The Republic of Moldova

An Assessment of Macroeconomic Policies 1998-2001 and Recommendations

Shannon Hill, Liana Mesropyan, and Chad West – December 7, 2005

History

The Republic of Moldova declared independence from the USSR in August 1991

Transnistria declared independence from Moldova September 1991 – “frozen conflict exists to this day”

Massive outflow of labor force: 25% currently resides outside of the country

Economy in the 1990’s

High inflation and low GDP/capita Weathered the 1998 Russian financial crisis Based on agriculture and agro-processing,

later largely on remittances

Gross Domestic Product

Russian Financial Crisis in 1998 caused downturn in output from 17.475 billion Lei to 16.020 billion Lei in 2000.

Beginnings of recovery from 2000 to 2001 to 17.321 billion Lei. GDP per capita decreased from 4,064 Lei in 1998 to 3,763 Lei in 2000. Beginnings of recovery from 2000-2001 to 4,065 Lei.

0

5000

10000

15000

20000

25000

1998 1999 2000 2001 2002

Years

GD

P Nominal GDP

Real GDP

Household Consumption

Household consumption declined substantially from 1998-2001 from 13.172 billion Lei to 11.990 billion Lei.

Consumption is likely due to the sharp rise in unemployment after 1998.

Consumption then recovers to 15.516 billion Lei from 2000-2001.

Government Consumption

Total government consumption decreased from 4.458 billion Lei in 1998 to 2.561 billion Lei in 2001.

Government share of GDP declined from 35% to 22.8% over the same time period.

Inconsistent with the IS-LM model because GDP rises from 2000-2001 while government consumption continues to fall.

0

5

10

15

20

25

30

35

1998 1999 2000 2001 2002

Years

Gov

exp. a

s %

of G

DP

Investment

Most significant problem facing Moldovan economy. Investment continued to decline from 4.523 billion Lei to 3.475 billion Lei from 1998-

2001. Investment continued to decline despite a substantial reduction in the interest rate

from 30.9% to 5.1%.

0.0

500.0

1000.0

1500.0

2000.0

2500.0

3000.0

3500.0

4000.0

4500.0

1998 1999 2000 2001 2002

Years

Inve

stm

ents

Net Exports

Moldova has been dependent upon imports since its independence from the Soviet Union in 1991.

Net exports have improved from 1998-2001 from -4.676 billion to -4.231 billion.

Improvement in NX caused by a depreciation of the Lei to major currencies. Ex. Exchange rate against the dollar fell from 8.3 to 13.1.

Inflation and Unemployment

Inflation remained high after Russian Financial crisis.

46% in 1999 and 31.2% in 2000.

Inflation rates have decreased but still remain in double-digits to the present day.

Low unemployment figures before 1998 contribute to very high annual inflation rates (in some years unemployment is below 2%).

Unemployment has fallen from 11.2% in 1999 to 7.4% in 2001.

Monetary Policy 1998-2001

Contractionary from 1998-1999

Expansionary from 1999-2001

Year Money Supply (in lei)

Interest Rate Inflation (% over previous year)

GDP growth (% over previous year)

1998 2,041,111,111 30.9 -6.5

1999 1,942,047,244 32.6 45.9 -3.4

2000 2,023,220,000 20.8 31.2 2.1

2001 2,276,867,031 11.0 9.8 6.1

Fiscal Policy

0.0

1000.0

2000.0

3000.0

4000.0

5000.0

6000.0

7000.0

1998 1999 2000 2001 2002

Gov. Rev

Gov Exp

Loan MarketLoan Market

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

1998 1999 2000 2001 2002

Year

Inte

rst r

ate

Series2

19981999

2000

2001

2002

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

0.0 500.0 1000.0 1500.0 2000.0 2500.0 3000.0 3500.0 4000.0 4500.0

Investments

% ra

te

Policy Option 1. Reduce Inflation

Y0 Y

LM1

LM0

IS0

r

BP

Policy Option 1. Reduce Inflation

Y1 Y0 Y

LM1

LM0

IS1 IS0

r

BP

Vulnerability

In the short run

counter-productive effects for GDP in total

Unemployment increases

Policy Option 2: Encourage Foreign Investment

Setting high interest rate

Capital inflow to the country

New job-places created

Increase in output

Policy Option 2: Encourage Foreign Investment

… and expansionary fiscal policy

Expenditures to social sector

This will hold the shift of IS to the right which might be caused by decrease of Nx

Policy Option 3: Improve the Investment Atmosphere

EU Border Assistance

Resolution of Transnistria problem

Institutional reforms

Adoption of anti-corruption strategy

Reduction of transaction costs for business

Promoting vocational education

Retrain labor force for market economy

Conclusions

Moldova has suffered from a number of negative macroeconomic trends, most of which do not follow from basic macroeconomic models.

Fiscal and monetary policies alone will not address these challenges. Instead, Moldova must continue to make commitments to the previously mentioned policies.

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