COUNTRY REPORT
Belarus Moldova
June 2000
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ISSN 1356-4137
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Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK Contents
3 Summary
Belarus
5 Political structure 6 Economic structure 6 Annual indicators 7 Quarterly indicators 8 Outlook for 2000-01 8 Political forecast 9 Economic policy outlook 10 Economic forecast 12 The political scene 16 Economic policy 18 The domestic economy 20 Foreign trade and payments
Moldova
22 Political structure 23 Economic structure 23 Annual indicators 24 Quarterly indicators 25 Outlook for 2000-01 25 Political forecast 27 Economic policy outlook 27 Economic forecast 30 The political scene 33 Economic policy 36 The domestic economy 39 Foreign trade and payments
List of tables
10 Belarus: forecast summary 11 Belarus: international assumptions summary 18 Belarus: consumer prices 19 Belarus: exchange rate 20 Belarus: merchandise trade, 1999 21 Belarus: current account 28 Moldova: international assumptions summary
EIU Country Report June 2000 © The Economist Intelligence Unit Limited 2000 2
28 Moldova: forecast summary 37 Moldova: consumer prices 37 Moldova: exchange rate 38 Moldova: wages 39 Moldova: balance of payments 40 Moldova: trade, Jan-Feb 2000 41 Moldova: composition of trade, Jan-Feb
List of figures
11 Belarus: gross domestic product 18 Belarus: money supply and inflation 19 Belarus: real exchange-rate index 20 Belarus: foreign trade 28 Moldova: gross domestic product 37 Moldova: exchange rate 40 Moldova: composition of imports 40 Moldova: composition of exports 40 Moldova: trade
EIU Country Report June2000 © The Economist Intelligence Unit Limited 2000 3
June 6th 2000 Summary
June 2000
Belarus
Outlook for 2000-01 The president, Alyaksandar Lukashenka, will maintain tight control over all aspects of policy formulation. The parliamentary election in October 2000 will bring few changes to the political landscape. The opposition will consolidate further, but not sufficiently to challenge Mr Lukashenka in the presidential election expected in 2001. The state will maintain direct control over the economy and resist restructuring collective farms and obsolete industrial enterprises. Real GDP growth will remain around 2-3% and will depend on continued Russian demand. The agricultural sector will remain in crisis. The administration’s commitment to low unemployment and high growth will lead to year-end inflation of between 150% and 175%, checked only by price controls and occasional, half-hearted attempts to tighten money supply and credit availability. Russia will dictate (and slow) the pace of further union between the two states.
The political scene Mr Lukashenka has confirmed his dominance of the government bureaucracy by dismissing or reprimanding senior ministers. Meaningful dialogue between the government and main opposition parties has yet to materialise, mostly because of Mr Lukashenka’s inflexibility. The new electoral code falls short of international standards. The opposition has shown greater unity in staging impressive street protests, which drew harsh responses from security forces.
Economic policy Mr Lukashenka has vowed to curb inflation through further resort to price and wage controls. Despite promises of policy tightening by the central bank, the IMF remains unimpressed. The government has increased mandatory currency sale requirements, but pledges to unify the exchange rate in 2000, which is unlikely to prove successful. The new presidential decree on land ownership is highly restrictive. Mr Lukashenka intends to preserve collective farming as the mainstay of Belarus’s agriculture.
The domestic economy A strong increase in industrial output has compensated for continued decline in the agricultural sector, leading to 5% year-on-year GDP growth in January- April. Monthly inflation has slowed, but continues to average above 5%. The Belarusian rubel continues to soften.
Foreign trade and Trade turnover with Russia is sharply up in year-on-year terms. The trade payments deficit has widened. Foreign direct investment remains low.
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Moldova
Outlook for 2000-01 The government’s weak support in parliament and the uncertainties surrounding the debate over constitutional amendments bring a high risk of further governmental instability and an early parliamentary election. The pres- ident, Petru Lucinschi, is likely to win re-election in the presidential election in 2000, despite recent signs of consolidation among centre-right political parties. The political conflict over the status of Transdniestr will remain unresolved. Real GDP will grow by a modest 1% in 2000, assuming that the negative effects of the drought and frost earlier this year can be somewhat contained, and by 2% in 2001. Despite greater currency stability, the EIU expects some loosening of monetary policy, in response to the government’s revenue shortfalls, to bring somewhat higher inflation by the end of 2000. The current-account deficit will widen as import growth outstrips that of exports, but will remain below 1998 levels.
The political scene Parliament’s failure to back legislation privatising wine and tobacco enterprises has underlined the government’s lack of parliamentary support. Centre-right parties have proposed an electoral coalition in advance of the presidential election—although this falls short of the political party consolidation needed for greater stability. The joint constitutional commission has emerged with a compromise between those favouring constitutional amendments to increase presidential powers, and those seeking to limit it. A meeting between Mr Lucinschi and the Transdniestrian leader, Igor Smirnov, achieved no results in solving differences over the political status of the breakaway region.
Economic policy Parliament has rejected crucial bills to privatise the wine and tobacco industries, leading the IMF and World Bank to freeze further lending. The loss of privatisation revenue and multilateral inflows will force revisions to the 2000 budget. There have been further electricity cuts by Romania. Progress continues towards privatisation of the remainder of the electricity sector.
The domestic economy Industrial production in the first quarter of 2000 rose sharply, pointing to an economic recovery. Sudden frosts in May and low rainfall threaten to cut production of many important crops, including grapes. Inflation as of April 2000 was down slightly at 39% year on year. The currency has remained relatively stable. Wage and pension arrears have been reduced, but unemployment benefit arrears are rising, as is joblessness.
Foreign trade and Trade recovered somewhat in the first quarter of 2000, but faster growth in import payments expenditure has more than doubled the trade deficit in year-on-year terms. The current-account deficit fell to 2% of GDP in 1999 from 20% a year earlier. Parliament has approved a securitisation package for part of Moldova’s gas debt. Public external debt as of the end of March 2000 totalled just under US$1bn.
Editor: Stuart Hensel Editorial closing date: June 6th 2000 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule
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Belarus
Political structure
Official name Republic of Belarus
Legal system The constitution adopted in March 1994 was amended by referendum in November 1996 to increase presidential power and form a bicameral parliament
National legislature Bicameral parliament (National Assembly): upper house, Council of the Republic, with 64 members; lower chamber, the House of Representatives, with 110 members
National elections June 23rd and July 10th 1994 (presidential); May 14th and 28th, November 29th and December 10th 1995 (legislative); next presidential election due in 2001; the date of the next legislative election to be decided by the president
Head of state President, Alyaksandar Lukashenka, elected with 80% of the vote on July 10th 1994
National government The president appoints the Council of Ministers and has strong executive powers
Main political parties The registered parties are: Communist Party of Belarus (CPB) and its ally, the Agrarian Party; parties of left-wing orientation include the Party of People’s Accord and the Party of All-Belarusian Unity and Accord; parties of pro-reform orientation include the United Civic Party and the Belarusian Social-Democratic Party (People’s Hramada); the main opposition party is the Belarusian Popular Front (BPF)
Council of Ministers Prime minister Vladimir Yermoshin Deputy prime ministers Andrei Kabyakov Valery Kokorev Leonid Kozik Ural Latypov Gennady Novitski Alyaksandar Popkov Vladimir Zametalin Head of the presidential administration Mikhail Miasnikovich
Key ministers Agriculture Yuri Moroz Communications Vladimir Goncharenko Defence Alyaksandar Chumakov Economy Vladimir Shymev Education Vasily Strazhev Enterprise & investment Alyaksandar Sazonev Finance Nikolai Korbut Foreign affairs Ural Latypov Industry Anatali Kharlap Internal affairs Valery Udovikov Labour Ivan Lyakh Social security Olga Dargel State property & privatisation Vasily Novak
Central bank governor Piotr Prakapovich
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Economic structure
Annual indicators
1995 1996 1997 1998 1999 GDP at current pricesa (BRb bn) 119 184 356 662 2,890b GDP at market exchange rate (US$ m) 10,306 13,856 13,714 14,283 11,514b GDP at purchasing power parity (US$ bn) 35.8 37.4 42.4 46.5 48.6b Real GDP growth (%) –10.4 2.8 11.4 8.3 3.4 Consumer price inflation (av; %) 709 53 64 73 294 Population (mid-year; m) 10.28 10.25 10.22 10.18 10.05b Exports fob (US$ m) 4,707 5,652 7,301 7,070 5,922 Imports fob (US$ m) 5,469 6,939 8,718 8,482 6,548 Current-account balance (US$ m) –458 –516 –788 –862 –257 State budget balance (% of GDP) –2.8 –2.0 –2.1 –1.5 –2.9 Reserves excl gold (US$ m) 377.0 469.2 393.7 338.8 280.0 Foreign debt (US$ m) 1,667 1,096 1,162 1,075 1,054b Exchange ratea (official; av; BRb:US$) 11.5 13.3 26.0 46.4 251.0
June 2nd 2000 BRb579:US$1 (official)
Origin of gross domestic product 1998 % of total Components of gross domestic product 1998 % of total Agriculture & forestry 12.7 Private consumption 56.2 Industry 36.5 Public consumption 22.1 Construction 7.1 Gross fixed capital formation 26.1 Transport & communications 11.7 Increase in stocks 0.1 Trade & catering 10.2 Net exports of goods & services –6.0 Total incl others 100.0 GDP incl statistical discrepancy 100.0
Principal exports 1997 % of total Principal imports 1997 % of total Machinery & equipment 31.7 Mineral products 27.5 Chemicals 11.5 Machinery & equipment 20.0 Textiles 11.3 Food products 12.9 Metals 9.2 Metals 12.5 Food & food products 8.6 Chemicals 11.5 Mineral products 8.2 Plastic & rubber 6.1
Main destinations of exports 1998 % of total Main origins of imports 1998 % of total CIS 73.7 CIS 66.9 of which: of which: Russia 65.5 Russia 53.8 Ukraine 5.8 Ukraine 11.1 Non-CIS 26.3 Non-CIS 33.1 of which: of which: Germany 2.7 Germany 8.7 Poland 2.5 Poland 3.3 Lithuania 2.2 Lithuania 2.4 a Incorporates the redenomination of the rubel on January 1st 2000; 1,000 old rubels=1 new rubel. b EIU estimate.
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Quarterly indicators
1998 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Government finance (BRb m) Revenue 41,396 52,204 60,068 85,983 151,899 228,444 281,353 393,314 Expenditure 41,352 55,472 59,165 93,589 145,423 228,688 291,194 474,650 Balance 44 –3,268 903 –7,606 6,476 –244 –9,841 –81,336 Output Industrial production index (seas adj; Jan 1994=100) 112.7 118.7 119.3 114.0 107.2 106.5 102.5 101.0 Employment, wages & prices Unemployed (end-period; ‘000) 118.2 105.0 105.8 105.9 105.5 96.9 96.7 95.4 Employed, registered (end-period; ‘000) 4,235 4,234 4,265 4,291 4,010 4,000 4,010 4,005 Nominal wages (end-period; BRb/month) 3,698 4,177 4,664 8,008 11,682 19,062 22,994 34,872 Consumer prices (1993=100) 17,849 19,674 24,689 45,445 67,539 84,601 107,665 159,649 % change, year on year 46 41 65 182 278 330 336 251 Producer prices, ind (1993=100) 12,984 14,105 17,649 35,055 61,512 73,263 89,400 120,935 % change, year on year 46 38 63 201 374 419 407 245 Financial indicators Exchange rate BRb:US$ (av) 32.2 35.4 45.5 73.2 174.7 247.9 274.5 303.7 BRb:US$ (end-period) 33.7 37.7 53.3 107.0 237.0 259.0 291.0 320.0 Interest rates (%) Deposit (av) 15.5 15.2 13.8 12.8 17.8 24.7 26.3 26.5 Lending (av) 28.3 27.8 25.9 25.9 36.3 51.9 55.2 60.8 Refinancing (end-period) 11.9 10.2 8.8 9.6 11.4 5.8 28.9 23.4 M1 (end-period; BRb bn) 35.64 44.44 58.58 80.93 100.35 135.56 190.79 233.42 % change, year on year 98.1 94.2 106.7 139.1 181.5 205.1 225.7 188.4 M2 (end-period; BRb bn) 61.72 76.19 98.44 217.25 267.15 325.40 425.45 504.44 % change, year on year 80.1 85.1 97.2 376.0 332.8 327.1 332.2 132.7 Sectoral trends Retail sales (1 Qtr 1995=100) 176.7 187.4 185.7 153.4 142.0 179.1 198.7 193.6 Fuel prodn index (Jan 1994=100) 73.2 95.3 102.7 109.0 119.2 134.8 96.4 105.9 Foreign trade (US$ m) Exports fob 1,749.9 1,875.5 1,673.5 1,770.8 1,321.6 1,536.1 1,383.9 1,680.3 CISa 1,355.4 1,428.9 1,175.0 1,200.9 793.2 921.2 851.3 1,069.9 Imports cif –2,252.1 –2,257.7 –1,986.0 –2,053.5 –1,410.9 –1,651.7 –1,567.4 –2,034.1 CISa –1,501.0 –1,427.1 –1,267.0 –1,359.4 –878.5 –1,028.2 –1,003.9 –1,372.2 Trade balance –502.2 –382.2 –312.5 –282.7 –89.3 –115.6 –183.5 –353.8 Foreign payments (US$ m) Merchandise trade balance –484.7 –356.3 –273.0 –244.5 –52.5 –70.5 –139.1 n/a Services balance 126.3 168.7 80.3 115.7 74.7 80.3 77.0 n/a Income balance –13.3 –22.6 –18.1 –36.2 –19.8 –32.1 –15.9 n/a Current-account balance –356.5 –168.1 –194.6 –142.9 17.7 –5.8 –42.2 n/a Reserves excl gold (end-period) 291.6 286.9 300.4 338.8 337.7 302.2 302.7 299.0 a Commonwealth of Independent States.
