“The revival of the economy of the Republic of Moldova in the next period will depend on the capacity of the Chisinau authorities to respond to the current challenges. The limited budgetary resources can be supplemented by the support of external partners, based on a coherent and transparent plan of post-crisis measures”
Forecasts
One month after the establishment of the state of emergency in the Republic of Moldova, the consequences of the COVID-19 crisis are more sizeable, both among the population, as well as the economic agents and employees. In a recent interview, Prime Minister Ion Chicu mentioned that the state lost 40% of its budget revenues because it did not collect money from taxes. Following the meeting of the Supreme Security Council on April 7, President Igor Dodon stated that the forecasts of the Ministry of Finance indicate, in optimistic terms, a reduction of GDP by 3% and a decrease of the planned budget revenues by 7.3 billion lei.
On April 14, the IMF revised the forecasts for Moldova's economic growth from + 3.8% in 2020 and 2021 to a recession of -3% in 2020 and an increase of + 4.1% in 2021 in the baseline scenario. Respectively, the 2-year cumulative economic growth was revised down by 6.5 percentage points compared to the aggregate value for emerging countries of -3.8%. If the current forecasts for 2020 and 2021 will be confirmed and we assume that the economy would grow steadily to 3.8% per year in the absence of the crisis, the country's GDP should accelerate 4.5% per year over a 10-year period from 2021 to recover the value of GDP lost during the crisis and reach the GDP performance that would have increased steadily to 3.8%. Alternative scenarios would be 34 years at a 4% increase or 6 years at a 5% increase (Figure 1).
Figure 1: Scenarios for recovery of lost GDP
Source: IMF, authors' calculations
Role of the state
The Federal Bank of San Francisco (USA) has analyzed the economic effects of pandemics from the 14th century until today in the light of real natural interest rate concept. This is the equilibrium rate between the supply of savings and the demand for investment, so that prices remain stable. Research shows that after the pandemic, the real natural interest rate decreases because citizens save more for reasons of either safety or the desire to recover losses. At the same time, demand for investment is declining. Considering the multiplier economic effects of consumption in tandem with the need of the economy of the Republic of Moldova to grow by at least 4.5% -5% per year, a more active role of the state in boosting the economy in the coming years is expected.
Being a country with limited financial resources, the main dilemma of the authorities is to find the balance between how much resources they allocate for social aid and fiscal incentives to keep the current contractual relations intact, on the one hand, and how many resources are destined to relaunch the economy. Nowadays, support initiatives such as (1) subsidizing and restoring social contributions (320 million lei), (2) unemployment aid, guaranteed income and social assistance (449 million lei), (3) interest subsidizing (90 million lei) ) and VAT refund (1 billion lei) are estimated at 0.87% of GDP. Respectively, the fiscal burden is relatively small compared to the fiscal measures announced by other emerging countries such as Romania - 2%, Russia - 1.4%, Czech Republic - 2%, Latvia - 6% (Figure 2).
Figure 2: Tax packages announced vs. number of COVID-19 confirmations
Source: IMF, Wolrdometers.info, author calculations
At the same time, the interaction between the government and external partners will play a key role in managing the crisis and post-crisis situation. This is because the budgetary resources for relaunching the economy can be supplemented by the assistance provided by external partners. According to the latest statements of Moldovan officials, the IMF is ready to award between 220 and 230 mln. USD to the Republic of Moldova, and a decision in this regard is to be taken in the near future. At the same time, the EU announced an 87 million EUR non-refundable support package to support the Republic of Moldova to respond to the crisis COVID-19, complementary to the economic support of up to 500 mln. EUR for the Eastern Partnership countries through the European Fund for Sustainable Development and the preferential credit lines of 100 million EUR for the SME sector. Additionally, the Republic of Moldova could capitalize on the remaining two tranches of the current EU macro-financial assistance program (up to 70 million EUR) which expire in July 2020. Currently, the government is making efforts to meet the remaining conditions. Moreover, the European Union is examining the possibility of launching a new anti-crisis macro-financial assistance framework for countries such as the Republic of Moldova.
In this context, the government needs to identify the priority sectors for targeting the allocated funds, including by facilitating the access of SMEs to lending programs, guaranteeing loans and covering interest rates on credit lines. At the same time, these resources can be used for measures to support and retrain the unemployed, but also for a possible revision of the technical unemployment scheme by reducing the rate of forced redundancies. Last but not least, the Chisinau authorities must communicate actively and transparently about the planned post-crisis measures and the budgetary coverage for these measures. These estimates can be used to request additional support from the EU and the IMF, following the model of EU states in communication with Brussels.
