The financing of the budget deficit depends significantly on external sources, and the key piece is the IMF programme. The authorities have moved dynamically towards meeting the pre-conditions of the agreement by November. However, after the second round of the presidential elections we are witnessing an institutional sabotage directed by the new majority of the PSRM, the "for Moldova" group and Shor guided by obscure interests, which endangers the budget for 2021, negatively affecting the financial stability of the country, relations with strategic development partners, in particular the IMF and the European Union, and consequently the population of the Republic of Moldova.
A huge budget deficit, but manageable with the support of partners
The deficit of the national public budget is expected to reach 14.4 billion lei in 2021, which represents 6.5% of GDP. The authorities propose a fiscal consolidation of 1.5 p.p. of the budget deficit compared to 2020. For comparison, the average amount of fiscal consolidation for emerging countries in 2021 is 2.3 p.p. (Figure 1), thus reflecting the relatively moderate fiscal position of the Republic of Moldova. The government does not plan to reach a budget deficit below 3% of GDP before 2023, signaling a gradual approach to deficit reduction.
Figure 1: Fiscal consolidation of budgets in emerging countries
Source: IMF, authors' calculations
The financing of the budget deficit in 2021 is planned to be covered from domestic sources worth 6.07 billion lei and net external loans amounting to 8.3 billion lei (Table 1). The latter is composed of 11 billion lei new loans and 2.7 billion lei loan repayments. The total volume of external state loan inflows to support the budget is estimated at 5.9 billion lei, while 4.4 billion lei will be dedicated to projects financed from external sources. From 5.9 billion lei budgetary support, 3.3 billion lei ($184 million) is planned to receive from the IMF, 1.1 billion lei (50 million euros) from the second tranche of the EU’s macro-financial assistance - OMNIBUS programme, and 909 million lei ($50 million) from the World Bank and the rest from other external sources. The value of external loans indicates how crucial is the external financing at this critical time.
Table 1: Financing the budget deficit
Source: Ministry of Finance, authors' calculations
The direction and momentum of the authorities to ensure an IMF programme were appropriate
In an policy paper published this year in summer, titled “Moldovan fragile tango between increasing external financing needs and strategic communication”, we argued that Moldova should attract at least $500 million to cover budgetary expenditure and at least $650 million for additional public investment over the next 5 years to boost the economy at the GDP level if it had grown steadily at 3.8% per year in the absence of the pandemic crisis. Back then, we considered that the government could borrow at least $330 million from the IMF, initiate negotiations with the EU €100 million in macro-financial assistance to finance structural reforms, on top of the €100 million EU OMNIBUS programme, and issue €500 million worth of Eurobonds for public investment.
In July, the IMF announced that Moldova could benefit from a 3-year programme (Extended Credit Facility and Extended Fund Facility) worth $558 million, which exceeded our expectations. Since then, the authorities have made considerable efforts to meet the pre-conditions necessary for the approval of a new programme by the IMF Board of Directors. The approval of the programme is also a conditionality for the disbursement of the second tranche of €50 million under the OMNIBUS programme and cement the opportunity for a new macro-financial assistance programme with the EU of at least €100 million.
In November, the Republic of Moldova had two more conditions to fulfill before starting the IMF programme: the law on the independence of the National Bank and the approval of three deputy governors at the National Bank. At the moment, the law on the independence of the National Bank was approved, the candidacy of Alexandu Savva was approved by the Parliamentary Legal Standing Committee, but the candidacies of Maia Pîrcălab and Constantin Şchendra were not endorsed.
Coordinated parliamentary sabotage of a potential programme with the IMF
The Republic of Moldova is very close to a new IMF programme. However, the latest events fuel the suspicions of an institutional sabotage. The draft of budget law for 2021 was voted by the new parliamentary majority of the PSRM, the "for Moldova" group and the Shor Party on December 3rd in a very undemocratic manner. At the same time, the law on the concession of the land of the former Republican Stadium was repealed and promulgated by the incumbent President Dodon, in spite the fact that the authorities were already at an advanced stage of negotiation with the US Embassy regarding the construction of the new embassy headquarter. The law was contested by the opposition in the Constitutional Court and suspended until a final decision of the Court on the matter. The adoption of this law damages the relationship with the US, which is the main voice in the IMF's board of directors. In addition, the same parliamentary majority, with elements of contested integrity, proposed to vote on a so-called "lustration law" calling for the dismissal of several managers in public institutions, including from the National Bank. This represents an implicit attack on the central bank just weeks after the vote on the law on the independence of the NBM. Moreover, Socialists and Igor Dodon announced that they aim to revert the retirement age limit to 57 for women and 62 men, which will jeopardise the public pension system and the pension reform previously coordinated with the IMF.
The repealing to the “billion law” – yet another populist initiative that complicates further the relationship with the IMF
The PSRM has also recently proposed a bill repealing the "billion law" aiming diminished fiscal pressure on the population. However, the negative effects of this bill will actually retain the same fiscal pressure and will also lead to a reduction in income in real terms for the population.