Sources: TACIS, Belarus Economic Trends; IMF, International Financial Statistics.
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Outlook for 2000-01
Political forecast
Domestic politics The president, Alyaksandar Lukashenka, and his powerful administration will continue to dominate the political scene over the forecast period, determining policy details and direction, and limiting the political space available to the opposition. The government headed by the new prime minister, Vladimir Yermoshin, will remain of secondary importance and will leave its predecessor’s policies unchanged—including state dominance of the economy, close relations with Russia and minimal structural reforms. Mr Lukashenka remains popular with large segments of the Belarusian population, despite recent harvest failures and chronic food shortages, and is the overwhelming favourite to win the presidential election in 2001.
Mr Lukashenka will ensure his continued control through a combination of populist propaganda, egalitarian redistributive measures, strong control over government bureaucracy and suppression of his opponents. Even though the opposition has become more active in recent months, the administration’s suppression of its activities and control over the mass media will prevent opposition parties from broadening and consolidating their power base. It appears unlikely, therefore, that a sufficiently strong and visible political figure will emerge from the loose coalition of opposition parties to challenge Mr Lukashenka in the next presidential election—especially following the disappearance of Victor Gonchar, one of the most prominent opposition leaders. Mikhail Chigir, a former prime minister in Mr Lukashenka’s govern- ment and currently the de facto leader of a broad spectrum of opposition forces that includes almost all but the most nationalist opposition groups, is unlikely to present a credible threat to Mr Lukashenka’s authority. His sentencing on May 19th on charges of embezzlement has marginalised him even further.
Election watch In October 2000 Belarus is scheduled to hold an election for the bicameral legislature established by the 1996 constitution—a document which inter- national human rights organisations have criticised as undemocratic and which many Western governments have yet to recognise. The major opposition parties also refuse to recognise the legitimacy of the 1996 constitution and, with little prospect of a fair campaign, have already vowed to boycott the election. The legislature that emerges after the election will therefore prove just as supportive of the Lukashenka administration as its predecessor.
The considerable efforts of the Organisation for Security and Co-operation in Europe (OSCE) to arrange a political dialogue between the opposition and the government are unlikely to produce significant results. The OSCE hopes that, through a dialogue, the opposition’s agenda will be incorporated into Belarus’s political discourse. However, as the government sees little need for com- promise, given the weakness of the opposition, this appears extremely unlikely. The Lukashenka administration would only back down if dire economic circumstances forced it to apply more concertedly for multilateral loans, which might be conditioned (in part) on greater democratisation. The opposition, for
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its part, is also unwilling to compromise with an administration that it has consistently labelled illegitimate. The most likely scenario, therefore, is that any dialogue that takes place will involve only the government and political parties that are generally supportive of its policies—and will result in a series of non- binding declarations and marginal changes to the electoral code designed to show the OSCE that Belarus is not as undemocratic as its foreign critics claim.
With little access to the media and the electoral process, the opposition is likely to resort to street protests as its only means of political participation. Recent rallies jointly organised by various political parties and movements opposed to Mr Lukashenka have shown that the opposition is still capable of impressive concerted action—despite the administration’s tight control. Although there will be a lull in demonstrations during the summer months, well-organised and well-attended opposition rallies are expected for the later part of 2000 and early 2001. These will further polarise Belarus’s already tense political scene, but are unlikely to force any significant concessions on the part of Mr Lukashenka.
International relations The Union Treaty signed by Russia and Belarus in December 1999 envisages the creation of joint executive bodies and a joint legislature (see The political scene). Whether these new entities will have real authority remains unclear— although the new Russian president, Vladimir Putin, seems equally as cautious as his predecessor about delegating powers to a supranational executive branch. In contrast, Mr Lukashenka is far more supportive of a close union underpinned by effective supranational bodies. However, given Russia’s relative dominance of its relationship with Belarus, any union will continue to be shaped by Russia’s interests and not by Mr Lukashenka. At this point, it is likely that some form of military co-operation between the two countries will be the first to emerge as a result of the Union Treaty, while other aspects of integration will not rank highly on Mr Putin’s list of priorities.
Economic policy outlook
Policy trends Despite the serious structural problems in the economy, the Lukashenka administration is extremely unlikely to abandon the highly interventionist economic policies that buttress its political control. This will preclude the structural reforms needed for greater efficiency and broad-based economic growth. The state will continue to set economic development priorities, and provide favoured industries and enterprises with imported resources and access to foreign currency at artificially low rates. In the agricultural sector the state will continue its reliance on collective farms and will consistently hamper the development of privately owned agricultural entities.
Especially in agriculture, where the government hopes to avoid a third consecutive bad harvest, the state will continue to support inefficient but politically important enterprises by means of cheap credit—particularly in late summer to finance the harvest. This credit to ailing collective farms will serve as a substitute for the sort of real reforms, such as restructuring the current system of property ownership, needed for sustainable agricultural sector growth. In other sectors the EIU expects only a marginal expansion of small
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private enterprises over the forecast period. Belarus’s private economy, which consists mostly of small enterprises concentrated in retail trade, will continue to suffer from the government’s hostile attitude, arbitrary restrictions, and insufficient protection against criminals and corrupt officials. As Mr Lukashenka regards independent entrepreneurs as providers of financial support for the opposition, his treatment of them will resemble that towards opposition politicians.
Fiscal policy Amid the overall chaos of the Belarusian economy, the state budget will remain in reasonably solid shape, with relatively low deficits fluctuating between 1% and 3% of GDP. This will not, however, present an accurate picture of the state of public finances, as the administration will continue to rely on extrabudgetary funds (controlled by the presidential administration) and inflationary redistribution to ensure requisite financing for its preferred projects.
Monetary and credit policy The IMF insists that before agreeing on a loan programme to stabilise Belarus’s currency, the government and the National Bank of Belarus (NBB, the central bank) need to show greater commitment to consistently prudent monetary and credit policy. This remains extremely unlikely, however, as tight credit and foreign-exchange liberalisation would deprive the government of valuable redistributive powers. By removing the underpinnings of Mr Lukashenka’s economic model, it would force the administration to make an unpalatable choice between introducing systemic structural reforms, and thereby weaken its economic control, or accepting the economic collapse that would result from unprofitable enterprises being increasingly starved of credit.
Economic forecast
Belarus: forecast summary (US$ m unless otherwise indicated) 1998a 1999a 2000b 2001b Real GDP growth (%) 8.3 3.4 2.0 3.0 Industrial production (% change) 10.1 8.0 7.0 4.0 Agricultural production (% change) –0.9 –8.6 –7.0 –5.0 Consumer price inflation (%) Average 73 294 200 160 Year-end 182 252 175 150 Exports fob 7,070 5,922 6,785 7,196 Imports cif 8,549 6,664 8,100 8,679 Current-account balance (% of GDP) –6.0 –2.2 –4.5 –4.5
a Actual. b EIU forecasts.
International assumptions We expect world GDP to grow by 4.5% (at purchasing power parity exchange rates) in 2000, helped by the continued strength of the US economy, a solid recovery in Asia and stronger growth in western Europe. The Russian economy has recovered more quickly from the 1998 financial crisis than was originally expected, and should improve on the solid 3.2% growth recorded in 1999. Oil
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prices are expected to ease in response to higher OPEC production limits, but will still remain well above average 1999 levels, thereby boosting Belarus’s import costs. Export prices for manufactures will decrease slightly in 2000, before picking up in 2001. The main risk to this forecast is a sharper than expected slowdown in the US.
Belarus: international assumptions summary (% unless otherwise indicated) 1998 1999 2000 2001 GDP growth US 4.3 4.2 5.1 3.1 OECD 2.4 2.9 3.7 2.8 EU 2.7 2.2 3.1 2.8 Exchange rates (av) US$ effective (1990=100) 119.3 116.3 118.9 114.5 US$:€a 1.12 1.07 0.93 1.00 Financial indicators US$ 3-month commercial paper rate 5.34 5.18 6.50 6.63 E 3-month interbank rate (DM before 1999) 3.53 2.97 4.03 4.65 Commodity prices Oil (Brent; US$/b) 12.8 17.9 24.5 20.0 Industrial raw materials (% change in US$ terms) –19.6 –4.3 16.2 9.9 Food, feedstuffs & beverages (% change in US$ terms) –13.9 –18.6 –2.1 4.9
a Ecu before 1999.
Economic growth Belarus’s technologically backward enterprises will continue in 2000 to produce large quantities of obsolete and low-quality goods for export to the Russian market. Robust Russian demand will permit industrial output growth of 7% this year, although this will diminish to 4% in 2001 as Russian importers gradually switch to Western sources. The poor performance of the agricultural sector will contrast sharply with strong industrial growth and will drag GDP growth down to around 2% in 2000 and 3% in 2001.
Although the government’s neglect of industrial sector reform is somewhat hidden by the ready market that exists in Russia for Belarus’s manufacturing exports, its resistance to agricultural sector reform is less easily disguised. We expect agricultural production to decline by at least 7% in 2000, especially given the lingering effects of the bad harvest in 1999, and the frost that has hit several regions and damaged crops in May. Meat, poultry and dairy production is likely to suffer from the shortage of grain which, combined with the lack of alternative sources of fodder, will force a reduction in the cattle stock.
Inflation The government’s reliance on credit expansion to prevent economic collapse (in the absence of restructuring) will lead to high inflation through the forecast period. Although the administration recognises the dangers of inflation and is now somewhat more amenable to IMF advice, the government will have no choice but to maintain loose policies to support politically mandated and unviable economic growth. It will therefore continue to rely on price and wage
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regulation as its main anti-inflationary tool, which will prove increasingly ineffective and will fail to bring average annual consumer price below 160% over the next two years.
Exchange rates Low demand for the Belarusian currency and continued capital flight will persist in the absence of reforms. The Belarusian rubel will be restricted to transactions involving domestic goods. Imported goods and even domestically produced durable goods of reasonable quality will increasingly be bought and sold in hard currencies. This trend, already visible, is likely to accelerate and will contribute to further, sharp nominal currency decline of between 50% and 60% in 2000.
External sector Given Russia’s improved growth forecast and the strong showing by the export sector in Belarus to date this year, we now expect a sharper increase in trade turnover in 2000. Export revenue is expected to grow by around 15% (mostly because of improved sales to Russia) and import expenditure by more than 20%, as the recent import compression becomes increasingly less sustainable. This should produce a trade deficit of around US$1.3bn and a current-account deficit of US$750m (4.5% of forecast GDP).
Belarus’s trade dependence on Russia is likely to become even more pronounced, regardless of the extent to which the Union Treaty is implemented. Russia’s economic recovery and sharp real currency depreciation against the dollar will ensure continued demand for inexpensive Belarusian output, while rising world prices for oil and gas will render Belarus even more dependent on Russian energy supplies. Belarus’s worsening terms of trade with Russia will contribute to growing trade and current-account deficits, as will the country’s inability to continue rationing imports of essential goods from the West. The uncompetitiveness of Belarus’s industrial products will limit the scope for significant expansion into Western markets.
