Is trade deficit a danger? Economic analysis by Info-Prim Neo

The balance-of-trade deficit totaled 1.595,3 billion USD in half a year, almost the same figure as for the whole 2006. The authorities and experts anticipate a negative balance of trade of 3 billion USD in 2008. Even if the monthly exports grew at a record rate this year, compared with the previous years, the imports also rose and the trade deficit reached a new record. The trade deficit increased almost threefold during the last four years, from 783.0 million USD in 2004 to 2.348,0 billion USD in 2007. Is the rising deficit a danger to the Moldovan economy? As an immediate consequence, the current account deficit rose by 32.4% in the first quarter, exceeding 250 million USD. “The high growth rate of the imports of goods (39.6%), which is higher than the grow rate of exports (26.7%), pushed the trade balance to 688.29 million USD, determining the balance of payments. It should be noted that the high penetration rate of the national economy (the ratio of imports to the GDP), at a time when the import prices increase considerably, has a significant impact on the level of prices inside the country,” the National Bank of Moldova said at the end of the first quarter. The discrepancies became wider over six months. Imports grew at a higher rate than exports. For many years, the structure of foreign trade by categories of products and geographical areas has not changed significantly to give reasons for optimism for the next years and this is worrisome. The formulated export promotion strategies have not radically changed the situation. The list of goods remained the same. Most of the exports come from the agricultural sector and processing industry and this tendency has not changed. The goods delivered after processed (lohn) make up about 30% of the exports to the European Union. These goods are processed under contracts with foreign partners from their raw material. Such types of contracts are based on Moldova’s cheap labor force. “One year and a half after the entrance into force of the Investment Attraction and Export Promotion Strategy for 2006-2015, a large number of the measures stipulated in the plan of action for implementing the strategy have not been carried out yet, mainly measures aimed at improving the legislative and institutional frameworks,” says the last number of the Economic Monitor published by IDIS ”Viitorul”. [Remittances, investments and foreign currency reserves cover a large part of the deficit] The trade balance is the only current account position in deficit, the balance of the other positions being in surplus. In the first quarter, 63.7% of the trade balance was covered by the remittances sent home by the Moldovans working abroad and the net inflows of foreign investments, which have increased considerably. The foreign investments attracted over January-March into the national economy were 1.6 times larger than in the first three months of 2007. Over 50% of the foreign investments attracted into Moldova come from the EU member states. The balance-of-trade deficit can be also covered by the central bank’s foreign currency reserves, which have also increased considerably, reaching the level projected for 2008 during seven months. The sources from which the trade balance can be covered do not look terminable and the high growth rate of imports will probably decrease when the internal market becomes saturated. It is not excluded that the internal consumption will diminish after the boom from the past three years. The rise in trade deficit does not pose a danger if the imports of technological goods, which take a firm second position among the imported goods, and of capital lead to productivity growths and, finally, to a sustainable economic growth. The imports of machines, appliances and equipment have notably increased in the past years, rising by 52.2% in the first half of 2008. “It is not right to consider the trade deficit a bad thing, without taking into account the imports of technological goods and capital,” many experts consider. The deficit coming from the imports of raw material, tools and equipment, especially if these go to export oriented companies, will generate higher productivity in the future as the enterprises will be better equipped. The authorities and companies should deal with the diversification of the range of products and of the markets where the Moldovan goods could be sold. The statistical data concerning the structure of foreign trade by types of goods show that the footwear, textiles and textile articles, fats and animal and vegetable oils are Moldova’s strong points from the angle of the trade deficit. The imports of such products increased, but they have a reduced value added. The 1.9-time increase in the exports of machines, apparatuses and equipment in terms of money, which had a share of 9.7% in the first half of 2008, as opposed to 6.4% in the corresponding period last year, inspires optimism. It is the duty of the decision makers to insure equilibrium in the foreign trade. But this should also be the duty of the companies that would become more competitive on the foreign markets if they invested in the modernization of the production process. If we speak about the present situation, the exports have been hit by the appreciation of the leu, which strengthened its positions against the US dollar as well as against the euro during the last weeks. This appreciation will have an impact on the exports to the EU, which make up half of Moldova’s exports.