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COUNTRY REPORT

4th quarter 1999

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

Belarus

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EIU Country Report 4th quarter 1999 © The Economist Intelligence Unit Limited 1999

Contents

3 Summary

Belarus

5 Political structure

6 Economic structure

7 Outlook for 2000-01

11 The political scene

14 Economic policy

17 The domestic economy

21 Foreign trade and payments

Moldova

23 Political structure


25 Outlook for 2000-01

29 The political scene

33 Economic policy

36 The domestic economy

39 Foreign trade and payments


43 Quarterly indicators and trade data

List of tables

7 Forecast summary

11 Global assumptions summary

17 Belarus: consumer prices

18 Belarus: exchange rate

19 Belarus: unemployment, Apr-Jun

19 Belarus: monthly wages and pensions

20 Belarus: real retail sales

21 Belarus: current account

25 Moldova: Forecast summary

29 Global assumptions summary

38 Moldova: consumer prices

38 Moldova: exchange rate

40 Moldova: composition of trade, Jan-Sep

41 Moldova: balance of payments

2


43 Belarus: quarterly indicators of economic activity

44 Moldova: quarterly indicators of economic activity

45 Belarus: OECD trade

46 Moldova: foreign trade

46 Moldova: structure of trade

47 Moldova: direction of trade

47 Former Soviet republics: exchange rates per $

48 Former Soviet republics: GDP and GDP per head

List of figures

10 Belarus: gross domestic product

17 Belarus: money supply and inflation

18 Belarus: exchange rate

21 Belarus: merchandise imports

21 Belarus: merchandise exports

28 Moldova: gross domestic product

38 Moldova: consumer price inflation

40 Moldova: imports, Jan-Sep

40 Moldova: exports, Jan-Sep

41 Moldova: trade, Jan-Sep

3


Summary

4th quarter 1999

Belarus

The government is likely to adopt a more flexible policy towards theopposition as long as economic conditions continue to worsen. Oppositionparties will improve their co-ordination but remain marginalised. The uniontreaty with Russia will not result in major changes for at least another twoyears. The government will continue its interventionist economic policies andsupport inefficient enterprises with cheap credits, thereby fuelling further highinflation. Real GDP will grow moderately, led by the industrial sector butdragged down by the continued decline in agriculture. The current-accountdeficit will remain sharply down.

A large-scale demonstration by the opposition has challenged the govern-ment’s authority but failed to undermine it. Another leading opposition figurehas disappeared, while the main nationalist party has split. The opposition haswon some concessions from the authorities on media access with the help ofthe OSCE. The final version of the union treaty with Russia postponesimportant changes until 2002.

The government has retained its tight control over the economy. Price controlshave failed to tame the high inflation caused by continued credit expansion.Relatively strong revenue collection and continued resort to off-budgetaccounts have permitted a slight budget surplus over the first eight months.

• Real GDP continues to grow thanks to strong industrial output, but it ishampered by the dismal performance of the agricultural sector. Loss-makingenterprises continue to burden the economy.

• Monthly inflation rates have risen steeply, leading to year-on-year inflationof above 300%. The rubel has moderated its slide but continues to fall at anominal monthly rate of between 3% and 5%.

Import compression over the first half of the year has exceeded the sharp dropin export revenue, leading to a slight current-account surplus. The trade deficitwith Russia has grown. Debts to Russia for gas supplies remain a majorproblem, now compounded by debts to Lithuania for electricity supplies.

Moldova

An early parliamentary election appears even more probable following therecent increase in political instability. The new government will not change thedirection of policies, but will prove less successful than its predecessor inpushing forward structural reforms. The presidential election in 2000 will addfurther instability and potentially reduce policy coherence. Multilateral

December 3rd 1999

Outlook for 2000-01

The political scene

Economic policy

The domestic economy

Outlook for 2000-01

Foreign trade and payments

4


assistance will resume, but with a high risk of renewed interruptions. Theeconomy is expected to stagnate in 2000 and post a modest revival in 2001,although this will depend on the quality of the harvest. A slow recovery inexport revenue will suffice to ensure that the current account remains wellbelow 1997-98 levels.

The pro-reform cabinet headed by Ion Sturza resigned following a vote of noconfidence. This vote reflects political calculations on the part of theparliamentary parties and the president, Petru Lucinschi, rather thanideological differences with the government’s policies. The ConstitutionalCourt has proscribed Mr Lucinschi’s powers to push through constitutionalchanges designed to strengthen his authority. At the OSCE summit in IstanbulRussia promised to withdraw all of its arms and troops from the region by end-2002. Gagauz-Yeri has elected a new governor and reasserted demands forgreater autonomy. The Bulgarian-speaking district of Taraclia has been elevatedto county status.

The IMF and the World Bank have suspended their loan programmes followingparliament’s rejection of crucial laws on privatising the tobacco and wineindustries. Although the 1999 budget was successfully amended to raise thedeficit, the 2000 budget has been critically delayed by the government crisis.Gazprom, Ukraine and Romania have cut energy supplies again as bills gounpaid. Privatisation in the electricity sector continues, despite the withdrawalof most of the companies that prequalified for the tender process. Theprogramme of land reform continues.

• Real GDP fell by an estimated 5.3% in the first half of 1999. Industry hasshown signs of recovery, however, with September output increasing by 25% inyear-on-year terms. Annual inflation reached over 30% in October.

• The currency appreciated through much of the third quarter beforeweakening with the fall of the government. Wage arrears have fallen slightly.

The trade deficit has dropped dramatically as a result of significant importcompression. Exports to central and west European markets have increased,but not sufficiently to compensate for the continued low demand in CISmarkets. The current account moved into surplus in the second quarter of1999. Moldova continues to restructure much of its sovereign debt.

Editor: Stuart HenselAll queries: Tel: (44.20) 7830 1007 Fax: (44.20) 7830 1023

Next report: Our next Country Report will be published in March

The political scene

Economic policy



Belarus 5


Belarus

Political structure

Republic of Belarus

The constitution adopted in March 1994 was amended by referendum inNovember 1996 to increase presidential power and form a bicameral parliament

Bicameral parliament (National Assembly): upper house, Council of the Republic, with64 members; lower chamber, the House of Representatives, with 110 members

June 23rd and July 10th 1994 (presidential); May 14th and 28th, November 29th andDecember 10th 1995 (legislative); next presidential election due in 2001; the date of thenext legislative election to be decided by the president

President, Alyaksandar Lukashenka, elected with 80% of the vote on July 10th 1994

The president appoints the Council of Ministers and has strong executive powers

The registered parties are: Communist Party of Belarus (CPB) and its ally, the AgrarianParty; parties of left-wing orientation include the Party of People’s Accord and theParty of All-Belarusian Unity and Accord; parties of pro-reform orientation include theUnited Civic Party and the Belarusian Social-Democratic Party (People’s Hramada); themain opposition party is the Belarusian Popular Front (BPF)

Prime minister Sergei LingFirst deputy prime minister Vasily DolgoliovDeputy prime ministers Gennady Novitski

Valery KokorevLeonid KozikUral LatypovGennady NovitskiAlyaksandar PopkovVladimir Zametalin

Head of the presidential administration Mikhail Miasnikovich

Agriculture Yuri MorozCommunications Vladimir GoncharenkoDefence Alyaksandar ChumakovEconomy Vladimir ShymevEducation Vasily StrazhevEnterprise & investment Alyaksandar SazonevFinance Nikolai KorbutForeign affairs Ural LatypovIndustry Anatali KharlapInternal affairs Valentin AgoletsLabour Ivan LyakhSocial security Olga DargelState property & privatisation Vasily Novak

Piotr Prakapovich

Official name

Legal system

National legislature

National elections

Head of state

National government

Main political parties

Council of Ministers

Central bank governor

Key ministers

6 Belarus


Economic structure

Latest available figures

Economic indicators 1994 1995 1996 1997 1998

GDP at market prices (BRb bn) 17,815 119,813 184,174 356,079 662,370

GDP at market exchange rates ($ m) 3,830 10,407 13,778 13,575 14,302

GDP at purchasing power paritya ($ bn) 39.2 36.1 37.9 42.5 42.1

Real GDP growth (%) –12.6 –10.1 2.8 10.4 8.3

Consumer price inflation (av; %) 2,221 709 53 64 73

Population (mid-year; m) 10.35 10.31 10.28 10.20 10.18

Exports fob ($ m) 2,510 4,803 5,790 7,383 7,123

Imports cif ($ m) 3,066 5,563 6,939 8,689 8,482

Current-account balance ($ m) –444 –458 –516 –788 –862

State budget balance (% of GDP) –4.2 –2.5 –1.7 –1.2 –1.9

Reserves excl gold ($ m) 101.0 377.0 469.2 393.7 338.8

Foreign debt ($ m) 1,273 1,667 1,096 1,162 1,076a

Exchange rate (official; av; BRb:$) 4,652 11,513 13,368 25,964 46,295

Exchange rate (av; BRb:Rb) 2.12 2.53 2.61 4.53 4,767

November 23rd 1999 BRb309,000:$1 (official)

Origin of gross domestic product 1997 % of total Components of gross domestic product 1997 % of total

Agriculture & forestry 14.1 Private consumption 58.8

Industry 36.9 Public consumption 19.3

Construction 7.2 Gross fixed capital formation 24.6

Transport & communications 12.6 Increase in stocks 1.0

Trade & catering 9.4 Net exports of goods & services –4.0

Total incl others 100.0 GDP 100.0

Principal exports 1997 % of total Principal imports 1997 % of total

Machinery & equipment 31.7 Mineral products 27.5

Chemicals 11.5 Machinery & equipment 20.0

Textiles 11.3 Food products 12.9

Metals 9.2 Metals 12.5

Food & food products 8.6 Chemicals 11.5

Mineral products 8.2 Plastic & rubber 6.1

Main destinations of exports 1998 % of total Main origins of imports 1998 % of total

CIS 73.7 CIS 66.9 of which: of which: Russia 65.5 Russia 53.8 Ukraine 5.8 Ukraine 11.1

Non-CIS 26.3 Non-CIS 33.1 of which: of which: Germany 2.7 Germany 8.7 Poland 2.5 Poland 3.3 Lithuania 2.2 Lithuania 2.4

a EIU estimate.

Belarus 7


Outlook for 2000-01

Forecast summary($ m unless otherwise indicated)

1998a 1999b 2000c 2001c

Real GDP growth (%) 8.3 1.5 1.0 2.0

Industrial production 11.0 8.0 4.0 5.0

Agricultural production –0.4 –10.0 –8.0 –7.0

Consumer price inflation ( %) Average 73 295 210 170 Year-end 182 240 200 150

Exports fob 7,123 6.000 6,200 6,500

Imports cif 8,482 6,400 6,650 7,000

Current-account balance (% of GDP) –6.1 –0.5 –0.9 –1.2

a Actual. b EIU estimates. c EIU forecasts.

Despite recent indications of a greater willingness to challenge the government(see The political scene), the opposition is unlikely to overcome the effects ofserious internal divisions and years of government suppression. As a result itwill fail to unseat the president, Alyaksandar Lukashenka, who will continueto ignore the opposition’s demands for a new presidential election and itsclaim that, according to the constitution in place at the time of his election,his term in office expired in July 1999 (3rd quarter 1999, page 10). However,Mr Lukashenka has predicated much of his legitimacy on ensuring a minimumstandard of living for all—a commitment which is now in question, followinga second consecutive disastrous harvest. To avert further disruptions to thecountry’s meagre supplies of basic foodstuffs, the government will seek foreign-currency loans to finance grain imports and adopt a more flexible stancetowards the opposition in response to criticism voiced by potential Westernlenders over the state of democratic rights in Belarus.

The EIU’s forecast for 2000-01 requires a number of caveats. A softening of theadministration’s position next year will not represent a lasting shift towardsgreater political pluralism, nor a narrowing of the ideological gap separatingMr Lukashenka and the opposition. The government will continue to use thevarious means at its disposal to harass its critics and proscribe the politicalspace open to the opposition—even if it temporarily abstains from the overthuman rights violations seen in the past. Moreover, if Belarus succeeds insecuring the requisite quantities of food needed to alleviate the effects of a badharvest, the government will quickly return to its customary policies of self-isolation from the West and open human rights abuse.

This move towards slightly greater flexibility will help ensure that talkssponsored by the Organisation for Security and Co-operation in Europe (OSCE)between the government and the opposition will continue in 2000 despiteslow progress and repeated disruptions. The openly confrontational stanceadopted by both sides, however, will preclude constructive dialogue. The

President Lukashenka willprove more flexible

towards the opposition—

—even if he proceeds withplans for elections—

—but will remain firmlyin control—

8 Belarus


possibility of a parliamentary election in 2000, as pledged by Mr Lukashenka,will lead to further assertiveness on the part of the opposition, which will seethe election campaign as a valuable platform from which to criticise thegovernment. If held, the parliamentary election will almost certainly failto satisfy international standards and is unlikely to change the compositionof the current parliament, which has provided consistent support forMr Lukashenka’s policies.

At this point it appears improbable that Mr Lukashenka would violate theconstitution he introduced in 1996 by delaying the presidential electionrequired in 2001. Assuming that this election proceeds as planned, we still seelittle prospect of an opposition candidate challenging the presidentsuccessfully. However, this situation could change if the economic situationdeteriorates even more than is currently expected. If Mr Lukashenka is unableto ensure even limited access to basic foodstuffs, or to avoid open hyper-inflation and currency collapse, then he will lose the widespread rural supportthat has proved the foundation for his rule.

Moreover, the recent split in the Belarusian Popular Front (BPF), the largestnationalist opposition party, might paradoxically lead to a more unitedopposition attack on the administration. The rump BPF is left under thecontrol of Vintsuk Viachorka, who has shown an understanding of the need towork with other opposition groups—unlike his predecessor, Zianon Pazniak,who has formed his own smaller BPF offshoot, called the Conservative-Christian Party of the BPF (see The political scene). Improved contacts betweenthe BPF and other major opposition parties, in particular the United CivicParty and the Social-Democratic Party (People’s Hramada), will result in moreco-operative efforts to oust the Lukashenka administration.

The opposition has traditionally focused much of its criticism of thegovernment on Mr Lukashenka’s plans for greater union with Russia. The twocountries had planned to bring this union one step closer on November 26th,when Mr Lukashenka and the Russian president, Boris Yeltsin, were scheduledto sign a newly drafted union treaty. However, Mr Yeltsin’s renewed illness hasled to a postponement of the signing ceremony. Although it is still likely toproceed in December, the union project would face a major setback ifMr Yeltsin’s health deteriorated to the point where another bout of politicaluncertainty in Russia could push it off the agenda. However, even then thetreaty is still likely to be signed eventually, as sufficient support for it existsamong a wide range of Russian leaders, who recognise it as a popular causeduring an election period.

