Infotag’s interview with Director of the Institute of Modernization of Moldova, Vladimir Golovatiuc.
Mr. Golovatiuc, inflation in Moldova in 2011 reached 7.8%, which was less than expected indicator of 9.6%. What are the factors that will mostly influence price growth in 2012?
In principle, several factors influence the inflation, among which I would notice money supply, i.e. policy of central bank and budgetary policy, exchange rate of Moldovan leu, economic condition, as well as inflation expectations. Taking into account the character of inflation in Moldova, I think that all these factors will have influence on price dynamics; however, their influence will be different.
In your opinion, which of these factors will be the less powerful?
I think that money supply will exert an insignificant pressure on inflation. The National Bank of Moldova (NBM) will strictly pursue own goal – to support stability of common-level prices, and in case of some threats the regulator can severely apply inflation suppressing instruments till declared parameters.
But in the respect of the state budget and real economic sector?
Taking into account the State Budget 2012 and forecast on real condition with its execution, one can suppose that the budgetary policy will influence price index more significantly than the NBM policy. Unfortunately, the government quite often shows that it is not the most efficient administrator of foreign credits, grants and tax revenues to its treasury (from the point of view of final economic interests). Majority resources, including on account of foreign loans, are used for current consumption, which may indirectly influence inflation growth. One should recognize that the state as represented by the Ministry of Finance (MoF) spends quite less means for public investment that could promote stable economic growth in Moldova in a long-term perspective, which (in its turn) would positively influence solving of social problems.
And which out of factors you named is the most powerful?
It is difficult and even impossible to name one factor; all they are interconnected, but I think that inflation expectations will permanently press consumer price growth in actual projected for 2012. I venture to underline that these expectations have a serious basis.
First of all, this is economic uncertainty related to upcoming second wave of crisis. Moldova not simply depends on foreign markets, however, like most countries of the region. Moldovan economy with its low diversity and competitiveness is characterized by a quite high level of vulnerability from foreign factors, and Moldova faces serious difficulties at the least conjuncture changes at foreign markets.
In the second place, it is unclear how economy will react to amendments that were introduced in the fiscal policy.
In the third place, it is political indeterminacy and uncertainty, when the political crisis will be overcome.
Also, one shall not forget about autumn tariff increase. Of course, it already made an own momentary contribution to inflation, but negative influence does not end here. Growth of tariffs has a slow effect, as far as goods and service producers include them in prime cost that later on leads to growth in prices, and above all, to further weakening of economic competitiveness.
Usually, exchange rate of the national currency also influences inflation in Moldova. What is your forecast on its influence upon inflation?
I can say that the NBM always took the aspect into consideration. It is also related, for example, to the fact that imports’ share in consumer basket makes over 60%. Therefore, any depreciation of the national currency will provoke increase of prices. Naturally, in such cases the market regulator has respective instruments, for example requirements to reserves of commercial banks, whose indicator makes to date 14% of sum of funds attracted in Moldovan lei and freely convertible currency. Another question is what influence it will have on the banking system, its liquidity indicators, and whether it will always be a positive, but it is already another story.
Based on what you said, inflation is quite perceptible to many things, including amount of money supply, which should be interpreted thus: the more money is in circulation, the higher is inflation therefore. But some reproaches in the real economic sector are hurled at monetary policy authors that too quite money is in circulation. Is that really the case?
Over last 2 years, amount of cash money grew by about 60% or 4 billion lei. The fact clearly shows that growth in money supply is not always a reason of inflation rise, but creates conditions for price growth that may occur at any moment. Cash money mass is divided into 2 parts, in one of which it is so-called consumer money necessary for all of us to make current purchases. Right this cash part can influence the inflation.
But concerning the second part of the money, which is named by some people money servicing business processes, it has a quite less influence on price growth and is accumulated by a less number of people. Cash amount that grew (by 4 billion lei) in the last 2 years mostly came to this part of money.
And subject to all factors, what inflation will be by results of 2012 – higher than in 2011, or lower, and above all, to what extent?
It is difficult to answer the question definitely. There are too many if – if one succeeds in overcoming political crisis, if one succeeds in creating an efficient government working based on a single plan and for single goal, if the second crisis does not affect us, if one has good harvest. At affirmative replies to all these questions, as well as taking into account initial conditions, I think that inflation level will be of single digit, i.e. lower than 10%, though prices on some goods and services will grow more significantly.