06 september, 2016

(INFOTAG’s exclusive interview with the Minister of Finance of Moldova Octavian Armasu)

Part 1. A low starting point in the development of an independent Moldova

"I.": Mr. Armasu, what thoughts you are having when you, as a citizen of the Republic of Moldova in the rank of Minister of Finance, think about the 25 years of independent development of the country?

O.A.: It was a hard way. Our country has no history of independent statehood, the elite has been only formed, which is the bearer of governance traditions.

The Republic of Moldova arose on the ruins of the Soviet Union, on the ruins of a rigid, authoritarian system, where there was no private property, no business, no civil liberties. In addition, we have inherited uncompetitive industry and agriculture based on the large amount of manual labor, respectively, there were many people involved; if I remember correctly, about 40% of the total population of the republic.

I say this not to complain about how our lives are out of luck. I am just stating the fact that the starting point we had is pretty low. This means that the time and effort to make Moldova a prosperous country should be more than, let’s say, for other countries of the former Eastern bloc.

"I.": What would you have named as the positive results of this quarter of a century?

O.A.: There are several fundamentally important changes that have occurred in the country during that time. First, the Republic of Moldova's economy is based on private capital. The role of the state in the economy has narrowed considerably, and the extent of its intervention in market mechanisms has decreased significantly. But most importantly, we do not notice the change in the attitude of citizens to the state ownership. People are critical of government’s involvement in commercial projects, and this is totally contrary to what was thought in the society in the early 90ies of the 20th century.

Second, there were built all state institutions necessary for the functioning of market mechanisms. They are still not perfect, but, despite all the difficulties, for 25 years, they have improved and continue to improve.

Third, there are competitive enterprises and industries, which have learned to compete in foreign markets. There are owners and managers who know how to do business in a competitive environment, introduce new technologies and develop the potential of human resources. Yes, they are still insufficient for our economy, but their number is growing.

I do not want in any way to gloss over the reality in which we live. I just outlined the positive changes that have occurred and have been occurring in the country since its independence. Our development is not necessarily ongoing, there were ups and downs. And that is okay, because every crisis, through which we have gone, identifies certain shortcomings, which need to be eliminated. Although we eliminated these drawbacks sometimes clumsily, generally, the country is developing, and it is already quite different from the one that was 25 years ago.

Of course, we all want already today to live in a country where the economy provides comfortable conditions of life for citizens, where government institutions are functioning effectively, where the citizens feel secure. But back to the first question, Moldova started with a very small potential, so we need more effort and patience to achieve the desired results.

"I.": In the understanding of the current Minister of Finance, from the point of view of finance and economy, what wasn’t done and why?

O.A.: Currently, the biggest difficulties I see in the banking sector. The problem of the lack of transparency of shareholders was on the agenda of many governments, but tangible results have not been achieved. Now are taken vigorous measures by the new leadership of the National Bank, the parliament and the government, and I have reason to hope that in the near future the situation will change drastically.

Problems remain in the non-banking sector, namely in the insurance segment, we do not have a functional capital market. The reason for all this is poor corporate governance. By the way, I think that for this reason there have been thefts from the three banks, which ultimately are in the process of liquidation. It is well known that in order to save the banking sector in general, and to return all deposits to individuals and legal entities, there has been granted a loan guaranteed by the government. That is what cost us the poor corporate governance.

"I.": Your immediate supervisor, prime minister Pavel Filip said on the eve of the 25th anniversary of the independence of the Moldovan state that the Republic of Moldova today is not what it was at the beginning of 2016, it is now different. What he had in mind, if you take into account the "financial side" of the issue?

O.A.: In January 2016, the state budget was on the verge of a serious crisis. The state was not funding the deficit, there was no support of foreign creditors, the banks, too, addressed the Ministry on disbelief, so interest rates on government securities reached 26%. There was no budget or tax policy. All this was the result of a protracted political crisis.

It was quite difficult to renew the relationship with the donors as trust has been largely undermined. And here I am referring to the trust of the whole country and its political elite.

In addition, there was quite deplorable the situation with tax revenues, both from the customs and the tax inspectorate. The population and business had very high inflation expectations – at the level of 10%. As a consequence of the population and investors' uncertainty, has been falling the consumption, which adversely affected the economic growth.

