Economic Reality no. 24 - Special Edition: in 2011 the Republic of Moldova recorded one of the highest economic growth rates in Central and Eastern Europe

The Independent Think Tank “Expert-Grup” has carried out its fourth annual economic X-ray, presented in Economic Reality no. 24, Special Edition. Its purpose is to give readers an overview of the major economic developments that marked 2011 and to help them better understand their implications. This edition covers five key aspects: 1) an assessment of the risks anticipated in the previous edition for 2011; 2) the 5 most revealing economic trends of 2011; 3) the 5 most important economic policy successes of 2011; 4) the 5 most remarkable economic policy blunders of 2011; and 5) the 5 most pressing risks for 2012.

In the previous economic X-ray, under the major risks for 2011 several important aspects were anticipated, and most of the forecasts came true. Thus, although the Moldovan economy continued to grow, this growth can be described as sclerotic. We also anticipated for 2011 an increase in the deficit of the state social insurance budget. Apparently the situation was brought under control, but the data available for the first 10 months of 2011 still show persistent pressures, which the government is trying to reduce by shifting an ever greater financial burden onto employers and employees. As for the uncertainties regarding the creation of the Government Presidium, it functioned, as anticipated, as a mechanism of mutual political control rather than of coordination. In the previous X-ray the experts sensed that in 2011, owing to adverse weather conditions and more expensive energy resources, price growth could accelerate. This did come true. The risk of a worsening debt crisis in Europe and the USA was also highlighted. Indeed, in Europe the sovereign debt crisis escalated so far that the very existence of the European project in its current form was called into question, while in the USA the growing budget deficit almost brought the country to the brink of a technical default.

The top 5 economic trends of 2011 include Moldova's economic growth of 6.1%. According to Expert-Grup estimates, in 2011 Moldova ranked 3rd among the Central and Eastern European countries (after Estonia and Lithuania) in terms of economic growth rate (although, as noted above, this was largely sclerotic growth). Another defining trend was annual inflation, which will exceed 8.0%. Having recorded in 2011 one of the strongest economic growth rates in Europe, Moldova will probably also hold the less honourable record for inflation. The next aspect worth considering is the fall in the lending interest rate to almost 14%. In October 2011 the average interest rate on bank loans in Moldovan lei reached a historic low of 14.03% (after which it rose to 14.57% in November). Another trend that made the top 5 for 2011 is the reduction of the budget deficit. However, large-scale corporate crimes and scandals  - which are also part of the top 5 economic trends - undermined the macroeconomic successes.

In the top 5 economic policy successes of 2011 one should note the launch on 12 December of negotiations on establishing a Deep and Comprehensive Free Trade Area between the Republic of Moldova and the European Union. Another promising aspect is the stepped-up activity of the Court of Accounts, which became much more visible and demonstrated very good performance in 2011. Moldova also entered the category of leaders in reforming the business regulatory framework. Our country climbed 18 places in the Doing Business 2012 ranking. In 2011 difficult but necessary decisions on privatising public assets were also adopted. The top 5 policy successes closes with the decision to apply indirect methods of assessing incomes and owners, which will bring untaxed incomes and property out of the shadows and improve fiscal equity.

The top 5 economic policy blunders and failures of 2011 highlights the initiative to cut the salaries of managers of public enterprises, described by Expert-Grup as pure populism. The state budget was once again a victim of political discord, as financial and budgetary discipline was breached at a high level. The failure of justice reform was also felt. Despite the promises made as far back as the first AIE government, in 2011 Moldova recorded virtually no tangible progress in justice reform. The lack of real political support for strengthening the institutional and legislative framework for competition protection was also noted. And the decision to ban wheat exports was vehemently criticised by both exporters and the IMF, and was repealed a few months after its adoption.

The top 5 economic risks for 2012 begins with the risk of minor economic growth or even a recession. We also expect an intensification of economic crimes. Owing to the inability to make use of financial resources, there could be a risk of a reduction in the volume of external resources granted to Moldova for financing public investment. In 2012 a deterioration of Moldova's relations with its CIS partners is possible. Also in the top 5 risks is “forcing” a government reshuffle, which could substantially amplify the other risks highlighted above.

This material was produced by the Independent Think Tank “Expert-Grup” with the support of the East Europe Foundation, from resources provided by the Government of Sweden and the Ministry of Foreign Affairs of Denmark/DANIDA through the Swedish International Development Cooperation Agency (Sida). The opinions expressed belong to the authors and do not necessarily reflect the views of the East Europe Foundation, the Government of Sweden, Sida or the Ministry of Foreign Affairs of Denmark/DANIDA.