As the government is unlikely to deliver the prudent monetary policy and economic liberalisation demanded by multilateral organisations and com- mercial lenders, Belarus’s debt stock will grow only slowly. Debts for supplies of Russian gas and Lithuanian electricity will remain a major problem, but may be partly paid in kind. Foreign investors will be as reluctant as potential creditors, given Belarus’s underdeveloped infrastructure, minimal market reforms, outmoded labour policies and unpredictable leadership. The only reason for investing in Belarus will be to gain access to the Russian market—although Russia’s relatively more successful market reforms will increase the incentives to invest in Russia directly. Foreign direct investment in Belarus, therefore, will remain the lowest in the Commonwealth of Independent States.
The political scene
Alyaksandar Lukashenka Vladimir Yermoshin was officially appointed prime minister in April, in place remains in tight control of Sergei Ling, an experienced Soviet-style bureaucrat who obediently followed the policies dictated by the president, Alyaksandar Lukashenka. The replacement is attributable to Mr Ling’s age rather than to any visible
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disagreements within the ruling elite, and will have no effect on policy, given the extent to which Mr Lukashenka continues to dominate the government bureaucracy. Mr Lukashenka once again confirmed his indisputable control by demoting the first deputy prime minister, Vasily Dolgoliov, for reasons that are not yet clear, to the post of governor of Brest region and by dismissing the interior minister, Yuri Sivakov, on April 24th. By removing Mr Sivakov, Mr Lukashenka distanced himself from a recent embarrassing incident in which law enforcement forces detained Russian journalists during an opposition demonstration (see below). This is not the first time that Mr Lukashenka has blamed his subordinates for excesses that stem directly from his own policy prescriptions.
In addition, Mr Lukashenka has publicly threatened the minister of defence, Alyaksandar Chumakov, with imprisonment. As with many of Mr Lukashenka’s statements, it is not clear whether this represented a spontaneous outburst or a rehearsed performance. Whatever the reason, the incident has elicited no visible response from the military. The fact that Mr Lukashenka allows himself to humiliate a leading government minister, and to do so without fear of negative repercussions from other parts of the ruling elite, underlines the extent to which his control over the bureaucracy remains unchallenged.
There are still no serious The Belarusian opposition has repeatedly attempted, with support from the talks with the opposition Organisation for Security and Co-operation in Europe (OSCE), to arrange a dialogue with the Lukashenka administration. The main opposition parties hope to negotiate access to state-controlled media, ease restrictions on political participation and win the right to organise peaceful demonstrations. However, instead of direct, detailed negotiations between the government and major opposition parties, the government has arranged a vaguely defined dialogue between political forces. The dialogue has attracted more than 90 voluntary organisations, some of them without identifiable political agendas (such as unions of athletes, painters and veterans of the second world war siege of Leningrad). Others taking part, such as the Communist Party of Belarus or the Belarusian Patriotic Party, support the regime and cannot plausibly be defined as opposition. The dialogue, presided over by the first deputy head of the presidential administration, Vladimir Rusakevich, was launched on March 29th. However, the sheer number of participants, most of whom lack clearly defined political goals, will preclude any serious progress towards recognition of the administration’s opponents as a legitimate political force.
The OSCE criticises the new According to the OSCE Advisory and Monitoring Group (AMG), the recently electoral code adopted Belarusian electoral code does not comply fully with internationally recognised democratic standards. The electoral code will be used in the parliamentary election scheduled for October 2000. According to the new code, six of the 12 members of the Central Electoral Commission are appointed by the president and six by the Council of the Republic (the upper chamber of parliament)—a system that will not ensure the independence of the commission or adequate representation by the opposition. The AMG has criticised provisions concerning electoral monitoring, access to mass media, campaign financing and voting procedures. The OSCE has condemned the
EIU Country Report June 2000 © The Economist Intelligence Unit Limited 2000 14 Belarus
government’s failure to implement the agreement on greater opposition access to the media concluded in 1999 and its use of “politically motivated” trials to suppress the opposition. Both the US administration and the OSCE have recently reiterated their call for the Belarusian government to locate the opposition leaders who disappeared in 1999, including the former deputy speaker of parliament, Victor Gonchar (4th quarter 1999, page 12).
Mr Lukashenka condemns Mr Lukashenka, however, asserts that Belarus enjoys a well-developed system Western interference of human rights and that the West is only looking for a pretext to support an opposition intent on destabilising the domestic political situation. This support for democratic opposition forces in Belarus is a source of continuous exasperation for Mr Lukashenka, who generally portrays opposition leaders as provocateurs financed by foreign powers. He recently alleged that the US government had directly financed the opposition’s street protests and that the opposition receives more than US$100m annually from foreign governments and from domestic (criminal) businessmen. From his perspective, opposition political leaders are interested only in self-aggrandisement and need not be acknowledged, let alone respected, as representatives of a legitimate, albeit dissenting, point of view. He argues that Belarus is victim to a double standard imposed by the West—which he regards as far more lenient towards countries that he considers less democratic than Belarus.
The opposition shows A change in leadership of the two main opposition parties has facilitated closer greater unity co-operation. Vintsuk Viachorka, who was elected chairman of the larger faction of the Belarusian Popular Front (BPF-Revival) after the split of the BPF in October 1999, is now working together with other opposition parties towards the creation of a coalition of opposition forces. The newly elected leader of the United Civic Party, Anatol Lyabedzka, belongs to the same generation of political leaders as Mr Viachorka and has had experience in co- operating with the BPF. These two leaders have co-operated sufficiently to organise joint opposition rallies and to co-ordinate their parties’ policies towards dialogue with the administration.
More than 10,000 people attended a rally held in Minsk on March 15th. Participants marched down the central street of the city and attended a meeting at which opposition leaders criticised the union with Russia and called for greater independence for Belarus as well as closer relations with European countries. The rally was officially authorised and proceeded peacefully. However, similar action by the opposition ten days later ended in confrontation with police. The authorities banned the rally and, as a show of force, deployed armoured personnel carriers and large numbers of police in riot gear. Police attacked not only the demonstrators, but also journalists, television crews and bystanders. Among those detained as a result of the confrontation was a Polish member of parliament, Mariusz Kaminski, who was watching the rally from the pavement, and Russian journalists, who report having been beaten.
Although reports indicate that more than 100 protesters and bystanders were beaten and detained by police, this action would have been considered legitimate by the administration had those involved all been Belarusian citizens. According to Mr Lukashenka the security forces’ only “mistake”,
EIU Country Report June 2000 © The Economist Intelligence Unit Limited 2000 Belarus 15
therefore, concerned the rough treatment of Russian journalists. Having been abroad at the time of the demonstration, Mr Lukashenka wasted no time in placing the blame on his interior minister, Mr Sivakov, who was forced to resign after the Russian president, Vladimir Putin, personally instructed Russia’s ambassador in Minsk to intervene on the journalists’ behalf. Similarly, the Polish embassy intervened immediately to secure Mr Kaminski’s release.
Mr Putin’s visit leads to no The incident with the Russian journalists proved particularly embarrassing for new announcements Mr Lukashenka, who has consistently emphasised his special relations with the Russian leader. One of Mr Putin’s first official trips as the new president included a visit to Minsk—which generated extensive positive coverage in the official Belarusian media. Nevertheless, nothing concrete appears to have emerged from his meeting with Mr Lukashenka, except for vague and non- committal statements on both sides that provide little indication of the goals and outcome of the visit. Not surprisingly, it was Mr Lukashenka who spoke at length and with enthusiasm, while his Russian counterpart confined his public speech to a few carefully selected sentences.
Union with Russia focuses Most aspects of the union between Belarus and Russia are still under discussion in on military co-operation numerous joint committees and stand little chance of rapid, practical implementation. Co-operation in the military sphere continues to be the only area in which the union has developed quickly. The two sides will soon imple- ment plans for the new joint regional military group, which will include approx- imately 300,000 troops. The Russian and Belarusian components of the force will co-ordinate their activities but remain under their own national command, with the Russian contingent based across the border from Belarus in western Russia. The only Russian military contingent currently on Belarusian territory is tasked with making operational the early warning radar system situated in western Belarus. The radar system, due to enter service later in 2000, forms part of Russia’s anti-missile and anti-aircraft defence, and will be operated by Russian personnel.
Main points of the 1999 Belarus-Russia Union Treaty
The 1999 Union Treaty is the latest in a series of steps towards greater integration of Belarus and Russia. These steps began in February 1995 when the then Russian president, Boris Yeltsin, and the president of Belarus, Alyaksandar Lukashenka, signed a treaty on friendship and co-operation. Treaties committing Belarus and Russia to closer co-operation followed in 1996 and 1998. The current treaty envisages the most comprehensive integration among the post-Soviet states, although it stops short of surrendering Belarus’s sovereignty to the newly created supranational bodies.
These bodies will include the Supreme State Council, made up of leaders from both countries, a joint Council of Ministers and a bicameral union parliament, comprising the House of the Union and the House of Representatives. Delegates from the Russian and Belarusian legislative bodies will form the House of the Union, while delegates to the House of Representatives will be directly elected. The Supreme State Council forms the union’s executive bodies and approves its budget and international agreements. Each country will have a right of veto and each will take turns to chair the Council.
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The Council of Ministers includes prime ministers, foreign ministers, and ministers of economics and finance from the governments of both countries. It is charged with the co-ordination of foreign and defence policy and with the creation of a joint economic space, including the harmonisation of fiscal, monetary and credit policy. Full harmonisation of customs tariffs is not envisaged until 2005. Unification of monetary systems, which is likely to entail adoption of the Russian rouble by Belarus, is planned in the next five to six years.
According to the treaty, both Russia and Belarus retain sovereignty and national identity, and will remain separate entities in the UN and other inter- national bodies. Military co-operation includes the creation of a joint military doctrine, a joint armament programme, and a regional group of Russian and Belarusian troops. Unification beyond the limits stipulated in the treaty is unlikely, at least before the implementation of some articles of the treaty, which is scheduled as late as 2005.
Economic policy
There is little change to On May 12th the government presented parliament with a five-year pro- statist economic policies gramme for economic development based on what the president, Alyaksandar Lukashenka, hails as the “Belarusian economic model”. This model resembles a slightly modified Soviet-type economy, including full employment, high rates of economic growth, a strong redistributive role of central government, limits on the economic freedom of private enterprises, and a commitment to large- scale centrally financed social programmes and construction projects. These objectives, however, conflict directly with a number of the policies outlined in the government’s plan. As long as Mr Lukashenka continues to push his own economic model, certain goals, such as unifying the exchange rates of the rubel, liberalising foreign-exchange markets and attracting foreign investment, will remain elusive.
Anti-inflation policies still Belarus’s problems of chronic high inflation underline the inherent dilemma focus on price controls faced by Mr Lukashenka. Once again, his presentation to parliament of the government’s economic policy acknowledged the detrimental consequences of high inflation. However, his emphasis on high growth and full employment precludes a concrete anti-inflation programme centred on tightened credit availability, limited monetary emissions and greater independence for the National Bank of Belarus (NBB, the central bank). Instead, Mr Lukashenka remains committed to further reliance on direct state control over prices and wages as the government’s principal means of controlling inflation. The limits of these policies are readily visible in the double-digit monthly inflation registered in recent years.
The central bank reduces The central bank, however, does occasionally attempt to tighten its policies, the refinancing rate although only sporadically. On February 25th it raised the annual refinancing rate to 175%. However, once monthly inflation had eased from 14.1% in January to 5.8% in March, the NBB moved quickly to lower rates again, bringing them back down to their November 1999 level of 110% by April 20th.
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The IMF demands greater The administration’s reluctance to tighten policies and embrace IMF reforms conditions has prevented any possibility of a much-needed IMF loan agreement. Although the Lukashenka administration continues to lobby for IMF assistance, it resists the combination of prudent monetary and credit policy, foreign-exchange liberalisation and structural reform required by the Fund. Following a visit to Belarus in March, IMF officials described the government’s measures to stabilise the monetary and credit systems as inconsistent, and policies to liberalise foreign exchange as insufficient. The NBB had counted on receiving US$155m in IMF financing in 2000—an expectation that appears groundless in view of current policies.
The Fund was particularly critical of moves to renew a requirement that a substantial share of hard-currency export proceeds be subject to mandatory sale at the artificially low official exchange rate on the government-run Belarusian Currency and Stock Exchange. This allows the government to redistribute hard currency to the enterprises that are unable to compete in foreign markets, but are in need of hard currency to purchase imported goods. The mandatory sales quota was raised in March from 30% to 40% of total hard- currency proceeds. Part of the increase in hard-currency availability will go towards additional oil purchases for Belarusian refineries.
