The health, political, economic and social impact of COVID-19 on Moldova

As part of our project “Eastern Partnership 2.0” we publish a series of articles about the three EU associ­ation states (Ukraine, Georgia, Moldova). Three authors from the region (Veronika Movchan, Irina Guruli, Sergiu Gaibu) analyse the health, political, economic and social impact of COVID-19 in their countries.

Most inter­na­tional bodies and researchers in the field have a common certainty that this crisis will go beyond the previous crisis of 2008 and could be one of the biggest in the last 50 years. The IMF has forecast a 3% drop in GDP for Moldova by 2020. But this scenario is rather optimistic. The EBRD forecasts a decrease of 4% and German Economic Team has evaluated the drop of Moldova’s GDP by 6.3%. For March, the National Bureau of Statistics of Moldova reported a decrease in indus­trial production by 10.5% compared to March 2019 and 8% compared to the month of February. Freight transport decreased by 15% in March compared to the same period in 2019. Under these condi­tions, the deteri­o­ration of the economic situation is certain.

The macro­eco­nomic indicators of the Republic of Moldova before the crisis showed a good financial stability, this being an advantage that could be used for economic recovery. But this window of oppor­tunity for Moldova is open for a short period of time and, if taken wrong measures, these resilience reserves can be quickly depleted and the country can be thrown into lasting economic stagnation. In the condi­tions of the Covid-19 crisis, Moldova will face a decrease in foreign exchange inflows from both important sources: remit­tances and exports. In the 2008 crisis, remit­tances fell by 29% and exports by 19.6% (2009 vs 2008). Social isolation and limiting inter­na­tional circu­lation will amplify the negative effect on these two main currency sources. Remit­tances have droped in March 2020 with 6% and in April with 10% comparing to the same period of 2019. Exports have recorded a drop of 18.3% in March 2020 vs March 2019. Maintaining a suffi­cient supply of foreign currency is critical for economic stability, ensuring the necessary imports for the national economy and keeping inflation in an acceptable corridor.

The quarantine measures have slowed down the spread of the virus. But the uneven appli­cation of the quarantine measures and the tolerance of the socialist Government to Russian Orthodox Church gatherings and some social events important for the pro-Russian Socialist Party for the upcoming presi­dential election campaign reduced signif­i­cantly the efficiency of the quarantine measures. Thus, after two months of effort of social isolation the number of infec­tions started to rise again dissolving the hopes of pandemic slowdown. Just a few days ago Moldova regis­tered 10000 persons with positive results on Covid-19. The pandemic revealed the deficiencies of the medical system and poor admin­is­trative coordi­nation and supply. As conse­quence Moldova regis­tered one of the highest rates of infection among medical staff, reducing response capabil­ities of the medical system to the needs of the population.

In addition to threats to public health, the Covid-19 crisis brings uncer­tainty to the economy. Public insti­tu­tions, businesses and house­holds are all affected by the slowdown in economic activity, but the main issue is the lack of predictability and evolution of the pandemic. The vast majority of sectors are experi­encing a sharp decline in sales and revenue due to the impos­si­bility of carrying out normal business due to disruption of supply chains and reduced demand both inter­nally and exter­nally. It becomes certain that the economy of the Republic of Moldova will be affected not only by internal factors, but also by the situation in countries such as Romania, Germany, Italy, Turkey or Russia. Thus, the external shock could spread to the export channel by reducing the demand for products processed in lohn (wiring, textiles). These branches depend directly on the automotive industry in countries such as Romania and Germany, or the textile industry in Italy. Some categories of house­holds such as credit holders, tenants, returning emigrants or workers in the informal economy do not have social protection in crisis situations.

The government is aware of the need to support the economy through social programs and invest­ments. It was developed a few social programmes for house­holds that lost revenues, but it seems that the inter­ven­tions are late and the admin­is­trative burden high. The Government intends to contract external loans to invest in infra­structure to support the economy. Certainly, a public investment program can be a suitable tool to counteract the effects of the crisis. However, the Government’s perspective on public investment is limited mainly to transport infra­structure. To this end, it was intended to contract EUR 200 million from the Government of the Russian Feder­ation, which failed, due to ambiguous and risky provi­sions of the agreement. As conse­quence the Consti­tu­tional Court has canceled the Parliament ratifi­cation of the agreement. The government is seeking alter­native options for financing their investment initia­tives. In the same time, Moldova has diffi­culties to absorb the resources already available from the Council of Europe, the World Bank and the EBRD for road modern­ization. Thus, the Government should consider a more strategic approach to the concept of investment, in order to increase the country’s compet­i­tiveness and ensure a rate of return of the investment projects capable of gener­ating additional added value in the economy to ensure the repayment of newly attracted credit resources and to avoid condemning Moldova to use current low-income sources to serve these debts. To this end, it is necessary to analyze the effects of the crisis, good inter­na­tional practices and to correctly prior­itize investment projects.