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"Airbag" for the economy of Moldova.

"Airbag" for the economy of Moldova.

In the response to one of our materials about the actual role of the National Bank of Moldova in the increase in the money supply and, consequently, pressure on the exchange rate, Dorin Dragutanu justly reproached us that in fact the role of the National Bank of Moldova is to maintain not the rate of leu, foreign currency intervention and as a consequence of currency rate fluctuations - are one of the tools for implementation by the National Bank.

The National Bank has more instruments for maintaining the level of inflation. But devaluation and revaluation of the national currency directly affects the inflation rate, as well as vice versa.

We started with the fact that in November 2011 the National Bank in four installments for four months has lowered the base rate from 10% to 4.5% p.a.

In 2008, when Europe and the US has been already attacked by the global economic crisis, Moldova only prepared for its consequences.

At the beginning of 2008, the National Bank raised the already high refinancing rate from 16% at the beginning of the year by18.5% in May; and then began to gradually decrease it.

Dynamics of security of NBM rate in 2008-2014.

 In September 2009 the base rate achieved its historic minimum of 5% p.a. Such drop – by 3,7 times must have its grounds.

Will the National Bank preparing for the current crisis?

Reducing basic rates is reducing the credit burden on business. On the other hand no one wants to take new loans.
In 2008 until April 2009, the interest rates on T-bills were so wasteful to the budget - from 15% to 23% p.a., and in these conditions any commercial Bank will place its funds in the liquid state bonds.

Banks with liquidity send resources into highly liquid segment – to the state T-Bills.

Average rate on STO -91 days in 2008-2014.

Realizing this, the National Bank takes a sharp decrease of the basis rate - as it is to this rate T-bills is tied. Money goes to STO with the lower rates.

Dynamics on STO-91 days on the face of dynamics of base NBM rate in 2008-2014.

 It should be noted as the rates on the STO fell - directly reflecting the decrease in the base rate, shown in the previous chart.

That clearly indicates the direct dependency rates on T-bills bills from the base rate of the National Bank. So, these are the reasons of the sharp reduction of the basic rate in 2009.

Therefore there are certain laws of economy which have the opposite effect in crisis conditions.

The main task of NBM is to keep inflation within the projected limits. It is the objective of reducing inflation and decided by the National Bank for 2001-2008. During this period, the actual inflation figures were higher than forecasted by the National Bank and which has not been able to keep inflation within the given parameters.

Inflation rate in Moldova in 2001-2013.



According to the results of 2009, inflation in Moldova
amounted to zero, as compared to 12.7 the year before.

The National Bank shall take the situation under control and not let the inflation to have such as a sharp rise. So in 2009 in its forecast for 2010, the National Bank set the benchmark inflation rate of 7.7 percent. For the next year 2011, the forecast of the National Bank is even higher - 9.6%; but in reality this indicator will make 7.6%.

Dorin Dragutanu has been appointed to the post of the President of the National Bank in November 2009, and he is not a native of the National Bank and did not know the internal situation. He was unlikely to quickly understand the situation, in order to adjust it for 2010-2011.

We can remember the end of 2011 – when the National Bank reduced the interest rate- from 10% in November to 4.5% in February 2012. The national Bank accepts the strategy not to reduce the level of inflation, and hold it in the hallway at the level of 5% p.a. plus or minus a half percentage point, as inflation was forecasted at 7.6%.

In 2008-2009, the National Bank reduced the base rate - it primarily prepared for the crisis, namely tried to create a "safety cushion" for the economy, part of stagnation, as the low base rate stimulates low lending rates and should lead to the development of the economy.

Let's look again at the diagram of dependence of rates on the T-bills to the base rate.

Dynamics of STO-91 days compared to dynamics of NBM base rate in 2008-2014.

 There is a gap between the crisis of 2009 and 2012. Four years ago it was justified by the impact of the global crisis, but what are the reasons of 2012 crisis?

Since 2012, the National Bank started to hold a strong currency intervention by buying foreign currency and thereby increasing lei mass. This practice was been held in 2013, that ultimately put pressure on the leu rate.

On the one hand, the National Bank shall keep the inflation rate, and have made serious efforts to exit a double-digit index in 2003-2008. But after 2009, when inflation has fallen to zero, the National Bank changed its priorities, and now it does not hold inflation, but vice versa it creates it. In 2010 NBM planned it at the level of 7.7% p.a., but in fact it made up 7.4%.

Only after two years from 2012, the National Bank has established the border of inflation at the level of 5%, assigning the corridor of plus or minus one and a half points.

The dynamics of inflation in 2012-2013 for the last 12 months.


It turns out that since February 2012, the inflation rate is set at 5% plus or minus a half percent - that makes from 3.5 to 6.5% p.a. The graph clearly shows that inflation is set by the National Bank of 5% - that is an inflated figure. It was required to make adjustment of 3.5 percent, plus or minus one point.

In order to keep inflation in a given five-percent corridor, but seeing trends of economy, the National Bank resorted not to adjust their forecasts and to currency interventions, with the aim of keeping inflation within the set corridor.

At the same time it happens against the background of a low base rate, which the National Bank in April 2013 reduced by one point to 3.5% p.a.

The National Bank claims that the reason for its currency interventions in 2012-2013 and it was the necessity to maintain inflation within the set corridor. So now it can't be retained above 5%, and it is trying to do it by means of currency interventions.

Which real reasons could justify the purpose of the National Bank to make currency interventions on a colossal scale in summer of 2012 and in summer of 2013?

Due to these intervention became the starting point on the path that led to the subsequent devaluation of leu.

The results are:

- Low base rate - loss of investors.

- No high interest rates on loans and deposits.

- Devaluation of the Moldovan leu.

Our inflation rate is defined as 5%. In EU countries the rate is 2%. In 2009, when several EU countries outside the Euro-zone, has decided to devalue its currency, the European Central Bank spoke about this as:

“The ability of some EU countries to devalue their currency with the purpose of obtaining economic advantages threatens the integrity of the common market". Then this statement was applied to Poland and Hungary, which devalued the currency by making their goods to the European market making them more competitive in the first post-crisis year”.

Moldova is highly dependent on the imports deliveries and is not yet able to provide itself with energy sources.

The position of IMF announced in 2009 by Johan Matisena was as follows "If you don't devalue your currency the exchange rate will be overvalued, and it will contribute to conservation of demand and high interest to import. Therefore, the IMF recommendations in conditions of long crisis are as follows- "Safety for the economy are not currency reserves and the exchange rate of the national currency. The currency reserves serve only the resource that can not let the exchange rate to collapse within one night."

The economic truth suggests that high base rate slows the rate of inflation, as it provokes more expensive loans. But otherwise the country is becoming more attractive for investors, which raises the demand for the national currency. If vice versa - low rates shall stimulate growth, but the country is losing investors and reduces the demand for the national currency.

The National Bank has also reserves and wind to repay the fluctuations of the rocking of the boat of the exchange rate, and it should take advantage of it. Otherwise its main goal – is inflation – it should decide this problem.

If the rate of leu will exceed 14 lei per dollar, currency devaluation will not stop. As it is seen the last time, demand prevails over the proposal.

In one large currency cash exchange office my good friend this week said that now there are no problems to sell the currency, there is a problem to buy it….

Draw your own conclusions.


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