The draft budget law for 2009 provides for higher salaries for budget-paid employees, allowances for youth and resources for implementing social programs. The law was drafted by the Ministry of Finance and submitted to the Government. The budget for the next year was built on a 6.0% growth of the Gross Domestic Product to 70.5 billion lei, an average inflation rate of 10%, a 19% rise in exports and a 24% increase in imports and an exchange rate of 9.12 lei for a dollar. The draft budget law for 2009 does not envision structural reforms, the public money being planned for use on current necessities. The personnel expenditure will rise by 45.98% compared with 2008, up to 3.971,6 billion lei. The state budget spending at all the divisions will increase by 21.0%. The largest part of the public spending will be used in the social sphere and to solve social problems (19.71 billion lei or 28% of the GDP). “The budget has an electoral character as 68.2% of the national public budget expenditure will go to the social sphere,” say experts. The authorities say yet that the social expenditure makes up 68.5% of the 2008 budget, as against 62.6% in 2007. The expenses for police and national security in 2009 will rise by 40.6% on 2008, for science and innovation – by 29.8%, for social assistance and insurance – by 30.9%, for servicing the state debt – by 34.3%, for education – by 22.4%, for healthcare – by 22.7%, for culture, arts and sport – by 3.5%. At the same time, the Government will allocate less money for national defense, transport and road management, environment protection and economy. The budget for 2009 will be by only 3.7% larger than the budget for this year. The rise will be mainly due to the resources collected by the local public authorities. Capital investment is estimated to rise just 3.7% from the 2008 budget, mainly due to local authorities. It is a social budget like the previous ones rather than a budget for developing the Republic of Moldova. The budget meets the interests of the social groups, but does not envision development steps. The state budget allocations for social assistance and insurance will total 2.57 billion lei (14.26% of the total spending), for education – 1.9 billion lei (10.7%), for healthcare 2.55 billion lei (14.19%), for public order and national security – 1.38 billion lei (7.67%). The state budget revenues will come to 17.2 billion lei, an increase of 13.6% compared with 2008. The spending will be 18.0 billion lei, a 21% rise year on year. Consequently, the state budget deficit will be 784.3 million lei. About 75% of the state budget revenues will be obtained from indirect taxes, especially VAT (64.35%), mainly VAT on imported goods. The Government anticipates that the imports will again exceed exports in 2009. The balance-of-trade deficit will be 4.45 billion US dollars. Expectedly, imports will total 6.5 billion US and exceed exports 3.1 times. The revenues from value added tax are underestimated as they are based on a too low exchange rate, while the VAT return (1.8 billion lei) is overestimated, economists consider. They estimate that the state in 2008 missed revenues of about 500 million lei as a result of the appreciation of the leu, as the imports are performed in foreign currency, while the customs duties are paid in lei. Economic analysts do not exclude problems related to the VAT return. In 2009, the state will limit the types of capital investments (spending) the VAT on which is returned, favoring those that are subsidized from state budget; will specify when to pay VAT on the imported services accompanying the compensatory products covered by the passive legalization regime. [Budget deficit of 1.3% of the GDP in 2009] Experts predict that the 2009 national public budget deficit of 1.3% of the GDP is probably the result of the tax bonanza of the last two years (the direct incomes have decreased), and of the rise in certain social expenses (600 million lei is planned in the 2009 budget for implementing the law on pay grades in the budgetary sector, while about 500 million lei to offset the rise in salaries in 2008 and other factors that have an impact on salaries). The state budget deficit for the next year is 3.5 times larger than the one planned for this year – 784.3 million lei as against 223.7 million lei. “A deficit of 1.3% of the GDP shouldn’t arouse concern, especially because the revenues planned for 2009 seem to be underestimated,” economists say. But the rate at which the deficit grows should be a reason for concern. In 2007, the national public budget deficit was 0.2% of the GDP, while that forecast for the next year is over six times larger. The Ministry of Finance calculated the state budget revenues taking into account the foreign loans (805 million lei) and the resources from selling and privatizing public property (390.4 million lei). The foreign grants are expected to total 819.2 million lei, including 558.1 million lei (61.2 million USD) for supporting the budget and 261.1 million lei (28.6 million USD) for financing projects from foreign sources – the European Commission, the Government of the Netherlands, the Government of the UK, the World Bank will be among the major donors. [Inflation and appreciation of the leu, risk factors] The Ministry of Finance expects that the inflation rate in 2009 will be 10.0%, while the exchange rate – 9.12 lei per dollar. The forecasts show a decrease in the growth rate of prices and a continuous appreciation of the national currency. But “the evolution of the exchange rate of the national currency supported by the massive inflows of foreign currency could exert additional pressure on the rising imports and could have a double influence on the budget revenues and expenditure,” the Ministry of Finance says. It considers that the continuous appreciation of the national currency will pose a risk to the state budget. As a result, the Government, in order to re-capitalize the National Bank, will use a part of the resources for raising the authorized capital of the central bank or will issue state securities so as to cover the debt balance of the general reserve fund. This necessitates additional financial recourses for serving the internally held public debt. A sum of 981.4 million lei was planned in the state budget for implementing projects with foreign financing. This is by 163.7 million lei or 14.3% less compared with 2008, mainly due to the appreciation of the national currency. On the other hand, the inflation could hinder the real growth of the budget expenditure and could determine additional expenses in the budgetary sector. Bank officials and economic analysts predict that the Moldovan leu could start depreciating this autumn and that the inflation for 2009 could be higher than the Government expects.