How Do We Get the Moldovan Economy Back on Track After the Pandemic?

[ANALYSIS Bulletin No 6] Rodica Crudu | To be able to talk about a possible recovery of the national economy, about strategic action plans and about solutions to overcome the crisis, we should start by understanding the nature of the current economic crisis. We do not want to generate uncertainties and contradictions in terms of the directions to be taken, or of the means to be used, making it thus difficult to return to normal.

What the pandemic meant for the Republic of Moldova

The COVID-19-induced economic crisis is not an ordinary, cyclical crisis, the causes of which originates from financial sphere imbalances, such as those of 2008-09, despite the feature that they share, which is that the stagnation of the economic cycle[1]. This time, the crisis originated in the spontaneous, total immobilization of the economic sectors for the period of social restrictions and the imposition of strict sanitary norms during the state of emergency. They distorted the economic balance between aggregate demand and supply, in investment, consumption, partial and whole value chains, and supply chains. Our economy, being a vulnerable one, as well as in the process of transition and reshaping due to previous political crises, is deeply affected.

The uncertainty and impossibility to intervene in the medium and long term have determined the Moldovan authorities to adopt a set measures aimed at establishing a framework for managing the pandemic crisis and at minimizing its damage to the Moldovan economy, citizens in general and the business environment. However, they were not well thought out and were not able to redress the situation properly. In order to determine appropriate measures for getting the national economy back on track and adapting to the ‘new normalcy’, this analysis aims to achieve the following objectives:

  • To identify the vulnerable economic sectors that are vulnerable and at the height of economic crisis;
  • To determine what were the measures taken by the Small and Medium-sized Enterprises (SMEs) – key links in the national economy – to continue business and to avoid bankruptcy;
  • To assess the measures taken by the state, as well as by our external partners, for relaunching, activating and adjusting the economic processes.

The Moldovan economy is dependent on the economies of external partners

The state of affairs in the Republic of Moldova is inextricably linked to the situation in the world and especially to that in the European Union. According to IMF estimates, in 2020 most of the large economies will collectively register GDP declines by 2.5-3.0%, and in some economies the recession will reach even higher levels. Preliminary estimates show that the GDP value of the Republic of Moldova for 2020 will decrease by 4.0-6.0%[2].

In order to assess the impact of the COVID-19 crisis on the economy, research and a number of studies were conducted. According to a study carried out by the United Nations Development Program (UNDP) in Moldova, exporting companies are among the most affected by the pandemic [3]. This is due to the fact that external

demand has dropped considerably, but also the crisis of raw materials has led most companies on both banks of the Nistru to completely suspend their exports or reduce them significantly. According to the data of the National Bureau of Statistics, in the first three months of 2020 the volume of goods from the Republic of Moldova sold on foreign markets decreased by 7.9%, due to reduced demand in countries affected by COVID-19. A greater impact is observed on export-oriented industries: manufacturing of car parts and engines, of wires and cables, connection devices for them as well as clothing and textiles manufacturing, processing and preservation of fruits and vegetables.

According to a study by IDIS ‘Viitorul’, as a result of the effects of the pandemic, as well as of measures taken to prevent the spread of COVID-19, export trade from Nistru’s left bank and domestic trade with the right bank went into negative-value zone, being in January-May 2020 9% below the previous year’s reference level.[4] During the first five months, the total value of trade turnover and exports between the two banks decreased by 13.6% and deliveries to the right bank diminished drastically for most product groups.

Impact on SMEs and the population

According to surveys conducted at the initial stage of the crisis (April 2020) by Expert-Group[5], about 2/3 of Moldovan enterprises anticipated a decrease in revenues by more than 35%. The causes are related to the restrictions applied by the authorities in the context of the state of emergency, but especially to the internal and external demand reduction. Moreover, in order to mitigate the impact of COVID-19 70% of respondents said that they planned to reduce staff costs and 64% and 68% planned to postpone current and strategic investments, respectively. In most cases, the staff costs optimization was to be achieved through unpaid leave, reduction of working hours and furlough. These, in turn, affected even harder the income of the population and therefore the aggregate demand, which would further aggravate the companies’ financial situation (through the snowball effect of the crisis)[6].

Together with the aforementioned actions, the pandemic severely affected micro, small and medium enterprises, and this in turn – thousands of Moldovan families who lost their jobs (MSMEs make up 95% of the private businesses in the country and employ over 60% of the population within these enterprises).[7]

According to the survey ‘Impact of the COVID-19 pandemic on Moldovan businesses’[8], conducted by the American Chamber of Commerce in Moldova (AmCham Moldova) between 3 and 18 July 2020 on a sample of 205 companies in the ICT sector, HoReCa, tourism, light industry, agriculture, transport, education, etc., 87% of respondents mentioned a decrease in income by up to 50% and more compared to that reported in the similar period of 2019. Among the factors that affected companies the most are the decrease in demand for products and services in the domestic market (77% of respondents) and the difficulties encountered by their business partners, expressed by delays in paying the invoices issued (56% of respondents).

