Identifier
Created
Classification
Origin
09CHISINAU485
2009-06-22 13:47:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Chisinau
Cable title:  

CRITICAL ECONOMIC TIMES: IMF MISSION PACKS UP AND GOES

Tags:  ECON EFIN EINV EREL ETRD MD 
pdf how-to read a cable
VZCZCXYZ0000
RR RUEHWEB

DE RUEHCH #0485/01 1731347
ZNR UUUUU ZZH
R 221347Z JUN 09
FM AMEMBASSY CHISINAU
TO RUEHC/SECSTATE WASHDC 8087
INFO RUEHMO/AMEMBASSY MOSCOW 3276
RUEHKV/AMEMBASSY KYIV 0644
RUEHBM/AMEMBASSY BUCHAREST 4332
RUEHSF/AMEMBASSY SOFIA 0694
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC 0752
UNCLAS CHISINAU 000485 

STATE FOR EUR/UMB, EUR/ACE, EEB/OMA

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV EREL ETRD MD
SUBJECT: CRITICAL ECONOMIC TIMES: IMF MISSION PACKS UP AND GOES
HOME

Sensitive but Unclassified. Please Protect Accordingly

UNCLAS CHISINAU 000485

STATE FOR EUR/UMB, EUR/ACE, EEB/OMA

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV EREL ETRD MD
SUBJECT: CRITICAL ECONOMIC TIMES: IMF MISSION PACKS UP AND GOES
HOME

Sensitive but Unclassified. Please Protect Accordingly


1. (SBU) SUMMARY: An IMF mission visited Moldova from May 28 to
June 8 to negotiate a new agreement. Following unproductive
discussions with Government of Moldova (GOM) officials, the mission
departed without a new arrangement. The IMF projected that
Moldova's GDP would decrease nine percent or more for 2009 and noted
that the Moldovan government budget was facing a severe deficit
because of mismanagement. The linchpins of economic growth in
Moldova for several years, remittances and foreign direct investment
(FDI),have dropped dramatically. The National Bank of Moldova has
intervened heavily in the foreign exchange market to support the
national currency, the Leu. The strong Leu, together with the
impact of the economic crisis on the region, has made Moldovan
exports too costly for export markets. The ruling Party of
Communists (PCRM) is focused solely on new elections and the
short-term economic developments. END SUMMARY

GOM MISMANAGEMENT LED TO BUDGET CRISIS
--------------


2. (SBU) The GOM is facing a sharp drop in GDP and a budget deficit
of 11 percent or more in 2009. While the IMF mission noted that the
regional economic decline was partly responsible for Moldova's
economic troubles, it pointed to the GOM and its misguided policies
as the principal culprit for the budget catastrophe. The government
had taken counterproductive measures since summer 2008 by raising
salaries and pensions, as part of an effort to maintain popularity
in the run-up to the April elections. Further, the GOM had
consistently refused to reduce staff or substantially cut spending
as revenues plummeted. The GOM was already delaying payments of
salaries, services and pensions. The IMF projected that the
government would need $550,000,000 immediately, followed by another
$250,000,000 from bilateral donors, to fill the revenue void in the
budget. The GOM is unable to raise money through bonds because
Moldova is a high risk. Commercial loans would be prohibitively
expensive should the GOM be able to find banks willing to provide
support. Paris Club members are unlikely to consider deferring
payments on outstanding loans or issuing new loans to a country

without an IMF agreement.

REMITTANCES AND FDI COLLAPSE
--------------


3. (SBU) Remittances and foreign direct investment (FDI) have
spurred Moldova's economic growth, averaging over six percent annual
growth since 2001. Remittances from the approximately one million
Moldovans working abroad equaled 37 percent of GDP in 2007 and FDI
surpassed USD 600 million in 2008. The IMF had long advised the GOM
to be prudent, noting that remittances could be a volatile revenue
source. Remittances have dropped 40 percent in 2009, proving the
folly of the GOM's reliance on this fluctuating source. The GOM
derives approximately 70 percent of its revenues from tariffs levied
on imports which, in turn, are financed primarily by remittances.
In addition, FDI has fallen 70 percent in the first five months of
2009, adding to Moldova's economic woes.

THE NATIONAL BANK AND BANKING SECTOR
--------------


4. (SBU) The National Bank of Moldova's (NBM) policy of foreign
exchange intervention has eroded the competitiveness of Moldovan
products and drained liquidity from the financial system. Moldovan
banks' already weak ability to offer credit to the economy has been
further eroded. The IMF was very concerned that one of the sixteen
banks in Moldova was near bankruptcy. On Friday, June 19, the NBM
withdrew the license of Investprivatbank. Should the GOM fail to
handle carefully the liquidation of Investprivatbank, the government
could easily incite a run on banks by mishandling the crisis.
Dozens of protestors waited in front of Investprivatbank on Monday
morning, June 22, demanding the return of their deposits.

WHAT MOLDOVA COULD, SHOULD, BUT WON'T DO
--------------


5. (SBU) One option the GOM could consider at this time would be to
approach the Paris Club for debt relief. However, the IMF mission
considered this step unlikely, since the government would need to
disclose its lack of an arrangement with the IMF. Bilateral support
from western countries is also highly unlikely without an IMF
agreement. Russia may be a possible creditor, since it may consider
increasing its influence in a former republic of the Soviet Union

more important than following standardinternational lending
practice. The GOM could brrow from the National Bank or print
money, but the IMF considered it unlikely that the government would
take either of these measures. The IMF underlined that Parliament,
which is responsible for approving and adjusting the budget, needed
to rectify the budget and balance government consumption and
revenues. The IMF deemed it important for the GOM to preserve
social spending and strengthen investment. The IMF mission's
statement noted that, unless Moldova implemented budget
rectification and legislative changes, the prospects for a deep and
prolonged recession would continue to grow.

COMMENT
--------------


6. (SBU) The previous IMF agreement expired at the end of May 2009.
The IMF mission stated before its departure that it stood ready to
support Moldova, should a new government request it. A new
government and political stability would need to precede a new IMF
mission in the autumn to negotiate a new agreement. The IMF
predicted that the GOM could continue to ignore the pending budget
crash and to pay pensions for another two or three months. The
parliament elected on April 5 failed to elect a new president and
Moldova has been mired in a political crisis, with repeat
parliamentary elections to take place on July 29. The strategy of
the ruling PCRM will be to maintain that the economic situation is
not as serious in Moldova as in neighboring countries and to
campaign on the slogan that a vote for the PCRM is a vote for
stability. The PCRM may speculate that pensioners who form a strong
base for the party will be home in August while many others, more
likely to support the opposition, will be away on vacation.
Meanwhile, the Moldovan economy continues unhindered towards a
crash.

KEIDERLING