Support for the union treaty in Russia reflects the Russian government’s successin securing a final version of the treaty that is unlikely to change relationsbetween Russia and Belarus significantly over the forecast period. The mostimmediate provisions merely reaffirm the high level of co-operation thatalready exists between the two countries. The vague terms used to define theresponsibilities of the joint legislative and executive bodies means that theirinterpretation will be left to the discretion of the Russian and Belarusian

—but will bring onlyslow changes

—although he could startto face a more united

opposition

The union treaty is likelyto be signed—

Belarus 9


governments. Steps towards further integration of the two countries’ taxsystems and customs administrations will not be taken before 2002, and asingle currency is now unlikely to be introduced before 2005 at the earliest.

Mr Lukashenka’s reliance on statist economic policies and his efforts toreconstruct the Soviet economy of the late 1980s will prove the primary com-plicating factor in any moves towards greater economic and monetary union.We see little chance of a major change in Mr Lukashenka’s economic policiesover the next two years. At most, the country’s dire economic situation willforce the government to seek greater assistance from multilateral institutions,which will insist on more signs of economic liberalisation and more prudentmonetary policy. This would then compel the government to introduce limitedreforms, however unwillingly. Such efforts are likely to include sporadic,qualified and temporary measures, for example, reduced quotas for mandatorysales of currency proceeds at the official exchange rate and a tighter creditpolicy, including the easing of foreign-exchange restrictions.

However, as discussed in our previous reports, none of these steps will lead tosustained changes in the government’s policies (1st quarter 1999, page 8). Thestate will continue to set economic development priorities and support selectedindustries and enterprises through preferential access to imported resourcesand to foreign currency at artificially low rates. In agriculture, the state willcontinue to rely on collective farms and hamper the development of privatelyowned agricultural entities.

The government’s unwillingness to introduce structural reforms, therefore, willperpetuate the dominant role played in the economy by inefficient butpolitically important enterprises, which depend on generous supplies of cheapcredit to remain in operation. This will be most evident in the agriculturalsector, where the government will seek to avoid at all costs yet another badharvest. Since it remains opposed to restructuring the current system ofproperty ownership, which would in any event take more than one year tocome into effect, the government will rely once again on an expansionarycredit policy—most likely next spring, before the sowing campaign, and thenagain in late summer, in time to finance the harvest.

Further credit expansion will foster continued high inflation, which thegovernment will seek to contain through price and wage controls, despite theglaring ineffectiveness of this policy in 1998-99. Although the government isaware of the dangers inherent in inflation and appears somewhat moreamenable to IMF demands for prudent monetary policy, it will have littlechoice but to print more money in support of politically mandated yetunviable economic growth. Average annual consumer price inflation this yearis likely to equal between 290% and 300%, slightly above the 270-280% wehave been forecasting since the start of the year. We expect a slightimprovement to around 210% in 2000 and 170% in 2001, following some half-hearted attempts by the National Bank of Belarus (NBB, the central bank) totighten its expansionary policies.

—but no major shiftin policy—

Some economicliberalisation is possible—

—which will mean furtherhigh inflation—

10 Belarus


In the absence of the substantive reforms needed for any sustained disinflation,the government will proceed instead with plans to redenominate the rubel byeliminating three zeros, starting on January 1st 2000. However, as this isunlikely to be accompanied by significantly tighter monetary and creditpolicies, the move will have no stabilising effect on the monetary system.Instead, we expect a further real depreciation over the forecast period, with thegovernment forced to accept a considerably sharper depreciation than was seenfor much of this year. We expect the rubel to reach BRb350,000:$1 by the endof the year and then to slide to as low as BRb850,000:$1 by the end of 2000.We remain pessimistic that the government will take the necessary steps toliberalise the current exchange-rate system, as this would require relinquishingthe control the government enjoys over enterprises that are required to applyfor foreign-currency access.

In this context of excessive state involvement in the economy, Belarus will findit increasingly difficult to maintain the high levels of growth seen in recentyears. In 2000-01 industrial sector growth and declining agricultural outputwill largely cancel each other out, resulting in very modest GDP growth ofaround 1% next year and 2% in 2001, provided Belarus avoids a repeat of thisyear’s extremely poor harvest results. The government is committed topreserving existing industrial structures, no matter how archaic and inefficient,and will persevere with a strategy based on the intensive production of largequantities of obsolete and low-quality goods destined for the Russian market.

However, without the requisite investment and restructuring, the returns fromthis policy will diminish considerably over the forecast period. Although theexpected recovery in Russian demand will permit continued industrial outputgrowth, this will prove far more modest than in 1997-98 and is unlikely toexceed an annual rate of between 5-6%. In agriculture the limits ofMr Lukashenka’s policies have already become apparent. This year’s disastrousharvest will influence agricultural performance well into the next year. Meatand dairy production is likely to suffer most, as the shortage of grain,combined with the lack of alternative sources of fodder, will force a reductionin the cattle stock. Agricultural production could decline by around 8% in2000, with a further drop expected in 2001 because of the lack of agriculturalsector reform and the reduced scope for soft credit to the sector.

Russia will continue to account for over 50% of Belarus’s foreign tradeturnover. Belarus’s cash shortage will make it excessively dependent on oil andgas imports from Russia, which it receives at a preferential price and for whichit can pay through barter. Mr Lukashenka’s reliance on the production of low-quality goods to increase industrial output will also mean continued relianceon Russia. These exports will recover somewhat from the decline experiencedsince 1998, especially as low-quality Belarusian products remain attractive toRussian enterprises that are unable to afford Western goods and rely on barter.

Belarus’s trade deficit will increase only slowly from the historic low expectedin 1999. Limited foreign-currency availability and the government’s concertedimport-substitution efforts, as well as renewed real currency depreciation, willensure at most slow growth in import expenditure. Export revenue will grow

Foreign trade will remainweighted towards Russia—

—currency instability—

—and only modestGDP growth

Belarus 11


through further increased trade with non-traditional markets and improveddemand in Russia. As a result, we expect current-account deficits of 0.5-1.5% ofGDP through the forecast period, well below the 5-6% recorded in 1997-98.

Low current-account deficits will prove critical for Belarus, which can rely onvery few sources of financing. Private and multilateral lenders are unlikely toincrease their presence in Belarus without further signs of substantial economicliberalisation. As the government is unlikely to meet these demands, totalforeign debt levels will remain extremely low by regional standards. Belaruswill remain an unattractive place for foreign investors, given its under-developed infrastructure, feeble market reforms, outmoded labour policies andunpredictable leadership.

The only rationale for investing in Belarus is the promise of access to theRussian market—which remains a relatively uninviting prospect, given Russia’slow aggregate demand. As the speed of Russia’s recovery increases, foreigninvestors will see more benefit in investing in Russia, where market reforms areat least more advanced than in Belarus. The level of foreign direct investmentsin Belarus will remain the lowest in the region throughout the forecast period.

Global assumptions summary(% unless otherwise indicated)

1998a 1999b 2000c 2001c

US GDP growth 4.3 3.8 2.9 1.9

EU growth 2.7 1.9 2.5 2.6

OECD growth 2.4 2.6 2.5 2.3

US $ effective exchange rate (1990=100) 109.5 106.3 100.1 98.2

$:€ 1.12 1.10 1.15 1.19

Oil price (% change) –33.3 41.0 8.4 –9.0

Export prices, manufactures ($) –1.5 3.2 5.8 2.9


Source: EIU Country Forecast.

The political scene

On October 17th a large demonstration against the proposed union treaty withRussia confronted the president, Alyaksandar Lukashenka, with his first seriouschallenge in several years. What started as an officially authorised rally inMinsk attended by approximately 20,000 protestors turned into a confron-tation with riot police, when a crowd of more than 5,000 marched to thepresidential residence in the centre of the city. In the clashes that followedprotesters hurled stones at the police, who responded with baton attacks andarrests of more than 100 people, many of them seemingly innocentbystanders. Many of those who were arrested reported being physicallyassaulted before their release more than 24 hours later. Mikalai Statkevich, thechairman of the Belarusian Social-Democratic Party (People’s Hramada) and

—and foreign debt willstay low

The opposition challengesthe administration

directly—

12 Belarus


one of the chief organisers of the demonstration, was charged with disturbingthe peace and was only released after spending two weeks in custody. Anotheropposition leader, Anatol Liabedzka, spent ten days in jail.

The confrontation demonstrated that Mr Lukashenka’s opponents remaincapable of large-scale and visible opposition to his administration and thatthey are prepared to adopt a more active stance. Despite the opposition’s showof force, however, Mr Lukashenka still remains popular with much of thepopulation, especially in rural areas. Recent opinion polls indicate that morethan 45% of the population would vote for Mr Lukashenka if a presidentialelection were held. The prime minister, Sergei Ling, came a distant second witharound 12% of support.

The low (single-digit) support shown for leading opposition figures indicatesthe success with which Belarusian authorities have limited the country’spolitical freedoms. The authorities’ sustained campaign of harassment hascentred on routine arrests of opposition activists and searches of oppositionparty offices. Most recently, law enforcement officers seized the accounts of theNaviny newspaper affiliated with the Belarusian Popular Front (BPF), the largestopposition organisation, after the newspaper published an article criticisingVictor Sheyman, the state secretary of the Security Council and a closeLukashenka ally. Another opposition newspaper was recently threatened withclosure, ostensibly on charges of tax irregularities.

The risk of further isolation from Western governments or multilateralinstitutions has not yet deterred the administration from directly targetingleading opposition figures. Mikhail Chigir, the former prime minister and aleading candidate in the shadow presidential election organised by theopposition in May 1999 (2nd quarter 1999, pages 10-11), has remained in pre-trial detention since April. One of the most prominent opposition leaders,Victor Gonchar, the deputy speaker of the Belarusian parliament disbanded byMr Lukashenka in 1996, disappeared on September 16th, only months afterhelping to organise the shadow presidential election. Mr Gonchar had becomeone of the most outspoken critics of the administration. The authorities haveyet to shed any light on the disappearance over the past two years of otherprominent political figures, such as the former chair of the National Bank ofBelarus, Tamara Vinnikova, and the former interior minister, Yury Zakharenko.

In addition to official harassment, the opposition’s low support also reflects thelack of co-operation to date between the various opposition organisations. TheBPF party congress held on October 30th has resulted in yet further divisions.The BPF has replaced Zyanon Pazniak, the long-time BPF leader who leftBelarus in 1996, with Vintsuk Viachorka, a former deputy chairman of theparty and a veteran of the Belarusian nationalist movement. This promptedapproximately 100 of Mr Pazniak’s supporters (around one-third of thecongress delegates) to convene separately and elect Mr Pazniak as chairman ofthe newly formed Conservative-Christian Party of the BPF (CCP-BPF). It isunclear how many rank and file BPF members will follow Mr Pazniak into thenew party. In the post-independence period Mr Pazniak commanded

—but fails to undermine it

Another opposition leaderdisappears—

—and the main nationalistopposition party splits—

Belarus 13


considerable respect among the nationalist opposition as the charismaticfounder of the BPF. Despite the emergence of several opposition parties,Mr Pazniak continued to present the BPF as the government’s only seriousopponent but failed to adjust his leadership style to changes in the country’spolitical landscape. Since 1996 his attempts to lead the party from abroad havestrained relations with other BPF leaders and reduced the effectiveness of hisleadership, as became clear during the shadow presidential election in May.

Several recent events suggest that co-operation between the various oppositiongroups might be improving. Even the split in the BPF points in this direction: incontrast to Mr Pazniak, the new leadership of the BPF headed by Mr Viachorka iswidely seen as pragmatic and willing to compromise with other oppositiongroups. The demonstration on October 17th, which was organised jointly bythe BPF, the Belarusian Social-Democratic Union and the United Civic Party,may provide one of the first signs that co-operation between the oppositionforces is improving. Similarly, opposition groups have demonstrated increasedsolidarity in their approach to the negotiations sponsored by the Organisationfor Security and Co-operation in Europe (OSCE) between government officialsand opposition leaders. The opposition, which has consistently supported theseefforts because of its limited access to other means of political participation, hasnow received its first concessions from the government in the form of some(limited) access to state-controlled television. The government has long resisteddirect dialogue with the opposition and has only recently become morereconciled to the idea, given its urgent need for foreign financial assistance andhence improved relations with Western governments.

Mr Lukashenka’s push for greater external financing stems from concern thattwo successive dismal harvests could seriously undermine public support forhis administration. Nonetheless, this has not precluded further flamboyantstatements reaffirming his antipathy towards the West. Following the demon-stration on October 17th he accused the West of paying $300,000 to theorganisers—in this case the opposition—and then reportedly advised Russianparliamentary deputies in Moscow “not to go down on their knees before thecrooks from the IMF”. Mr Lukashenka understands the effect of these anti-Western statements on domestic audiences and on Russia’s polity and willtherefore rely on others within his administration to signal greater flexibilitytowards Western governments and multilateral institutions.

At the time of Mr Lukashenka’s visit to Moscow government officials in Minskreceived a visiting IMF delegation to resume talks about the possibility of anemergency loan. Similarly, the need to improve Belarus’s image in advance ofthe OSCE summit held in Istanbul in November prompted a foreign ministrystatement portraying the release of opposition leaders arrested after thedemonstration of October 17th as a goodwill gesture to the West. Belarus’sforeign minister, Ural Latypov, consistently refrains from radically anti-Westernstatements, while the prime minister, Sergei Ling, recently proved unusuallycandid when he acknowledged that foreign loans and investments depend onBelarus bringing its policies in line with international standards.

—increasing the control ofpragmatic leaders

The administration adoptsa more conciliatory stance

towards the West—

14 Belarus


However, these overtures towards the West do not signal a major change in theadministration’s orientation, which remains focused on ever-closer union withRussia. Both Russian and Belarusian leaders have hailed the draft union treaty,which is likely to be signed in mid-December (see Outlook for 2000-01), as asignificant step towards closer integration. The treaty provides for supra-national legislative and executive bodies and the formation of a Supreme StateCouncil, which in theory will govern the union state and be chaired alter-natively by the presidents of the two countries. The bicameral legislature of theunion state will include an upper chamber (House of the Union), to which theBelarusian National Assembly and the Russian Federal Assembly will eachdelegate 36 members, and a lower chamber (House of Representatives)comprising 28 directly elected delegates from Belarus and 75 from Russia. Theunion state will include a council of ministers, composed of key ministers fromthe Russian and Belarusian governments and chaired on a rotating basis by thetwo prime ministers. According to the treaty both countries will remainsovereign states and retain their independent armed forces, with only regionalmilitary groups coming under joint command.

