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.
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