Collective farms remain the Mr Lukashenka has signed a decree authorising limited private ownership of mainstay of agriculture land in Belarus. The decree would facilitate land purchases by companies (including those partly or fully owned by foreigners) for investment projects, and would allow purchasers of state-owned enterprises to own the land occupied by these enterprises. However, the decree is limited in scope. Decisions on land sales are to be taken by the president, and it is unclear if the administration will allow a secondary land market to develop. Moreover, agricultural land is excluded from private ownership. In his annual address to parliament, Mr Lukashenka ruled out full-scale land privatisation, and reaffirmed his commitment to preserving collective and state farms as the backbone of the agricultural sector.
The central bank chairman The chairman of the NBB, Piotr Prakapovich, regularly provides optimistic promises increased reserves projections on the growth of the bank’s hard-currency reserves. At the end of the first quarter of 2000 he once again predicted that they would reach US$450m (including gold) by mid-2000. According to IMF data, the central bank’s gross currency reserves (excluding gold) stood at US$244m in February, a slight dip since January, which resulted from sales of hard currency needed to slow money supply growth. In order to reach its target, the NBB is relying on hard-currency revenue from sales of shares in Belarusian companies, and loans from the IMF and Russia, and has begun to issue dollar-denominated bills at an annual interest rate of 6%. However, although the central bank can persuade commercial banks to purchase a certain amount of the new dollar- denominated bills, the IMF loan will not materialise, and Belarusian enterprises are not sufficiently desirable for foreign investors to buy large stakes.
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The NBB expects a Russian According to Mr Prakapovich, Belarus expects to receive the equivalent of stabilisation loan approximately US$350m in loans from Russia in 2000. The funds will be used to stabilise the Belarusian currency in advance of pegging it to the Russian rouble and moving to a single currency for the union state. The government maintains that US$500m in foreign-currency reserves (including gold) would suffice to stabilise the Belarusian rubel and introduce a single exchange rate. Although the prime minister, Vladimir Yermoshin, has presented a single exchange rate as a primary economic policy objective, the gulf separating the official and black-market exchange rates will make this extremely difficult. As of May 5th the market exchange rate in currency exchange booths was almost double the official exchange rate of BRb490:US$1, and the black-market rate for the dollar stood even higher at around BRB1,200:US$1.
The domestic economy
GDP grows by 4% in Real GDP increased by 5% in year-on-year terms in the first four months of January-April 2000 2000, down from the 7% growth recorded in January-February. Industrial out- put in the first four months of this year grew by 6% year on year. However, the Ministry of Statistics and Analysis has also released figures based on a new methodology for calculating industrial production, which show more muted industrial growth of 3% and real GDP growth of 4% year on year over the same period. Agriculture continues to suffer from the combined effects of consecutive bad harvests in 1998 and 1999. Agricultural production dropped by 8.6% in 1999, and registered an 8.5% decline in the first four months of 2000 compared with the same period of 1999. Lack of fodder, caused by the disastrously low 1999 grain harvest, has resulted in a dramatic drop in meat and dairy production. In January-April 2000 the agricultural sector produced 9% less meat and poultry and 17% less milk than in the first quarter of 1999 (when supplies of meat and milk were already low). Food shortages have become a permanent feature of Belarus’s consumer market.
Belarus: consumer prices (av; % change) Month on month Year on year 1999 Jan 16.6 216.2 Feb 13.7 248.7 Mar 12.1 278.4 Apr 7.4 291.5 May 8.9 312.3 Jun 7.1 330.0 Jul 6.0 343.4 Aug 7.1 357.5 Sep 12.1 336.1 Oct 14.2 311.6 Nov 14.3 276.3 Dec 13.6 251.3 continued
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Month on month Year on year 2000 Jan 14.1 243.8 Feb 9.3 230.5 Mar 5.8 211.9 Apr 5.1 205.2 Sources: TACIS, Belarus Economic Trends; press reports.
Monthly inflation slows to High rates of growth and near-full employment in a loss-making economy single digits (40% of Belarus’s enterprises operated at a loss in January 2000), have resulted in extremely high inflation. Although monthly consumer price inflation dropped from 14.1% in January to 5.1% in April, there is little indication that this represents a long-term trend. Renewed currency weakness and further loosening of monetary and credit policies are likely to bring an upswing in inflation later in the year. Inflation in Belarus remains the highest among members of the Commonwealth of Independent States.
The Belarusian rubel In January-May 2000 the official exchange rate of the Belarusian rubel depreci- depreciates steadily ated steadily against the US dollar, losing 43% of its value in nominal terms. The steepest nominal decline was in May, when the rubel weakened by more than 15%.
Belarus: exchange rate (av) % change, Brb:US$1 month on month 1999 Jan 123.2 –21.9 Feb 168.3 –26.8 Mar 232.6 –27.7 Apr 241.0 –3.5 May 247.9 –2.8 Jun 254.8 –2.7 Jul 263.6 –3.3 Aug 274.5 –4.0 Sep 285.5 –3.9 Oct 296.2 –3.6 Nov 307.0 –3.5 Dec 317.6 –3.3 2000 Jan 339.5 –6.5 Feb 390.0 –12.9 Source: TACIS, Belarus Economic Trends.
Despite greater currency stability throughout the region in 2000 and occasional hard-currency purchases by the NBB in an effort to tighten money supply growth, the rubel has weakened more sharply this year than at any point since the first quarter of 1999. This suggests renewed efforts by the monetary authorities to narrow the gap between the commercial and official rates— potentially in advance of renewed efforts to unify the exchange rate (see Economic policy).
EIU Country Report June 2000 © The Economist Intelligence Unit Limited 2000 20 Belarus
Foreign trade and payments
Trade turnover and deficit Preliminary data show a strengthening of the export recovery that began in increase sharply December 1999, including a 34% year-on-year increase in export revenue in January-February 2000 to US$1.02bn. However, with import expenditure rising by almost 50% to about US$1.28bn, the trade deficit in this period stood at US$256m—substantially higher than the US$101m deficit recorded in the first quarter of 1999. The sharp increase in export revenue reflects a statistical base effect (as export revenue fell by 30% in the year-earlier period), as well as the further deepening of Russia’s recovery from its 1998 financial crisis. Data for the first two months of 2000 show a particularly strong 40% year-on-year increase in exports to Russia—which exceeded even the 35% increase in trade with countries outside the Commonwealth of Independent States recorded in the same period. Russia still accounts for more than 55% of the total volume of Belarus’s foreign trade and, according to the recently adopted national programme for export development, will remain the main destination of Belarus’s exports for at least the next five years.
Belarus: merchandise trade, 1999 (US$ m unless otherwise indicated; % change year on year in brackets) 1 Qtr 2 Qtr 3 Qtr 4 Qtr Imports 1,411 1,652 1,567 2,034 (–37.4) (–26.8) (–21.1) (–0.9) of which: CIS 879 1,028 1,004 1,372 (–41.5) (–28.0) (–20.8) (0.9) non-CIS 532 624 564 662 (–29.1) (–24.9) (–21.6) (–4.6) Exports 1,322 1,536 1,384 1,680 (–24.5) (–18.1) (–17.3) (–5.1) of which: CIS 793 921 851 1,070 (–41.5) (–35.5) (–27.5) (–10.9) non-CIS 528 615 533 610 (33.9) (37.7) (6.8) (7.1) Source: TACIS, Belarus Economic Trends.
The current-account deficit Official data report a current-account deficit in 1999 of US$257m, or around narrows sharply in 1999 2.2% of GDP. This represents a considerable narrowing compared with 1997 and 1998, when the current-account deficit stood at between 5.7% and 6% of GDP. However, this reduced deficit reflects a drastic import compression, which more than compensated for the steep decline in export revenue recorded over the same period. This rationing of imports will prove increasingly difficult to sustain, especially given rising energy costs, and is likely to give way to a gradual widening of the trade and current-account deficits in 2000, despite expectations of considerable improvements in the export sector.
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Belarus: current account (US$ m unless otherwise indicated; % change year on year in brackets) 1997 1998 1999 Exports of goods 7,383 7,123 5,949 (27.5) (–3.5) (–16.5) Imports of goods –8,718 –8,482 –6,548 (25.6) (–2.7) (–22.8) Trade balance –1,335 –1,359 –599 (16.3) (1.7) (–55.9) Net services 554 491 298 (–3.2) (–11.4) (–39.3) Net income –85 –90 –65 (174.7) (6.6) (–28.4) Current transfers 78 96 108 (–14.1) (21.9) (13.4) Current-account balance –788 –862 –257 (52.7) (9.5) (–70.2) Sources: IMF, International Financial Statistics; TACIS, Belarus Economic Trends.
Oil and gas supplies from Russian oil and gas suppliers, particularly Gazprom, the natural gas monopoly, Russia decline remain dissatisfied with payments received from Belarus and cut supplies in March by almost one-third in year-on-year terms. Even though Belarus and Russia have negotiated an agreement permitting Belarus to send goods in lieu of part of the payment due, the rest of the bill needs to be paid in cash. In the first quarter of 2000 Belarus paid US$46m for Russian gas supplies, equal to only 43% of the scheduled payment.
Foreign investment Foreign investors remain extremely reluctant to place their money in the remains very low Belarusian economy. Cumulative inflows of foreign direct investment (FDI) into Belarus between 1989 and 1998 stood at US$456m (around US$45 per head), more than three times less than in Latvia, Lithuania or Estonia. In absolute terms Belarus ranks fourth lowest in terms of FDI among countries of the former Soviet bloc, ahead of only Macedonia, Moldova and Albania, and lowest in per-head terms.
EIU Country Report June 2000 © The Economist Intelligence Unit Limited 2000 22 Belarus
Moldova
Political structure
Official name Republic of Moldova
Legal system Moldova adopted a new constitution on July 28th 1994. The Transdniestr region has declared independence, which the central government has not recognised. The region inhabited by the Gagauz minority was granted special legal status in December 1994
National legislature Unicameral assembly, the parliament, with 101 members, directly elected by proportional representation
National elections November 17th 1996 (presidential) and March 22nd 1998 (legislative); next elections due in December 2000 (presidential) and by 2002 (parliamentary)
Head of state President, Petru Lucinschi, sworn in on January 15th 1997
National government Moldova has an executive presidency. The prime minister chairs the Council of Ministers. The coalition government approved by parliament on March 1st 1999 was voted out of office on November 9th 1999 and replaced by a technocratic government on December 21st 1999
Main political parties The former governing centre-right coalition, the Alliance for Democracy and Reforms, was voted out of office in November 1999 and is now in opposition. It consisted of the Bloc for a Democratic and Prosperous Moldova (15 seats in parliament), the Democratic Convention (13 seats) and the Party of Democratic Forces (8 seats). Together with the Christian-Democratic Popular Party (9 seats), these parties comprise the centre and centre-right in parliament. The Communist Party of Moldova holds the largest number of seats (39). Since March 1999 ten deputies have left their parliamentary factions and now sit as independents
Council of ministers Prime minister Dumitru Braghis Deputy prime minister & minister of economy & reforms Eugeniu Slopac Deputy prime ministers Lidia Gutu Valeriu Carciuc
Key ministers Agriculture & food-processing Ion Rusu Culture Ghenadie Ciobanu Defence Boris Gamurar Education & science Ion Gutu Finance Mihail Manoli Foreign affairs Nicolai Tabacaru Health Vasile Parasca Industry & energy Ion Lesanu Internal affairs Vladimir Turcan Justice Valeria Sterbet Labour & social protection Valerian Revenco Transport & communications Afanasie Smochin
Central bank governor Leonid Talmaci
EIU Country Report June 2000 © The Economist Intelligence Unit Limited 2000 Moldova 23
Economic structure
Annual indicatorsa
1995 1996 1997 1998 1999 GDP at current prices (Lei m) 6,480 7,798 8,917 9,122 12,204 GDP at market exchange rate (US$ m) 1,441 1,693 1,929 1,698 1,161 GDP at purchasing power parityb (US$ bn) 7.4 7.1 7.3 6.9 6.7 Real GDP growth (%) –1.4 –5.9 1.6 –6.5 –4.4 Consumer price inflation (av; %) 29.9 23.5 11.8 7.7 39.3 Populationc (mid-year; m) 4.4 4.3 4.3 4.3 4.3b Exports fob (US$ m) 739 823 890 643 471 Imports cif (US$ m) 841 1,079 1,171 1,024 568 Current-account balance (US$ m) –98 –201 –286 –347 –23 Consolidated budget balance (% of GDP) –5.8 –9.7 –7.5 –3.3 –3.0 Reserves excl gold (US$ m) 257.0 312.0 366.0 143.6 185.7 Foreign debt (US$ m) 686 829 1,037 1,035b 972b Exchange rate (av; Lei:US$) 4.50 4.60 4.62 5.37 10.52
June 1st 2000 Lei12.62:US$1
Origin of gross domestic product 1998 % of total Components of gross domestic product 1999 % of total Agriculture & fishing 25.8 Private consumption 68.8 Manufacturing 16.7 Public consumption 19.0 Construction 3.2 Gross fixed investment 18.8 Total incl others 100.0 Increase in stocks 3.3 Net exports –9.9 GDP 100.0
Principal exports 1999 % of total Principal imports 1999 % of total Food products 41.9 Mineral products 37.5 Vegetable products 14.4 Machinery & equipment 12.3 Textiles 13.7 Textiles 11.7 Machinery & equipment 6.3 Chemicals 8.1 Live animals & animal products 6.2 Metals & metal products 4.4
Main destinations of exports 1999 % of total Main origins of imports 1999 % of total Russia 40.7 Russia 20.8 Romania 8.8 Romania 15.8 Germany 7.8 Ukraine 14.1 Ukraine 7.3 Germany 11.7 Italy 5.5 Italy 6.0 a Excluding Transdniestr unless otherwise indicated. b EIU estimates. c Including Transdniestr.
