On November 7, the International Monetary Fund is to announce if it will sign a new agreement with the Republic of Moldova. Before this event, IPN News Agency conducted an interview with Deputy Prime Minister Octavian Calmac, Minister of Economy.
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– Mister Minister, how do you assess the economic situation of Moldova and what actions the Government takes to improve the business climate?
– Moldova’s economy during the last few years has undergone a slight transformation. We are trying to introduce a new economic model. We want to replace the consumption-based model with an investment-based one. This is a long-lasting process. The confidence of national and foreign investors in the Government’s actions, in the country must be restored for building such a model. For the purpose, we need political, economic, financial and banking stability and a series of actions in the judicial system, where we face the biggest constrains for the business sector. We must also continue the fight against corruption. This is the package of elements that can build the necessary entrepreneurial environment. In parallel, the Ministry of Economy works alongside other governmental institutions to improve the business climate and to create opportunities and attractive elements comparable with those existing in the region.
What did we do to reduce the administrative burden on businesses? We introduced that moratorium on inspections. The standard procedure for carrying out inspections was adopted by Parliament. According to this, the governmental institutions must plan the inspections, notify the business entities and impose fines only if there are risks of tax evasion. For newly founded enterprises, the inspections were suspended for three years. Even if inspections are carried out, they must be recommendatory in character. The number of inspection bodies was reduced. We are waiting for the law to be published so as to start to implement it. It was decided to create a Common Electronic Register of Inspections, where each business entity that works legally will have a cell to see all the planned inspections and results. If more institutions have planned inspections at a business entity, these should be merged.
On the other hand, serious steps were taken to simplify the customs and fiscal administration procedures by annulling a number of decisions taken by the Customs Service at internal level and by reducing the reporting burden. We proposed an initiative that is to be put to the vote in Parliament soon and is to be implemented staring with 2017. There will be one report instead of five required of business entities. We will use a series of promotional instruments. For small and medium-sized enterprises, which account for the largest part of the economy, we have training programs and programs to support the participation in national and international exhibitions and to attract investments for them. Access to financing remains the main constraint. We have a series of programs to support the SMEs in rural areas and programs intended for young people and women. Starting with next year, there will be implemented a program designed for all the enterprises that want to make use of the provisions of the Association Agreement with the EU, with financing with a grant component from European funds provided through the EBRD. We didn’t initiate the program this year because the banking system of Moldova undergoes changes and the program was postponed until the start of next year. The instrument is available for three Eastern Partnership countries – Ukraine, Georgia, and the Republic of Moldova. It is a long-term program that provides tens of millions of euros for the private sector for projects to promote exports and services in the European area.
There are a series of other support instruments that we promote like the development of Free Economic Zones and Industrial Parks, identification of partners, strengthening of capacities of institutions, a series of strategies and vision documents needed by the private sector. We have a program for business entities to take part in exhibitions, to identify partners, to obtain the necessary consultancy while implementing an investment project. For the third and fourth quarters, we planned over ten missions of Moldovan businessmen to business forums, contacts with the authorities and other business entities. In parallel, we hold negotiations with representatives of Western countries to obtain additional financing for the Republic of Moldova, mainly grants or cheap loans.
– You mentioned a number of actions, but what results have been achieved?
– The moratorium expired at the end of September and the Ministry of Economy was mandated to authorize inspections if there is clear evidence of evasion or problems that require intervention. As a result of the compiled report, we authorized not more than 200 on-the-spot inspections. In most of the cases, these were related to the work of the Tax Service, where most of the payments are made and there are risks of tax evasion. In parallel, we authorized several inspections by the Labor Inspectorate and the Ecological Inspectorate, but only 200 for the multiple enterprises. It was a kind of new impetus for the business entities, especially because the loans were expensive and the economic activity was difficult at the start of the year and the pressure exerted on them by the inspection bodies in 2015 was great. On average, there were by 3-4 inspections a year.
– Were these inspections abusive?
– I presume they were abusive. The governmental inspection institutions often committed abuses, especially in relation to those who worked legally. These reported, informed and tried to maintain a transparent communication regime and were, in fact, the victims of this system. By introducing the moratorium and by making rules clearer, at least correctness as regards intervention in the work of business entities was ensured. We are trying to lay emphasis on those who work illegally and do not declare their entrepreneurial activities. We will work more with these so as to bring them all under the umbrella of the legal framework.