Today the situation in the economy and public finances is much better. We gained the trust of the banks, the National Bank carries out a stimulating monetary policy, interest rates on government securities dropped to the level of 10%, which is already quite acceptable with inflation of 6-7%. (Continuation of the interview with the Finance Minister Octavian Armasu in the next issues of INFOTAG news agency).

Part 2. Budget problem – a large share of current expenses

"I.": How soon can we talk in the affirmative way about the return of confidence in the country of external partners?

O.A.: We manage to regain the trust of foreign partners, we have reached an agreement with the IMF at the expert level, received the first tranche of the Romanian government, which has become in a sense the "first sign" of external financing.

Moldova has the budget and fiscal policy for 2016; budget expenditures are no longer limited only to wages and pensions. Today are unlocked government procurements, and all ministries are to implement their programs within the established spending limits.

Yes, we still have much work to do, but I can say that we are back to a normal development. In order that we can completely normalize the situation, we need to start implementing the reforms that we agreed with the IMF, to receive the approval of the program by the Board of Directors of the IMF, as well as to restore the funding from the European Union. To achieve these goals we need to work, as well as it is absolutely necessary stability in the country.

"I.": What could have been the public finances of the Republic of Moldova for these 25 years, if the promises of politicians that govern the state would have been implemented in practice?

O.A.: It is very difficult to make assumptions, and it is a thankless business to speak in the subjunctive mood. But, in my opinion, it is a good thing that politicians have not fulfilled some of their promises, because for 25 years of independence we had a lot of populist ideas based on short-term electoral interests. Because of this populism we have a very cumbersome, complicated and non-transparent pension system. For the same reason, the Republic of Moldova has a cumbersome state apparatus, from the central government and ending with local authorities. This has led to the fact that in the structure of the state budget the main share of expenses account for operating costs and for the investment component remains insufficient resources. This is one of the key reasons for the slow development of the country and I think the main problem of the Moldovan public finance today.

The fault of populist decisions is that we have a very large informal sector in trade and other industries, a lot of unnecessary tax breaks that allow evasion of fees to the state treasury. It is time to stop, especially the opposition forces, and not to build a public relations campaign and electoral propaganda on populist ideas, not to push the society in the wrong direction and expectations.

"I.": There was a time when your main focus was on the budget for 2016, on the negotiations with the IMF, on the reform of public procurement, on the effective management of the Polish credit risks, on the bond issue for credit of NBM of troubled banks. What does now concern you more and takes much of your time as Minister of Finance?

O.A.: I and my colleagues in the Ministry are focused primarily on the same objectives, but also added new equally important issues. We continue to work with the budget this year, as it became apparent that certain adjustments would be required to comply with the limits of its deficit. We have finished work on the medium-term budget planning framework conditions, and immediately began to work on tax policy and budget for 2017.

One of the priority directions of the reforms included in the program with the IMF is to increase the share of budget expenditures aimed at investment and development. And at the same time ensuring the social protection of vulnerable layers of the population. This goal is a long term, and we will pursue it for three years, but we need to act today, introducing structural reforms in various sectors.

In the area of public procurement, we have completed the development of the strategy of reforming the sector for the next three years. In the preparatory phase, there are a number of very important projects such as the reform of the tax service, with the participation of the World Bank and technical assistance from the Swedish government, the reform of the customs service.

Another important project is reforming the management of public enterprises, also supported by the World Bank, which we will implement together with our colleagues from the Ministry of Economy.

"I.": You were in favor of the maximum possible predictability of the financial market, eliminating the unpredictable actions of the Ministry of Finance. How predictable is now the Ministry’s action for market participants?

O.A.: As promised to the bankers, we have been increasing issuance of government securities in the first quarter of 2016 and held relatively stable market in the second quarter. In the second half of the year, because there was external funding, there will be some reduction in the volume of government securities issue. We must do this to ensure that more resources are available for the real economy, to stimulate economic growth. But we will gradually reduce the volume, so to enable the banking sector to adapt to the new situation. Reducing the volume will be predictable. We do not intend to return to the parameters that have been at the beginning of 2016. Therefore, up to the end of the year the banks will be able to place part of the liquid resources to the government securities. (Continuation of the interview with the Finance Minister Octavian Armasu in the next issues of INFOTAG news agency).

Part 3. Government decisions will become more transparent and efficient

"I.": In 2016, the Ministry of Finance managed to increase by more than 10% the revenues to the budget at the expense of purely administrative effort. When the budget revenues will increase due to the reforms and new growth points in the economy?