Nonetheless, the final draft of the treaty reflects the strength of Russianopposition to Mr Lukashenka’s more maximalist notion of such a union. Thetreaty has stretched the implementation of its more crucial provisions until2002 and beyond. The two countries will retain separate customs and foreigntrade tariffs and separate tax codes until 2002 and will delay the introductionof a single currency until 2005. Mr Lukashenka appears to have accepted thetreaty with uncharacteristic restraint, recognising that it represents the limit ofwhat can currently be achieved in the light of Russia’s considerable reluctance.

Economic policy

The president, Alyaksandar Lukashenka, issued a decree in October to changethe nominal value of the Belarusian monetary unit as of January 1st 2000.Until 2003 the monetary authorities will exchange the rubel notes currently incirculation—the largest of which has a denomination of BRb5m or around$16—for new rubels at a ratio of 1,000:1. This move confirms the indefinitedelay of any new Belarusian-Russian currency and should not be seen as achange in monetary policy, which remains exceedingly expansionary. Broadmoney supply (M2), which has traditionally been closely correlated toinflationary trends in Belarus, rose by more than 95% over the first ninemonths of the year, higher even than the 70% increase seen over the sameperiod in 1998. Currency in circulation has risen even faster, increasing byalmost 160% since the start of the year, compared with a 48% rise over thesame period in 1998.

Faced with growing budget expenditure and insufficient revenue, the govern-ment plans to issue more money before the end of the year. Nonetheless, theEIU still expects a slightly slower increase in M2 broad money supply this yearcompared with 1998, as the administration is unlikely to repeat the massive

The government plans toredenominate the

currency—

—but remains committedto union with Russia—

—which will happenonly slowly

—but shows little sign ofsubstantive policy

changes—

Belarus 15


emissions carried out in December 1998 in the wake of the regional financialcrisis. In that month alone, M2 rose in month-on-month terms by 75%,leading to a year-on-year increase of 276%. Even given a recent rising trend, weexpect M2 to grow by less than 200% this year. The increase in currency incirculation, however, will prove even more precipitous and is almost certain toexceed the 120% increase seen last year. This indicator grew at an averagemonthly rate of almost 12% between January and September and is likely tofinish the year with an increase of around 250%.

The government has therefore remained heavily reliant on soft credits andmonetary emissions in order to bolster production and maintain widespreadconsumer subsidies, despite well-publicised statements throughout much ofthe year that committed it to tighter policies. Mr Lukashenka’s distrust of realstructural reforms and his vision of a state-controlled economy have made thispattern almost unavoidable. Moreover, the administration’s attempts to controlthe fallout from its policies have proved largely insufficient and have relied ontightening the state’s control even further.

The government, which depends on price and wage controls as the principalmeans of controlling inflation, has recently begun to subject private companiesto the sort of wage regulation that previously applied only to government-controlled enterprises. According to a presidential edict issued in October,private companies must now pay salaries that are calculated according togovernment guidelines. Alongside these wage controls, Mr Lukashenka hasbeen forced to tighten price controls on basic consumer goods even further toprevent a sharp drop in real spending power. However, price controls merelyexacerbate widespread shortages further and force even more enterprises thatalready face spiralling producer price increases to incur growing losses andamass further wage arrears.

The government has responded to the country's financing problems byembracing an import substitution programme designed to ensure that cash-strapped Belarusian enterprises choose domestically produced goods of inferiorquality over imported goods.

Finally, as the anchor of its state-centred efforts to stabilise the economy, theNational Bank of Belarus (NBB, the central bank) has unveiled a plan tostabilise the economy by reducing the rubel’s month-on-month devaluation to2%. Although this policy is designed to encourage IMF assistance, it is unlikelyto have any effect, or even prove workable, without being preceded by anumber of reforms, including further foreign-exchange liberalisation andtighter credit policies—two measures which the government sees as under-mining its control and jeopardising its goal of high economic growth.

The government’s fiscal policy has proved relatively more successful thanalmost all of the other parts of its programme. Over the first eight months ofthe year total state budget revenue of BRb561trn ($2.24bn at the officialexchange rate) and expenditures of BRb557trn resulted in a slight budgetsurplus of around BRb3.5trn, or 0.2% of GDP, as calculated by BelarusEconomics Trends. In real year-on-year terms total revenue increased by almost

Tax collection proceedsreasonably well—

—or of relinquishing itseconomic control

16 Belarus


5% over the first eight months of 1999, after having fallen by almost 4%during the fourth quarter last year, at the height of the regional crisis. Theimprovement in revenue collection seen this year, however, remains far belowthe almost 40% real year-on-year increase registered over the first threequarters of 1998.

Budget expenditure has also fallen in real terms since the start of the regionalcrisis forced the government to tighten spending. Real expenditure fell byalmost 5% in year-on-year terms during the three quarters ending June 1999,compared with a real year-on-year increase of over 40% during the year-earlierperiod. Preliminary data suggest that this trend towards reduced realexpenditure continued in the first two months of the third quarter. Thegovernment originally targeted a budget deficit for 1999 that was equal to1.8% of GDP. Even after the approval of budget amendments in late September,which increased the deficit target by around BRb99.9trn, the government stillappears likely to meet its original target of 1.8%. As discussed in previousreports, however, the government’s deficit does not capture the far less trans-parent expenditure of extra-budgetary funds controlled by the presidentialadministration (3rd quarter 1999, page 12).

The draft 2000 budget approved by the cabinet in early November plansexpenditure of BRb1.34trn and revenue of BRb1.24trn (using the new denomi-nation for the rubel). Around 46% of revenue is expected to come fromindirect taxes, such as value-added tax (VAT) and excise taxes, roughly in linewith recent levels and slightly down on 1997, when more than 50% of revenuecame from indirect taxes. Only around 16% of revenue is expected to comefrom direct taxes, such as income and profit taxes, which is substantially lowerthan the 23-25% seen in 1996-98. The low contribution of direct taxes to thestate budget remains a chronic problem in Belarus, and one which is unlikelyto improve without the emergence of a more vibrant private sector.

As in past years, the government’s draft budget is based on optimistic targetsfor monthly inflation, which are forecast at around 4-5% in 2000, and foragricultural sector growth, predicted to reach around 5-6%. Neither of thesetargets is likely to be met. The monthly inflation target is below levels recordedin any month since August 1998 and far below the average monthly increaseof over 10% recorded so far this year. In the agricultural sector, limitedprospects for swifter reform or improved investment suggests that this sector isunlikely to meet its target, having only once grown at an annual rate of morethan 1% since independence.

Other underlying budgetary assumptions, however, appear slightly morerealistic. In contrast to the 1999 budget, the government has scaled down itsexpectations of GDP growth to 2-3% in 2000, only slightly higher than theEIU’s forecast. Similarly, the government expects an increase in industrialproduction of 2-3%, well down from estimated average yearly growth in1997-99 of around 12%.

—and real expenditurehas dropped

The draft budget isunveiled

Belarus 17



According to official sources, real GDP growth slowed to around 2% in the firstten months of 1999 in year-on-year terms, somewhat below governmentprojections of a 4-6% annual increase. Even this relatively modest growthrequired a year-on-year increase of 8.2% in industrial output in order tocounter the crisis in agricultural sector: as measured by monthly output data,real agricultural production has remained mired in decline since September1998. Even the government’s unusually optimistic estimates now predict a 10%year-on-year drop in agricultural output, roughly in line with the 10.3%decline recorded between January and October this year.

State and collective farms proved disproportionate contributors to this sharpdrop in output, with state-sector production declining by almost 15% in year-on-year terms over the first nine months of the year. The steep agriculturaldecline this year stems in part from the lingering negative effects of the badharvest in 1998, which brought a 27% reduction in feedstuffs this year and aslight drop in livestock, poultry and egg production as a result. The dairy sectorslumped even further, with output falling by 11% in year-on-year terms overthe first ten months of the year. This year’s harvest promises to bring furtherweak output next year, with 1999 grain production down by around 20% toabout 4m tonnes. Other crops faired poorly as well, with the potato harvestdown by 29% compared with last year, the sugar beat harvest down by 9% andflax fibre by almost 40%. Loss-making enterprises continue to burden theagricultural sector, with 38% of agricultural enterprises reporting losses inAugust 1999, almost double the number recorded in August 1998.

Over the first ten months of 1999 average monthly inflation was around 10%,or approximately double the government’s original target. Monthly inflationrates climbed to 12.1% in September and 14.2% in October, sharply higherthan the optimistic forecast provided in September by the first deputy primeminister, Vasily Dolgoliov, who predicted average monthly inflation of around7% throughout the remainder of the year.

Belarus: consumer prices(% change; av)

1998 Month on month Year on year

Jan 3.9 49.9Feb 3.1 44.9Mar 3.3 46.4Apr 3.8 45.7May 3.4 43.4Jun 2.7 41.0Jul 2.8 42.9Aug 3.8 46.9Sep 17.6 64.5Oct 21.0 92.9Nov 25.0 136.8Dec 21.7 181.7

continued

GDP growth hasmoderated considerably—

Inflation is double thegovernment’s targets—

—due to a dismal harvest

18 Belarus


1999 Month on month Year on year

Jan 16.6 216.2Feb 13.7 248.7Mar 12.1 287.4Apr 7.4 291.5May 8.9 312.3Jun 7.1 330.0Jul 6.0 343.4Aug 7.1 357.5Sep 12.1 336.1Oct 14.2 311.6

Sources: Belarus Economic Trends; press reports.

In November the economics ministry published a revised 1999 inflationforecast of 240%, which appears considerably more realistic and corresponds tothe EIU’s estimate for year-end inflation, which is based on expectations ofaround 12% monthly inflation over the last two months of the year. Asdiscussed in previous reports (1st quarter 1999, page 16), official inflation datacontinue to mask the considerable hidden and latent inflation that stems fromadministrative prices and extensive black-market activity.

Compared with the rapid nominal depreciation seen at the end of 1998 andthe first several months of 1999, the monthly depreciation of the Belarusianrubel has proved relatively stable since March at 2.5-4%. Since the govern-ment’s last major alteration to the exchange rate regime on March 1st,therefore, the currency has lost only around 25% of its nominal value,compared with a loss of over 75% in value during the five-month periodbetween the end of September 1998 and early March this year. In real terms,this has brought a gradual appreciation of the exchange rate against both theUS dollar and the Russian rouble since early March, although the rubel remainswell down against both currencies compared with its peak in October 1998.

Belarus: exchange rate% change,

BRb:$1 month on month

1998May 35,299 2.9Jun 36,605 3.6Jul 39,551 7.4Aug 45,288 12.7Sep 51,732 12.5Oct 55,332 6.5Nov 68,143 18.8Dec 96,211 29.2

1999Jan 123,222 21.9Feb 168,300 26.8Mar 232,636 27.7Apr 241,000 3.5May 247,900 2.8Jun 254,818 2.7Jul 263,591 3.3Aug 274,555 4.0

Source: Belarus Economic Trends.

—but the rubeldepreciation has slowed

Belarus 19


Belarus: unemployment, Apr-Jun

1997 1998 1999

Unemployed 157,400 105,000 96,900

Unemployment rate (%) 3.4 2.3 2.1


Official statistics continue to record low levels of unemployment, partlybecause the government has prioritised full employment and hence resistsclosing down inefficient loss-making enterprises, and partly because of chronicunderreporting. Officially recorded unemployment between July andSeptember stood at only around 2.1% of the total workforce, slightly downfrom an average of 2.3% for 1998. As measured by official figures, averagequarterly unemployment has trended consistently downwards from the peakof 3.9% reached in the fourth quarter of 1996. As in many other former Sovietstates, low unemployment benefits create no incentive for the jobless toregister at employment agencies. Current monthly benefits average of aroundBRb1.3m ($4) are equal to around 6% of the average wage.

Belarus: monthly wages and pensions(av; BRb ’000 unless otherwise indicated)

Wages Pensions Nominal Reala Minimum Arrearsb Nominal Reala

1998Jan 3,024.2 100.8 250.0 797.5 1,238.2 122.3 Feb 3,390.0 109.6 250.0 803.8 1,475.3 141.4 Mar 3,698.2 115.8 250.0 722.8 1,475.3 136.8 Apr 3,669.3 110.6 250.0 948.3 1,475.3 131.8 May 3,854.9 112.4 250.0 1,081.7 1,475.3 127.5 Jun 4,176.8 118.6 250.0 1,312.9 1,475.3 124.1 Jul 4,348.2 120.1 250.0 758.7 1,721.2 140.9 Aug 4,449.0 118.4 250.0 1,068.6 1,721.2 135.7 Sep 4,663.6 105.5 250.0 1,234.7 1,738.8 116.6 Oct 5,731.1 107.2 350.0 1,167.0 2,011.4 111.5 Nov 6,369.0 95.3 350.0 766.0 2,119.8 94.0 Dec 8,008.2 98.4 350.0 1,113.7 2,579.8 94.0

1999Jan 8,978.50 94.7 500.0 1,418.90 2,922.3 91.30 Feb 9,953.90 92.3 500.0 1,135.50 3,610.9 99.20 Mar 11,682.20 96.6 500.0 1473.1 4,026.9 98.7 Apr 1,2849.6 99.0 1,000.0 2047.7 4,500.2 102.7 May 1,7580.6 124.3 1,000.0 4328.8 5,481.6 114.9 Jun 1,9061.8 125.9 1,000.0 5163.2 5,974.2 116.9 Jul 2,0456.2 127.4 1,000.0 4867.1 7,962.1 147.0 Aug 2,1467.3 124.9 1,000.0 5786.7 8,584.2 148.0

a Dec 93=100. b BRb bn.


Between August 1998 and August 1999 nominal average wages increased byaround 380%, or just over 5% in real terms. However, real wages fell steadilybetween May and August, as high levels of consumer price inflation graduallyeroded the effects of the 37% surge in nominal wages seen in May. In dollarterms, wages have kept pace remarkably well as a result of the rubel’s slowed

Official statistics show lowunemployment —

—an increased realincomes—

20 Belarus


depreciation, rising by almost 55% between February and August. Nonetheless,this translates into an average monthly wage of only around $78, well downfrom the peak of $114 reached in June 1998.

While nominal pensions had risen by almost 400% in year-on-year terms byAugust 1999, the latest data reported in Belarus Economics Trends show that realpensions only began to rise in year-on-year terms for the first time in July,helped by a 33% nominal increase in pensions awarded that month. By Augustreal pensions were around 9% higher than at the same point last year,although this still corresponds to just slightly more than $30. The governmentintends to increase all pensions by an average of 17% in December, but thatwill fail to keep up with the high levels of inflation recorded since September.

The government’s emphasis on sustaining real wage and pension growth hashelped ensure strong domestic demand in recent months. The year-on-yeartrend in retail sales was generally positive in real terms between May andAugust 1999, following six months of steady year-on-year decline. The strongershowing that began in May coincided with a sharp rise in both wages andpensions. By August 1999 real retail sales were more than 15% above the levelrecorded at the same point in 1998.

