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Fluctuation of exchange rate, what it depends on and what we should know about it. IPN debate


https://www.ipn.md/index.php/en/fluctuation-of-exchange-rate-what-it-depends-on-and-what-8004_1078329.html

The fluctuation of the exchange rate in the period is a reason for concern for many people. This year it comes together with health, social, economic and political concerns that are more pronounced that in other periods. Experts invited to IPN’s public debate “Fluctuation of exchange rate, what it depends on and what we should know about it” discussed why this phenomenon happens and what should be known and done to diminish these concerns.

Igor Boțan, the standing experts of IPN’s project, said the financial problems are solved by the National Bank of Moldova (NBM) whose key objective is to ensure and maintain the stability of price. “If we take this objective into account, we understand how the NBM acts when it sets the exchange rate. The exchange rate is set based on the supply and demand on the market. But we should first give the definition – the exchange rate is the price of a currency of a country expressed in monetary units of another country,” stated the expert, noting there are several exchange rates applied by the NBM – the reference exchange rate that is set daily and the market exchange rate that is formed at interbank level.

According to him, there are many factors that influence the exchange rate. These are internal economic factors related to the volume of production, labor productivity, quality of goods, purchasing power, etc. These factors have great inertia, but often generate sudden fluctuations. There are also financial-monetary factors, the interest rate on the market, the budget deficit, etc. and political factors, such as the political and legislative stability in the country, long-term national projects and others. The external political factors, such as alliances, military conflicts, free trade areas, commercial partnerships and also speculative actions and others have an influence too.

Veaceslav Ioniță, economic expert of the Institute for Development and Social Initiatives “Viitorul”, said that when it goes to the exchange rate, the people usually pay attention to the euro and dollar even if the Republic of Moldova has economic relations also with other states that influence us. “This week we witnessed several records – for the first time in 2020 – when the Moldovan lei depreciated against ten most important currencies of the currency basket. Also this week, the leu, after three years, crossed the ceiling of 21 lei per euro. Two diametrically opposed tendencies are witnessed – the euro that became much stronger and the regional currencies that depreciated considerably against the dollar.

“The question was, what does the Moldovan leu do? Follows the euro, strengthens itself against the dollar, as it happens in the case of the Romanian lei or, on the contrary, depreciates as the regional currencies do and we have inflation? It followed rather the path of the dollar. Currently, the Moldovan leu is almost at the same level as the dollar, compared with the start of the year. But we have two months and a half during which our leu has depreciated continuously against the euro. Now the feeling of discomfort for many people is related to this indicator we called the “currency shock”. What do I mean? Our citizens are dissatisfied and worried, regardless of what’s going on. If the leu appreciates considerably, our citizens are concerned. If the lei deprecates considerably, our citizens are also concerned. The people do not like instability,” explained Veaceslav Ioniță. Acceding to him, during the past two months and a half, the leu has deprecated against the euro because the euro became much stronger at international level, while against the regional currencies, the leu is much stronger.

Transparency International Moldova economic expert Veaceslav Negruța, ex-minister of finance, said that when it goes to the currency market, we should note that the key goal of the NBM is to ensure the stability of prices and this is different from the three objectives pursued by the Bank before the amendment of the legislation in 2007. Since then, the NBM has taken care of the stability of prices, not yet of the exchange rate even if the NBM is the only institution that is empowered to intervene in the currency market when the fluctuations are larger than the normal ones. This is an important aspect as the NBM has rather the supervision duty and intervenes only in particular situations.

For example, in November 2020 the NBM bought euros and dollars and this intervention came to US$144 million. Respectively, a particular quantity of lei was put into circulation to strop the deflation tendency. The NBM governor said that inflation at the end of this year could be 0%, but the inflation target is of 5%. The NBM now fights deflation and this is its main objective.

In another development, the expert said the supply and demand in relation to the dollar and euro depend on several factors, such as remittances from abroad, exports as a result of which currency enters the country and foreign loans in the public sector and the private one.

The public debate “Fluctuation of exchange rate, what it depends on and what we should know about it?” was the 162th installment of the series “Developing political culture through public debates” that is supported by the Hanns Seidel Foundation.