Transnistrian Economic Reality is a periodical publication that identifies the most important economic and political developments in the eastern districts of the Republic of Moldova. Its readers are policymakers, CEOs of domestic and international companies and commercial banks, representatives of the international institutions and foreign embassies, political parties and economic journalists working on both sides of the Dniester River.

The Transnistrian economy is expected to shrink by about 18% in 2022 and by about 2.5% in 2023. The decline is expected to be caused mainly by a reduction of about one third in the volume of industrial production, which accounts for about 30% of the region's economy, against the background of the temporary reduction of natural gas supplies from Gazprom and the temporary suspension of electricity supplies to the right bank, as well as a reduction in the activity of other major industrial enterprises.    

Another major economic and social challenge for the region is the reduced propensity to consume and invest against the background of the war in Ukraine, the energy crisis and negative economic dynamics on the right bank and in neighbouring countries. Domestic trade and HoReCa activity in the region, which indirectly measures the population's propensity to consume, is set to shrink by at least 10% against the background of heightened uncertainty, reduced employment rate and falling population’s income. Thus, in 2022, the real average wage in the region is expected to fall by about 3-5%, the number of employees - by about 11 thousand people, and the labour demand of the real sector - by about 1000 people. Firms' investment appetite is very low, with the volume of investments in fixed capital expected to fall by around 35% in 2022. This in turn will exacerbate the problem of the low competitiveness of the region's economy, which relies on the low cost of gas and electricity, and undermine economic growth in the medium to long term. 

Authorities in the region have a limited range of tools to intervene to mitigate shocks. Even before the crises in 2022, the region's budget was unbalanced: at the end of 2021, the share of the budget deficit in GDP was about 12% (the maximum allowable level is 3%), covered by domestic loans and non-reimbursable financing from the Russian Federation. In 2022-2023 the financing of the budget deficit will be extremely problematic due to the economic difficulties in the Russian Federation, the domestic economic crisis, but also the substantial reduction in budget receipts against the background of the disruption of electricity supplies to the right bank, the reduction in natural gas supplies, the slowdown in economic activity and the increasing propensity to tax evasion. For example, at the end of the third quarter, 2022, the volume of arrears to the region's public budget increased by 16% compared to the beginning of the year, and the number of active businesses registered with local tax authorities decreased by 15 units (unofficial figures could be more dramatic).

Authorities in the region will have to resort to budgetary optimisations in parallel with the tightening of fiscal pressure and controls. Given that the tax burden in the region is relatively low (at the end of 2021 the share of budget revenue in GDP was only 18%) and the volume of tax arrears is increasing, the authorities in the region will most likely increase some taxes or levies as well as intensify tax controls to make private companies honour their tax obligations. As regards the optimisations, there will be a freeze on expenditures and capital investment, optimisation of the work of public institutions, interruptions to hot water supplies, measures to save electricity, etc. in order to ease the pressure on the region's budget. 

In addition to the acute economic and social crises, 2022 has also exacerbated the demographic problem. At the end of 2021, the number of live births was 9% lower and the number of deaths - 24% higher than in 2020. At the same time, the ratio of deaths to live births has steadily increased over the last few years from 1.6 at the end of 2018 to 2.9 in 2021-2022 (for every person born there are 3 deaths). This problem is aggravated by the phenomenon of emigration, which has intensified in 2022 against the background of the war in Ukraine and the economic and social crises in the region. This trend will accelerate population ageing, undermining the region's potential and natural rate of economic growth. Especially in a situation where only about 53% of the population is of working age (the share has been gradually decreasing over the last few years) and more than half of the working age population is economically inactive.

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This publication is produced with the support of the ‘Confidence-Building Measures’ programme, funded by the European Union and implemented by the United Nations Development Programme. The views expressed in this document are those of the authors and do not reflect the views of the European Union or the United Nations Development Programme. The authors are also aware of the risks related to possible statistical data quality issues, which they have used with extreme caution.