Publication: Monitor Volume: 5 Issue: 215

The parliament’s November 9 dismissal of Prime Minister Ion Sturza’s government may produce important changes in Moldova’s political scene, but is unlikely to change Moldova’s dismal economic circumstances. Instead, these events have made a sharp deterioration in the Moldovan economy more likely.

The no-confidence motion, which was led by the Moldovan Communist Party (MCP) and the Popular Front (PF), raises considerable doubts as to the direction of Moldova’s market transition. The MCP, which is the largest single party with roughly 40 percent of the seats in parliament, adamantly opposed IMF-style macroeconomic stabilization policies and structural reforms, which it claims have impoverished Moldova’s population.

Caught between the MCP’s demands for increased government spending and IMF fiscal and monetary austerity, the ADR and economic reform policies generally, found themselves in an increasingly difficult position. Spillover effects from the August 1998 Russian financial crisis obliterated a nascent economic recovery in 1997 and helped push GDP down by 9 percent last year ( The Russian crash also triggered a balance of payments crisis for Moldova in late 1998 that led to the collapse of the leu and surging inflation. Between September 1998 and September 1999, the leu lost half its value against the dollar, while year-on-year inflation jumped from 4 percent in August 1998 to 50 percent in August 1999. These unfavorable trends further narrowed the government’s policy options and weakened the ADR’s already tenuous parliamentary majority. Popular support shifted increasingly towards the Communist Party as real wages and consumption fell drastically, while budget cuts needed to secure vital IMF and World Bank credits met increasingly vehement parliamentary opposition.

The most pressing problem facing the new government is likely to be the IMF’s decision to indefinitely delay disbursal of a US$35 million credit that would have unlocked an additional US$150 in concessional loans from other lenders. With virtually no access to international capital markets and limited appeal to foreign investors, Moldova relies heavily on multilateral lending to finance its large current account deficit. The loss of IMF funding threatens to precipitate another sharp leu devaluation which would re-ignite inflation.

But despite its anti-IMF rhetoric, the MCP does not proposal a Lukashenka-esque union with Russia as the answer to Moldova’s economic problems. Chisinau is therefore likely to remain dependent on the multilateral institutions, which will restrain the new government’s ability to deviate substantially from its predecessor’s economics policies. While this may prevent the reversal of already implemented reforms, the MCP’s aversion to macroeconomic austerity and structural reforms, particularly privatization, indicates that Moldova’s market transition will slow further during the next several years. Moreover, even if the need to secure IMF funding does bring compliance from the communists, political disputes between the MCP and nationalist PF are likely to continue to hinder the pursuit of reforms and sound economic policies. Moldova’s prospects for macroeconomic stability and sustainable growth therefore seem unlikely to improve for at least several years.