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Moldova and the US sign $27 million agreement to support democratic and economic development of Moldova

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On September 28th, the United States Government represented by the US Agency for International Development (USAID) and the Government of Moldova represented by Prime-Minister Pavel Filip signed the assistance agreement to provide about $27 million for activities of creating “a more effective and accountable democratic governance system and increase trade and investment”.

The agreement was signed by the PM Filip and the USAID representative Karen Hillard, US Ambassador James D.Pettit serving as witness.

The focus of the agreement is to support good governance and to increase investment:
“The activities to support good governance will focus on increasing citizens’ engagement in overseeing governmental decision making, improving transparency and accountability of the justice system, improving local governments’ responsiveness to citizens’ needs, and combating corruption.

To increase investment the projects will focus on improving competitiveness, enhancing the business climate and regulatory frameworks, increasing access to finances, and improving agriculture practices.”

USAID will provide funding through contracts and grants to local implementing partners, responsible of reporting on the use of funds and the progress.

Previously, the Government of Moldova was announcing only about $4 million expected to be received as assistance for good governance projects.

Since 1991, Moldova benefited from $1,4 billion of assistance from USAID and Millennium Challenge Corporation.

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An International Monetary Fund mission will visit Chişinău next week

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An International Monetary Fund (IMF) mission, led by Ruben Atoyan, will be visiting the capital city of the Republic of Moldova during January 22 – February 5, 2020, as a press release of the IMF permanent representative office in Moldova stated.

According to the statement, during the visit, the mission will hold discussions with Moldovan authorities “in preparation of the 2020 Article IV consultation and in the context of the sixth and final reviews of Moldova’s IMF-supported program under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) arrangements.” 

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members. First, a staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board (IMF Factsheet on Surveillance), as it is explained on the organisation’s official page.

“The mission will take stock of the recent economic developments and the progress in authorities’ program implementation, update and assess the macroeconomic outlook, and discuss with the authorities medium-term challenges and risk facing Moldova’s economy and policies to address them,” is mentioned in the press release.

The last visit of the IMF staff team in Moldova took place during October 2–8, 2019. At the conclusion of the visit, Mr. Atoyan made the following statement:

“We commend the authorities for taking decisive actions to bring the IMF-supported program back on track and advancing reforms. During the past week, we have held constructive discussions on recent economic developments and policies to maintain macroeconomic and fiscal stability. To this end, the mission initiated discussions on policy priorities and financing for the 2020 budget. Discussions on measures and reforms to support the fiscal policy package for 2020 will continue in the period ahead, including during the upcoming IMF-World Bank Annual Meetings in Washington, D.C.”

In December 2019, Prime Minister Ion Chicu declared that a pause in the relationship with the IMF could be taken if the given organisation opposes investments in infrastructure or insists on the rise in gas tariffs. “Our goal is to build lasting relationships with the IMF, but not at any cost,” stated Premier Ion Chicu.

The head of the Moldovan Government noted that a new program could be signed with IMF, after the current program expires in March. However, according to him, the IMF is a partner that imposes conditions that can restrict the Government’s development plans and investments in infrastructure. “The IMF is a partner of the Republic of Moldova and I am for having a program supported by this institution. Beyond the financial aspect, there is the one of reforms. I want to finalise the existing program by March and then have another,” said Ion Chicu.

Moldova’s three-year IMF program was approved on November 7, 2016, being supported by a loan of s 129.4 million special drawing rights (SDR), which is about $182 million, or 75% of the Republic of Moldova’s quota. 115 million SDR (about US$160 million) have been already disbursed. Two thirds of the loan are provided under the Extended Credit Facility, which carries a zero interest rate through 2018, a grace period of 5½ years, and a 10-year maturity. The rest of the loan is provided under the Extended Fund Facility, which carries an annual interest rate equal to the SDR basic rate of charge (currently 1.7 percent), and is repayable over 10 years with a 4½ -year grace period.

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The Chicu government was criticised for its intention to introduce taxes on digital giants. Expert’s opinion

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The Government of Moldova led by Ion Chicu was criticised for the proposal of Ministry of Finance, made after the draft state budget for 2020 was made public, to oblige multinational digital companies such as Facebook, Google, Apple, Amazon, Netflix or Airbnb to register legal entities in Moldova and pay VAT on the revenues they earn from Moldovan users.

However, “going alone against the companies that rake in colossal revenues by any standards can undermine the efficiency of the whole enterprise and even affect our relationship with the United States,” it is opinated in a study, which has Vladislav Kaim, the member of the UNCTAD Youth Network and a master student in Economics at Lund University, as the author.