EIU Country Report June 2000 © The Economist Intelligence Unit Limited 2000 24 Moldova
Quarterly indicators
1998 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Government finance (Lei m) Revenue 518.4 501.0 573.0 1,129.4 452.2 727.9 813.6 1,072.0 Expenditure 546.0 557.0 624.8 1,299.7 467.3 902.6 905.6 1,159.6 Balance –27.6 –56.0 –51.8 –170.3 –15.1 –174.7 –92.0 –87.6 Employment, wages & prices Unemployed, registered (end-period; ‘000) 39.1 33.7 33.8 32.0 40.1 38.6 40.0 34.9 Nominal monthly wages (av; Lei) 238 248 256 287 258 294 316 406 Consumer prices (Jun 1994=100) 137.8 138.9 137.2 143.1 178.3 193.1 212.0 229.5 % change, year on year 8.1 7.0 4.6 6.9 29.4 39.0 54.5 60.4 Wholesale prices, ind (Dec 1992=100) 25,066 25,856 25,826 27,147 33,178 35,636 40,097 43,912 % change, year on year 12.4 9.9 6.6 10.0 32.4 37.8 55.3 61.8 Financial indicators Exchange rate Lei:US$ (av) 4.70 4.73 4.80 7.25 8.74 10.73 11.02 11.57 Lei:US$ (end-period) 4.72 4.74 4.97 8.32 9.68 11.46 10.96 11.59 Interest rates (av; %) Deposit 20.0 19.7 21.4 25.6 28.8 27.5 27.2 26.7 Lending 29.9 28.8 31.0 33.6 35.8 35.4 35.4 35.5 Money market 25.1 25.8 28.1 44.7 37.3 34.3 31.5 27.2 Treasury bill 26.6 27.4 33.6 34.5 32.7 31.2 31.1 18.9 M1 (end-period; Lei m) 1,243.9 1,135.7 968.3 1,065.5 1,073.0 1,138.1 1,435.1 1,479.8 % change, year on year 31.7 7.9 –17.5 –18.0 –13.7 0.2 48.2 38.9 M2 (end-period; Lei m) 1,898.4 1,860.7 1,662.5 1,763.9 1,867.9 2,207.8 2,470.5 2,520.0 % change, year on year 35.0 18.5 –7.0 –8.3 –1.6 18.7 48.6 42.9 Sectoral trends Production Wine (dal m) 2.65 2.37 1.54 0.74 1.00 1.04 1.76 1.78 Processed fruit & vegetables (‘000 tonnes) 20.95 9.38 40.82 12.40 7.60 8.85 38.69 8.47 Sugar (‘000 tonnes) 90.09 17.46 34.77 145.69 5.92 0.00 19.66 74.10 Foreign trade (US$ m) Exports fob 176.2 181.4 139.7 134.8 100.8 95.3 118.3 156.6 CISa 128.7 144.0 98.5 60.0 49.6 56.2 62.2 88.2 Imports cif –293.8 –282.2 –251.9 –196.8 –127.4 –121.6 –141.7 –176.5 CISa –133.3 –105.6 –103.3 –99.7 –72.6 –43.8 –40.4 –64.2 Trade balance –117.6 –100.8 –112.2 –62.0 –26.6 –26.3 –23.4 19.9 Foreign paymentsb (US$ m) Merchandise trade balance –118.8 –97.2 –105.6 –66.8 –33.7 –34.2 –26.7 n/a Services –21.0 –22.9 –16.2 –14.4 –13.2 –7.2 –8.6 n/a Income balance 13.2 5.4 13.6 0.6 4.5 6.8 15.6 n/a Current-account balance –109.2 –92.9 –91.4 –53.8 –17.7 –7.0 6.7 n/a Reserves excl gold (end-period) 325 289 215 144 181 164 222 186 a Commonwealth of Independent States. b IMF data.
Sources: IMF, International Financial Statistics; TACIS, Moldova Economic Trends.
EIU Country Report June 2000 © The Economist Intelligence Unit Limited 2000 Moldova 25
Outlook for 2000-01
Political forecast
Domestic politics Instability will continue to dominate Moldova’s political scene in 2000-01 and preclude effective policy formulation. None of the parliamentary parties can be counted on to provide the government with the consistent support needed to ensure greater reform progress. Owing to the weakness of the cabinet and the ongoing constitutional debate, the risk of further governmental instability and an early parliamentary election remains.
As was the case with past governments, the cabinet led by Dumitru Braghis has received little support from parliament. The two parties that voted for the new government at the end of December 1999—the Communist Party of Moldova (CPM) and the right-wing nationalist Christian-Democratic Popular Party (CDPP)—are also the two least likely to support the government’s reformist policies or to build a lasting alliance. The centre-right parliamentary groups are the most likely to back reforms but are reluctant to support the government’s policies, even though these policies closely resemble the programme proposed by their own government in 1999. They argue that the CPM and CDPP bear the responsibility of supporting the government, having forced its centre-right predecessor out of office in November 1999.
Nonetheless, it is possible that the Braghis government, which is still supported by the president, Petru Lucinschi, will succeed in limping along without being forced to resign before the presidential election, currently scheduled for December 2000. Although in the past a number of parties have called for the resignation of the government and an early parliamentary election, it is likely that they will increasingly focus on the forthcoming presidential contest and will try to avoid a vote of no confidence in the government: in contrast to its earlier position, the CPM is unlikely to call for an early election; the CDPP has little interest in provoking an early election in which it will fair poorly; and centre-right parties have recently switched their attention towards forging an electoral coalition (see The political scene).
Constitution and Despite the desire of many parliamentary factions to avoid an early election, election watch there is still a risk that Mr Lucinschi will count on benefiting from an early return to the polls—especially if he can combine presidential and parlia- mentary elections with a referendum on changing the constitution (see below). This gives rise to a couple of alternative scenarios: parliamentary and presidential elections could be held as early as September or October, and could be combined with a constitutional referendum; or there could be an early return to the polls for parliament that would then be followed by a presidential election in December. At this point, however, it is still likely that an early parliamentary election will be avoided and that the presidential contest will proceed as planned in December.
Tension surrounding the issue of constitutional amendments has eased slightly now that the joint constitutional commission has emerged with a compromise
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that appears to enjoy generally broad support—although it is still too early to gauge the extent to which parliamentary deputies will feel that the com- promise satisfies their concerns over Mr Lucinschi’s drive for greater presidential powers (see The political scene). Moreover, the divergence between Mr Lucinschi’s position and that of some of the parliamentary deputies suggests that any compromise reached by the commission is likely to have sidestepped a number of the most difficult questions—which could derail any newfound solution once the commission’s proposal goes before parliament. It is likely, therefore, that the constitutional debate and a possible constitutional referendum will continue to distract from reform progress for the remainder of this year. Moreover, it is unlikely that the proposed constitutional changes will foster greater political stability during the forecast period in the absence of more deep-seated political reforms.
Transdniestr Although a high-level summit involving Moldova, Transdniestr, Russia, Ukraine and the Organisation for Security and Co-operation in Europe (OSCE) is planned for the third quarter of 2000, the EIU is pessimistic over the outcome and we maintain our earlier forecast that the political dimension of the Transdniestr conflict will remain unresolved in 2000-01. The Tiraspol leadership will persist in demanding political autonomy within a confederal state, which is unacceptable to the Moldovan government. Russia, for its part, is not expected to make great efforts in withdrawing from the region, despite its commitments at the OSCE summit in November 1999 to remove all weapons by 2001 and all personnel by 2002. On the economic front there will be further progress for both Chisinau and Tiraspol, although such initiatives also demonstrate the extent to which Transdniestr has already obtained de facto independence.
International relations Moldova’s foreign policy will remain broadly pro-European over the forecast period, even given the risk of the CPM at some point taking on a role in government. Moldova’s political leaders (across the spectrum) are aware of the country’s reliance on Western financing and the need to diversify exports away from Commonwealth of Independent States (CIS) markets. They will continue to implement Moldova’s partnership and co-operation agreement (PCA) with the EU and to co-operate with NATO, but will preserve Moldova’s current neutral stance—out of deference to its large ethnic Russian minority and Russia’s sensitivity towards more aggressive attempts to join the alliance.
This emphasis on neutrality will fuel further efforts at ensuring good relations with neighbouring states—as seen by the recently initialled basic treaty with Romania. Although small but powerful constituents in both Moldova and Romania will remain vocal proponents of closer integration, they are unlikely to have a significant impact on policy formulation. However, Moldova’s ability to chart an independent course will be increasingly constrained by its extreme dependence on Russia, Ukraine and Romania for energy supplies. Moldova’s extensive energy supply debts to these states (especially Russia) will provide them with considerable leverage over domestic political and economic policy questions and, probably, a disproportionate role in the eventual privatisation of Moldova’s state-owned enterprises.
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Economic policy outlook
Policy trends Despite the uncertainty created by Moldova’s chronic political instability, it is unlikely that the government or parliament would veer decisively away from current pro-reform policies. We expect further progress on fiscal consolidation, relatively sound monetary policy, continued land reform and greater progress in privatisation. Throughout the forecast period, however, implementation of these policies will remain problematic—with the result that reform progress will remain disappointing and uneven. Although the government will have little choice but to remain committed to co-operating with the IMF and World Bank, its efforts are easily stymied by disputes within parliament, by a lack of support from the president or by the powerful opposition mounted by vested bureaucratic and business interests.
Fiscal policy The 2000 budget passed in April targets a deficit of Lei380m (US$30m; 2% of target GDP), based on expenditure of Lei4.175bn and revenue of Lei3.795bn. The assumptions used in the budget, including 2% real GDP growth and 28% year-end inflation, are likely to prove overoptimistic without greater political stability and above-average growing conditions for the agricultural sector. Moreover, the government will need to revise the budget as a result of the IMF’s decision not to continue lending under the extended fund facility (EFF)—which the government had been relying on for budget deficit financing. Similarly, parliament’s rejection of legislation to privatise the wine and tobacco sectors will bring additional revenue shortfalls, as the budget had factored receipts from these sales into projected revenue. The government’s suggestion that the expected shortfall can be met by renegotiating debt and clamping down on the shadow economy is not practical within the limited time frame—especially as the presidential election campaign will preclude the increase in wage and benefit arrears that have traditionally helped Moldovan planners in times of budget difficulty. Despite the government’s assertion that it will introduce further cuts in expenditure, we expect significant revisions to the budget by mid-year.
Economic forecast
International assumptions We expect world GDP to grow by 4.5% (at purchasing power parity exchange rates) in 2000, helped by the continued strength of the US economy, a solid recovery in Asia and stronger growth in western Europe. Robust growth in western Europe will help to improve Moldova’s exports, although the potential here is limited by Moldova’s narrow export base and difficulty penetrating west European markets. The Russian economy has recovered more quickly from the 1998 financial crisis than was originally expected, and should improve on the solid 3.2% growth recorded in 1999. Although the price trend for most major Moldovan exports is generally positive, import costs in 2000 will be affected by slightly higher average oil prices. Although oil prices are expected to ease in response to higher OPEC production limits, they will still remain well above average 1999 levels. The main threat to this forecast is a sharp slowdown in the US.