O.A.: First of all, I want to note that we in the ministry believe that there are still reserves of revenue growth in the budget of the improvement of administration in customs and tax authorities. To do this, in fact, we have started the reform of these services.

We pin hopes on positive changes in the real sector, investment and consumption. Already in 2016, the Ministry of Economy predicts a slight increase in GDP at the level of 3%, which is very little for our country, but not bad for the situation after the crisis in which we find ourselves.

The main thing that can do the Ministry to stimulate economic growth is the improvement of the business climate and reasonable budgetary resources for investment in projects that are developing. To improve the business environment, we proposed a number of measures in the draft fiscal policy for 2017. I invite representatives of business to send us their ideas and suggestions for the final approval of this important document. Without the participation of entrepreneurs is impossible to get a good final result – improving the business environment.

"I.": What did it cost the Minister of Finance not to turn "the state into a bad bank" with the Polish government’s loan for 100 million euros? What is the fate of this loan, will it be prolonged?

O.A.: The most important thing is that we found a solution that satisfies everyone, the entrepreneurs, the state and the Polish side. We are close to the establishment of a new operational regulation under which businesses can receive loans from this credit in the banks on good terms. I very much hope that the Polish government will take a positive decision on the extension of the implementation of the loan, and it will be another tool to stimulate economic growth in Moldova. Such a statement the Moldovan government sent to Warsaw.

"I.": How soon will work the reform in the public procurement sector, and will there be an effect on public finances?

O.A.: The first step in the reform of the sector will be the creation of an independent agency to review complaints. I look forward to an early approval by the parliament in the second reading of amendments to the law on public procurement, which will provide the legislative framework for the establishment of this agency.

It is under the approval of the government the reform of the public procurement strategy. I will mention only some of the measures provided for in this strategy:

- Automation of processes and the introduction of an e-procurement system to ensure transparency at all stages of the procurement, until the full execution of contracts. This will increase the transparency of the process and reduce opportunities for corruption;

- De-bureaucratization of the public procurement agency and change its role in the system from record keeping and verification of the fulfillment of the formal procedures to effective procurement management. The agency should not be engaged in seeking out formal violations, rather to engage in the continuous improvement of processes, the search for increasing efficiency in procurement routes, combining the procurement of various departments to obtain the most favorable conditions, helping contract organizations to properly conduct the procurement.

These are just a few areas of work, which will engage the efforts of the Ministry in the next two to three years.

"I.": You called for "political stability", which as the air is necessary to reforms. Do you feel it?

O.A.: Without a doubt, today's society is a lot more stable than six months ago. Unfortunately, some politicians, blinded by lust for power, continue to try to heat up the passion for the destabilization of the situation. A striking example – the protests during the celebration of the independence of the Republic of Moldova. After all, everybody understands that all that happened was a banal struggle for power. Only its organizers have crossed the border of integrity. It was not the president and the government feast, but a celebration of all Moldovan citizens. For many people this day has a special meaning. Did they really need on this day to demonstrate a desire to get to power?

It seems to me that some politicians have overplayed. The destruction that brought the last two years of political instability in Moldova thought them nothing?!

"I.": As a minister you could not come to terms with the bureaucratic system, its "slow perturbation", but how are you feeling now, eight months later. Has bureaucracy overwhelmed you?

O.A.: I am glad that I am not alone suffering from the bureaucratic system. And not because I found "fellow sufferers", but because there are like-minded people who want to change the system for the better in the government.

We want to simplify and accelerate the decision-making system by making these decisions more transparent and effective. And as the prime minister himself is the engine of reforms, I am optimistic that in the near future the government will be more efficient and productive.

"I.": Do you feel support and political will for what you do as the finance minister?

O.A.: I did not come to this position with the "individual" program of the Minister of Finance. I agreed to join the team of Pavel Filip, because the goals that it set for itself is in tune with my understanding of what needs to be done at this point for the development of the country. This is – the creation of good conditions for business. And I am glad that we have full agreement as a team on the subject of what to do, and most importantly, there is a genuine desire to help businessmen to create conditions to attract new investments to Moldova's economy.

Among other tasks are the eradication of corruption, including in the area of public finance, the restoration of relations with development partners, to attract investment and, of course, the resumption of the course of European integration of Moldova. I am very glad that I had the opportunity to apply my knowledge and experience to achieve these important goals and tasks in the development of the country.

"I.": Thank you for the interview!

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