The BNM's statutory capital was 2.8 billion lei as of September 30, 2020. Thus, the statutory capital accounts for around 5.1% of total monetary obligations. On 31 October, the government bonds issued by the Ministry of Finance to execute the payment obligations derived from state guarantees (payment note for the banking fraud) was 12.6 billion lei. In the event that draft law No. 491 of 04.12.2020 enters into force, then the NBM will have to account as losses the amount of 12.6 billion lei, which would lead to a negative statutory capital of 9.8 billion lei. Consequently, the capital and reserves as a ratio of the money supply would be just over minus 15% and would mark Moldova in the list of 24 countries of the world (Nicaragua, Suriname, Mozambique, Zimbabwe etc.) with a negative statutory capital.
According to the point 6 of the Article 19 of the Law on the National Bank of Moldova, if the statutory capital falls below 4% of the total monetary obligations of the National Bank, then the Government, i.e. the Ministry of Finance, transfers in 60 days to the National Bank a capital contribution in state securities (VMS) at a market interest rate until it reaches 4% of the total monetary obligations. Thus, the Ministry of Finance will have to issue 12 billion lei worth of state securities within 60 days. For comparison, the state securities issued on the primary market are worth 14.4 billion lei as of 30 November. Thus, the draft law will not reduce the fiscal pressure in any way because the Ministry of Finance will have to issue state securities to compensate for the losses of the statutory capital.
Moreover, the additional emission to increase the statutory capital of 4% of the monetary bonds would also put pressure on the national currency. The transmission of state securities to the NBM would not significantly affect the currency through the money supply channel, but it would affect the public's trust in the currency. A depreciation of the Moldovan Leu would certainly lead to higher inflation and lower incomes in real terms. Finally, such an approach towards “billion law” will significantly diminish the potential of an IMF programme.
2021 budget deadlocked
The way in which the state budget for 2021 was voted in the first reading and other troubled initiatives from the PSRM, the "for Moldova" group and Shor, further fuels the opposition's suspicions that it is intentionally acting to derail a potential IMF programme and make the situation as difficult as possible for the next government. For this reason, the draft budgets for 2021 may not be supported by the opposition.
Three solutions are being circulated. The first is for the government to assume the responsibility in front of the parliament over the law of the state budget, the state insurance budget and the budget of compulsory health insurance. Although the mechanism of assuming the responsibility has been previously applied, it cannot be used in the case of these laws, as it would violate the provisions of art. 131 para (2) of the Constitution of the Republic of Moldova. The second scenario is the non-approval of budgets for 2021. This would mean that the monthly budget from January 2021 onwards would be one-twelfth of the 2020 budget. Consequently, some wage increases such as those for health workers could not be implemented. In addition, if this situation were to be extended for several months due to early parliamentary elections, the Ministry of Finance would have in difficulty to honor its expenditures on the state debt service, which is estimated at 2.12 billion lei in 2021 or 20.7% more than in 2020. The third option would be for the opposition parties to insist on excluding dangerous tax measures, such as those relating to excise duty on cigarillos and other provisions that endangers Moldova’s commitments to the IMF and try to strike a parliamentary consensus to adopt the budget laws.
Considering that the PSRM, the "for Moldova" group and Shor have launched several legislative initiatives sabotaging the government's efforts so far to have an agreement with the IMF, there is a general perception that the current government would also be willing to accept the opposition's amendments just to have an approved budget for 2021. In addition, if eventual early parliamentary elections result in the formalization of a new coalition from opposition parties, a new government would most likely be appointed in the second half of the year. Therefore, the implementation of the budget by then would fall under the responsibility of the current government, whether a reformed or provisional one.
In conclusion, the institutional sabotage directed by the PSRM under the guidance of Igor Dodon, together with the "for Moldova" group and Shor who are trying to worsen as much as possible the internal situation for any next government is damaging for the Republic of Moldova. Moreover, this sabotage endangers the budget for 2021, negatively affecting the financial stability of the country, relationships with strategic development partners, in particular the IMF and the European Union, and consequently the wealth and security for the population of the Republic of Moldova.
Dumitru Vicol is associate expert at the Institute for European Policies and Reforms. He was involved in projects to promote and develop financial instruments in Moldova. He is a graduate of the London School of Economics (United Kingdom).
Iulian Groza is an expert in international relations, European policies and good governance. He served as Deputy Minister of Foreign Affairs and European Integration. He currently leads the Institute for European Policies and Reforms.
This Commentary is published within the framework of the project "We and Europe – Analysis of Moldovan-European Relations through Innovative Media and Analytical Products", implemented by the Institute for European Policies and Reforms (IPRE), in partnership with IPN and Radio Chisinau, with the support of the Konrad Adenauer Foundation. The opinions presented in this commentary are of the authors only.