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Moldova: international assumptions summary (% unless otherwise indicated) 1998 1999 2000 2001 GDP growth US 4.3 4.2 5.1 3.1 OECD 2.4 2.9 3.7 2.8 EU 2.7 2.2 3.1 2.8 Exchange rates (av) US$ effective (1990=100) 119.3 116.3 118.9 114.5 US$:€a 1.12 1.07 0.93 1.00 Financial indicators US$ 3-month commercial paper rate 5.34 5.18 6.50 6.63 E 3-month interbank rate (DM before 1999) 3.53 2.97 4.03 4.65 Commodity prices Oil (Brent; US$/b) 12.8 17.9 24.5 20.0 Industrial raw materials (% change in US$ terms) –19.6 –4.3 16.2 9.9 Food, feedstuffs & beverages (% change in US$ terms) –13.9 –18.6 –2.1 4.9
a Ecu before 1999.
Economic growth The Moldovan economy’s strong first-quarter growth, including double-digit increases in industrial production, is partly a function of the statistical base effect created by the economic turmoil experienced during the same period of 1999, which bore the brunt of Russia’s financial crisis in August 1998, and the ensuing collapse of Moldova’s main export markets. Year-on-year production increases will prove far more subdued over the remainder of the forecast period, leading to modest real year-on-year GDP growth of around 1% in 2000 and 2% in 2001. Slow structural reform, stemming in large part from ongoing political turmoil, will preclude stronger growth. Repeated energy stoppages will inevitably hamper industrial production, while widespread impoverishment will continue to dampen consumer demand.
Moldova: forecast summary (% change year on year unless otherwise indicated) 1998a 1999b 2000c 2001c Real GDP –6.5 –4.4 1.0 2.0 Industrial production –11.0 –9.0 4.0 2.0 Agricultural production –7.0 –8.0 –2.0 2.0 Consumer price inflation (%) Average 7.7 39.3 30.5 21.8 Year-end 18.2 43.8 24.5 14.0 Exports (US$ m) 643 471 522 560 Imports (US$ m) 1,024 568 600 672 Current-account balance (US$ m) –347 –23 –45 –75 % of GDP –20.4 –2.0 –3.8 –6.3 Exchange rate (Lei:US$) Annual average 5.37 10.52 13.50 16.80
Year-end 8.32 11.59 15.50 17.80
a Actual. b EIU estimates. c EIU forecasts.
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Exchange rates Following a 44% nominal depreciation against the dollar in 1998 and a 28% loss in value in 1999, the leu has proved relatively stable so far in 2000, with a first-quarter depreciation of only 8%. We forecast that the leu will depreciate by 25% in 2000 as a whole, to around Lei15:US$1 by the end of the year, lower than the government’s forecast of Lei12-13:US$1. In 2001 the pace of nominal depreciation should slow to between 10% and 15%, on the expectation of further relative currency stability in Moldova’s main trading partners, notably Russia. However, the possibility of even greater than expected political turmoil brings considerable risk to this forecast.
Inflation Year-end inflation should reach around 25% in 2000 and under 15% in 2001, a substantial improvement on the 44% recorded in 1999. Although year-on-year inflation in April 2000 stood at 39%, the high monthly rate of 1.4% recorded that month was largely attributable to a 24% increase in electricity tariffs, a one- off factor, as well as a 5% hike in bread prices caused by wheat shortages. As noted above, the exchange rate, which is the main determinant in Moldovan inflation, is expected to remain relatively stable, while the National Bank of Moldova (NBM, the central bank) is expected to run a generally tight monetary policy. We nevertheless expect some policy loosening in the second half of 2000 as budgetary problems force further central bank credits to the government.
The external sector Although the current-account deficit should remain well below 1998 levels in both years of the forecast period, this will not reflect any sharp recovery in Moldova’s export sector. This sector will remain dangerously narrow, with continued dependence on agriculture and excessive reliance on Russian demand. Expansion into markets outside the Commonwealth of Independent States, such as western Europe, will prove difficult, given insufficient marketing know-how, poor quality control and substantial barriers to entry. Nonetheless, low domestic demand and liquidity constraints will dampen the increase in import expenditure—thereby ensuring a current-account deficit of under 4% of GDP in 2000; only slightly wider than the deficit in 1999.
Moldova’s public external debt stock, officially estimated at just under US$1bn at the end of the first quarter of 2000, will continue to represent a serious burden on the budget, especially in the absence of multilateral financing. The costs will prove particularly onerous in the fourth quarter of the year when debt servicing rises from US$17m-19m to US$27m, as Moldova struggles to meet a US$3.7m coupon payment on its US$75m Eurobond and US$5.7m on an EU loan. Moldova will try in particular to meet its multilateral and Eurobond obligations, but will remain unable to tap private capital markets until after the end of the forecast period. We expect Moldova to restructure further portions of its gas debt, as political considerations in Moscow will prevent the Russian gas company Gazprom, the major creditor, from either cutting off supplies indefinitely or declaring the country bankrupt.
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The political scene
The IMF chooses not to The lack of a stable pro-government majority in parliament has brought resume financing further disappointments to the government’s programme and another setback to relations with the IMF. Although parliament fulfilled a major Fund requirement on April 11th by passing the 2000 budget, it voted on April 17th to reject the legislation on wine and tobacco sector privatisation required for a resumption in IMF financing. Only 16 independent and Christian-Democratic Popular Party (CDPP) deputies, out of a total of 101, voted for the measure. Communist Party of Moldova deputies, who control 40% of the seats in parliament, abstained from the vote despite having backed the government’s confirmation bid in December 1999. Right-of-centre parties, which had supported similar privatisation initiatives while in government in 1999, voted against the legislation, arguing that the responsibility for supporting the government’s programme lay with the Communists.
The government still lacks Parliament’s rejection of wine and tobacco sector privatisation, therefore, strong political support reflected a combination of ideological opposition, party political consid- erations and vested interests eager to maintain the status quo in these important sectors. The consequences of this failed vote have been serious. On April 19th the IMF announced its decision not to release a US$35m tranche in May, dashing any hope that further multilateral financing might materialise before the end of 2000 at the earliest (see Economic policy). Even this might prove overoptimistic, given the lack of political support for Dumitru Braghis’s government in parliament. Although it retains the backing of the president, Petru Lucinschi, which gives it a degree of security for the moment, it has yet to secure the centre-right parliamentary support needed to ensure a different outcome when wine and tobacco privatisation returns to the agenda. This will not happen before the next parliamentary session begins in September, and could be further derailed by a move to an early parliamentary election (see Outlook for 2000-01: Political forecast).
Centrist and right-wing The lack of fully consolidated political parties and, consequently, of a stable parties show more unity parliamentary majority therefore remains one of the main impediments to more rapid economic reform and more effective policy formulation. The collapse of the Alliance for Democracy and Reforms (ADR) government in 1999 underlined this problem, as it stemmed largely from rivalries and divisions between leaders of the constituent parties. Although centrist and right-wing parties have recently begun to show greater unity, this is unlikely to turn into the sort of consolidation needed. The prime motivation for renewed centre- right co-operation comes from the presidential election scheduled for 2000. At the end of April the Party of Democratic Forces, the Democratic Party of Moldova (led by the parliamentary speaker, Dumitru Diacov), and the Party of Revival and Conciliation announced the formation of a centre-right electoral alliance and plans to put forward a joint candidate for the presidential election. However, these groups have shown little ability in the past to set aside their differences—which they will need to do in order to defeat Mr Lucinschi in the election. At the moment the most likely joint candidates include Mr Diacov
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and the former prime minister Ion Sturza. However, other figures in the new alliance are also likely to seek the nomination—which could prompt a long and divisive dispute and undermine the centre-right’s election prospects. Even if it is able to agree on a joint candidate, the coalition is likely to prove short- lived and is unlikely to survive beyond the presidential election.
A compromise emerges on Moreover, the announcement of a joint centre-right candidate could be constitutional changes delayed by the debate on constitutional amendments. This debate pits Mr Lucinschi, who insists that only greater presidential powers could solve Moldova’s political paralysis, against parliamentarians who are pushing either for increased parliamentary powers or a stronger cabinet role (1st quarter 2000, page 31). On May 27th the joint constitutional commission that was established earlier this year announced that it had succeeded in forging a compromise. The commission includes representatives of the presidency, the parliament and the Council of Europe’s Venice Commission, an organisation that has taken an active role in legal reform in former Soviet bloc states.
The joint commission’s compromise proposal includes provisions to strengthen the government’s position (only the prime minister and not the entire cabinet would need parliamentary approval) and increase the president’s plenary powers. However, it appears that many of the more contentious issues have been left unresolved. Parliament could therefore still unravel the compromise once issues such as changes to the electoral system (proportional representation or a first-past-the-post system) come under debate, or if it chooses to bring the joint commission’s suggestions more in line with its own draft proposals—a move that Mr Lucinschi would resist.
Other proposals are still It is not clear, therefore, whether the work of the joint constitutional under consideration commission means that the three other proposals under consideration now recede into the background. These would have either strengthened the govern- ment’s authority, introduced a parliamentary republic in which the president would be elected by parliament, or (as outlined in Mr Lucinschi’s proposal) significantly enhanced the powers of the presidency. Mr Lucinschi has already submitted his initiative to the constitutional court for consideration and, if deemed constitutional, could still present it to parliament, despite the compromise worked out by the joint commission. The changes contained in Mr Lucinschi’s initiative include the introduction of a mixed electoral system, based on 70 single-mandate constituencies and 30 deputies elected from nationwide party lists. Mr Lucinschi also proposes that the government be given the power to set the parliamentary agenda, and introduces the concept of a constructive vote of no confidence in the government.
On May 5th Mr Lucinschi’s concern that parliament might move to consider alternative initiatives designed to increase its own powers led him to rush the submission of his proposals to the constitutional court—thereby provoking a request from the chair of the joint commission that neither the constitutional court nor parliament consider any proposals for constitutional amendments until the commission completes its work. Mr Lucinschi’s concerns are well- founded, as it is doubtful at this point that a majority of deputies support his initiative. The Communist Party’s stance is particularly important in this
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respect—if it considers itself to have a good chance of winning the presidential election this year, it might move further in line with Mr Lucinschi in favour of enhanced presidential powers.
Public protests intensify The ongoing debate among Moldova’s political leaders over constitutional amendments has coincided with significant outbursts of vocal public opposition to the government’s policies. The most serious of these coincided directly with the cabinet’s efforts both to secure parliamentary backing of its privatisation programme and to prevent further delays in IMF funding. Starting on April 17th large numbers of students demonstrated in Chisinau in protest at plans to eliminate their free access to public transport. Over a four-day period more than 10,000 protesters blocked the centre of the city, picketing municipal and government buildings and clashing with police in occasionally violent confrontations. The crowds only began to disperse after Mr Braghis and the mayor of Chisinau, Serafim Urechean, promised to cancel the planned abolition of free student access to public transport and ensure an increase in student grants. Although on a much smaller scale, public protests at government policies resurfaced on May 15th when 2,000 veterans of the war in Afghanistan picketed government offices—once again in protest over cancelled benefits. Incidents such as these are likely to be repeated in the near future, given increasingly widespread impoverishment and the low level of popularity enjoyed by the country’s political class. These mass protests also indicate the degree of public opposition to planned reforms—which will further increase resistance in parliament and the president’s office to more concerted reform progress during the election season.
Transdniestr talks have The only high-level negotiations this year on the political status of the yielded little breakaway region of Transdniestr, which took place on May 16th in Tiraspol between Mr Lucinschi and Igor Smirnov, the Transdniestrian president, once again stalled on the two sides’ interpretations of the Moldovan “common state” defined in the May 1997 Moscow memorandum. Whereas the Moldovan side interprets this as meaning broad autonomy for Transdniestr, the Transdniestrian leadership demands a dialogue between equal states. As with previous summits, this one produced incremental results on economic issues, including an agreement for joint repair of two strategic bridges across the Dniestr damaged during the 1992 armed conflict, export certification, a protocol on economic courts and an agreement by Transdniestr to allow the Moldovan Chamber for Trade and Industry to open a branch in Tiraspol.
