The unprecedented COVID-19 shock hit Moldovan firms through several channels and necessitated immediate liquidity support to protect them from massive closures. In the short run, the authorities should focus on securing medical supplies and staffing, measures to slow the spread of the virus and reduce the peak load on health systems, securing fiscal stability and access to finance, keeping the financial sector stable while ensuring adequate liquidity, shows the 2019 Enterprise Survey presented by the World Bank, IPN reports.
According to WB specialists, although the fiscal deficit remained contained in 2019, it will expand rapidly in the wake of the pandemic. In the first quarter of 2020, collections by the fiscal service decreased by 3.6 percent y-o-y. In April, authorities adopted a set of supportive measures to counteract the pandemic with an estimated cost of 2.4 percent of GDP.
Marcel Chistruga, economist at the World Bank Moldova County Office, the unfolding economic crisis will lead to a contraction of the Moldovan economy in 2020. The fiscal deficit and public debt will widen as government steps in to protect lives, firms and households.
2019 growth, at 3.6 percent, was underpinned by strong domestic demand led by wage increases, remittances, credit expansion and rising public spending. Yet growth declined sharply to 0.2 percent in the last quarter as agriculture and electricity production plunged, with a slowdown in exports and investments.
Monetary policy relaxed prior to the crisis outbreak and continues its dovish stance. In anticipation of disinflationary pressures, the policy rate was cut to 5.5 percent in December. On the back of weaker domestic demand and downward spillover from international commodity prices, the inflation rate declined to 5.9 percent in March 2020, say specialists of the World Bank.
The current account deficit declined prior to the crisis but is again set to widen. It tightened by one pp to 9.7 percent of GDP in 2019 as exports growth exceeded those of imports in the second half of 2019. A sharp drop in exports and remittances, however, will widen the deficit back to above 10 percent of GDP in 2020.
The prolonged disruption of economic activities until August 2020 would cause growth to fall by 5.2 percent, the biggest drop since 2009. Weaker growth will further strain public finances faced by already large financing needs at 15 percent of GDP. A higher number of returning migrants, high social spending needs and high unemployment may put additional strain on labor market conditions and create further fiscal pressures.
If the coronavirus outbreak is largely contained by mid-2020 with a recovery thereafter, in the baseline scenario by year-end the economy will still have to deal with a recession of 3.1 percent. The economic lockdown and travel restrictions will lead to a sharp deterioration in activity in Q2 with a severe drop in disposable income.
