IMF experts suggest lines of defense against inflation in Moldova

A recently published article titled “Inflation in Moldova”, authored by IMF experts Nikoloz Gigineishvili and Johan Mathisen, suggest the Moldovan Government and the central bank to consider building several lines of defense against inflation, deemed a reason for concern. According to the authors, inflation is sometimes referred to as the “silent thief” as it erodes the value of money - in your pocket, under your mattress, and your next paycheck. Inflation is also detrimental to the economy as it tends to reduce investment and slow down economic growth. Therefore, the relatively high level of inflation in Moldova is indeed a cause for concern. Obviously the recent increase in food prices has made the achieving of the objective of low and stable inflation more difficult in the short term. This is because the so-called “first round effect” of the higher food prices has been – as it should be – accommodated in the overall price level. The unfortunate result is that many people find it harder to make ends meet. There is therefore an increased urgency to put in place a properly targeted social assistance system. So as to not make the situation even worse, it is essential to halt the “secondary round effect”, namely that the higher food prices spill over into prices of other goods. What can be done? Inflation is not a new phenomenon, and other countries in the region have been successful in bringing down inflation to low levels. The IMF experts suggest the problem is that there is just too much money in Moldova’s economy. In the last year the stock of money grew at a phenomenal rate of 40 percent, and exceeded 27 billion lei. With weak growth following the drought, this means that there was too much money chasing too few goods. It is not surprising in these circumstances that prices have risen and Moldova has been importing more and more foreign goods to make up for the shortfall. This is where the National Bank and the Government can play a crucial role. These authorities have to make it less attractive to spend and more attractive to save. That is monetary policy can lead to a reduction in the amount of money in the economy, ultimately through shifts in borrowing and lending rates. This makes it more costly to borrow for non productive purposes and encourages households to save. In Moldova, this means that higher interest rates is the first line of defense against the secondary round effect of higher food prices A second line of defense is to prevent speculation against the national currency. At the moment it is a highly profitable business to borrow at low interest rates abroad and lend at high interest rates in Moldova. This adds to money woes. The way the National Bank prevents this is through taxing such operations through reserve requirements on banks. This approach has been successful throughout Europe, and has been successful in Moldova. In early 2007, inflation was coming down quickly, as the National Bank of Moldova raised its base rate in line with best international practices. With the impact of the drought beginning to fade, strong action by the NBM should quickly reestablish price stability, say the IMF experts in the article titled “Inflation in Moldova”.