Belarus: real retail sales(% change)

Year on year Month on month

1998Jan 28.8 –20.6Feb 36.5 2.0Mar 39.5 16.2Apr 28.0 –6.8May 34.4 2.7Jun 30.2 1.8Jul 38.6 7.0Aug 21.6 –3.5Sep 21.5 –2.8Oct –0.1 –3.6Nov –8.3 –7.8Dec –16.0 2.5

1999Jan –9.6 –14.6Feb –15.6 –4.8Mar –13.8 18.8Apr –9.4 –2.2May 1.9 15.6Jun 1.1 1.0Jul 3.0 9.1Aug 15.3 8.0


—as well as growingretail sales

Belarus 21



Belarus’s foreign trade has declined precipitously this year in nominal dollarterms. Export revenue equalled around $3.77bn over the first eight months of1999, down by approximately 21% in year-on-year terms. However, as in othercountries of the Commonwealth of Independent States (CID), such as Ukraineand Moldova, an even greater import compression has more than compen-sated for this drop in revenue. Over the first eight months of the year importexpenditure dropped by just over 30%, totalling around $4.1bn. The resulting$329m trade deficit represents a sharp improvement over the $1.09bn deficitrecorded during the year-earlier period. Balance-of-payments data for the firsthalf of 1999 indicate a slight current-account surplus of $25m, in contrast tothe $578m deficit recorded over the same period in 1998.

Although it is too early to suggest a definite trend, the declining year-on-yeartrend in export revenue and import expenditure that began in the thirdquarter of last year appeared to bottom out in the first quarter of 1999, whenquarterly exports were down by around 25% and imports were down by almost40% in year-on-year terms. The increasing reliance of both Russian andBelarusian enterprises on barter transactions over the first eight months of thisyear has led to the share of barter exports rising to 36% of total exports and theshare of barter imports to 32%. This represents an increase of 32% of exportsand 26% of imports conducted through barter over the year-earlier period.

Although the Russian market still receives more than 53% of total Belarusianexports, total export revenue from trade with Russia decreased by almost 39%in year-on-year terms between January and August 1999. Moreover, Belarusrecorded a trade deficit with Russia in the first eight months of this year(import expenditure exceeded export revenue by 11%), in contrast to the tradesurplus recorded over the same period in 1998, when exports to Russiaexceeded imports by around 4%. More than 54% of Belarus’s imports over thefirst eight months of the year came from Russia.

The trade deficit withRussia grows—

Trade levels remainsharply down

22 Belarus


Belarus’s gas-related debts appear as a perpetual feature of its trade with Russia.These debts to Gazprom, the Russian gas monopoly, currently stand at around$230m. It is unclear whether payment in kind has been negotiated, as was thecase in earlier agreements, when Russia accepted Belarusian goods in lieu ofpayment. Belarus’s debts to Gazprom have now been aggravated by growingdebts to Lithuania for electricity supplied from the Lithuanian nuclear powerplant at Ignalina, near the Belarusian border. Belarus’s debt to Lithuania forelectricity supplies currently totals $81m, one-third of which is expected to bepaid by April 2000. Lithuania has already signalled its willingness to acceptpayment in kind.

Belarus: current account($ m; % change year on year in brackets)

1998 1999 I Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr

Exports of goods 1,764 1,887 1,689 1,784 7,123 1,354 1,545(21.0) (5.2) (–15.0) (–16.9) (–4.1) (–23.2) (–18.4)

Imports of goods 2,248 2,244 1,962 2,028 8,482 1,397 1,615(15.1) (11.2) –(11.4) (–19.9) (–2.2) (–37.8) (–28.7)

Trade balance –485 –356 –273 –245 –1,359 –43 –71(–2.4) (59.3) (19.5) (–36.9) (–1.7) (–91.1) (–81.0)

Net services 116 144 72 108 440 75 80

Net income –14 –26 –16 –22 –78 –18 –21

Current transfers 15 43 17 65 140 15 17

Current-account balance –368 –210 –220 –146 –945 20 5

Sources: National Bank of Belarus, published in Belarus Economic Trends; IMF, International Financial Statistics.

—as do energy debts

Moldova 23


Moldova

Political structure

Republic of Moldova

Moldova adopted a new constitution on July 28th 1994. The Transdniestr region hasdeclared independence, which the central government has not recognised. The regioninhabited by the Gagauz minority was granted special legal status in December 1994

Unicameral assembly, the parliament, with 101 members, directly elected byproportional representation

March 22nd 1998 (legislative) and November 17th 1996 (presidential); next electionsdue in late 2000 (presidential) and by 2002 (parliamentary)

President, Petru Lucinschi, sworn in January 15th 1997

Moldova has an executive presidency. The prime minister chairs the Council ofMinisters. A new coalition government was approved by parliament on March 1st 1999;it was voted out of office on November 9th 1999. No new government has been named

The former governing centre-right coalition, the Alliance for Democracy and Reforms,was voted out of office in November 1999. It comprises the Bloc for a Democratic andProsperous Moldova (17 seats in parliament) the Democratic Convention (16 seats) andthe Party of Democratic Forces (9 seats). Together with the Christian-Democratic PopularFront (9 seats), these parties comprise the centre and centre-right in parliament. TheCommunist Party of Moldova holds the largest number of seats (39). Since March 1999ten deputies have left their parliamentary factions and now sit as independents.

Prime minister Ion Sturza (resigned with his cabinet on November 9th 1999)

First deputy prime minister Nicolae AndronicDeputy prime minister & minister for the economy Alexandru MuravschiDeputy prime minister Oleg Stratulat

Agriculture & food processing Valeriu BulgariCulture Ghenadie CiobanuDefence Boris GamurarEducation Anatol GrimalschiFinance Anatol ArapuForeign affairs Nicolai TabacaruHealth Eugeniu GladunIndustry & commerce Alexandra CanJustice Ion PaduraruLabour & social protection Vladimir GuritsencoSecurity Valeriu Pasat

Leonid Talmaci

Official name

Legal system

National legislature

National elections

Head of state

National government

Main political parties

Council of ministers

Key ministers

Central bank governor

24 Moldova


Economic structure

Latest available figuresa

Economic indicators 1994 1995 1996 1997 1998

GDP at current prices (Lei m) 4,737 6,480 7,798 8,917 8,804

GDP at exchange rate ($ m) 1,109 1,441 1,693 1,929 1,639

GDP at purchasing power parityb ($ bn) 7.3 7.4 6.9 7.1 6.6

Real GDP growth (%) –31.1 –1.4 –7.8 1.3 –8.6

Consumer price inflation (av; %) 486.4 29.9 23.5 11.8 7.7

Populationc (mid-year; m) 4.4 4.4 4.3 4.3 4.3

Exports fob ($ m) 619 739 823 890 644

Imports cif ($ m) –672 –809 –1,075 –1,235 –1,043

Current-account balance ($ m) –82 –98 –191 –268 –334

Consolidated budget balance (% of GDP) –5.9 –5.8 –9.7 –7.5 –3.5

Reserves excl gold ($ m) 179.9 239.8 312.0 366.0 143.6

Foreign debt ($ m) 499 681 844 1,040 1,032

Exchange rate (av) Lei:$ 4.27 4.50 4.60 4.62 5.37

November 30th 1999 Lei12.04:$1

Origin of gross domestic product 1998d % of total Components of gross domestic product 1998d % of total

Agriculture & fishing 28.9 Private consumption 84.0

Manufacturing 23.5 Public consumption 18.3

Construction 5.1 Gross fixed investment 21.9

Total incl others 100 Increase in stocks 4.0

Net exports –28.3

GDP 100.0

Principal exports 1998 % of total Principal imports 1998 % of total

Food products, beverages & tobacco 55.1 Mineral products & fuel 31.7

Vegetable products 11.2 Machines, electronic devices & equipment 19.1

Textiles 9.8 Chemicals 9.0

Machines, electronic devices & equipment 6.6 Textiles 6.2

Live animals & animal products 5.4 Metals & metal products 4.0

Main destinations of exports 1998 % of total Main origins of imports 1998 % of total

Russia 53.0 Russia 21.7

Romania 9.6 Ukraine 16.0

Ukraine 7.8 Romania 11.7

Germany 5.0 Belarus 9.0

Belarus 3.8 Germany 5.2

a Excluding Transdniestr unless otherwise indicated. b EIU estimates. c Including Transdniestr. d Preliminary.

Moldova 25


Outlook for 2000-01

Moldova: Forecast summary(% change year on year unless otherwise indicated)

1998a 1999b 2000c 2001c

Real GDP –8.6 –6.0 0.0 2.0

Industrial production –11.0 –10.0 2.0 2. 0

Agricultural production –7.0 –5.0 –1.0 2.0

Consumer price inflation Average 7.7 38.0 28.0 16.0 Year-end 18.2 37.0 22.0 13.0

Exports ($ m) 644 470 500 550

Imports ($ m) –1,043 –560 –650 –720

Current-account balance ($ m) –334 –25 –50 –60 % of GDP –20.4 –2.3 –5.3 –6.9

Exchange rate (Lei:$) Annual average 5.37 10.57 14.60 19.00 Year-end 8.32 12.50 17.00 22.00


The Moldovan political scene will remain volatile over the forecast period. TheEIU sees little prospect of a stable parliamentary majority emerging, and thereis a great likelihood of further political manoeuvring in advance of next year’spresidential election. Although we expect parliament to approve a techno-cratic government and postpone the need for an election until at least thesecond quarter of next year, a very high risk exists that the legislators willfail to agree to a new government, thereby hastening the dissolution ofparliament and a new election. This would prove extremely serious forMoldova, as it would further delay the multilateral financing andstructural reforms needed to avoid additional economic crisis in 2000.

The fall of the government led by Ion Sturza and recent efforts to form anew government have confirmed the degree to which personal rivalries andshort-term interests continue to dominate politics. The unholy alliancebetween the Communist Party of Moldova (CPM) and the right-wingChristian-Democratic Popular Front (CDPF), which helped bring down theSturza government, has predictably already foundered. The majority thatmight emerge to take its place is likely to prove only slightly more stable. Thenew government will prove short-lived as a result, plagued by presidentialambitions in advance of next year’s election and the on-going dominance ofvested political and economic interests.

The prospect of a role for the CPM in government has increased as a result ofeven further divisions on the centre-right. The CPM is likely to proveinfluential in the formation of a successor to the Sturza cabinet, even if it doesnot get a leading role. If the failure of current attempts to form a majority leadsto new parliamentary election in early 2000, the CPM will benefit from wide-spread dissatisfaction among voters and stands a chance of improving on the40% of parliamentary seats it currently controls.

The political scene willremain unstable—

—with the CPMparticipating in

government—

26 Moldova


As discussed in previous reports, however, CPM involvement in governmentwould not result in a dramatic policy shift away from reforms. Nevertheless,the CPM would fail to bring to its IMF programme the same degree ofcommitment seen under the Sturza government and would risk further costlysuspensions in multilateral assistance. It would also find it difficult to backaway from long-standing commitments towards increased social and economicsubsidies, thereby potentially unravelling the fiscal consolidation achievedin recent months.

The presidential election scheduled for late 2000 will dominate politicalcalculations for much of the first half of the forecast period. In particular,political considerations in advance of the election will raise the risk of slowingthe reform process and a lengthy break in multilateral financing, as seenduring the last parliamentary election. While Mr Lucinschi’s re-election is byno means assured, his leading challengers, such as Mr Voronin, lack thecharisma and the powers of incumbency that Mr Lucinschi will bring to thecampaign trail. The president is not a committed reformer, as he confirmed inhis populist indictment of Mr Sturza on the eve of the no-confidence vote inNovember that brought down the government, and will prioritise his ownelectoral consideration—especially if this helps undermine the existingparliamentary system and increases support for moves towards a presidentialsystem. Many of his challengers will come from within parliament and willsimilarly resist the tough choices required by the IMF programme, for fear ofthreatening key domestic constituencies and the interests of powerfuleconomic backers.

Mr Lucinschi’s efforts to amend the constitution will continue, despite theConstitutional Court’s recent decision limiting his powers to push throughconstitutional changes. Mr Lucinschi will hope to use the opportunityprovided by the fall of the Sturza government to push for a parliamentarymajority more willing to support his proposed changes—or at least morewilling to increase his de facto control over both the government and thelegislature. However, his parliamentary opponents have been strengthened bythe court ruling, which endorsed parliament’s prerogative on constitutionalchanges, and will continue to push their counter-proposal designed tostrengthen the powers of the legislative branch. Nonetheless, Mr Lucinschi'sopponents in parliament are unlikely to receive the two-thirds majority neededto adopt constitutional changes. With no sign that this issue will be resolved,the constitutional question will remain a distracting and destabilising part ofthe political scene. Moreover, it will allow Moldova’s leaders to avoid morefundamental underlying problems, such as the country’s unconsolidatedpolitical party system.

The stalemate over the breakaway region of Transdniestr is similarly unlikely tobe resolved in the near future. The leadership in Transdniestr remainsdetermined to safeguard its power base—or at least to delay any concessions—in order to extract the best possible deal from the various parties involved. Itwill therefore wait to see whether the Organisation for Security andCo-operation in Europe (OSCE) or Western governments increase pressure on

—and with a presidentialelection due in 2000

—as will negotiations onTransdniestr—

Debate on constitutionalchanges will continue—

Moldova 27


Moldova to concede greater autonomy, hoping for an improvement in itsbargaining position following parliamentary and presidential elections inRussia and Moldova. In the meantime, Transdniestr will continue to participatein OSCE-sponsored negotiations for a political solution to the stand-off and thewithdrawal of arms, if only to avoid further economic sanctions.

The most difficult issue in the conflict will centre on the definition of thestatus of Transdniestr. The Tiraspol leadership continues to demand aconfederation of two equal states, while Chisinau insists that Moldova remainsa unitary state—with at most a high degree of autonomy for Transdniestr (seeThe political scene). A possibility exists that the threat of an escalatingeconomic crisis in Transdniestr, combined with international pressure onMoldova, could lead to some movement on either side and allow the basis fora settlement to emerge. This would require Moldova to move towards aslightly more confederal stance and to frame its position in a manner that isacceptable to Transdniestr’s leaders. Even this outside possibility, however,would still not solve the stand-off during the forecast period, given thenumber of issues to be settled after several years of separation and a bloodycivil war.