In order to mitigate the economic impact of the pandemic, companies implement various measures such as accessing intra-group credits, creating export opportunities, creating new business lines, reducing the operating schedule, postponing investments, reducing staff costs, reshaping the business model and moving towards new market requirements and new consumer behaviours etc.

According to 80% of the entities participating in the survey, the measures that should be implemented by the state to overcome the pandemic crisis are reduction of taxes, duties and other contributions, which could influence the process of overcoming the pandemic crisis, while 75% of the companies considered the home-stay pays should also be taken into account in taxes as an absolutely necessary tool.

What the government and other stakeholders involved did and have to do

In this sense, according to the Government Decision No 630 of 19.08.2020 approving the Endorsement to the draft law on establishing fiscal exemptions for certain categories of enterprises[9], it was rejected the idea of approving fiscal exemptions until 31 December 2020 on all taxes, contributions and duties, namely income tax, value added tax, excise duties, private tax, customs duty, road taxes, real estate tax, local taxes, compulsory state social insurance contributions, on the basis of non-specification of the potential categories of final beneficiary enterprises and the impossibility of reducing the consolidated state budget during this

unstable periodAccording to Order No 100 of 26.05.2020 of the Ministry of Economy and Infrastructure[10] regarding the approval of the Support Instrument on digitalization of small and medium-sized enterprises and the operation of amendments to sub-program 5004, the crisis created the impossibility of consumers movement and affected the process of meeting supply and demand. According to the study ‘How COVID-19 pandemic affected the work of Moldovan companies’[11], companies in all sectors want to readjust and access the online market. As a result, the ‘SMEs Digitalisation Program’ was launched by the Organisation for SMEs Development (ODIMM), with the aim of supporting domestic producers in digitising their business processes and selling products or services on online platforms. In the same train of thoughts, as a result of cooperation of the Association of Creative Companies of Moldova and the Artcor Center, the GoOnline platform was launched to connect digital service providers with SMEs that needed support to transfer their businesses online and generate sales. According to the administrators of the platform, 61 small businesses were digitised as part of the project, benefiting from the development of visual identity, websites integrated with online payment and delivery solutions, etc. Another 25 digital service providers joined together to help small businesses be present online.[12]

As to guaranteeing loans, the Government came up with a New Guarantee Product – a financial product launched by ODIMM in partnership with Moldovan commercial banks, for issuing preferential loans to SMEs affected by the pandemic crisis.[13] Thus, companies that recorded a decrease in sales revenue by 30% between March and June 2020 compared to the similar period of the previous year will be able to apply for working capital loans state-guaranteed to an extent of up to 80%, with a zero guarantee fee until 31.12.2021.   Also, companies applying for investment loans will be able to benefit from guarantees that will cover up to 80% of the loan with a maximum value of MDL 5 million. The new guarantee product was developed as a result of engaging Government’s responsibility towards the Parliament and by approving the amendments to the 2020 State Budget Law, thus being additionally allocated MDL 50 million lei for the capitalization of the Loan Guarantee Fund, managed by ODIMM.

Conclusions and recommendations

Relaunching economic processes, ensuring competitive development, strengthening the business environment, remain among the major challenges of our country. And the pandemic only made them worse. In this context, the Government should come up with solutions that give the possibility of readjustment to the new realities, in the form of an anti-crisis plan focused on financially supporting the companies and the populationMaintaining income for both households and companies is a key factor in maintaining market demand, avoiding poverty rates increases, producers going bankrupt, state budget revenue decrease. These practices are widely used in Western economies, but also in Central and Eastern Europe, in countries such as the Czech Republic and Romania.

Other solutions could be to ensure increased tax flexibility for businesses and employment protection measures. The experience from previous crises shows that the recovery of the economy is all the more difficult as unemployment rises. That is why the Government's efforts should be channelled towards the active support of domestic producers through various fiscal and financial instruments, as well as through campaigns meant to actively promote domestic producers. This will allow avoiding bankruptcies and mass layoffs, i.e. mitigation of the economic recession. At the same time, in order to mitigate the crisis’ influence on the expectations of consumers and companies, it is necessary to communicate actively and transparently with them on the measures taken by the authorities. Moreover, the creation of platforms for communication between companies, civil society, external donors and public authorities could be an important resource for post-crisis recovery and adaptation to the ‘new normalcy’.