Areas of intervention
Given that the complete reopening of the economy and the return to normalcy for some sectors is conditioned by the appearance of a vaccine or the immunity of citizens against COVID-19, it is understandable the reluctance of the authorities not to directly compensate the salaries of the employees under technical unemployment for an indefinite period. However, this implicit assumption of higher unemployment should also come with the responsibility of providing jobs for these people, especially in the immediate future when the role of the state in the economy will become greater. Respectively, it is urgent for the state to announce its macroeconomic vision for the post-crisis period in order to instill confidence in the unemployed and those in need tomorrow.
In this regard, the government should reinforce the message that a period of de-globalization is likely to follow, leading to a regionalization of the value chains. Respectively, the Republic of Moldova is in fierce competition with the Balkan countries, Eastern Europe and Turkey to attract those production assets that will be moved from China to Europe to be closer to the local consumer. At least 4 intervention pillars are needed to materialize this vision.
First of all, it is necessary to identify the strategic and priority sectors that could be included in the regional value chain and at the same time that could substitute some of the country's imports. In addition to IT and agriculture, the mechanical and electronic industry can offer competitive advantages. For example, the assembly or production of water pumps could be part of both the European value chain and substitute imports of pumps for the agricultural sector.
The second aspect concerns the retraining of the unemployed, especially those in the most affected sectors, such as HoReCa, tourism, trade and seasonal workers returning from abroad. During the period when they receive unemployment benefits, it would be beneficial for the National Employment Agency to train the unemployed at distance with technical capabilities for the mechanical industry, electronics, construction and other sectors identified primarily by the state. Part of the financial support from the International Monetary Fund amounting to 220-230 mln. USD could be used in this direction.
The third pillar would be fiscal measures to support investments in machinery (accelerated depreciation, for example), guarantee loans for equipment and others. This should also be complemented by public procurement of machinery for state-owned enterprises. Within the limits of the financial possibilities, the assistance from the IMF and the EU could be used.
The pillar of resistance would be massive investments in infrastructure that would include hospitals, national roads, logistics centers and other objects of national importance. Apart from the fact that this would become the main artery of the country's reindustrialization vision, public infrastructure projects could compensate for the decrease of the consumption of the aforementioned population and boost economic growth to a minimum of 4.5% -5% per year to recover the lost GDP. In the latest country report from the IMF, it is estimated that if the budgetary cost of VAT exemptions of 1% of GDP were directed to direct transfers to the population or the reduction of income tax for natural or legal persons, then it could generate additional up to 2.6% of GDP. However, considering the structural shock over consumption after the pandemic, their multiplier could be diminished. At the same time, the redirection of budgetary spending to public infrastructure could additionally generate between 2% and 4.3% of GDP (Figure 3).
Figure 3: Impact on GDP by redirecting the budgetary cost for VAT exemptions of 1% of GDP
Source: IMF
We could conclude that investments in infrastructure can significantly accelerate economic growth compared to other budgetary expenditures. However, in order Moldova to benefit the most from this economic multiplier, transparency and maximum efficiency of public investments are needed. This can only be achieved with the active involvement of the development partners, business associations, civil society and the political opposition to be attracted in the process of consulting and monitoring the implementation of projects. Infrastructure investments should be financed by a combination of assistance and external loans from the IMF, EU, EIB, EBRD, US, Russia, international (Eurobond) and domestic financial markets (indirect financing through the purchase of state securities by the National Bank of Moldova), so that the amount invested reaches 1-1.5 bln. USD for the next 2-3 years.
Dumitru Vicol, Mihai Mogîldea
- Dumitru Vicol is a strategist on emerging markets at an American bank in London. He was involved in projects on the promotion and development of financial instruments in Moldova. He is a graduate of the London School of Economics (UK).
- Mihai Mogildea works as a Team Leader of the Europeanisation program, within the Institute for European Policies and Reforms (IPRE). He is a graduate of the master's program in European Political and Administrative Studies at the College of Europe (Bruges).
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This Op-Ed was published within the project "We and Europe - Analysis of EU – Moldova relations through innovative media and analytical products", implemented by the Institute for European Policies and Reforms (IPRE), in partnership with IPN and Radio Chisinau, with the support of the Konrad Adenauer Foundation. Opinions presented in this editorial do not necessarily correspond to the position of the donors.