Russia’s commitment at the OSCE summit in November to remove its armsfrom Transdniestr by the end of 2001, as well as all remaining troops by 2002,opens up further possibilities of a break in the existing stalemate. Russia couldlink its departure to demands for greater concessions from Moldova onTransdniestr’s status—without explicitly supporting the region’s independence.Even then, however, Transdniestrians are likely to remain opposed to thewithdrawal of the Russians, thereby providing the Russian government with anexcuse to delay its departure from the region and to satisfy the power-ful domestic interests intent on preserving Russia’s forward base on the edge ofthe Balkans.

Moldova’s new government is almost certain to retain a reform-orientedoutlook and seek further co-operation with the IMF—even if it proves lesssuccessful than its predecessor at avoiding further delays in multilateralfunding. This assumption is supported by the platform presented by ValeriuBobutac, chosen recently by Mr Lucinschi in an unsuccessful attempt to form anew government (see The political scene). In the parliamentary vote toconfirm his cabinet, Mr Bobutac received the support of the CPM faction,despite a platform that borrowed heavily from the outgoing government.

The progress made on structural reforms over the past year is therefore unlikelyto unravel as a result of renewed political instability or through an increasedCPM role in government. Many of the programmes currently under way, suchas land reform and electricity sector privatisation, do not require furtherparliamentary action and would therefore need active measures by parliamentto be stopped. On land privatisation, in particular, much of the impetus forreform has not necessarily come from Mr Sturza but from others, such as theagriculture minister, the economy minister and the speaker of parliament, whoare likely to continue as powerful forces in parliament. In contrast to

The new government willcontinue with reforms—

—which has only anoutside chance of being

resolved—

—despite recent Russiancommitments to withdraw

28 Moldova


neighbouring Ukraine, there is no parliamentary faction that would be likely topush for a halt to privatisation or reverse a programme that has proved popularwith Moldova’s large rural population.

Similarly, the IMF and the World Bank are likely to have ensured furtherprogress on reform by their swift decision to suspend multilateral loanprogrammes following parliament’s rejection of legislation to privatise thetobacco and wine sectors. Parliamentary agreement to pass this legislation,which is likely to follow the formation of a new government, will help avert anindefinite suspension of multilateral lending but will prove insufficient toprompt the rapid return of external financing. Before it resumes its lending,the IMF will require a proven commitment to reform on the part of the newgovernment; it will need agreement on a reform programme similar to the onerecently agreed with the Sturza government and will demand passage of anacceptable budget for 2000. There is little to guarantee that the newgovernment will attain the degree of fiscal consolidation achieved under theSturza cabinet. Although parliament is likely to pass a budget in keeping withthe IMF’s requirements, the new government is likely to overshoot its deficittarget in the absence of further concerted fiscal reform—especially in anelection year.

The decline in output has begun to stabilise earlier then expected and will leadto a smaller drop in real GDP than originally forecast. On the assumption thatfurther financial crises can be avoided, we expect the decline in growth toflatten out in 2000, with moderate growth expected in 2001. This will reflectgradual structural reform, including agricultural sector privatisation, andfurther recovery in Russia, which will improve prospects for key industries suchas the wine sector. However, the more rapid growth needed to reverse years ofpost-Soviet decline will fail to materialise during the forecast period. Only withgreater political stability and further accumulation of necessary reforms willMoldova begin to attract the investment that is needed for faster growth.

We expect steady disinflation to the end of the forecast period, brought on bylow consumer demand and greater currency stability, leading to year-endinflation of around 22% in 2000. Nevertheless, consumer price inflation willremain moderately high next year compared with 1997 and the first half of1998, predominantly on account of the weakness of the currency and somefurther price liberalisation. The monetary policy of the National Bank ofMoldova (NBM, the central bank) will remain relatively sound and is unlikelyto support any temptation to loosen fiscal policy on the part of the newgovernment. Slowed depreciation in 2001 should allow greater disinflation to ayear-end level of 13% inflation in 2001. This forecast assumes that Russia willavoid further devaluations on the scale seen in August 1998, and that Moldovamanages to stabilise the political situation sufficiently to secure a resumptionof IMF and World Bank funding.

Exports are expected to remain depressed throughout the forecast period.Although the Russian economy has revived since the financial collapse in1998, moderate growth in Moldova’s exports to Russia will fail to recover the

The decline in growth hasmoderated and disinflation

will generally continue—

—while trade remainsdepressed

—for fear of losingmultilateral support

Moldova 29


ground lost in the wake of last year’s Russian rouble devaluation, givenextensive import substitution and increased tariffs in Russia. Central andeastern Europe and the EU will continue to take a growing percentage ofMoldova’s total exports. Nonetheless, a lack of investment, marketing skillsand quality control in Moldova, combined with EU protectionism in impor-tant sectors, will hamper Moldova’s efforts to redirect its exports. Low importexpenditure over the forecast period will further hamper any strong recovery inthe export sector, as Moldova lacks the financing needed to bring in essentialcapital goods and energy inputs. Continued import compression and moderateexport growth will allow record-low current-account deficits of well below 7%of GDP.

Global assumptions summary(% unless otherwise indicated)

1998a 1999b 2000c 2001c

US GDP growth 4.3 3.8 2.9 1.9

EU growth 2.7 1.9 2.5 2.6

OECD growth 2.4 2.6 2.5 2.3

US$ effective exchange rate (1990=100) 109.5 106.3 100.1 98.2

$:€ 1.12 1.10 1.15 1.19

Oil price (% change) –33.3 41.0 8.4 –9.0

Export prices, manufactures ($) –1.5 3.2 5.8 2.9


Source: EIU Country Forecast.

The political scene

Moldova plunged into renewed political crisis with the dismissal of the pro-reform government led by the prime minister, Ion Sturza, on November 9th.The motion in parliament was supported by 58 deputies, including all themembers of the Communist Party of Moldova (CPM) and the Christian-Democratic Popular Front (CDPF), together with a handful of independentdeputies who had previously formed part of the governing Alliance forDemocracy and Reforms (ADR) coalition.

Although the downfall of the Sturza government occurred sooner thanexpected, it came as little surprise following months of disagreement withinthe ADR and the defection of a number of deputies from the governingmajority—developments which had rendered the government unlikely toretain the support of parliament. The immediate catalyst for the cabinet’sremoval came with a vote at the end of October on legislation to privatise thetobacco and wine industries. Both the IMF and the World Bank viewed thislegislation as a precondition for further funding (see Economic policy), whileMr Sturza had explicitly linked the future of his government to the fate of theprivatisation legislation.

The government falls—

30 Moldova


The parliament’s dismissal of the government, however, was not rooted inideological differences over the desirability of further privatisation. Underdifferent circumstances both the CDPF and CPM could have been expected tosupport privatisation efforts and to continue co-operation with multilateralinstitutions. A far more plausible explanation is that the Sturza government’sdismissal stems from a new round of political in-fighting and pre-electionmanoeuvring on the part of the handful of individuals and interests thatdominate the political scene in Moldova. Mr Sturza’s programme, therefore,threatened powerful political and economic interests that stood to benefit fromhis removal: the recently installed fiscal posts at the Transdniestrian border cutinto a lucrative smuggling business; a tighter stance on Transdniestr threatenedto choke off the Transdniestrian economy from which many still benefit; andbudgetary consolidation was cutting into privileges.

Mr Sturza’s weak position in parliament made him an easy target for thoseinterested in bringing him down—especially as the legislature has given littleproof of consensus in favour of stability and reform. The CDPF, led by IurieRosca, has demonstrated few ideological foundations and, as seen in March1999, has shown few qualms about precipitating new crises in the hope ofpolitical gains. The CPM won the largest number of seats in the March 1998parliamentary election but failed to gain an overall majority. It has consistentlyquestioned the legitimacy of Mr Sturza’s government, ever since the highlycontroversial vote that led to its approval (2nd quarter 1999, page 28).

The president, Petru Lucinschi, is also widely considered to have beeninstrumental in precipitating the government’s downfall and is likely to haveplayed a role in prompting the defections needed from the ADR coalition inorder to ensure a successful no-confidence vote. Not only is he up for re-election in 2000, but he has also long sought to increase the powers of thepresidency through more constitutionally mandated responsibilities andthrough closer control over the day-to-day workings of the government.Mr Sturza had not only resisted these efforts but had performed sufficientlywell since his appointment to become a potential challenger to Mr Lucinschiin next year’s presidential contest. Although Mr Lucinschi initially portrayedthe crisis as involving only the government and parliament, he publiclyblamed Mr Sturza for failing to tackle Moldova’s legacy of corruption andeconomic decline on the eve of the no-confidence vote.

A Constitutional Court ruling on November 3rd, which proscribedMr Lucinschi’s powers to amend the constitution, is likely to have acceleratedthe momentum towards the dismissal of the government. Renewedparliamentary instability served to support Mr Lucinschi’s claim that thecurrent system was flawed, while allowing him to push for a new configurationin parliament more amenable to his control. According to the parliamentaryspeaker and the head of the Bloc for a Democratic and Prosperous Moldova(BDPM), Dumitru Diacov, the president held meetings prior to the no-confidence vote with the CPM and the CDPF, as well as with the three ADRmembers who joined in voting against the government.

—after standing in the wayof economic interests—

—party politicalconsiderations—

—and the presidentialagenda

Moldova 31


Since the resignation of the Sturza cabinet Mr Lucinschi has pushed for agovernment of technocrats, which would bring more presidential allies intocabinet posts. He nominated Valeriu Bobutac, the former ambassador to Russiaand economics minister in 1994-96 as a replacement to Mr Sturza acceptable toboth the CDPF and the CPM. However, on November 22nd Mr Bobutac fellfour votes short of the minimum needed for parliamentary approval, havingsecured the support of only the 40 CPM members and eight independents. Atthe last minute the CDPF surprised many (including the CPM) by abstaining,having failed to secure the cabinet posts it requested. The CPM had been slatedto receive four cabinet positions, while seven of the portfolios were allocated toknown supporters of the president, including five members of the previousadministration. Following parliament’s rejection of Mr Bobutac, the CPM brokeoff all co-operation with other parliamentary groups, arguing that it hadconceded as much as it could to the CDPF, including general agreement thatany new government would continue Mr Sturza’s programme. Since then,however, Mr Lucinschi has met repeatedly with the CPM, fostering rumoursthat the party might try again to back a new government.

Mediators involved in resolving the stand-off over the breakaway region ofTransdniestr held a summit in Tiraspol in mid-October under the auspices ofthe Organisation for Security and Co-operation in Europe (OSCE). As inprevious meetings, the summit resulted in little more than a restatement byMoldovan and Transdniestrian representatives of their respective positions.Moldova is at most offering broad autonomy to Transdniestr, whileTransdniestr continues to insist on a confederation of equal states, each withits own parliament, constitution, government and court system as well ascontrol over a wide range of policies, including foreign and economic affairs.As in previous summits, such as the one held in Kiev in July 1999, the twosides progressed incrementally on technical issues, for example, on theestablishment of joint transport and energy systems. In the absence of abreakthrough on an agreement about the status of Transdniestr, the OSCE andother mediators appear to be concentrating on at least ensuring continuedcontact between the two sides on less politically charged issues.

Incremental progress has also been made on the withdrawal of Russian forcesand armaments. Starting in October, Russian troops began destroying severaltonnes of armaments in the region and stepped up their withdrawal ofweaponry and troops from Transdniestr. However, these are small steps towardsremoving the 40,000 tonnes of ammunition and 30,000 small arms dumped inthe region following the dismemberment of the Warsaw Pact. Moscowofficially maintains that it would leave Transdniestr were it not for Chisinau’sinability to reach an accord with Tiraspol, and blames Moldovan obstruction(in such areas as providing rail transport) for the slow rate of troop and armswithdrawal. However, Russian leaders continue to face strong internal pressureto maintain a presence in the region, and thus to delay the redeployment.Transdniestr has remained equally opposed to any move and sees thestockpiled armaments as valuable leverage in any negotiations over debtpayments to Russia.

The Transdniestr summitproduces few results—

The president proposes anew cabinet

—although Russia starts itswithdrawal—

32 Moldova


The Russian government’s revival of interest in Transdniestr stems directlyfrom the renewal of its war in the breakaway region of Chechnya. The build-upof Russian arms in the Caucasus has placed it in clear breach of the 1990Conventional Forces in Europe (CFE) treaty. With the new CFE treaty due to besigned at the OSCE summit in Istanbul (it was signed on 19th November),Russia needed to deflect the inevitable criticism of its assault on Chechnyathrough greater flexibility over its forward presence in Moldova. According toRussian press reports the meeting between the Russian premier, Vladimir Putin,and the Transdniestrian president, Igor Smirnov, that preceded the summitincluded instructions to Transdniestr not to obstruct the removal of troops andweaponry. Moreover, at the OSCE summit Russia agreed to withdraw all armsfrom Transdniestr by the end of 2001 and all of its troops (currently around2,500) by the end of 2002. However, it appears likely that, with the OSCEsummit successfully over, Russia will delay its redeployment beyond thesedeadlines on the basis of time-tested arguments that financial and logisticalhurdles stand in the way of quicker implementation.

The predominantly Bulgarian-speaking region of Taraclia is to receive countystatus following parliament’s approval in October of a number of recommen-dations offered by the government’s commission on the status of the region.When Moldova implemented administrative reforms in early 1999, it includedTaraclia in the county of Cahul, despite protests from the local population andcomplaints by the Bulgarian government. Local elections for Taraclia, whichwill have a county and municipal council, nine village councils and tenmayors, have been set for January 23rd 2000. Unlike Moldova’s ten othercounties, which comprise around 50 communes each, Taraclia will consist ofonly nine. Inevitably, nationalist circles have not welcomed the government’sdecision on Taraclia. The Party of Revival and Harmony (PRH), the remainingmember of the Alliance for Democracy and Reforms, has threatened to expelNicolae Andronic, deputy premier and head of the commission on Taraclia, forvoting against the party line in favour of Taraclia’s change in status.

In August the region of Gagauz-Yeri held its first elections since obtainingautonomy in 1994. These including elections for the popular assembly, whichserves as the local parliament, and the governor (bashkan), a position whichwields considerable power in the region. Moldova’s deputy foreign minister,Dimitrii Croitor, won 61% of the vote in a run-off election in Septemberagainst the incumbent governor, Grigorii Tabunschik. Until recently Gagauz’sautonomy presented few difficulties for the central government. However, itsnew government is now pushing for increased independence. The new speaker,Mihail Kendighelian, a key figure in securing the region’s initial autonomy,announced Gagauz’s intention to run its own budget, tax system, foreign andeconomic affairs and hold local referendums on key issues. In October thepopular assembly passed a law on the region’s representation in foreigncountries and duly appointed official representatives to Turkey (the Gagauzi areTurkic Christians) and Transdniestr, with which the Popular Assembly claimsto have signed a bilateral treaty in 1993. The central government has objectedto these appointments on the grounds that it alone determines foreign policy.