– What concrete measures are taken to reduce the underground economy?
– It is a complex process. The illicit imports into Moldova are a channel for using the underground economy. Most of the measures to manage risks in the customs administration process were taken in this regard. Despite the decline in exports and imports in 2015 and 2016, the amounts collected by the Customs Service have increased even if the taxes weren’t raised. The results are already visible and can be seen in statistics. It is for the first time in history that the customs collected over 1 billion lei a month into the state budget. Similar work was done to manage risks in the sensitive areas, at less credible business entities. Fiscal administration was also improved. Actions were also taken to improve the legal framework.
We are yet dissatisfied with the paten-based trade. We see that this instrument was used by many traders to legalize products imported illegally or at a much lower value declared at customs posts. We submitted a proposal for patent holders – on the one hand, we extend the access of these individual entrepreneurs to more types of activity; on the other hand, we ensure correctness in taxing these. The common tax we suggest is of only 1% of the revenues. These will be able to import goods that they will have to declare and the turnover was raised from 300,000 to 600,000 lei. When the level of 600,000 lei is passed, the payment of VAT becomes mandatory. This enables them to interact with large business entities. The obligation to have cash register is the only inconvenience, but the price of this machine will be deducted from the taxes that are to be paid. In other words, the state will subsidize the purchase of the cash register.
– Whey the patent-holders oppose and protest then?
– I presume their sales are much larger than the legal ceilings. The initial patent conception didn’t envision the legalization of a distribution network. The conception was implemented in the 1990s, when the economy was in a deep crisis and there was a shortage of jobs. It was a short-term solution. When we try to structure a legal business, when the consumers must have access to a guaranteed product, applying the international practice in this field is inevitable. I think using the patent for 20 years was enough for obtaining an appropriate business culture, on the one hand, and for shifting to civilized trade to respect all the rights of consumers, on the other hand.
The first elements of the new conception were planned in the medium-term expenditure framework that was accepted by the Government in September. There are a number of elements related to the individual entrepreneurial activity that we propose in the context of the fiscal-budgetary policy. The Government will soon approve it and Parliament will then adopt it. The objective is to start implementing it on January 1, 2017 as the patent-based trade will be banned from then. Patent will remain for particular types of crafts only.
– At the end of September, you said the Russian Federation will soon lift the restrictions on the import of Moldovan products. A roadmap was worked out. Is the dialogue advancing?
– As regards the Russian Federation, I think we managed in 2016 to establish a high-level dialogue. I had three meetings with Russian Deputy Prime Minister Dmitry Rogozin. These enabled us to open discussions on this roadmap and we are sure that the joint commission for commercial-economic cooperation will convene in November, after a hiatus of five years. The commission is to sign the roadmap that was generally finalized in the last meeting with Rogozin. It consists of a number of elements. Only about 50% of the draft disseminated by the press remained. We cannot say what namely as it is yet to be signed.
We go with three key messages to the Russian Federation. The first: elimination of customs duties imposed on Moldovan products. There are 19 categories of products subject to customs duties and these affected 85% of the exports to Russia. The second measure concerns the non-tariff measures applied to our products – requirements towards alcoholic beverages, fruit and vegetables and those lists of companies. We want to pass from lists of companies to lists of reasoned requirements applicable to all the national or international producers so that we shift to civilized, modern, bilateral trade safe for consumers. We consider our infrastructure in the sanitary, phytosanitary and veterinary sectors is sufficiently equipped to guarantee that the products exported from Moldova are inoffensive. The third element is related more to a technical problem that affects our carriers – the transit of our deliveries though the Russian Federation to third countries.
These subjects and those concerning energy and migration will be discussed by experts at the end of this November. The commission meets in Moscow, by rotation.
– The IMF Board convenes in November. Will we have a new agreement? Recently, two U.S. senators requested that the IMF should make sure that the provided money does not reach those who stole billions of lei from the banking system. Can such requests influence the decision to sign the accord?
