Our embassy in Chisinau reports regularly on the political and economic situation in Moldova. We have also seen recent reports from the International Monetary Fund and the Economist Intelligence Unit on the Moldovan economy.
Economic growth has slowed recently due to the impact of sharp increases in the gas price, and the continuing ban on wine exports to Russia. Despite these factors, we expect Moldova to achieve modest growth of 3 per cent. in 2006, down from 6 per cent. predicted earlier in the year, followed by a slight recovery in 2007.
Moldova remains heavily dependent on remittances from Moldovans working overseas. Currently estimated at roughly US $l billion, remittances account for over 30 per cent. of gross domestic product (GDP), and through import taxes provided some 56 per cent. of the state budget. This has enabled the Government to run fiscal surpluses over the last few years, amounts they have used for repaying the principles on their debt. On the downside, this has meant significant proportion of the Moldovan labour force is productively employed outside of the country, leading to serious shortages in skilled labour.
Moldova’s debt remains high, but has fallen sharply in recent years from 100 per cent. of GDP in 2001, to 55 per cent. in 2005. In addition, Moldova received debt treatment from the Paris Club in early 2006, which has reduced debt service to the Paris Club by nearly 60 per cent.. The UK is not a creditor. The total stock of debt looks set to continue to decline over the next few years, despite the slowdown in economic growth.
While generally sound fiscal and monetary policies are being pursued by the authorities, inflation has accelerated to 14 per cent. year-on-year on the back of continuing high remittances, rapid increases in real wages, increasing funds from donors and hikes in energy prices. As both remittances and gas prices are likely to rise again next year, the amount of disinflation the authorities will be able to achieve during 2007 will be limited.
The combined effect of the wine ban and the gas price increase, however, means that we expect to see a worsening of Moldova’s external position, with its current account deficit set to rise to around 18 per cent. of GDP in 2006, up from 5.6 per cent. in 2005.