—with an eye to theOSCE summit

Taraclia becomesa county—

—and Gagauz-Yeri pushesfor further autonomy

Moldova 33


Economic policy

The parliamentary vote of no confidence in the Sturza government and itsrejection of key privatisation legislation has prompted the suspension offunding from multilateral lenders, including a $35m disbursement planned bythe IMF in December. The Fund had been prepared to release this trancheunder Moldova’s extended financing facility (EFF), on the condition thatparliament passed legislation on tobacco and wine privatisation and completeda second reading of the 2000 budget, which had been ready for parliamentaryconsideration at the time of the no-confidence vote.

Even if a new government is formed relatively quickly and passes the necessarylegislation, the fall of the Sturza government marks a major downturn inMoldova’s relations with the Fund. The IMF has repeatedly lauded the Sturzagovernment’s achievements, including considerable fiscal adjustment,increased foreign-currency reserves, record low interest rates and acceleratedstructural reform. In addition to the tranche intended in December, the Fundstood prepared to issue a further $35m disbursement in March and then tomove towards an even more conciliatory enhanced structural adjustmentfacility (ESAF) programme by mid-2000, worth potentially around $100m overthree years.

Renewed political instability has now placed this at risk. With parliamentarydebate of the 2000 budget even further behind schedule, a resumption of IMFfinancing is likely to be delayed until the second quarter of 1999. Whileparliament is still likely to pass the wine and tobacco privatisation legislation,if only to secure continued multilateral support, the new government willprove less able than Mr Sturza to ensure the degree of fiscal consolidation andstructural reform needed to ensure smooth relations with the IMF.

The fall of the Sturza government has also jeopardised the $20m expected forthis year under Moldova’s World Bank structural adjustment credit (SAC) andthe $50m in Bank financing anticipated for 2000. The World Bank, which takesits cue from the Fund, moved quickly to suspend its assistance to Moldova onNovember 8th. The Bank will insist that a further privatisation progress and asuitable budget programme be in place before resuming its support. Moreover,a potential €15m in EU assistance for macroeconomic stabilisation and struc-tural reforms in 2000 now also appears at risk. A prolongued suspension inofficial lending could prove disastrous for Moldova, which enjoys almost noother sources of external credit: although it has not defaulted on its Eurobond,its access to cheap financing from the international capital markets effectivelyended after the Russian crisis in August 1998.

The government had initially agreed with the IMF to limit its 1999 deficit to2% of GDP but was forced by the rapid depreciation of the leu to revise itsoriginal target. Following protracted negotiations with the government duringthe second half of this year, the IMF ultimately agreed to an increased deficiton condition that Moldova reduced its stock of budgetary arrears andrescheduled its Russian and Romanian debts (see Foreign trade and payments).

The IMF suspends lending—

—followed closely by theWorld Bank

The 1999 budget isamended—

34 Moldova


The budgetary amendments subsequently passed by parliament on November4th have increased the deficit by Lei383m ($32m) to Lei583m, with expen-diture slated to rise by Lei507m. External funding is set to increase by Lei84mas a result of additional assistance from the US and the Netherlands.

The collapse of the Sturza government has dealt a serious blow to the 2000budget approval process, which had been set to begin at the time of thegovernment’s resignation. In agreement with the IMF, the government hadproposed a deficit equal to 2.2% of forecast GDP, based on expenditure ofLei4.1bn and revenue of Lei3bn. Domestic and international debt servicingwere to account for around 30% of expenditure. The government based itsbudget on underlying assumptions of 2% real GDP growth, annual inflation of15% and an average exchange rate of Lei12:$1.

All three of these assumptions appear optimistic, in particular the projectedexchange rate, which has already been overtaken by the currency’s recentdownturn. While the other two targets are by no means implausible, theywould require optimal weather conditions for the agricultural sector, continuedstability and increased demand in Russia, and sound policy prescriptions fromthe new government, which will be expected to propose a budget along similarlines to tap further IMF financing. Most probably, however, recent events suchas the loss of scarce external funding will force the new government to revise itsunderlying assumptions and tighten fiscal policy further.

The non-payment crisis in Moldova’s energy sector has recently promptedfurther energy disruptions. The country’s energy debts remain an extremelyserious problem, with most of the population currently receiving only a fewhours of electricity per day. Ukraine, which supplies around 25% of the city ofChisinau’s electricity, cut supplies in November as a result of non-payment.Romania, which supplies up to 15% of Moldova’s electricity, announced onNovember 10th that it too would cut supplies, claiming that the dismissal ofMr Sturza’s government invalidated its earlier agreement with Moldova. Fivedays after this announcement, however, it resumed its electricity delivery.Finally, the Russian gas supplier Gazprom reduced its daily supply of around4.7m cu metres by 40% in early November, on the basis that Moldova had onlypaid 15% of its October bill. According to Moldovagaz, the Russian-Moldovan-Transdniestrian joint venture, Moldova’s outstanding debts to Gazprom,excluding Transdniestr, totalled $179m in principal and $112m in fines.

The successful privatisation of Moldova’s unprofitable electricity sector, whichhas proved a major drain on the state’s finances, should help to ensure moreregular electricity supplies and increase the sector’s efficiency, transparency andprofitability. On November 24th Moldova revealed details of the bids receivedfor the country’s electricity distributing companies (discos). Moldova’s discoswill be privatised in three separate regional bundles covering the south, north,north-west and centre of the country (including Chisinau). The tender processsparked interest from five western companies that prequalified to participate inthe bidding: Cinergy and AES (US), Electricité de France, ESB International(Ireland) and Union Fenosa (Spain). Shortly before the deadline, however, all

—but debate of the 2000budget is delayed

Energy suppliers cutMoldova off again—

—while privatisation in theelectricity-sector

continues—

Moldova 35


the companies except Union Fenosa withdrew from the process, citing theincrease in political uncertainty stemming from the fall of the Sturzagovernment. The disco privatisation seems set to proceed regardless of thissetback, however, and fears of a less than transparent privatisation process areunlikely to be confirmed. Given the leverage enjoyed by both Russia andUkraine as a result of Moldova’s energy dependence and energy debts, theseconcerns came to a head when two more companies, RAO UES (Russia) andLuganskoblnergo (Ukraine), slipped into the tender process after the pre-qualification deadline in September.

The tender commission’s final decision, expected by December 23rd, will comedown to Union Fenosa and Luganskoblnergo, as RAO UES failed to submit aproper bid and was disqualified as a result. The bids from Union Fenosa offersubstantially more than Luganskoblnergo in terms of cash up-front. While theUkrainian company pledged considerable sums in terms of investment, itoffered only $5m in cash for the first bundle of discos, $1m for the second and$500,000 for the third, as well as a total of around $105m in investmentcommitments. Union Fenosa, in contrast, offered around $20m for the firstbundle, $15m for the second and $5m for the third, in addition toapproximately double these amounts in investment commitments.

Following the final decision on December 23rd, subsequent rounds ofnegotiation will take at least two months, thereby dashing Moldova’s hopes ofreaping some benefit from privatisation during the winter months. The nextstep in the process involves the sale of 51% stakes in Moldova’s generatingcompanies (gencos), set to proceed in the first quarter of 2000. Even withoutthe worsening political situation, this should prove a more difficult propositionthan the disco privatisation: two-thirds of the generating companies producepredominantly heat, for which non-payment is endemic because of theabsence of end-user metering.

While parliament’s decision to block the privatisations of the wine and tobaccosectors seemed aimed at provoking a vote of no confidence in the government,it had earlier approved laws on privatising Moldtelecom, the state-ownedtelecoms operator (3rd quarter 1999, page 32). Four as yet unnamed financialcompanies have applied for the post of financial adviser on the sale, which isdue in 2000. The government has also decided to restructure the debts of thefuel distributor Tirex-Petrol prior to its eventual sale. While a Romanianconsortium is expecting to obtain a controlling stake of 51% in Tirex-Petrol inlieu of outstanding debts, the possibility also exists that the government willattempt to privatise Tirex-Petrol through an international tender. The state-owned tour operator Moldova-Tur has been put up for sale, on condition thatthe eventual investor pledges to create 1,000 jobs in the sector.

In contrast to the haphazard and uneven transformation of the industrialsector, Moldova’s programme to transfer rural property to private ownershiphas proved unique among CIS countries and a relative success story inMoldova’s transition, given the opposition of vested interests in the food-processing sector that are eager to preserve their mutually beneficial

Land reform continues—

—leading to Spanish andUkrainian bids

Other privatisations aremoving slowly

36 Moldova


relationships with the managers of collective farms. The national landprogramme, which started in 1998, is designed to establish a network ofprivate farms through the break-up and privatisation of former collectives. Thelaw on essential properties, passed in 1998, has provided a major boost to theseefforts by establishing a framework for liquidating the massive debts thatMoldova’s collective farms have amassed. The law removes a major hurdle toprivatisation by exempting from bankruptcy and debt proceedings all essentialproperty on farms that participate in the programme. The collective farms’social assets, such as roads and schools, and large physical assets, such asprocessing units, are being transferred to local or national government owner-ship, while private creditors receive ten years’ tax credit against debts.

As of the end of September 1999, over 900 collective farms had applied toparticipate in the project; of these, around 500 had completed their land andproperty tenders. Nearly 800,000 land titles had been prepared for 280,000new private owners. Individuals obtain property certificates with specifiedmonetary values which can be redeemed against physical assets. Under thenational land programme, land title and parcels of land (as distinct fromproperty) are granted on condition that they are actively farmed. This isdesigned to encourage consolidation through increased land leases and sales.

Although leasing and purchasing remain extremely expensive, given highinterest rates and scarce access to credit, a number of farmers are alreadyleasing additional land in return for cash and/or crop payments. Moreover,under various internationally funded programmes producer associations andco-operatives are being encouraged to provide small-scale farmers with accessto marketing, equipment and distribution facilities. Over the medium term,however, the success of moves towards greater consolidation and profitabilityin the agricultural sector will depend on further essential reforms. Withoutreducing market distortions and patronage-based relationships, and withoutfacilitating access to credit and encouraging foreign investment, mostagricultural producers in Moldova will move only slowly beyond the level ofsubsistence farming.


After falling by an estimated 7.8% in the first quarter of 1999, real GDPdecreased by a further 3.3% in the second quarter, according to preliminaryestimates from the Department of Statistical and Sociological Analysis. Thetotal drop over the first half of the year equalled around 5.3%, according toMoldovan Economic Trends, mostly as a result of the continued crisis in theindustrial sector. Industrial production over the first nine months of the yeardropped by around 13% over the corresponding period of 1998, dragged downby a 26% drop in the food and beverages sector, which accounts for over halfof industrial output. Within this sector, wine production fell by 37%, processedfruit and vegetables by 17%, milk production by 21% and bread by 25%. Onlyan increase in tobacco, textiles and chemicals, which together account for a

The decline in GDP hasmoderated—

—whose success willdepend on further reform

—resulting in new privatefarmers—

Moldova 37


relatively small portion of total output, broke with this declining trend. Lowdomestic demand, as reflected in a 33% drop in retail trade, has played a majorrole in this GDP decline, as has slumping Russian demand for Moldovanexports. The sharp downturn in trade has affected not only industry andagriculture, but also other sectors such as cargo transport, which fell by 23% inyear-on-year terms over the first nine months of 1999.

The marked improvement in Moldova’s monthly production figures in thethird quarter, as measured in year-on-year terms, reflects the collapseexperienced during the corresponding period in 1998 at the height of theregional crisis. Year-on-year output in September, for instance, increased by25%, compared with declines of over 20% in the first and second quarter.However, the beginnings of a recovery in the industrial sector after months ofdecline is suggested by the fact that month-on-month output also increasedsharply during this period, including a 17% rise in August and a 34% jumpin September.

Agricultural output over the first nine months of 1999 declined by around 7%compared to the year-earlier period, with animal production falling by 3% andcrop production by 9%, including a 9.5% decline in the wheat harvest toaround 788,000 tonnes. The agriculture minister, Valeriu Bulgari, warned inOctober that the country faced a bread shortage, as state procurers lacked themoney to purchase grain from local producers. As of the beginning of Octoberthe state had purchased only 42,000 tonnes of grain, compared with an annualconsumption of 260,000 tonnes of wheat alone.

While Moldova faces a shortage, farmers are selling their produce abroad,where they can at least be guaranteed payment. Wheat exports have rocketedfrom 30,000 tonnes for the whole of 1998 to 252,800 tonnes in the first ninemonths of 1999. Much appears to have been sold at well below world prices tocountries such as Turkey, Belarus and Ukraine as well as to Western markets inpreference to the state procurement bodies, which offer higher prices but notnecessarily up-front.

Month-on-month inflation rose gradually from around 0.7% in August to 2.1%in October, largely for seasonal reasons. The central bank’s sound monetarypolicy has helped to contain average monthly inflation over the first tenmonths to around 2.8%, leading the EIU to expect average inflation of around38% this year, slightly lower than originally forecast in the first quarter. Largelyas a result of increased regional instability, currency devaluation and utilityprice liberalisation, average monthly inflation has proved considerably higherthan the negligible inflation recorded over the same period in 1998.

Year-on-year inflation is likely to have peaked in October at around 54%,however, with little chance of a repeat of the 7-9% monthly inflation recordedin the last two months of 1998. Even with some increase in inflation expectedin November and December, compared with August and September, we expecta considerable drop in year-on-year rates to around 37% by the end of the year.

—as the industrial sectorstabilises

A wheat shortagethreatens—

—and inflation risesmoderately

38 Moldova


Moldova: consumer prices(% change)

Month on month Year on year

1998Jan 1.3 10.4Feb 0.4 9.3Mar –0.1 8.1Apr 0.7 8.0May 0.2 7.6Jun –1.1 4.3Jul –1.4 3.9Aug –0.6 4.1Sep 0.2 3.1Oct 1.4 3.6Nov 8.6 11.3Dec 7.8 18.2

1999Jan 5.4 23.0Feb 1.5 24.3Mar 0.6 25.2Apr 2.0 26.8May 4.1 31.8June 7.2 42.8Jul 2.5 48.5Aug 0.7 50.4Sep 1.7 52.7Oct 2.1 53.7

Sources: Moldova Economic Trends; news reports; EIU.

The Moldovan leu proved relatively strong in the months leading up to therecent bout of political uncertainty, and even appreciated by around 6%between May and September. However, the leu resumed its nominal slide inearly October, due to the seasonal downturn in exports and the government’sdecision to reduce Treasury-bill sales, which prompted increased foreign-currency purchases by commercial banks. During the first half of Novemberthe currency depreciated by around 9% after the dismissal Mr Sturza’sgovernment, bringing the currency below the Lei12:$1 mark for the firsttime—dragged down by concerns over a protracted governmental crisis and ashift towards more inflationary policies under a new government.