According to the Ministry of Finance estimations, such measures of taxation would bring additional 100 million lei in the state budget. Still, the experts community, political opposition and public reacted rather sceptically and, as a result, the Government had to postpone the entering of the decision in force from 1 January to 1 April, as it is mentioned in the study.

In the context of a union-wide digital services tax, which is aimed to be implemented by the EU in 2020, but also the disagreements between countries with different interests, “Moldova as a small market with no current stake in the future of digital economy even more so cannot afford to act unilaterally,” claimed Kaim.

“The presence of Google, Facebook and other digital giants in the life of Moldovans is ubiquitous. Thus, it is the duty of the government to make sure that our citizens get a fair deal from it, but unilateral measures imposed by a small and one of the poorest countries in Europe against the behemoths who thrive on effects of scale an global reach have a very limited potential of achieving that. Their potential impact on our relationship with the US should also be considered.”

The expert suggested two more strategies for the Moldovan government to choose from, instead of going alone against digital giants without leverage. First, to delay the adoption of the new tax until January 1, 2021, until the EU would establish a permanent solution. “Thus, the Moldovan digital taxation regime will match the one of the biggest single market in the world, which can generate beneficial spillover effects in other spheres – for example, a faster obtaining of the GDPR adequacy decision,” Vladislav Kaim claimed.

In case the executive wants to adopt a more proactive and regional strategy, it could come up with an initiative of a joint Eastern Partnership task force on digital taxation, comprised of representatives of the ministries of economy, fiscal bodies and antitrust regulators. “Aiming for an EaP wide digital service tax in coordination with the processes in the EU will likely be supported by the office of Margrethe Vestager, the vice-president of the European Commission whose mandate lies in this sphere,” specified the author of the study.

The study was produced within the project “Fostering the Adoption and Implementation of Key Reforms”, implemented with the support of National Endowment for Democracy and Watch Dog Moldova.

Photo: DAMIEN MEYER/AFP/Getty Images

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Economy

Expert-Grup: economic forecasts for Moldova in 2020

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The experts from the Expert-Grup Independent Analytical Centre have given the forecasts for the Moldovan economy in the year 2020. According to them, the bank fraud will still affect the economy of the Republic of Moldova in 2020, along with this year’s presidential elections and the adopted budgetary policy.

In 2020, the biggest challenge for the economy of the Republic of Moldova will represent the expansionary budgetary policy, which includes a budget deficit of over 3% of GDP and has unclear funding sources.

The analysts emphasised that the risk is related to the increased amount of the possible loans taken by the Government from the commercial banks. “Before elections, governments usually focus on increased budgetary spending with unclear financial coverage and this year is no exception. In the context of worsening relations with development partners, including with the International Monetary Fund, the Government could more intensely resort to domestic loans taken from commercial banks. This will hit the economy again because the banks will prefer to credit the Government rather than the real sector, affecting the investment activity and the economic growth,” stated the Executive Director of the Expert-Grup Centre, Adrian Lupuşor, for Ziarul de Gardă.

Another important challenge is the electoral context, namely the presidential elections that create a high level of uncertainty and instability, the Expert-Grup representatives said. “That is the main fear of an investor, especially in such countries as Moldova. This means that during the election period the level of uncertainty is high and it is risky for someone to invest. This affects the activity of the enterprises, the creation of jobs and the general economic growth. […] These factors create risks for the macro-financial stabilisation,” Lupușor said.

The Moldovan bank fraud scandal, which occurred in 2014, will still affect the economic development of the country in 2020. “In 2018, the Republic of Moldova experienced a shameful evolution in investigations related to the bank fraud. Now that we have a new leadership in the General Prosecutor’s Office, we have certain expectations again,” the expert claimed.

Still, experts of the centre said that  there are no premises for a possible crisis in the foreign exchange market of the Republic of Moldova, even though there will be certain trends with pressures on the national currency in the new year. “They are about reducing exports, remittances, foreign assistance and foreign direct investment. All of it will put pressure on the balance of payments, because the main sources that ensure the inflow of foreign currency in the country will be affected. Still, the National Bank has sufficient foreign exchange reserves to avoid excessive fluctuations in the exchange rate and to face the economic challenges mentioned above,” explained Lupușor.

The Expert-Grup Independent Analytical Centre noted, in a press release, that among the most important challenges for 2020 are the planned budget deficit for 2020, a low capacity to implement public investments with external financing, supplying the country with natural gas, ensuring the legal and decision independence of the National Bank, investigating fraud in the banking sector, but also the worrying developments in the labour market.

Photo: expert-grup.org

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