IMF AND WORLD BANK REPS SEE BLEAK

UNCLAS CHISINAU 000530

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

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV EREL ETRD MD
SUBJECT: IMF AND WORLD BANK REPS SEE BLEAK
ECONOMY FOR MOLDOVA IN 2009

REFS: (A) CHISINAU 0496, (B) CHISINAU 0493, (C):
CHISINAU 0485

Sensitive but unclassified. Please protect
accordingly.


1. (SBU) SUMMARY: At a donors' meeting on June
25, IMF Resident Representative, Johan Mathisen,
and World Bank Country Manager, Melanie Marlett,
assessed the current status of the Moldovan
economy as bleak and reviewed possible measures to
assist Moldova. The IMF projects a GDP
contraction of nine percent. Imports and
remittances, the lifeline of the Moldovan economy,
have dropped substantially. Moldova can do little
to insulate itself from the economic crisis in the
region. The ruling Party of Communists of the
Republic of Moldova (PCRM) is unwilling to
mitigate the effects of the economic crisis in
advance of parliamentary elections on July 29.
While the World Bank could not provide budget
support without an IMF agreement, the bank is
considering increasing its support to several
existing programs to help Moldova. END SUMMARY

GOM UNABLE TO ENGAGE WITH IMF MISSION
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2. (SBU) An IMF mission arrived in Moldova on May
28 for two weeks of negotiations with the
Government of Moldova (GOM) on a USD 550 million
18-month IMF program. The failure of the recently
elected parliament to choose a new president in
two rounds of voting and the subsequent
dissolution of the parliament made it very
difficult for the mission to work with government
authorities. Many government officials were also
MPs engaged in the political drama unfolding in
the parliament. The ruling PCRM caretaker
government was concerned primarily with political
developments and the need to set the date for new
elections. The mission departed on June 8,
planning to return in the fall once a new
parliament and government were in place.

GOM TAKES NO ACTION
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3. (SBU) The caretaker government is unwilling to
take emergency measures such as delaying salary
and pension increases to deal with the worsening
state budget and economic crisis in Moldova. It
doesn't want to draw more attention to the issue
prior to elections. The reluctance of the GOM to
take action until after new parliamentary
elections will lead to further deterioration of
the economy. Mathisen said the IMF had revised
its projection that GDP would drop from six to
nine percent. He added that it could decline even
more.

EXPORTS SHOW SOME RESILIENCE
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4. (SBU) The IMF resident representative explained
that exports were actually doing rather well in
the current economic crisis, having dropped only
30 percent. Moldovan exports suffered not only
from the impact of the economic crisis on the
region but also from the strong national currency,
the Moldovan leu (MDL). All other currencies in
the region had dropped significantly in the past
six months and then recovered slightly. The
continued strength of the MDL had made Moldovan
products increasingly more expensive for customers
in neighboring countries, as their national
currencies lost value. If the MDL had also
declined to the same degree as other currencies in
the region, the prices of Moldovan goods would
have remained more or less the same in other
countries. The National Bank of Moldova had
intervened in the currency markets over the past
six months to support the MDL. Mathisen noted
that the GOM derived approximately 70 percent of
its revenues from taxes levied on imports. The

government was intent on maintaining a strong
currency in order to enable consumption and keep
imports (and duties on imports) flowing.


5. (SBU) The major reason for a degree of
resilience in the export market resided in the
record harvest of 2008. Moldovan farmers had
exported many of their commodities from 2008 in
the first half of 2009. The projections for the
2009 harvest were for a 30 percent drop. Lack of
available credit was another problem for the
economy. Persistent rumors of the MDL's
devaluation before and after the April 5 elections
had discouraged businesses from seeking loans,
although interest rates had dropped from 25
percent to 20 percent. Inflation was currently
minus 1.6 percent for the year which differs from
other countries in the region where inflation is
running from five to ten percent. The phenomenon
of deflation in Moldova combined with inflation in
neighboring countries made Moldovan products more
expensive. Despite the deflation/inflation
development and the strong MDL, exports had not
declined as sharply as imports and remittances.
As a result of exports dropping less than imports,
Moldova's trade deficit had decreased.

MOLDOVA AND THE REGION IN CRISIS
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6. (SBU) The depth of the economic crisis in
Moldova will depend largely on the seriousness of
the recession in the region. The IMF projects GDP
for the region to drop slightly more than in
Moldova. Moldova is highly dependent on Russia
and Ukraine as export markets and can only hope to
sell more goods as the economies in those
countries improve. Russia is also the single
largest destination country for Moldovan migrants.
An improving Russian economy will mean increasing
remittance flows to Moldova. Moldova will remain
in a recession longer than neighboring countries
because its economy has been driven by remittances
and investments. These elements will likely be
the last to recover from the crisis.

WORLD BANK CONSIDERS ASSISTANCE OPTIONS
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7. (SBU) Saying that the country's state budget
was "in a dire situation," World Bank Country
Manager, Melanie Marlett, mentioned three options
she and her colleagues were considering to assist
Moldova. The World Bank could not provide any
cash to cover the government's expenditures
without an IMF agreement, but the country manager
explained that ongoing World Bank programs that
could be enhanced to help Moldova. Marlett said
the World Bank was reviewing aid in the areas of
employment generation, financial sector and social
protection. In employment generation the World
Bank was looking for ways to support more
community activities through its Moldovan Social
Investment Fund and to restructure its roads
rehabilitation project. A component of the roads
rehabilitation project had been cancelled due to
misappropriation by the GOM, but the World Bank
was searching for a mechanism to reset that
component. In the financial sector the World Bank
was looking at possibilities to provide funding to
support exports and supplement the Rural
Investment Services Project. Finally, in the area
of social protection the World Bank hoped to scale
up its health and social assistance programs.

COMMENT
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8. (SBU) The GOM's current focus is the July 29
elections. As long as Moldova does not have an
IMF program, doors to assistance from the World
Bank, the European Commission, Paris Club and many
bilateral donors will remained closed. Acting
President Vladimir Voronin traveled to Moscow on
June 22 where Russian President Vladimir Putin

announced a USD 500 million loan to Moldova.
Voronin himself noted that the first tranche would
not arrive before the end of 2009 and does nothing
to assist the economy now. Many observers
considered the loan a campaign ploy and are
doubtful any of the funds will ever make their way
to Moldova. The current political crisis paired
with the economic crisis means Moldova will likely
suffer longer and recover more slowly than its
neighbors.

CHAUDHRY