AFTER THE BALANCE-OF-PAYMENTS CRISIS: MOLDOVA’S PROSPECTS FOR MACROECONOMIC STABILITY.

Precipitated by the August 1998 Russian financial crisis, Moldova suffered a full-scale balance-of-payments crisis in late 1998 and 1999. Moldova’s crisis rapidly reversed the substantial progress which the government and the National Bank of Moldova (NBM) had made over the previous three years toward establishing macroeconomic stability. In the wake of Russia’s financial meltdown, Moldova’s current account deficit surged to 20.4 percent of GDP in 1998 as exports to Russia, Moldova’s largest trading partner, plummeted in the fourth quarter. A massive outflow of foreign capital, primarily Russian portfolio investment, severely exacerbated the situation since inflows of portfolio investment had financed most of Moldova’s large current account deficit in 1997. The drop in export earnings and the outflow of foreign capital triggered a massive exchange rate adjustment. The leu, which had traded at around 4.8 to the dollar for much of the four years prior to the Russian crisis, fell to US$1=8.3 leu in December 1998. As import prices ballooned, due to the leu’s devaluation, year-on-year inflation accelerated from 4.1 percent in August 1998 to 18.2 percent in December 1998.

Moldova’s current account deficit narrowed from US$347 million in 1998 to an estimated US$20 million (1.8 percent of GDP) in 1999 as the exchange rate correction, combined with the outflow of foreign portfolio investment and delays in the disbursal of IMF credits, severely curtailed Moldova’s ability to finance imports throughout 1999. Although the current account deficit’s decline eased some of the downward pressure on the leu, the currency continued to depreciate rapidly in 1999 because of the National Bank of Moldova’s decision to finance the budget deficit by printing money. Two major political crises contributed to the fall in the currency. The leu fell to 12.2 against the dollar at the end of 1999, a depreciation of 60 percent since August 1998. Due to continued growth in import prices and strong growth in the money supply, year-on-year inflation accelerated to 42.4 percent by the end of 1999.

Moldova’s ability to restore macroeconomic stability this year remains in doubt. Fiscal and monetary policy remains in flux following the change of government in November 1999. Although the new government has expressed its desire to work with the IMF to rejuvenate economic reforms and tighten fiscal policies, parliament has yet to pass the government’s restrictive draft budget and approve the privatization of state-owned wineries and tobacco companies, both of which are requirements for IMF lending. Further delays in the release of IMF and World Bank credits would likely lead to the monetization of the budget deficit by the National Bank of Moldova and a further acceleration in inflation and fall in the value of the currency (Russian and international agencies, March 24-31).

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