Moldova: exchange rate, 1998(period averages)

% change,Lei:$1 month on month

May 4.73 –0.2Jun 4.74 –0.3Jul 4.75 –0.2Aug 4.78 –0.6Sep 4.86 –1.7Oct 5.51 –11.8Nov 7.71 –28.5Dec 8.54 –9.7

continued

Political instabilityweakens the leu

Moldova 39


% change,Lei:$1 month on month

Jan 8.53 0.1Feb 8.74 –2.4Mar 8.95 –2.3Apr 9.60 –6.8May 10.87 –11.7Jun 11.74 –7.4Jul 11.09 5.8Aug 10.98 1.0Sep 10.98 0.0

Source: IMF, International Financial Statistics.

Although wages have increased in nominal terms, real wages have fallen as aresult of rising inflation. As of August 1999 the average wage of Lei314 ($29) amonth was down by around 20% in nominal terms as well as over 4% down inreal terms compared with the year-earlier period. The percentage of theminimal consumer basket covered by the average wage had also fallen, fromjust under 60% in August 1998 to around 44% in August 1999. One of therelative successes of Ion Sturza’s term in office has been a moderate reductionin wage and other arrears despite the ongoing economic recession. Total wagearrears fell from Lei639m at the beginning of 1999 to Lei594m at the start ofSeptember, a nominal reduction of around 8%. However, not all sectors haveseen a reduction in arrears. While agricultural wage arrears, which account foraround 35% of total areas, fell from Lei218m to Lei158m over the period, andthose in manufacturing from Lei65m to Lei56m, in the public sector they havecontinued to mount. In the healthcare and social sectors arrears rose fromLei60m to Lei69m, and in education from Lei89m to Lei94m. A number ofschools across the country have been on strike to demand 50% wage rises andclearance of the backlog in arrears.

The US State Department has singled out Moldova, alongside Belarus andUkraine, as being particularly unprepared to avoid the disruption in manyvital services caused by the millennium computer bug. The Moldovan govern-ment only recently announced that it needs around $1m to acquire systemsthat are compatible with the year 2000; other estimates put the sum at $4m. Anofficial from the energy department warned that the electricity network,railways, pensions and benefits payments systems could all be severely affected.


Trade turnover in the first nine months of the year fell to $705m, down from$1.3bn in the corresponding period of 1998. The trade deficit for the perioddropped dramatically, from $327m to $76m, although this was more areflection of the lack of financing to purchase goods, especially essential capitalequipment, than of an improvement in export performance. Export revenuefell by 37% to $314m and import expenditures by 53% to $391m. In line withthe reduced role of the Commonwealth of Independent States (CIS) in

Real wages have fallen

Y2K becomes an issue

Trade continues to fall—

40 Moldova


Moldova’s trade, the proportion of trade conducted through barter rather thancash has decreased slightly, from 13.3% to 12.3% in the case of exports andfrom 7.9% to 5.4% in the case of imports.

The most dramatic foreign-trade development continues to be the slump in thevalue of exports to CIS countries since the regional financial crisis in August1998. Sales to the CIS in the first nine months of 1999 fell by 55% to $168m,from $373m in the corresponding period of 1998. Export sales to Russia havefallen by almost 60%. The CIS’s share of total exports, meanwhile, fell from74% to 53%. The one encouraging trend is that sales to central and easternEurope and to the EU increased both in absolute terms as well as in the shareof total exports over the first three quarters of 1999. Exports to central andeastern Europe rose by over 20% and doubled their share of total exportrevenue from 9% to 18%. Exports to the EU increased by over 20% from $55mto $66m, with the share up from 11% to 21%.

Moldova: composition of trade, Jan-Sep 1997 1998 1999

% of % of % % of % $ m total $ m total changea $m total changea

ExportsFood, beverages & tobacco 337.1 56.4 286.4 57.2 –15.0 124.1 39.5 –56.7 Live animals & animal products 56.1 9.4 28.9 5.8 –48.5 20.9 6.6 –27.7 Vegetable products 47.9 8.0 43.0 8.6 –10.2 43.0 13.7 0.0 Machines, electronic devices & equipment 33.0 5.5 34.1 6.8 3.3 20.0 6.4 –41.3 Textiles 44.5 7.4 48.3 9.6 8.5 48.3 15.4 0.0 Metals & metal products 6.5 1.1 6.9 1.4 6.2 11.4 3.6 65.2 Mineral products 1.8 0.3 1.9 0.4 5.6 1.2 0.4 –36.8 Total including others 597.6 100.0 500.8 100.0 –16.2 314.4 100.0 –37.2

Imports Mineral products 301.5 35.1 239 28.9 –20.7 149.9 38.4 –37.3 Machines, electronic devices & equipment 108.1 12.6 166.9 20.2 54.4 40.9 10.5 –75.5 Chemical products 80.5 9.4 73.8 8.9 –8.3 31.8 8.1 –56.9 Vegetable products 29.7 3.5 11.2 1.4 –62.3 7.2 1.8 –35.7 Textiles 45.8 5.3 48.8 5.9 6.6 49.0 12.5 0.4 Metals & metal products 37.1 4.3 33.4 4.0 –10.0 17.0 4.4 –49.1 Total incl others 859.9 100.0 827.4 100.0 –3.8 390.5 100.0 –52.8

a Year on year.Source: Moldovan Economic Trends.

The dramatic decline in demand from the CIS has affected almost all ofMoldova’s major export categories. The biggest drop over the first nine monthsof 1999 was in the food, beverages and tobacco sector, where sales fell by 57%relative to the year-earlier period. This is the country’s most important exportearner, accounting for almost 60% of total goods exported in the first ninemonths of 1998.

Over the same period this year that percentage had dropped to around 40%.Revenue from exports of machines and equipment also registered a substantialfall of around 42% over the period. Exports of textiles, the second mostimportant export item with around 15% of the total, declined only slightlyrelative to the year-earlier period. Only metals production, accounting forunder 4% of exports, showed any improvement on 1998, rising by 65%.

Moldova 41


Imports have slumped far more evenly in terms of origin. Imports from Russiadropped in year-on-year terms by 49% between January and October, whilethose from the CIS fell by 55% and those from the EU by 53%. With Moldovaseemingly incapable of servicing its energy debts to Russia, Ukraine andRomania, this trend is set to continue.

Import expenditure on minerals, chiefly fuel, was down by 53%. Given thesignificant rise in oil prices in 1999, the fall in volume terms is likely to havebeen considerably higher. The most significant drop in import expenditure hasbeen experienced in machinery and equipment, a critical indicator of atransition economy’s ability to finance the purchase of goods needed tomodernise its economy. This sector registered a fall of 75% over the first ninemonths of 1999.

Moldova: balance of payments($ m)

1998 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr

Goods: export fob 179.1 184.8 142.8 137.4 644.1 99.4 93.1

Goods: import fob –297.9 –282.1 –258.9 –203.7 –1042.6 –132.0 –123.1

Trade balance –118.8 –97.3 –116.1 –66.3 –398.5 –32.7 –30.0

Services: export 29.4 34.3 29.2 26.1 119.0 14.0 18.7

Services: import –48.0 –50.1 –47.3 –46.9 –192.4 –32.3 –29.9

Service balance –18.6 –15.8 –18.1 –20.9 –73.4 –18.3 –11.1

Income: credit 34.0 33.9 36.2 26.8 130.8 25.7 25.6

Income: debit –19.7 –24.6 –22.8 –23.2 –90.3 –17.8 –15.2

Net income 14.4 9.2 13.4 3.6 40.6 7.9 10.4

Current transfers (net) 18.6 26.0 23.3 29.6 97.5 26.3 33.0

Current-account balance –104.4 –77.9 –97.5 –53.9 –333.7 –16.8 2.3

Capital-account balance 0.0 0.0 0.4 1.1 1.4 –0.1 115.6

Foreign direct investment 12.8 31.5 16.4 24.7 85.3 12.9 –0.6

Outward 0.4 0.6 –0.2 0.3 1.0 –0.5 –0.2

Net direct investments 13.1 32.0 16.2 25.0 86.3 12.4 –0.8

Portfolio investment liabilities –0.2 –12.2 –5.7 –36.7 –54.8 –6.7 –135.0 Equity securities (net) 1.6 1.4 2.2 5.9 11.0 1.2 1.1 Debt securities (net) –1.8 –13.6 –7.8 –42.6 –65.8 –7.9 –136.0

Net portfolio investments –0.2 –12.2 –5.7 –36.7 –54.8 –6.7 –135.0

Other investment liabilities (net) 74.2 17.1 –4.5 13.1 99.9 69.6 46.1

Other investment assets (net) 2.1 –24.8 –20.1 –6.2 –49.1 –13.5 –22.0

Net other investments 76.2 –7.7 –24.6 6.8 50.8 56.1 24.0

Change in international reserves 40.7 37.4 75.8 68.8 222.6 –40.4 10.0

Capital and financial-account

balance 129.8 49.5 62.2 64.9 306.4 21.3 13.8

Net errors & omissions –25.4 28.4 35.3 –11.0 27.4 –4.5 –16.2

Source: National Bank of Moldova.

42 Moldova


This import compression has resulted in a marked improvement in the currentaccount despite the collapse in exports. Moldova’s current account moved to asurplus of just over $2m in the second quarter of 1999, compared with a $78mdeficit in the year-earlier period. The deficit for the first half of 1999 totalledonly $14.5m, in contrast to the $182m deficit in the corresponding period of1998. This is largely attributable to a reduction in the trade deficit of over 70%,to around $63m, combined with a slightly lower services deficit and anincrease in transfers of almost one-third.

In line with its commitment to the IMF, the finance ministry has provedrelatively successful to date in efforts to secure the restructuring of Moldova’sexternal debt-service obligations. Moldova used $35m of its structuraladjustment loan (SAL II) from the World Bank in June 1999 to buy back the$140m in Treasury-bill debt issued to Gazprom for historic gas supply debts. Aforeign intermediary secured the deal without Gazprom’s knowledge ofMoldovan involvement; according to the ministry, total savings from the deal(in net present value terms) are estimated at around $154m. Since thenMoldova has arranged a deal with Gazprom to securitise much of its gas debtthrough promissory notes worth a total of $90m. These promissory noteswould be considerably more liquid than Moldova’s earlier $140m T-bill deal, asthey can be used in privatisation deals, as budgetary payments and ascollateral. According to the finance ministry, the promissory notes are to beissued by December 15th and would have a maturity of seven years, with atwo-year grace period and a fixed interest rate of 7.5%. Moldova has alsoreached preliminary agreement with Romania at the ministerial level toreschedule a further $11m in debt, with a first payment of $1m in 2002 to befollowed by yearly payments of $2m over five years. Finally, Moldova isnegotiating with Germany to restructure around DM84m ($47m) in direct andgovernment-guaranteed debt.

The European Bank for Reconstruction and Development (EBRD) has agreed toprovide trade facilitation notes of up to $5m to Moldova-Agroindbank andVictoriabank. The EBRD’s trade facilitation programme, which provides lettersof credit and advance payment guarantees to local banks to finance exportsand imports, was launched at the beginning of 1999 to encourage a revival oftrade in the region in the aftermath of Russia’s financial collapse. At the sametime, however, the EBRD cut its contribution to an earlier project for therehabilitation of Chisinau’s water supply from $10m to $5.2m. The cut wasblamed on the inability of Chisinau Municipality, another financier in theproject, to pay its commitments, as well as on delays on the part of the localproject contractor.

The current accountimproves dramatically—

The EBRD lends tolocal banks

—and restructuringcontinues

Moldova 43


Quarterly indicators and trade data

Belarus: quarterly indicators of economic activity 1997 1998 1999

2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr

Industrial production Monthly avGeneral index Jan 1994=100 104.9 106.3 108.2 113.1 118.8 114.3 110.1 90.8 106.8Fuel “ 75.7 76.9 81.8 74.0 96.4 103.9 110.2 119.2 134.8

EmploymentUnemployed ‘000 157 140 126 118 105 106 106 107 100

End-QtrEmployed, registered ‘000 4,184 4,187 4,196 4,235 4,234 4,265 4,291 4,304 4,279

Wages & pricesNominal wagesa BRb ‘000 2,188 2,664 3,276 3,698 4,177 4,664 8,008 11,682 19,062

Monthly avConsumer prices 1993=100 13,344 14,485 15,796 17,296 19,086 21,969 37,554 60,259 78,710 change year on year % 64 69 70 47 43 52 138 248 312Producer prices, ind 1993=100 9,867 10,632 11,380 12,578 13,685 16,068 26,814 53,422 69,318

Retail tradeSales Jan 1995=100 108.7 118.5 137.2 134.3 142.2 150.4 134.4 116.8 139.3

Money End-QtrM1, seasonally adj: BRb bn 21,859 25,349 21,535 28,468 42,440 52,260 51,320 80,796 129,477 change year on year % 97.8 104.7 115.5 98.1 94.2 106.2 138.3 183.8 205.1

Foreign trade Qtrly totalsExports $ m 1,774.1 1,961.5 2,126.2 1,749.9 1,875.5 1,673.5 1,770.8 1,325.5 1,541.2 to CIS “ 1,096.4 1,404.6 n/a n/a n/a n/a n/a n/a n/aImports ” 2,004.9 2,222.6 2,522.1 2,252.1 2,252.7 1,986.0 2,053.5 1,410.9 1,651.7 from CIS “ 1,289.7 1,387.7 n/a n/a n/a n/a n/a n/a n/a

Exchange holdings End-QtrForeign exchange $ m 376.2 383.5 393.7 291.3 286.1 299.4 338.4 335.3 301.8

Exchange rateOfficial rate BRb:$ 26,980 27,830 30,740 33,660 37,540 53,200 220,000 236,000 259,000

a Average monthly.

Sources: TACIS, Belarus Economic Trends, monthly; IMF, International Financial Statistics.

