Veaceslav IONITA: The government killed the business, but flirted with the population
Having experienced the first half of 2020, I would like to think that the worst for the Moldovan economy in general and business in particular is behind us. But is it? The editor-in-chief of InfoMarket news agency Alexandru Burdeinii talked about this with "IDIS Viitorul" analyst, former chairman of the parliamentary commission on economics and budget Veaceslav Ionita.
InfoMarket: Data on state budget revenues for 6 months has not yet been published, and in the first five months of the year the budget received only 14 billion lei - out of 69 billion laid down in the law for the whole year. Although practice shows that the second half of revenues always exceeds the first, incomes are still not very impressive. How do you assess the dynamics of budget revenues for the first five months of the year?
Veaceslav IONITA: The government said that this year there will be the largest decline in revenues and the deficit will be at least 17 billion lei in the national budget. If we take only the state budget, then 37 billion lei can be obtained from the 44 billion, which includes all types of income: tax, from privatization and grants. That is, the shortfall in revenue from the state budget will be at least 16% that is 7 billion lei; of which the tax recession is 20% of the planned. We shouldn’t forget the existing inflation (4.25% in 12 months); that is, in real terms, the budget situation is simply disastrous compared with last year.
InfoMarket: But at the same time, the government manages to pay salaries in the public sector on time, make social payments and even increase salaries and pensions...
Veaceslav IONITA: Yes, it does, due to what? In the first 5 months of the year, we were saved by the fact that the IMF unprecedentedly, without any conditions, allocated funds more than 120 countries to fight against Covid-19; Moldova received 4.3 billion lei. The second point that saved the budget was good income in the first two months of the year. And the third point, unfortunately, is that we are cutting back on investments and eating up money. Although, we have been doing this for many years in a row. For example, we have a law regulating 80% of excise taxes on fuel which should be directed to the maintenance and repair of roads, but it used to be only 35% the previous sixth year in a row. There is a claw in the budget regulating to allocate only 32% (instead of 80%) every year. These three positions “saved” us in the first half of the year.
The situation will be worse. We do not have international financial support. The new agreements are being discussed now, in particular, the two-year program with the IMF, but the money will be allocated only next year. The EU gives us 50 million euro. It is only 1 billion lei with a hole in the budget of 17 billion lei. And so far, the government has no real sources of income coverage. They could find some funds at the domestic market or abroad.
This year, the government should pay 2.8 billion lei for international debts. 900 million had to be paid for the first 5 months. During this time, the Cabinet of Ministers found 640 million from external sources, that is, they took new loans to fulfill current obligations but there was a shortage of 260 million lei, then they were forced to find this amount from the revenues received in the budget and spend them on international obligations.
In total, the government needs to lend 17 billion lei this year; of which 2.8 billion should cover current international loans; the rest of the funds should remain in the budget. In my opinion, it will be possible to receive maximum 3 billion in addition to 4.3 billion from the IMF; so there remains a deficit of almost 10 billion lei.
InfoMarket: What are the main incomes in the budget this year? What is being implemented, and what is not yet?
Veaceslav IONITA: The only thing that is implemented in the budget is the adjusted income from tax revenues, which look good, given the positive results of the first two months of this year. Also, the government lent 3 billion lei in the domestic market since the beginning of the year and does not make expenses. The investments mentioned in the state budget have no real coverage.
For example, Appendix No. 6 to the budget law, these are capital investments of central authorities. It is planned 4.5 billion lei which is 2 times lower than previously. It would be a wonder if the budget will be executed in the amount of 1 billion. There will be no capital investments. 5 billion lei have been planned for road repairs and constructions this year. The government has already cut 4.4 billion, so it will be amazing if at least 2 billion is invested.
The 2020 budget is a survival budget. We cut back on everything related to investments; everything goes to the current running costs. Investments mean development.
InfoMarket: What is the structure of budget revenues?
Veaceslav IONITA: The main revenues of the public budget are taxes on income and expenses of the population. This includes both social tax and medical tax, the government taxes everything that is connected with the incomes of the population, then the government taxes the expenses of the population. Business is involved in budgeting by 15%, the population by 85%. According to the state budget, the situation is slightly different, but similar. The biggest revenues from the state budget are VAT and excise taxes. It was planned 6.6 billion lei revenues on excise taxes this year out of 44 billion lei of all revenues to the state budget. That is, 15% of all revenues are excise taxes. If we remove non-tax revenues from the state budget (fines, revenues from privatization, dividends of state companies, etc.), it turns out that the share of excise taxes from tax revenues accounts 20-25% of the state budget. VAT accounts 50% of revenues. It turns out that the state budget is kept on VAT and excise taxes, which are consumption taxes.