– We reached a staff-level agreement in July. A series of preconditions, prior actions were set for the authorities. One chapter concerned the consolidation of the banking system, the taken actions. The taken decisions can be seen, including the assumption of responsibility by Government for a number of laws. The second chapter referred to the appropriate management of budget incomes and costs amid the absence of financing from the foreign partners. We cut the incomes and costs without affecting the social policy instruments. The third block refers to the energy sector that we had to stabilize so as not to witness a system collapse. As the IMF representative said, we have a positive report produced by the team of negotiators. The Board will announce its decision as regards the new, three-year program with the Republic of Moldova, with all the related financing. Immediately afterward, the IMF will unblock the first tranche, followed by disbursements by the World Bank and the European Commission. The IMF will provide about US$180 million, with the first tranche being of US$ 25 million. The World Bank will allocate US$ 45 million, while the European Commission €50 million. All these institutions launched the internal disbursement procedures.
However, the IMF is a technocratic financial institution where the political factor does not have a say. There are procedures and rules. As long as the Republic of Moldova respects all these rules and procedures, there are no risks that the decisions taken earlier will be suspended or annulled. We are appreciated for the made efforts and I want to assure you that these resources will be disbursed.
– What about the implementation of the economic part of the Association Agreement with the EU, which is the DCFTA?
– We have a series of commitments that are divided into several categories. We have the legal aspect that consumes most of the human resources at governmental institutions. We have over 300 legal acts that must be implemented. In 2016 we managed to restore the normal pace of commitment implementation. At the beginning of this year, over 2/3 of the commitments were overdue. We have now fulfilled 80% of the commitments. The sanitary, phytosanitary and veterinary measures are the most difficult ones. These will enable us to export products of animal origin to the European market. At legislative level, over 240 European technical regulations are to be implemented in addition to the 300 mentioned above. The second element concerns the National Food Safety Agency, consolidation of lab infrastructure and strengthening of the capacity to cope with challenges in the field and I’m glad that we managed to deal with the African swine fever and there are no other hotbeds. We have yet difficulties related to the institutional capacities in environment, transport regulation, air transport where a new Air Code is needed. We have difficulties in the maritime transport services sector where we must ensure clarity and better management of Moldova’s colors. We have a series of energy projects to ensure interconnection with the European market, but these projects are costly and need a systemic approach. We make effort to move on in practically all the areas.
– As we are in an election campaign and have candidates who are for terminating the Association Agreement with the EU, can you anticipate what will happen if we have a President with such views?
– As the Constitutional Court confirmed, Moldova remains a parliamentary republic and, if the President does not promulgate particular laws initiated by the Government or Parliament, this will be obliged to promulgate them. So, the current legal framework enables us to continue on the path of European integration. The Association Agreement was a lifebuoy for the Moldovan economy following the imposition of bans. This is against no one. It is only an additional opportunity for the Moldovan business sector. Statistics show that 64% of our trade is oriented to the EU. It would be native to say that this accord is useless and inconvenient and should be thus abrogated. It allows renegotiating some of the elements and we will return to these in time.
– For example?
– We work to obtain the recognition of compliance certificates so as to avoid the double certification of our products in the EU and vice versa. This implies too high costs. For example, access to financing. We want to be treated in regional context with the same business financing instruments as other countries, like Romania, so that our businesses do not migrate to Romania. We want similar projects so as to maintain the economic capacity in the country.
– What Moldovan products are now in demand in the EU? Can out entrepreneurs satisfy the demand?
– The processed products are the most popular. We focus mainly on intermediary semi-finished products. We have the light industry or textiles and the auto industry (making of cars and spare parts for them). Taken together, these account for 50-55% of the transactions with the EU. On another dimension, we have grains, sugar, alcoholic beverages and food products that found a place on the EU market. Except for sugar and wines, the finished products could not penetrate the EU market. The EU also goes through a period of economic hardships and the prices there were reduced and we cannot ensure access and competition to this market. I refer to fresh fruit. But we make effort to ensure reasonable and attractive competition and to obtain the right to export products of animal origin to the EU. We want to start with fresh eggs, powdered milk and refrigerated meat. In this area, we invested and advanced a lot.
As to the European products that compete directly with the national products (about 7%), the competition refers rather to assortment and diversity as in the case of prosciutto, more sophisticated pressed cheese or degreased milk products. In fact, pressure on our producers is exerted by the imports from the East, especially Ukraine. We even applied a temporary commercial protection measure and this gave our milk and meat businesses a break to improve their situation. We will analyze its results and will investigate the effects. If our industries recovered, it won’t be extended.
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Mariana Galben, IPN
