Moldova’s finance ministry this month cut its 2022 GDP growth forecast to 0% from a previous 0.3%. This is due to the global crisis, noting the effects of the war in neighboring Ukraine and rising global energy prices.
Moldova, one of Europe’s poorest countries, faces severe drought in its agriculture-rich economy, in addition to international inflationary pressures and the effects of the war in neighboring Ukraine, so this year will be at best. facing stagnation.
The worst drought in 500 years, which has affected much of Europe, including Moldova, is projected to increase industrial output by 1.5%, while the agricultural sector is projected to contract by 18%. According to the European Commission’s report on the impact of drought in Europe, Moldova is one of the most affected regions in terms of deteriorating vegetation conditions.
At the same time, Moldova’s inflation rate has soared, reaching 33.6% y/y in July, up from 31.8% y/y in June. Electricity and gas prices rose the most, but food prices also rose significantly compared to the same month in 2021.
The full-year forecast is now slightly below that number, having been raised to 29.5% from 21.9% previously.
The National Bank of Moldova responded with a series of rate hikes, the latest on 4 Aug, when the monetary policy rate was raised by 3 points to 21.5%, the same interest rate corridor by +/-3 points.
Imports in the energy sector were also behind Moldova’s rising current account deficit, which surged by more than 50% year-on-year in the second quarter, and its share of GDP also increased sharply.
The pessimistic forecast by Chisinau’s finance ministry is broadly in line with the range of forecasts made by international economists earlier this year.
The International Monetary Fund (IMF), which currently forecasts moderate growth of 0.3% this year, warned in early August that real GDP would stagnate in 2022.
“The war in Ukraine … continues to have a significant impact on Moldova’s economy … Repercussions from a worsening global outlook, supply disruptions and rising input costs are exacerbated by drought conditions on agricultural production.” said the IMF.
“Inflation accelerated sharply due to rising energy and food prices, and the exchange rate fell, reflecting a very challenging market environment,” he added.
In its latest series of forecasts in May, the European Bank for Reconstruction and Development (EBRD), which forecast 1% growth this year, warned that higher gas prices were a major risk for Moldova.
Meanwhile, Moldova is also one of just six economies in the Europe and Central Asia region that the World Bank expects to contract this year. The remaining economies are Kyrgyzstan, Tajikistan and Belarus, along with warring states Russia and Ukraine. According to her June forecast by the World Bank, Moldova’s economy will shrink by 0.4% in 2022.
Meanwhile, the Vienna Institute for International Economics (wiiw) predicts that Moldova is headed for a contraction of 1%. This contrasts with her 11 EU member states in the region, whose economies have proven far more resilient to crises, and her ambitious EU member states in the Western Balkans. In the Western Balkans, growth is expected to be slower, at +2.9%. .
From crisis to crisis
Two years ago, Moldova was hit by the corona crisis, with several waves of the pandemic putting severe pressure on its health services, falling remittances from Russia and other countries, and relative poverty making vaccine access difficult. I had a hard time.
A strong recovery was seen in 2021 when Moldova fully reversed its 8.3% contraction in 2020 and finished the year up 4.4% versus 2019. But this recovery came to an abrupt end when Russia invaded neighboring Ukraine.
Moldova, one of Europe’s two poorest countries alongside Ukraine, suddenly had to take in hundreds of thousands of refugees, including 90,525 as of mid-August. Despite the country’s lack of resources, the Chisinau authorities and ordinary Moldovans were quick to entertain those fleeing the fighting in Ukraine. Despite receiving support from international donors, Moldova’s burden is severe.
In addition, many Moldovans fear that if Russia acquires enough territory in Ukraine, their country will be next. The eastern part of the country has already been ruled by Russian-backed separatists since the early 1990s. Since the invasion, there have always been fears that Russia would seize the Ukrainian Black Sea city of Odessa and strike against Moldova to build a bridge to the Transnistrian separatist republic.
These concerns are somewhat mitigated (but not recognized) by Russian forces bogged down in fighting in Ukraine and by the government of Tiraspol trying to reassure the Moldovans that they do not intend to engage in war. (although there are more hawkish voices within republics that don’t have one). .
However, Moldova is suffering economically due to the civil war. Both Ukraine and Russia are major trading partners. Serbia, one of Russia’s few remaining friends in Europe, signed a new gas deal on favorable terms this spring, while Moldova’s contract signed with Gazprom last November meant that the country’s gas prices would rise. Rising sharply, gas company MoldovaGaz has repeatedly struggled. payment.
All of this has led analysts at the Chisinau-based think tank Expert-Grup to claim in a presentation ahead of July’s donor summit that the country is facing a “perfect storm.” I was.
The storm has been linked to “rising energy and food prices, high inflation expectations ahead of the winter season when gas prices hit their highest peaks, skyrocketing logistics costs, disrupting value chains, and causing major disruptions among businesses, households and governments. Along with wars on the border that have caused certainty, this year’s drought and stagnation, and even the recession,” the presentation said.
Despite increased international support, “Moldova is unprepared for two new risks: a potential new wave of inflation triggered by the draft and the upcoming seasonal rise in gas prices. warns the expert group.
“There are growing indications that this summer’s drought will undermine a significant portion of agricultural production, leading to a wave of food price spikes.In addition, gasoline prices could double or even triple in the coming winter. could double, triggering another inflation shock to the economy, which would be followed by further monetary policy tightening, placing an additional burden on indebted businesses and households (most loans are at floating exchange rates). to be issued),” said Expert-Grup.
Other countries in emerging Europe face similar pressures, but think tanks say a quarter of the population lives in absolute poverty, with food and utilities accounting for about 60% of household spending. Few countries have a more difficult starting point than occupied Moldova. .
The Moldovan government has to revise its 2022 state budget to mitigate the negative effects of the war-induced energy and refugee crises in Ukraine and has also approved new measures related to the energy crisis. These will be considered by Congress from August 26th to September 8th.
However, there have been some more positive developments, notably the EU’s decision to grant the county EU candidate status along with Ukraine. This has already helped drive reforms, and the government announced in August that it was strengthening its ministerial team to better implement the EU’s agenda.
Moreover, the bank is doing well after extensive reforms sparked by the infamous “billion dollar bank fraud” scandal. “Well-capitalized, liquid and profitable banks have weathered the impact of the current crisis well,” the IMF said in August.