InfoMarket: And these taxes are paid by consumers.
Veaceslav IONITA: Yes. I calculated that the average family in Moldova (of three people) pays 70 thousand lei per year in the form of taxes. This figure is growing every year, although this year it will be less not because the state has become kind, but due to the fact people are getting poorer and consuming less.
InfoMarket: VAT is charged on almost all consumption, but is it possible to structure excises in the replenishment of the budget, because they do not apply to all goods?
Veaceslav IONITA: Excise taxes can be divided into three parts: excise tax on luxury goods; excise tax on bad habits; excise tax as a form of road management. Using data from the approved budget, from the planned 6.6 billion lei of excise tax revenues; 2.5 billion falls on petroleum products; 2.2 billion for tobacco products, 1 billion for automobiles and 0.9 billion for all other excise taxes (alcohol, gold, crystal, caviar, imported alcohol). Three categories of excisable goods account for 85% of excise tax revenues.
InfoMarket: Business, both large and small, to put it mildly, was offended by the state and may stop paying all taxes. Like, the state did not help me, I survive myself, and why should I support the state?
Veaceslav IONITA: When you do not pay taxes, you break the law, then the state has the ability to punish. Indeed, the only thing that was done during the crisis was that business that allowed to postpone any taxes for a short time. It would be better if given the opportunity to postpone not for the quarter, but until the end of the year. Although, the state is in a difficult situation.
There is a risk that the business in some part may go into the shadow economy. When the tax burden is large, the entrepreneur agrees to pay bribes, but not pay taxes. We all know that good tax administration is when a system is created in which it is beneficial for a business to pay taxes. Whenever you raise taxes, you need to look to see if the business goes into the shadows.
InfoMarket: During the crisis it was easier for those who receive budget revenues. And what is our correlation of jobs between state structures and private business?
Veaceslav IONITA: You asked a very correct question. We are the only country in Europe (only Belarus is close to us), where the number of people who work in the state-controlled sphere is almost 70%. In Moldova, 600 thousand officially employed people, of which 220 thousand are public sector workers. Taking into account those who work in the public sector, at state enterprises, in private companies whose business is controlled by the state (for example, a telecom operator), it is almost 70%. Free private business provides just over 30% of jobs.
InfoMarket: They are private sector workers who are most affected by the crisis.
Veaceslav IONITA: Unfortunately, yes. This sector is one of the fastest growing, and it is also the most vulnerable.
InfoMarket: How much jobs are reduced due to the crisis in Moldova?
Veaceslav IONITA: According to the national survey, which we did at the beginning of the epidemic, 10% of people said that they no longer work; it’s about 70 thousand people. According to the structure, as I noted, 600 thousand were officially employed, another 100 thousand say that they work full time, but without a work book. And about 50 thousand receive money in envelopes. We believe that those who were working unofficially were the first to lose their jobs. The forecasts showed the number of officially employed will be reduced by 10%, this is a lot. Another 5-10% (at least 40 thousand people) will lose their jobs at least temporarily.
InfoMarket: The Moldovan business, especially small and medium, faced three main challenges: paying taxes, paying off loans, paying rent. Who and how can help him overcome difficulties: the state, the financial sector, owners of commercial real estate?
Veaceslav IONITA: Speaking of state support, I noted that the developed countries approved a financial package of assistance to business at 50% of their budget revenues. If Moldova has a state budget of 44 billion, then 50% would be 22 billion lei. But in reality, the entire package of financial assistance to business and the population will amount to a maximum of 2.5 billion lei. Basically, it 's payments to medical personnel, payments for technical unemployment and support of pensioners. The business gets almost nothing. There was only approved a package of compensation for interest on new loans, but only a few companies used it. This is such help to the business that it does not need it, like a discount coupon in a casino.
InfoMarket: The only sector that has achieved something is HoReCa; they reduced VAT from 20% to 15%. But, why didn’t they return to the level of 10%, as was customary under the government of Pavel Filip?
Veaceslav IONITA: In general, this is not the sector that has been suffered the most; they rather complained a lot. There is another sector, which is very important for Moldova, which suffered very much, it’s the wine-making sector. Today, we export 85% of our wines. This year there will be a problem with exports. But HoReCa was able to clearly state that the situation is bad in this sector, comparing with other industries within the country. We should also compare HoReCa report with other countries. Romania reduced VAT from 8% to 5%. We should also take into account the number of tourists coming to Moldova. On average, 17 tourists per year in the world per 100 people, we have only four. We do not have tourism at all, we are not competitive. We are the only country which has 18 tourists who go abroad for every foreign tourist in Moldova. This is the official statistics. This industry brings $1.2 trillion a year in the world, but only $50 million in our country.
