBM policy rate and low interest rates, create all the necessary preconditions for increasing the Government's domestic loans. At the same time, actions are needed to expand the range of creditors/buyers of state securities (SS) on the primary market, in particular among companies and the population. This could simplify the procedures based on which anyone could purchase SS, which would allow the Government to take out domestic loans on more favourable terms. 

c. Municipal bonds (about 50 million EUR). Following the model of the countries in the region, local public authorities could issue municipal bonds in order to identify resources needed to make capital investments. In the context of the coronacrisis and the budget constraints generated at central and local levels, this loan instrument can diversify the sources of financing of local public authorities and could even increase their financial autonomy. In order to develop this instrument, these bonds should be granted a preferential tax treatment, following the model of countries in the region, where income from investments in municipal bonds is not taxed (currently, the 12% taxation is a major barrier to the development of this instrument, especially since no issuance has been recorded so far). 

d. Issuance of Eurobonds (about 500 million EUR). The current situation on foreign capital markets is favourable for the issuance of Eurobonds on favourable terms, thanks to the abundance of liquidity. The Republic of Moldova could mobilize a large part of resources needed for an active economic recovery programme by issuing Eurobonds at interest rates similar to those issued by Ukraine or Armenia (about 3-4% per year). In this regard, discussions with international rating agencies should be started as soon as possible in order to assess the macro-financial situation and update the country rating, which currently seems to be underestimated by one of these agencies.

e. System of state guarantees and development of financial risk insurance, in parallel with stricter regulation of bank commissions in favour of consumers. In the medium and long term, banks should be motivated to focus more on lending to the real sector, while other forms of income (e.g. commissions, currency speculations, etc.) should decrease as a share in the structure of banks' business models. In this regard, it is necessary to solve one of the classic failures of the free market, when the perception of the excessive risk in relation to certain categories of potential creditors leads to adverse selection by banks, which deprives those companies of access to finance and creates a vicious circle for them. Companies at high risk are micro and small businesses in the agricultural sector, without a credit history or even start-ups, which access new markets/niches. As a rule, such companies cannot offer any pledge or credible turnovers to obtain bank loans on favourable terms. In that case, the Government could establish a system of state guarantees to partially cover the risk perceived by banks. At the same time, financial risk insurance should be developed to enable banks to manage those risks more effectively. This would allow channelling the excess liquidities from the banking system into the real economy, while unlocking around 250-300 million EUR.

3. Communication and coordination among institutions and with the target audience. The programme of measures will not have the expected impact if it is not actively communicated to the target beneficiaries, especially considering that, according to surveys, more than one third of companies are poorly informed or are not informed at all about the support measures implemented by the Government. In this regard, it is appropriate to place the relevant information on a website dedicated to support measures, for which companies can apply online. In addition, the package of measures involves interaction and coordination among various public institutions (e.g.: Ministry of Economy and Infrastructure, Ministry of Finance, National Bank of Moldova, State Tax Service, etc.). In this respect, it is necessary to set up an anticrisis cell, which should include high-ranking representatives (e.g. secretaries of state or ministers) from the institutions concerned, in order to ensure the necessary synergy. The respective unit should also actively communicate with the specialised unit on the coordination of foreign assistance during the pandemic, in order to ensure the synergy between the Government's actions and the support provided by development partners. 

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This document is published by the Independent Think-Tank Expert-Grup within the project “Inform, Empower, Act! Civil Society for good budgetary governance in Moldova” funded by the European Union and Konrad Adenauer Stiftung e.V. The contents of this document are the sole responsibility of „Expert-Grup” Independent Think-Tank and can under circumstances be regarded as reflecting the position of the donors.


Tags: Natalia Chitii


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