44 Moldova


Moldova: quarterly indicators of economic activity 1997 1998 1999

3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Employment Monthly avUnemployed, registereda ‘000 27.1 28.0 39.1 33.7 33.8 32.0 40.1 n/a n/a

Wages & pricesNominal wagesb Lei 210 229 238 248 256 287 258 294 n/aConsumer prices Jun 1994=100 131.2 133.9 137.8 138.9 137.2 143.1 178.3 193.1 212.1 change year on year % 8.5 8.1 8.1 7.0 4.6 6.9 29.4 39.0 54.6Wholesale prices, ind Dec 1992=100 24,217 24,678 25,066 25,856 25,826 27,147 33,178 35,636 40,097

Money End-QtrM1, seasonally adj Lei m 1,075.5 1,159.7 1,356.5 1,209.5 887.5 951.3 1,170.1 1,212.1 1,315.4 change year on year % 20.3 30.6 31.7 7.9 –17.5 –18.0 –13.7 0.2 48.2M2 Lei m 1,585 1,740 1,689 1,603 1,370 1,357 1,391 1,461 1,745

Foreign trade Qtrly totalsExports $ m 206.4 276.8 176.0 182.4 142.8 135.9 100.6 95.5 118.3 to CIS “ 154.3 160.4 128.7 144.0 98.5 60.0 49.6 56.2 62.2Imports ” 294.3 320.8 293.8 282.2 252.8 196.8 130.9 121.0 138.6 from CIS “ 145.4 153.4 133.3 105.6 98.4 99.7 72.6 43.8 40.4

Exchange holdings End-QtrForeign exchange $ m 358.7 364.8 324.2 287.6 211.9 142.9 179.3 164.0 n/a

Exchange rateOfficial rate Leu:$ 4.62 4.66 4.72 4.74 4.97 8.32 9.68 11.46 10.96

a End-quarter. b Average monthly.

Sources: IMF, International Financial Statistics; TACIS, Moldova Economic Trends.

Moldova 45


Belarus: OECD trade($ ‘000)

Germany Italy France Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

OECD exports fob 1997 1998 1996 1997 1997 1998

Food 31,439 15,871 5,991 6,023 2,490 1,182 of which: cereals & preparations 3,621 1,375 1,178 413 182 340 Chemicals 115,391a 118,172a 4,343 6,900a 14,375a 19,709a

Textile yarn, cloth & manufactures 32,256b 27,120b 14,162 25,561b 2,728b 3,456b

Iron & steel 141,597c 56,631c 846 4,628c 2,037c 763c

Metal manufactures 7,672d 5,232d 5,871 1,386d 1,861d 1,376d

Machinery & transport equipment 287,423 361,701 38,541 43,666 25,842 20,092 of which: road vehicles 137,449e 193,489e 1,665 3,504e 6,801e 6,763e

Clothing & footwear 16,061 15,592 10,157 17,044 54 289 Scientific instruments etc 21,993 19,840 5,046 1,846 2,043 1,928 Total incl others 769,998 723,877 107,738 130,543 64,921 57,835

Germany US Italy Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

OECD imports cif 1997 1998 1997 1998 1996 1997

Food 18,386 17,804 0 0 1,864 1,239 Wood & cork & manufactures 25,597 36,838 85 290 3,151 3,735 Metalliferous ores & scrap 7f 0f 0f 76f 39 0f

Petroleum & products 124g 127g 0g 0g 0 490g

Chemicals 25,936a 16,337a 2,421a 33,193a 588 973a

Textile yarn, cloth & manufactures 17,057b 14,630b 8,415b 19,718b 7,029 10,531b

Non-metallic mineral manufactures 4,682h 4,710h 1,222h 2,786h 2 33h

Non-ferrous metals 5,910c 7,675c 62c 12c 0 9c

Metal manufactures 360d 145d 30d 0d 1,821 118d

Machinery & transport equipment 25,235 33,373 7,228 2,822 3,909 3,487 Clothing 52,005 44,952 46,493 42,901 18,536 24,806 Scientific instruments etc 15,002 16,154 582 718 58 240 Total incl others 220,989 229,638 70,083 112,564 63,419 66,033

a Including crude fertilisers and manufactures of plastics. b Including fibres. c Including manufactures and scrap. d Tools etc and miscellaneousmetal manufactures. e Including tractors. f Ores, slag and ash. g Mineral fuels. h Including precious metals and jewellery.

Source: UN, External Trade Statistics, series D.

46 Moldova


Moldova: foreign trade($ ‘000)

Total Russia Ukraine Romania Bulgaria Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

Imports cif 1994 1995 1994 1995 1994 1995 1994 1995 1994 1995

Food 34,477 49,447 3,360 6,620 5,166 10,902 1,913 2,205 459 983Crude materials 19,141 31,562 5,438 8,188 3,318 8,939 3,023 2,651 217 155Coal 55,657 50,278 7,390 6,317 47,676 43,485 0 0 0 0Petroleum & products 132,394 182,568 67,721 63,991 24,345 66,427 15,332 16,281 49 3,045Chemicals 44,439 77,722 8,482 15,765 6,503 13,433 4,331 5,745 3,239 2,270Manufactured goods 74,979 120,505 25,895 39,303 14,005 21,888 3,932 10,813 3,491 11,024 of which: paper & manufactures 10,781 26,639 6,970 12,088 640 1,350 218 1,384 576 235 textile yarn, cloth & mnfrs 23,326 28,120 5,050 5,668 1,307 1,428 2,100 2,946 886 218 non-metallic mineral mnfrs 13,928 23,622 2,790 4,291 2,976 4,131 428 3,820 1,837 7,347Machinery & transport eqpt 84,395 127,877 20,659 27,633 9,081 11,708 7,474 9,729 1,940 3,746Total incl others 668,951 840,713 319,103 277,995 122,709 228,487 42,553 55,953 10,120 31,876

Total Russia Ukraine Romania Germany Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

Exports fob 1994 1995 1994 1995 1994 1995 1994 1995 1994 1995

Food 230,598 295,954 118,144 132,842 27,113 8,886 33,836 63,788 10,851 23,464 of which: fruit, vegetables & preps 105,678 116,279 54,220 56,005 22,040 1,948 1,121 4,604 10,653 23,341Beverages & tobacco 132,176 174,345 95,204 141,172 13,585 5,911 2,913 3,277 880 203Manufactured goods 42,327 52,615 12,919 18,905 3,842 7,960 16,428 13,808 1,298 1,866 of which: non-metallic mineral mnfrs 5,640 15,378 1,365 9,319 1,463 2,768 2,504 2,457 0 0Machinery & transport eqpt 65,148 58,793 36,259 27,607 15,249 14,783 5,777 5,773 313 81Clothing 14,297 23,315 6,183 5,161 945 226 392 678 1,246 5,902Total incl others 566,001 745,530 289,703 360,141 68,561 58,894 83,415 103,667 19,678 45,440Source: UN, External Trade Statistics, series D.

Moldova: structure of trade($ m)

Imports Exports Jan-Dec 1997 Jan-Dec 1998 Jan-Dec 1997 Jan-Dec 1998

Total CIS Total CIS Total CIS Total CIS

Live animals & products n/a n/a n/a n/a 75.4 57.7 34.2 19.3Vegetable products 37.3 11.6 16.4 6.9 75.3 44.8 71.5 35.3Food prods, beverages & tobacco n/a n/a n/a n/a 479.0 394.3 350.5 295.9Mineral prods, incl fuels 414.0 369.0 324.7 255.5 n/a n/a n/a n/aChemicals 112.7 29.7 92.5 22.8 n/a n/a n/a n/aTextiles 61.7 11.7 64.0 8.3 58.2 13.6 62.2 7.8Metals & products 51.8 31.4 41.3 23.3 8.6 2.5 9.3 1.6Machinery 150.8 35.5 196.2 37.4 45.7 37.3 42.3 32.0Total incl others 1,171.7 604.6 1,025.5 445.1 874.4 608.4 636.4 431.1

Source: Moldova Economic Trends.

Moldova 47


Moldova: direction of trade($ m)

Imports Exports Jan-Dec Jan-Dec Jan-Dec Jan-Sep Jan-Sep Jan-Dec Jan-Dec Jan-Dec Jan-Sep Jan-Sep

1996 1997 1998 1998 1999 1996 1997 1998 1998 1999

CIS 664.1 604.6 445.1 345.3 156.8 546.1 608.4 431.1 370.6 168.0 Russia 295.3 333.2 222.4 168.9 86.1 430.1 508.9 337.3 294.7 120.3 Ukraine 297.1 211.2 163.7 130.9 53.5 47.6 49.4 49.4 40.9 23.9 Belarus 61.0 48.6 52.9 39.7 15.9 34.2 35.4 32.1 25.3 16.9

Central & eastern Europe 179.5 217.9 239.5 194.4 94.7 132.4 95.7 81.6 46.0 56.6 Romania 72.1 101.3 119.6 95.6 58.8 74.9 58.9 61.3 34.1 28.8 Hungary 14.2 15.7 39.7 30.7 7.4 2.7 1.7 3.5 0.9 10.8 Bulgaria 58.4 61.7 31.5 27.9 6.2 12.7 9.9 3.3 1.2 4.4

EU 162.6 234.0 269.2 229.3 107.7 78.3 90.0 83.6 56.3 66.0 Germany 65.9 94.7 91.9 77.8 47.8 29.9 32.4 24.1 16.4 24.6 Italy 33.9 48.6 56.0 45.7 22.5 21.1 23.9 22.4 16.3 17.7 Netherlands 10.5 12.0 13.6 8.9 13.3 8.7 5.6 4.8 2.6 1.5

Total incl others 1,079.2 1,171.7 1,025.5 828.4 390.5 801.6 874.4 636.4 499.9 314.4

Source: Moldova Economic Trends.

Former Soviet republics: exchange rates per $ 1997 1998 1999

Oct 6th Jan 12th Apr 3rd Jul 4th Oct 7th Jan 14th Apr 9th Jul 9th Oct 7th

Outside rouble zoneArmenia (dram) 501 496 502 502 508 529 535 543 521Azerbaijan (manat) 3,928 3,891 3,858 3,861 3,857 3,896 3,931 3,950 4,325Estonia (kroon) 14.2 14.5 14.8 14.5 13.1 13.4 14.5 15.3 14.6Georgia (coupon/lari) 1.30 1.31 1.34 1.35 1.37 1.96 2.21 1.93 1.86Kazakhstan (tenge) 75.6 75.6 76.5 77.1 80.5 84.2 118.0 132.7 141.0Kyrgyz Republic (som) 17.3 17.4 18.1 19.3 22.4 29.6 34.8 41.1 42.9Latvia (lats) 0.59 0.60 0.60 0.60 0.58 0.57 0.59 0.61 0.58Lithuania (litas) 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00Moldova (leu) 4.62 4.66 4.72 4.75 4.99 8.40 9.48 11.19 10.95Turkmenistan (manat) 4,165 4,165 4,165 5,200 5,200 5,200 5,200 5,200 5,200Ukraine (hryvnya) 1.87 1.90 2.04 2.07 3.41 3.43 3.94 3.97 4.45Uzbekistan (som) 75.8 80.4 84.5 93.5 105.8 110.7 114.8 123.6 135.9

Inside rouble zone (local parallel currencies & Russian rouble)Belarus (rubel) 27,910 30,830 33,760 38,010 53,600 113,000 239,000 260,000 293,000Russia (rouble) 5.865 5.972 6.112 6.202 15.794 21.800 26.150 24.440 25.750Tajikistan (Tajik rouble) 747 748 754 754 754 985 1,050 1,287 1,436

Sources: OMRI; FT; BBC Monitoring, Summary of World Broadcasts; Reuters; Bloomberg.

48 Moldova


Former Soviet republics: GDP and GDP per head(at purchasing power parity)

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

ArmeniaGDP $ bn 17.7 17.0 16.0 7.8 6.8 7.3 7.9 8.6 9.0 9.7 per head ($) 5,084 4,804 4,435 2,114 1,828 1,935 2,111 2,274 2,371 2,493

AzerbaijanGDP $ bn 21.9 20.0 20.6 13.6 10.7 8.7 7.3 7.6 8.2 9.1 per head ($) 3,090 2,804 2,858 1,863 1,456 1,167 981 1,004 1,072 1,184

BelarusGDP $ bn 48.3 49.1 50.0 46.2 43.8 39.6 36.2 37.9 43.0 47.1 per head ($) 4,724 4,782 4,872 4,481 4,228 3,840 3,524 3,700 4,203 4,623

EstoniaGDP $ bn 7.9 7.5 7.0 6.1 5.8 5.8 6.2 6.6 7.4 7.8 per head ($) 5,043 4,801 4,475 3,978 3,803 3,898 4,196 4,486 5,081 5,381

GeorgiaGDP $ bn 23.5 21.4 17.6 10.8 7.6 5.6 5.4 6.1 6.9 7.2 per head ($) 4,318 3,919 3,232 1,975 1,388 1,033 1,004 1,132 1,280 1,332

KazakhstanGDP $ bn 70.8 73.2 70.4 62.6 54.2 42.0 39.1 40.0 41.3 40.8 per head ($) 4,357 4,477 4,281 3,788 3,288 2,578 2,444 2,521 2,638 2,629

Kyrgyz RepublicGDP $ bn 11.1 11.9 11.2 9.8 8.2 6.3 6.0 6.5 7.3 7.5 per head ($) 2,570 2,706 2,506 2,138 1,840 1,401 1,330 1,431 1,578 1,603

LatviaGDP $ bn 13.9 14.8 13.7 9.1 8.0 8.3 8.4 8.8 9.7 10.2 per head ($) 5,190 5,544 5,147 3,461 3,070 3,245 3,340 3,544 3,944 4,167

continued

Moldova 49


1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

LithuaniaGDP $ bn 20.3 20.4 19.9 16.0 13.7 12.8 13.5 14.4 15.7 16.7 per head ($) 5,510 5,486 5,312 4,270 3,681 3,443 3,642 3,883 4,236 4,517

MoldovaGDP $ bn 16.2 16.5 14.0 10.2 10.3 7.3 7.4 6.9 7.1 6.6 per head ($) 3,733 3,773 3,214 2,336 2,362 1,687 1,699 1,603 1,654 1,535

RussiaGDP $ bn 881.4 887.4 870.2 760.0 711.9 642.6 628.8 618.0 633.3 611.3 per head ($) 5,931 5,974 5,864 5,124 4,805 4,343 4,245 4,183 4,305 4,172

TajikistanGDP $ bn 10.0 10.2 9.6 6.9 5.1 4.5 4.0 3.9 4.1 4.3 per head ($) 1,939 1,920 1,755 1,231 903 779 690 661 673 706

TurkmenistanGDP $ bn 10.1 10.7 10.4 10.1 9.3 7.7 6.8 7.4 6.6 7.1 per head ($) 2,816 2,903 2,786 2,507 2,166 1,752 1,505 1,605 1,427 1,495

UkraineGDP $ bn 220.4 220.6 207.9 191.3 168.4 134.3 120.4 110.4 108.6 108.0 per head ($) 4,258 4,246 3,998 3,675 3,224 2,576 2,327 2,150 2,134 2,144

UzbekistanGDP $ bn 45.9 47.2 48.5 44.0 44.1 43.6 43.6 45.1 48.3 51.0 per head ($) 2,280 2,312 2,325 2,061 2,020 1,956 1,942 1,970 2,049 2,134

Sources: IMF; World Bank, Statistical Handbook: States of the Former USSR; UN Economic Commission for Europe, Bulletin for Europe, Vol. 44 1992; EIU calculations.

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