Russia’s commitment to Russia’s commitment at the Organisation for Security and Co-operation (OSCE) withdraw is uncertain summit in November 1999 to withdraw all arms and personnel from Transdniestr by 2002 still appears doubtful. The Russian military voiced concern over the feasibility of the deadline shortly after Russia’s then president, Boris Yeltsin, signed the agreement. Since then Moscow has renewed calls for a prior political solution between Moldova and Transdniestr before any withdrawal can be completed (1st quarter 2000, pages 33-34). In April a Commonwealth of Independent States (CIS) parliamentary delegation to the region reinforced this stance, and stated that withdrawal would prove more complicated than initially envisaged, especially as none of the promised
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financial assistance had materialised. The Transdniestrian leadership has denied any claim to the weapons themselves, but insists that it will press for 50% of their financial value before allowing them out of the country. The region hopes to offset this amount against its outstanding gas bill to Russia. As expected, hardly any of the 40,000 tonnes of ammunition have been shifted since the OSCE summit in November.
Transdniestr has called for an increased contingent of Russian and Ukrainian troops in the region. Apart from the benefits that it brings to Transdniestr’s beleaguered economy, an international military presence helps its leaders reinforce their long-standing claim of a potential threat of Moldova unifying with Romania. According to Transdniestr’s parliamentary speaker, Gregori Marakutsa, unification formed part of the agenda of those who organised the student riots in Chisinau in April 2000 (see The political scene). Mr Smirnov has indicated that Transdniestr will request guarantees from Russia and Ukraine that they will retain troops in the region to avoid a repetition of the 1992 conflict.
Chisinau wins a dispute The Moldovan government has relatively little influence on political develop- over left-bank villages ments in Transdniestr. In March 2000 the region held its own local elections, which Chisinau declared illegal—to no practical effect. Although the Tiraspol authorities are becoming increasingly self-confident, Moldova did score a victory over Transdniestr when it succeeded in preventing it from annexing agricultural land belonging to five villages located on the left bank of the Dniestr but subordinated to Chisinau. Tiraspol issued a decree to this effect in late 1999, which Chisinau initially ignored until distraught village represent- atives drew the matter to its attention in early 2000. Tiraspol backed off once Moldova threatened economic sanctions.
Economic policy
Parliament rejects key The government has once again failed to obtain parliamentary approval of privatisation bills legislation for greater privatisation in Moldova’s major wine and tobacco sectors (see The political scene). On April 19th, two days after the doomed vote, the IMF responded to the parliament’s rejection of wine and tobacco privatisation by announcing that it would not provide the next US$35m tranche of Moldova’s extended fund facility (EFF). This is the most recent in a series of setbacks to Moldova’s relationship with the Fund, which initially suspended EFF lending in 1997 after structural reforms ground to a halt. The IMF briefly resumed credits in August 1999, until the pro-reform government led by Ion Sturza was removed in November (3rd quarter 1999, page 30). The World Bank, which conditions its lending on an operating IMF agreement, subsequently suspended a US$20m tranche from a structural adjustment credit (SAC).
The multilaterals have not Moldova will now receive no more tranches from its EFF agreement, which abandoned Moldova technically expired in May 2000. However, the IMF and the World Bank have started negotiations with Moldova on a new, joint three-year programme. It is likely that the IMF will move to a more concessionary form of funding through
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its poverty reduction and growth facility (PRGF). The World Bank has announced that it will also continue to finance other projects in sectors such as agriculture, energy and education, including its sponsorship of the relatively successful national land programme (4th quarter 1999, page 35). However, the earliest that financing can be expected under any follow-on programme would be at the end of 2000, although this assumes that Moldova escapes further major governmental crisis and progresses on some of the underlying loan conditions. The lack of IMF credits has placed considerable strain on Moldova’s foreign-exchange reserves and its ability to service its foreign debt.
Moreover, the IMF agreement is almost certain to make any follow-on agreement conditional on parliament’s approval of the wine and tobacco privatisation legislation. Having already been voted down in the current session of parliament, the legislation will not now be considered until the next session, scheduled to begin in September. Although some sort of compromise might be reached to allow the legislation to be passed, the various parliamentary groups still diverge considerably on this issue. The Communist Party of Moldova, for example, demands that each privatisation project be examined separately—while the centre-right opposition argues that this will allow the Communists to block privatisation where it conflicts with their own vested interests. The government has put forward an alternative approach that might prove more successful, which is to pass the final decision on privatisation from parliament to the government. This could prove more popular with the Communists, who could then argue that, although they still oppose privatisation, the matter is out of their hands.
Europe is providing Despite recent decisions by the IMF and World Bank to hold back on further further loans credits, the European Bank for Reconstruction and Development (EBRD) is to lend US$25m for a variety of projects in 2000, and the EU is pressing ahead with a long-term supplementary loan worth E15m (US$13.95m). The European Parliament voted in favour of the credit in May 2000, following a report on Moldova from a Finnish MEP, Marjo Matikainen-Kallstroem. This report acknowledged that, since independence, Moldova has faced a number of serious obstacles, such as the secession of Transdniestr, the ongoing Russian military presence in Transdniestr and the break-up of the Soviet Union’s highly integrated economic system. EU credits will help support foreign-currency reserves, balance-of-payments and structural reforms. The EU has previously provided Moldova with two loans totalling Ecu60m.
The 2000 budget is passed Unlike the privatisation bill, the government faced relatively few problems passing an austere 2000 budget that (generally) met IMF requirements. The budget, passed on April 11th, sets expenditure at Lei4.18bn (US$330m) and revenue at Lei3.8bn, with a deficit projected to equal around 2% of GDP, in line with IMF demands. The budget assumes GDP growth of 2%, year-end inflation of 28% and an average exchange rate of around Lei12.3-13:US$1. However, the budget, which was passed before parliament’s rejection of wine and tobacco privatisation, counted on receipts from these sales and the resumption of multilateral credits—neither of which are now likely to materialise. The government has since proposed alternative sources of revenue, including the privatisation of other state-owned enterprises, reorganisation of the public
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administration, a reduction in the eligibility for benefits and further restructuring of foreign debt. Other government suggestions, such as increasing control of the excises from Transdniestrian trade and reducing the role of the shadow economy, will prove even more difficult.
Money growth targets for The National Bank of Moldova (NBM, the central bank) has set extremely strict 2000 are in doubt targets for 2000 in an effort to curb the upswing in inflation in 1999. The NBM plans to contain broad money (M2) growth to 2% and to reduce the money base by around 10%. M2 jumped by 43% year on year in 1999, following a decrease of around 8% in 1998, while the money base grew by 41% in 1999 following a reduction of 6% in 1998. The targets for 2000 are already in question. Despite the government’s sometimes optimistic statements over its ability to plug the budget gap in 2000 through additional revenue sources, other statements have already hinted at the possibility of greater NBM crediting of the government— especially as IMF financing and wine and tobacco privatisation revenue will not materialise. Average monthly M2 growth in the first two months of 2000 failed to drop below 1999 levels, with a sharp 5.8% increase in February.
There have been more cuts Moldova has experienced further widespread black-outs and disruptions as a in energy supplies result of endemic non-payment for energy supplies. At the end of March the Romania electricity supplier Conel stopped supplies to Moldova in response to slow progress in settling US$26m in outstanding debts. A further reason, according to the Romanians, was that Moldovan authorities had made no effort to renegotiate a supply contract that had recently expired. Moldova had initially proposed a 51% stake in the fuel company Tirex-Petrol as settlement, which the Romanians have resisted because of the company’s sizeable liabilities. Romania is also under pressure from the IMF to reduce Conel’s own debts. Moldova has now offered bartered agricultural goods and stakes in further electricity privatisations to offset the debt. Romania is pressing the Moldovan government to convert the debt owed by the electricity distributor Moldtranselectro into state debt.
Electricity privatisations Moldova’s ongoing electricity sector privatisation marks one of the few significant get under way structural reforms achieved to date. In contrast to the dismal record amassed by successive governments in recent years, the new private investors will respond to financial pressure through further progress in reducing debts, eliminating the culture of non-payment and introducing the infrastructure needed to stop energy theft. The government hopes to build on the successful sale of three electricity distributors to Union Fenosa (Spain) in February 2000 (1st quarter 2000, page 37) by selling off the remainder of the electricity sector. It has offered 100% stakes in the two remaining distributors, North Electricity in Balti and North-West Electricity in Donduseni, and 70% in three generators (two in Chisinau and one in Balti). Potential investors for the distributors must have experience in managing networks in a competitive market economy, have a customer base of at least 100,000 consumers and sales equivalent to a minimum US$100m, as well as a track record of developing power projects in a transition/developing economy. Crédit Commercial de France is acting as the adviser.
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Eight bidders have pre-qualified for the generator sales: Enron, AES and NRG (all US companies); Elyo and SIIF (France); Union Fenosa; NEEDS (Lebanon) and Siemens (Germany) in consortium; and Exxon Power (US) and Enel (Italy) in consortium. Two bidders have emerged for the remaining distributors: ABB (Switzerland and Sweden); and Kiev Oblenergo (Ukraine) and Conel in con- sortium. Although the government will largely focus on securing a high upfront price, it has also indicated a preference for investors able to refurbish the companies at the lowest tariff. It is not clear whether the Ukrainian- Romanian bid for the distributors will become part of an official electricity debt write-off, and how this would affect the price and terms offered.
The domestic economy
Industry is reviving Year-on-year industrial production data for the first four months of 2000 suggest an impressive recovery—albeit from an extremely low base in 1999. Year-on- year industrial output rose by 6.4% in January, 22.9% in February, 2.4% in March and 16.8% in April. For seasonal reasons no agricultural data are yet available. Initial reports indicate that late frosts in May caused damage to vineyards, fruits, walnuts, vegetables, tobacco and other susceptible crops, although the government has accused farmers of overstating predicted losses in order to obtain further financial aid. Low rainfall has also raised even more serious concerns over the agriculture sector’s performance this year. Although Moldova’s agricultural sector reforms have been reasonably successful, producers lack the necessary marketing skills and credit availability. A new US$7.7m credit from the International Fund for Agricultural Development, which was ratified by parliament in May, will only gradually help to address this problem by opening credit lines to small- and medium-sized farms for planting and equipment acquisitions.
A wheat shortage looms The government’s most immediate concerns centre on potential wheat short- ages, especially following the ban on exports introduced by Ukraine in April to conserve its own stocks. This has forced up wheat prices in Moldova by 60%, which in turn has sharply increased the price of Moldovan bread and related staples. In response, the prime minister, Dumitru Braghis, has announced an embargo on Moldovan wheat exports until the third quarter.
Price increases moderate The rise in year-on-year consumer price inflation peaked as expected in October 1999 (at more than 50%), with rates easing gradually to just under 39% by April 2000. However, monthly inflation rates still averaged above 4% between November 1999 and January 2000 (compared with an average of just over 1% during the same period in 1997-98), with significant disinflation only starting in February. Since then monthly inflation has averaged below 1%, and will benefit increasingly from seasonal factors during the third quarter. The downward trend in monthly inflation that began in February, was disrupted only in April, when the government raised electricity tariffs by 24% and wheat shortages led to a 5% increase in bread, which pushed services prices up by 4.2% and food prices by 1.1%.
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Moldova: consumer prices (% change) Month on month Year on year 1999 Jan 5.4 23.0 Feb 1.5 24.3 Mar 0.6 25.2 Apr 2.0 26.8 May 4.1 31.8 Jun 7.2 42.8 Jul 2.5 48.5 Aug 0.7 50.4 Sep 1.7 52.7 Oct 2.1 53.7 Nov 4.3 47.6 Dec 5.0 43.8 2000 Jan 2.9 40.4 Feb 1.3 40.1 Mar 0.1 39.4 Apr 1.4 38.6 Sources: TACIS, Moldova Economic Trends; news reports; EIU.
The exchange rate shows The relatively stable exchange rate of the leu has played a large role in greater stability containing inflation. After a 6% nominal depreciation between the start of the year and mid-January, the leu depreciated by only 2% over the next three months, leading to a total nominal depreciation over the first five months of the year of around 8%. In contrast, the currency lost more than 28% of its value in the same period of 1999. The principal risk to the leu comes from renewed instability among Moldova’s main trading partners, notably Russia, and internal political instability. The most recent major depreciation occurred in early November 1999 following the collapse of Ion Sturza’s government, when the leu lost more than 10% of its value (1st quarter 2000, page 39).