Rodica Crudu is an expert for LID Moldova on the economic policies of the European Union. She is university lecturer and dean of the Faculty of International Economic Relations of the Academy of Economic Studies of Moldova, she is Jean Monnet Professor, coordinating several EU-funded projects in the field of European integration studies. She holds the National ‘Quality Crystal’ Award (2018) for promoting quality in higher education in the Republic of Moldova. In the course of her professional activity, Rodica Crudu participated in numerous study visits and professional internships at various universities in Europe (UK, Spain, Belgium, Germany, Lithuania, Romania, etc.) and in US (Fulbright Fellowship at American University, Washington DC), where she gave presentations or lessons.

This material was developed by LID Moldova experts under the project The Best Way: Periodic Bulletin funded by the Friedrich Naumann Foundation for Freedom (FNF). Opinions and conclusions expressed in this material are those of the authors and the experts and do not necessarily reflect the position of the funder.

Elements of text, images, tables, or charts may be taken over provided that the source is cited, i.e. LID Moldova, and that the appropriate hyperlink is attached.

Copyright © LID Moldova

[1] Marinescu C., ‘The economy in a state of emergency – how do we restart the economy?’, Ziarul Financiar, 28.04.2020

 https://www.zf.ro/zf-24/economia-in-stare-de-urgenta-cum-repornim-economia-19104497

[2] BusinessClass, ‘What will happen to Moldovan economy after the pandemic’?, 01.07.2020 https://businessclass.md/ro/actual/chto-budet-s-moldavskoj-ekonomikoj-posle-pandemii/

[3] UNDP, ‘Sweden and UNDP support small and medium-sized enterprises to overcome the COVID-19 crisis’, August 2020 https://www.md.undp.org/content/moldova/ro/home/presscenter/articles/2020/suedia-_i-pnud-susin-intreprinderile-mici-i-mijlocii-s-depeasc-c.html

[4] UNDP, ‘Developing export capacities on both banks of the Nistru’ 2019-2022
https://www.md.undp.org/content/moldova/ro/home/projects/advanced-cross-river-capacities-for-trade.html

[5] Lupusor A., ‘Anti-crisis macroeconomic policy: from defense to offense so as to combat the effects of COVID-19’, Expert-Grup, April 2020

https://www.expert-grup.org/media/k2/attachments/Comentariu_economic_solutii-anticriza.pdf

[6] Lupusor A., Pintea D., Gaibu S.,‘COVID-19: How to rescue the national economy and prepare the ground for a post-crisis recovery’, Expert-Grup, April 2020  https://www.expert-grup.org/media/k2/attachments/COVID19_Cum_salvIm_economia_nayionalI_ui_pregItim_terenul_pentru_o_relansare_post-crizI_2.pdf

[7] UNDP, ‘Sweden and UNDP support small and medium-sized enterprises to overcome the COVID-19 crisis’, August 2020https://www.md.undp.org/content/moldova/ro/home/presscenter/articles/2020/suedia-_i-pnud-susin-intreprinderile-mici-i-mijlocii-s-depeasc-c.html

[8] AmCham Moldova, Ministry of Economy and Infrastructure, ‘How COVID-19 pandemic affected the activity of Moldovan companies’ August 2020
https://mei.gov.md/sites/default/files/2._amcham_survey_report.pdf

[9] Government of the Republic of Moldova, Government Decision No 630 of 19.08.2020 on the approval of the endorsement to the draft law, regarding the establishment of fiscal exemptions for some categories of enterprises, 21.08.2020
https://www.legis.md/cautare/getResults?doc_id=122786&lang=ro

[10] Ministry of Economy and Infrastructure of the Republic of Moldova, Order No 100 of 26.05.2020 on the approval of the Support Instrument on digitalisation of small and medium-sized enterprises http://odimm.md/files/digitalizarea/2020/Ordin_100_26.05.2020.pdf

[11] AmCham Moldova, ‘How COVID-19 pandemic affected the activity of Moldovan companies’, 10 April 2020https://www.amcham.md/st_files/2020/04/16/6AmCham%20COVID%20Business%20Impact.pdf

[12] Ministry of Economy and Infrastructure, ‘More and more entrepreneurs digitalise their businesses with the support of the programs launched by the Government and development partners’, 18.08.2020 https://mei.gov.md/ro/content/tot-mai-multi-antreprenori-isi-digitalizeaza-afacerile-cu-suportul-programelor-lansate-de

[13] Ministry of Economy and Infrastructure, ‘A New Guarantee Product was launched for companies affected by the crisis generated by COVID-19’, 07.09.2020
https://mei.gov.md/ro/content/fost-lansat-un-nou-produs-de-garantare-pentru-companiile-afectate-de-criza-generata-de-covid