VZCZCXYZ0084
RR RUEHWEB

DE RUEHCH #1003/01 3641220
ZNR UUUUU ZZH
R 301220Z DEC 09
FM AMEMBASSY CHISINAU
TO SECSTATE WASHDC 8720

UNCLAS CHISINAU 001003 
 
STATE FOR EUR/UMB, EUR/ACE, EEB/OMA 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EREL ETRD MD
SUBJECT: ECONOMIC AND POLITICAL CRISES NECESSITATE 
2009 BUDGET ADJUSTMENTS 
 
Sensitive but Unclassified.  Please protect 
accordingly. 
 
¶1. (SBU) SUMMARY:  The previous Party of 
Communists (PCRM)-dominated Parliament adopted 
Moldova's initial state budget for 2009 with 
positive forecasts for GDP growth and receipts. 
However, the new government of Moldova (GOM) 
inherited a GDP drop of minus nine percent for 
2009, falling revenues, and significant social 
expenditures maintained by the previous government 
during an election year.  An October agreement 
with the IMF has provided some budget relief, 
helping the new GOM to temporarily cover the 
deficit.  In addition, on December 3, the new 
Parliament amended the budget to reflect the new 
reality and reduce expenditures.  The PCRM 
boycotted the vote, stating that it would not 
support cuts in social programs.  END SUMMARY. 
 
OPTIMISTIC ORIGINAL BUDGET PROJECTION 
------------------------------------- 
 
¶2.  (U) The former PCRM-led GOM based its budget 
forecasts for 2009 on optimistic economic 
assumptions - six percent real GDP growth, single- 
digit inflation at 9.5 percent and a stable and 
strong exchange rate for the Moldovan Lei (MDL 
9.12 per USD).  However, the global economic 
crisis had a severe impact on the economy in 
Moldova.  According to GOM data, GDP shrank by 7.6 
percent in the first six months of 2009.  The GOM 
projects that the overall GDP will be MDL 59.9 
billion (USD 5.4 billion) in 2009, approximately 
nine percent less than in 2008. 
 
BUDGET DIFFICULTIES IN 2009 
--------------------------- 
 
¶3.  (U) When the Alliance for European Integration 
(AIE) assumed power on September 25, it inherited 
a grim financial situation, with the budget 
deficit in the first nine months of 2009 reaching 
MDL 1.963 billion (USD 178 million).  The state 
budget is heavily dependent on customs duties and 
Value Added Tax (VAT), which were adversely 
affected by the global economic crisis.  In the 
first nine months of 2009, budget revenues were 
MDL 10.8 billion (USD 980 million), which equaled 
only 61 percent of the total annual revenue 
projection.  During the first nine months of 2009, 
average budget revenues were only MDL 34.3 million 
per day, substantially less than the daily average 
of MDL 43 million for the same period in 2008. 
 
¶4. (U) The budget projections also were affected 
by election year politicking, as the previous GOM 
planned increased pensions and salaries for 
teachers and other government workers to woo 
voters.  The drop in revenues forced the PCRM 
government to cut expenses for all sectors with 
the exception of support to the social insurance 
budget.  In spring all ministries were instructed 
to reduce expenditures by 20 percent to ensure 
adequate funding for social programs.  As a 
result, there are no arrears in social payments, 
including wages and pensions in Moldova.  The PCRM 
has focused attention on its preservation of 
social payments during the economic crisis as a 
great success.  However, the GOM was and continues 
to be behind schedule on reimbursements for VAT to 
Moldovan exporters.  Local businesses report 
delays of over six months.  The delay in VAT 
reimbursements actually means that the real budget 
deficit is much greater than the official figure. 
 
IMF SUPPORT FOR THE BUDGET DEFICIT 
---------------------------------- 
 
¶5.  (U) In late October, the GOM and the IMF 
reached preliminary agreement on a new economic 
program of USD 588 million.  (Note:  The previous 
GOM in June opted not to negotiate a new agreement 
with the IMF in light of the difficult conditions 
that the IMF would have required.  IMF imposed 
measures were not welcome prior to parliamentary 
elections in July.  End Note.)  The agreement is 
subject to approval by IMF management and the IMF 
board, which will meet on the issue in January 
¶2010.  In addition, Moldova was able to use its 
 
Special Drawing Rights (SDR) allocation from the 
IMF (equivalent to about USD 186 million) to cover 
its immediate budget deficit in November 2009. 
Under the IMF conditions, Moldova's budget deficit 
should not exceed seven percent of its GDP in 
2010, five percent in 2011, and three percent in 
¶2012.  In addition to IMF budgetary support, the 
GOM is also raising funds with the sale of 
government securities (MDL 1.5 billion).  (Septel 
will discuss additional conditions of the IMF 
agreement.) 
 
AIE APPROVES BUDGET AMIDST PCRM BOYCOTT 
--------------------------------------- 
 
¶6.  (U) On December 3, the AIE-majority Parliament 
adopted an amendment to the 2009 budget which 
significantly reduced revenue by 26 percent from 
an initial projection of MDL 17.7 billion (USD 1.6 
billion) to MDL 13.1 billion (USD 1.2 billion). 
Another amendment cut spending by 3.1 percent from 
MDL 18.3 billion (1.65 USD million) to MDL 17.7 
billion (USD 1.6 million).  The budget deficit was 
increased considerably from the original 
projection of MDL 574 million (USD 52 million) to 
MDL 4.65 billion (USD 420 million) - an increase 
of a factor of eight. 
 
¶7. (U) The PCRM had submitted proposals to 
preserve much of the social spending increases 
planned previously by the PCRM government in 
committee meetings.  The new GOM did preserve the 
provision of the previous PCRM-led GOM for a 
salary increase for teachers of 24 percent 
retroactive to September 1, 2009, but postponed 
other planned increases.  Two further salary 
increases are planned for teachers on January 1, 
2011 and September 1, 2011.  Salary increases for 
all other government employees will not be 
considered before 2011.  The PCRM then boycotted 
the voting on the amendments, arguing that it 
could not support cuts in social spending. 
 
COMMENT 
------- 
 
¶8.  (SBU) The new GOM has taken practical steps to 
respond to the budget crisis, but will face the 
difficult challenge of living within its means 
while preparing for possible new parliamentary 
elections in fall 2010 (since the AIE was unable 
to elect a president in two rounds of voting this 
fall).  In particular, the new GOM is keen to 
avoid cutting services, which could exacerbate 
social tension, and is counting on an economic 
upturn in its export markets in 2010.  Perhaps 
more significantly, the government is hoping for 
economic growth in Russia, Ukraine, Italy and 
Portugal, where the largest concentrations of 
Moldovan guest workers are located.  Remittances 
from Moldovans abroad continue to equal 
approximately one-third of GDP in Moldova. 
 
MICHELI