InfoMarket: How can winemaking sector be supported, especially nowadays?
Veaceslav IONITA: There is a very simple mechanism, and it will not cost a leu to the government. The legislation of the country allows it, but so far it is not mandatory: companies importing and selling petroleum products should be required by law to include 5% bioethanol in gasoline. After the crisis of 2015, Moldovan winemakers have accumulated huge stocks of wine that they cannot sell. They can be converted to bioethanol and sold to companies selling petroleum products. The industry can be saved, the state will not spend a leu on this, and the consumer will not feel any extra costs.
InfoMarket: Can this really help the industry?
Veaceslav IONITA: It will save the industry. It is required to approve the volume of bioethanol every year, which should be part of petroleum products. If the year is good, and winemakers can sell everything, we don’t turn it on, if the bad year, we turn it on. And the bad years are the years of crisis, when petroleum products are getting cheaper, so consumers will not feel the difference in the final price. This measure can triple income of the wine sector in the country. ANRE must constantly keep in touch with wine producers, determine the possible surplus and volume of oil products consumption and the percentage of bioethanol in gasoline: 2% or 3%, maximum 5%. ANRE should also set the price for bioethanol, which should be the same for every market player.
InfoMarket: What about the banks? Do they really support their customers, or do they just conduct PR-campaigns?
Veaceslav IONITA: Banks have just begun to come out of the 2014 crisis. The volume of loans was 48 billion lei, then it fell to 32 billion, and this year it reached 42 billion and has already fallen to 40 billion again. The crisis reduces the volume of loans. The National Bank provided a mechanism on loans with debts and delays in payments which did not reduce the credit indicators of commercial banks. But, it’s important for banks to retain their customers now. There are few new loans at this time.
InfoMarket: There were a lot of controversy regarding the relationships between the leasers and the landlords...
Veaceslav IONITA: Unfortunately, our legislation does not regulate this very clearly. After all, the state declares quarantine, the Chamber of Commerce and Industry must ascertain force majeure circumstances. Unfortunately, this has not happened. Now, many economic ties are not efficient due to the legislation, unfortunately, it does not regulate these relations clearly during the crisis. You can’t put a burden on only one party, you need to find some mechanisms to regulate business activities during a crisis. Although, many landlords made concessions in cooperation with tenants.
InfoMarket: Is it possible to determine the sectors of the economy have suffered the most? Are there any who have benefited from the crisis?
Veaceslav IONITA: Everyone suffered. The car market reduced 34%. The residential real estate market reduced by 40%. This is something that can be measured easily and quickly. The consumption of non-food items is falling dramatically. Online ordering has won in developed countries, but it cannot be considered as a market in our country, rather, home delivery. Moldova's offline companies are trying to survive through online ordering, since it begins to gain momentum.
InfoMarket: What is your forecast for the second half of the year? What will happen to the economy and budget by the end of the year? Taking into account, the upcoming presidential elections this year.
Veaceslav IONITA: We are saved by the fact that (sorry for the black humor) we do not have an economy. There’s nothing special for us to lose. Trade industry will suffer greatly and the services sector. Those are major sectors in Moldova. I hope that everything will begin to recover by the end of the year. Next year, I think we will catch up with the pre-crisis volumes. The example of the market for new cars, it has a huge decline of 34%, but the decline is slowing down already, and slow growth is expected starting from September-October.
The government, unfortunately, will end this year unpleasantly regarding the budget. The budget targets will most likely not be met. Our state will receive up to 38 billion from the planned revenues of 44 billion. I think they will take more on the domestic market: it was planned 3.6 billion lei, increased to 5.6 billion, and will attract about 7 billion. There will be no new grants. We will not receive 7-8 billion lei from external loans. By the way, few people pay attention, but the 2019 budget was not executed for 3.5 billion lei, we missed this amount and cut incomes, some were transferred to this year.
In general, with regard to taxes and incomes, the Prime Minister does not need to do anything, because the bureaucratic apparatus is working. The only challenge of this government was ensure normal relations with international partners in order to receive money and close the hole in the budget. My opinion regarding the criterion the government’s performance can be assessed: I would call the one and only one - the opportunity to receive money from abroad and block domestic debts.
InfoMarket: Government also goes through crisis management phase...
Veaceslav IONITA: Government made it very chaotic and short-sighted. The Cabinet of Ministers took very tough measures in relation to business and killed it, but flirted with the population (probably because of the upcoming elections). And we got a situation where the economy was killed but the population was walking on the streets: quarantine measures were not respected, public transport worked, etc. As a result, we became the most infected country in the world. The lack of measures by the government turned into critical situation in the healthcare sector and killed business activities. They donated business in vain. // July 17, 2020 - InfoMarket.