Moldova: exchange rate (period average) % change, Lei:US$1 month on month 1999 Jan 8.53 –9.6 Feb 8.74 –2.4 Mar 8.95 –2.3 Apr 9.60 –6.8 May 10.87 –11.7 Jun 11.74 –7.4 Jul 11.09 5.8 Aug 10.98 1.0 Sep 10.98 0.0 Oct 10.99 –0.1 Nov 12.00 –8.5 Dec 11.73 2.4 2000 Jan 12.14 –3.4 Feb 12.54 –3.2 Source: IMF, International Financial Statistics.
EIU Country Report June 2000 © The Economist Intelligence Unit Limited 2000 38 Moldova
Real wages have declined Wages have failed to keep pace with inflation and have fallen in real terms. The average nominal monthly wage in February 2000 stood at Lei337.90 (US$27), down by just over 2% in real terms. This represents a moderate improvement since mid-1999, when real wages were 15-20% lower than in the same period of 1998. However, the average wage masks wide discrepancies in earnings. Whereas average real wages in the financial sector, already the highest in Moldova, rose by 30% and those in manufacturing by 8%, the earnings of workers in health and social services and in the education sector fell by more than 20%. As of February 2000 average wages by sector ranged from Lei1,685 in finance and Lei584 in manufacturing, to under Lei200 in education, agriculture, and health and social services. According to the Department of Statistics and Sociological Analysis, the minimum subsistence level stood at Lei233 in May.
According to official data, the number out of work as of end-March 2000 totalled 36,700, roughly unchanged since the same period of 1999 at around 2% of the workforce. However, the official unemployment rate is widely under- stood to understate substantially the actual level of joblessness. If part-time workers and those on unpaid leave are taken into consideration, the percentage of the workforce not fully employed stood at around 12% in the fourth quarter of 1999, even when measured by official data. This number rises even higher if the unregistered unemployed are taken into account: as less than one-quarter of the registered unemployed receive even the low level of benefits available, a large number of jobless workers do not bother to register. Among those who are employed, wage arrears remain a serious problem. Although they decreased in 1999, and as of the end of February 2000 amounted to Lei527m, they have shown signs of increasing again. Arrears in the budgetary sector accounted for almost half of total wage arrears. Unemployment benefit arrears rose to Lei13.3m by the end of February 2000 from Lei11.6m at the end of 1999. The government did succeed in bringing pension arrears down, however, from Lei300m (US$28.5m) at the end of 1999 to Lei245m by mid-May 2000.
Moldova: wages (% change unless otherwise indicated) Nominal wages Nominal wages Real wages (Lei) (year on year) (year on year) 1999 Jan 252.6 9.2 –11.2 Feb 246.5 4.8 –15.7 Mar 274.6 11.1 –11.3 Apr 272.5 11.5 –12.1 May 298.0 24.9 –5.2 Jun 312.4 19.1 –16.6 Jul 298.9 18.9 –19.9 Aug 314.4 20.8 –19.7 Sep 334.3 30.9 –14.3 Oct 339.3 37.6 –10.5 Nov 375.8 43.5 –2.8 Dec 502.4 42.9 –0.6 2000 Jan 329.6 30.5 –7.0 Feb 337.9 37.1 –2.1 Sources: TACIS, Moldova Economic Trends; EIU.
EIU Country Report June 2000 © The Economist Intelligence Unit Limited 2000 Moldova 39
Foreign trade and payments
The current-account deficit Recently released data from the National Bank of Moldova (NBM, the central shrinks bank) have confirmed the dramatic reduction in the trade and current-account deficits in 1999. Moldova’s current-account deficit in 1999 fell to US$23m or 2% of preliminary GDP, roughly the same as the estimate presented in the EIU’s previous report. This contrasts sharply with the US$347m deficit (20.4% of GDP) recorded in 1998 and the US$285m deficit (14.8% of GDP) seen in 1997, mainly because of a 68% year-on-year decline in the trade deficit. This improvement was attributable overwhelmingly to a collapse in overall trade, with import costs dropping in year-on-year terms by 43% and export revenue by 27% (1st quarter 2000, page 41).
Net direct investment in 1999 was a mere US$32.7m, compared with US$86.2m in 1998, with potential investors frightened off by the continual political instability and parliamentary backtracking on privatisation. The net portfolio investment deficit rose from US$53.8m in 1998 to US$141.2m in 1999, with political instability playing a leading role alongside the depreciation of the currency and poor economic prospects.
Moldova: balance of payments (US$ m) 1998 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year Exports fob 179.1 184.7 142.7 137.0 643.6 100.3 93.6 119.3 155.9 469.2 Imports fob −297.9 −281.9 −248.2 −203.7 −1,031.7 −133.9 −127.3 −146.2 −184.8 −592.2 Trade balance −118.7 −97.2 −105.5 −66.3 −388.1 −33.5 −33.7 −26.9 −28.9 −123.1 Net services −21.0 −22.6 −16.3 −14.4 −74.3 −11.7 −4.0 −9.7 −23.4 −48.8 of which: transport −11.3 −8.4 −6.2 −3.0 −28.9 −4.0 3.4 −0.6 −3.9 −5.1 travel −5.5 −5.9 −4.4 −5.3 −21.1 −3.7 −4.8 −6.4 −5.2 −20.0 Net income 13.2 5.4 13.6 0.6 32.7 7.9 10.6 15.2 5.3 39.0 of which: remittances 27.4 24.8 28.0 19.5 99.7 20.6 22.6 25.7 19.9 88.9 Net transfers 17.3 21.9 16.7 26.6 82.4 23.4 32.0 23.2 31.5 110.2 Current-account balance −109.2 −92.6 −91.6 −53.8 −347.2 −14.0 4.9 1.9 −15.5 −22.8 Capital account −0.6 −0.2 −0.1 1.2 0.3 −0.1 115.6 0.0 0.1 115.4 Financial account 140.0 66.7 66.4 62.5 334.5 14.0 −115.3 −25.6 37.5 −89.4 of which: direct investment 15.6 32.5 15.5 22.7 86.2 6.9 −1.6 16.9 10.5 32.7 portfolio investment 1.6 −10.0 −4.8 −40.7 −53.8 −6.4 −135.1 1.4 −1.1 −141.2 other investment 82.1 5.8 −20.2 11.8 79.6 54.0 11.4 12.2 −5.5 72.1 Capital & financial account 139.4 65.5 66.3 63.6 334.9 13.9 0.3 −25.6 37.4 26.0 Overall balance (incl errors & omissions) 30.2 –27.1 –25.2 9.8 –12.4 –0.1 5.2 –23.8 21.8 3.2 Source: National Bank of Moldova.
EIU Country Report June 2000 © The Economist Intelligence Unit Limited 2000 40 Moldova
Imports are rising faster However, with the recovery in imports outstripping that of exports so far this than exports year, Moldova’s current account is expected to worsen slightly in 2000. Increased fuel costs have brought a sharp rise in mineral import costs, which account for almost 40% of total import expenditure—which rose by 39% in year-on-year terms as a result. This far outstripped the 16% rise in export revenue over this period. Export earnings from food, beverages and tobacco (the largest export sector) improved only marginally on the crisis-ridden year- earlier period, and remained well below half of their levels in the same period in 1998. The only significant increase came in textiles and metals, which account for a relatively small percentage of total export earnings. As a result of the proportionally faster recovery in imports, the trade deficit more than doubled in January and February compared with the same period of 1999.
The upturn in exports has come to a large degree as a result of the economic recovery in Russia, Moldova’s main trading partner, and an increase in sales to countries outside the Commonwealth of Independent States (CIS), notably the EU. After the drastic collapse in trade turnover seen in 1999, therefore, trade levels have begun to improve somewhat, but still remain well below 1998 levels. The local export base is debilitatingly narrow and highly dependent on agriculture and agricultural goods.
Moldova: trade, Jan-Feb 2000
% change, US$ m year on year Exports CISa 39.3 49.4 EU 20.6 22.6 Central & eastern Europe 7.7 43.0 Imports CISa 52.8 8.6 Central & eastern Europe 25.1 97.6 EU 24.4 53.5
a Commonwealth of Independent States.
Source: TACIS, Moldova Economic Trends.
EIU Country Report June 2000 © The Economist Intelligence Unit Limited 2000 Moldova 41
Moldova: composition of trade, Jan-Feb
1998 1999 2000 US$ m % of total US$ m % of total % changea US$ m % of total % changea Exports Food, beverages & tobacco 62.7 57.1 23.9 39.1 −61.9 28.3 39.9 18.4 Live animals & animal products 5.6 5.1 3.4 5.6 −39.3 2.2 3.1 −35.3 Vegetable products 14.2 12.9 13.7 22.4 −3.5 13.6 19.1 −0.7 Machines, electronic devices & equipment 6.8 6.2 2.4 3.9 −64.7 2.8 3.9 16.7 Textiles 7.3 6.7 9.1 14.9 24.7 12.5 17.6 37.7 Metals & metal products 0.7 0.6 1.2 2.0 71.4 3.7 5.2 208.3 Minerals & mineral products 0.3 0.3 0.2 0.3 −33.3 0.2 0.3 0.0 Total incl others 109.7 100.0 61.2 100.0 −44.2 71.0 100.0 16.0 Imports Mineral products 61.6 33.9 41.7 51.5 −32.3 57.0 50.8 36.7 Machines, electronic devices & equipment 43.6 24.0 7.7 9.5 −82.3 12.1 10.8 57.1 Chemical products 12.4 6.8 5.0 6.2 −59.7 9.9 8.8 98.0 Vegetable products 2.4 1.3 1.2 1.5 −50.0 9.9 8.8 725.0 Textiles 7.1 3.9 7.2 8.9 1.4 9.1 8.1 26.4 Metals & metal products 5.9 3.2 2.0 2.3 −66.1 3.0 2.7 50.0 Total incl others 181.9 100.0 80.9 100.0 −55.5 112.3 100.0 38.8 a Year on year.
Source: TACIS, Moldova Economic Trends.
Parliament ratifies gas debt Moldova’s outstanding debt to the Russian gas company Gazprom is estimated rescheduling at US$760m, of which US$400m is owed by Transdniestr. In its negotiations with Gazprom, Ukraine has sought to convert US$90m in debt dating back to 1996-97 into government bonds, but has reportedly been rebuffed by Gazprom, which would face high tax payment under Russian law. The debt will now be restructured into bearer securities (holder having title), with separate securities issued for principal and interest (at 7.5% a year). The principal-only notes are redeemable over 2002-07, the interest-only notes over 2000-06. At Gazprom’s insistence the notes can also be used for acquiring shares in Moldovan companies about to be privatised. Parliament approved the deal in late March. Some US$100m in Moldovan goods, including food, wine and tobacco, will be used to cover a further portion of gas debts.
In addition to barter and debt postponement, the prime minister, Dumitru Braghis, suggested in April that Moldova could lease Russia a military base in Tiraspol in lieu of some of the debts. Transdniestr has for some time used the purported cost of the Russian presence as a means of bargaining over its gas debts. There has been no attempt to tackle the gas debt problem at its root by stamping out local non-payment. By April Moldova was already behind on its payments for 2000 supplies, despite Gazprom cutting supplies completely in February as a warning.
Total debt is rising According to the NBM, Moldova’s total public external debt at the end of March 2000 was just under US$1bn. The rejection by parliament of wine and tobacco privatisation legislation, and the subsequent decision by the IMF and World Bank not to resume financing (see Economic policy), have increased the risk of a default—and have prompted the government to intensify efforts to reschedule its debt-service obligations.
EIU Country Report June 2000 © The Economist Intelligence Unit Limited 2000 42 Moldova
Moody’s lowers Moldova’s Although Moldova has avoided the debt defaults of many CIS countries sovereign rating following the 1998 Russian crisis, its credit ratings have been affected adversely by poor economic and political developments. In May the credit-rating agency Moody’s Investors Service downgraded Moldova’s foreign ceiling for bonds, as well as its US$75m Eurobond, from B2 to B3, making new international borrowings even more unlikely in the near future. Moldova has been under review for a downgrade since July 1999. The agency cited the conflict between the president and parliament, as well as the recent decision by the IMF and World Bank not to resume lending, as the reasons for going ahead with the downgrade. B3 is the sixth highest of Moody’s 11 speculative-grade ratings. Moldova’s domestic- and foreign-currency bank deposits remain at Caa1, one grade below B3. In theory the downgrade makes it more expensive for Moldova, should it wish to tap the international credit markets.
EIU Country Report June 2000 © The Economist Intelligence Unit Limited 2000