The Moldovan leu turns 24 today. Young currencies are not unusual, but what is extraordinary about the leu is the very challenging environment in which it was born and has existed so far.
Moldova became an independent state on August 27, 1991, in the aftermath of the Soviet Union’s dissolution. The following August, Moldova became a full member of the International Monetary Fund (IMF) and the World Bank Group, an important achievement for the new Moldovan authorities. These laid the foundations for the new Moldovan currency which was to be issued one year later. The bold decision to introduce the new currency was taken on November 29, 1993, when, with the support of the IMF, Moldova put in circulation the Moldovan leu. On November 29, 2017, Moldova is celebrating the 24th anniversary of the birth of its currency.
Figure 1: Moldovan leu banknotes printed in 1994 and 2010
Source: The first Moldovan leu printed in 1994, signed by the first governor of the NBM and a new banknote signed by the second governor (NBM website)
From an economic point of view, some conditions for a stable currency had been met in the early nineties, such as the lack of any foreign debt, the economic potential of the agriculture sector and, of course, Moldovans’ wish to have their own currency. These premises were of major importance, but it should be noted that Moldova barely had any foreign currency reserves and had no gold holdings whatsoever at the time when this new currency was “born”. In the dissolution process of the former Soviet Union, Moldova opted for “no share of the foreign debt, no share of the international assets”. The starting point of “no foreign debt” was a major positive factor (although rapidly lost in the transition to a market economy), but the lack of any gold holdings have haunted the currency until now.
Based on the good results in the implementation of reforms, the leu managed to remain stable in the first five years of circulation at around at 4.50 lei to the US dollar, as compared to its initial exchange rate established administratively by the National Bank of Moldova (NBM) at 3.85 lei to the dollar. However, the evolution of this new currency was to follow more dramatic developments in the coming years. First, a very steep depreciation followed the 1998 crisis. The second one was to follow in 2014 (see Fig. 2) when the currency sharply depreciated to 20.87 lei to the euro as of end-2016. As of November 24, 2017, the leu was quoted at 20.62 lei to the euro. During 2015-2016, the level of 22.00 lei to the euro was exceeded, which shows the fragility of a young currency unable to weather the extreme conditions derived from scandals, frauds and a struggling economy. An incipient and fragile appreciation trend was experienced by the leu in the first half of 2017 (mainly versus the US dollar). A new recent rating from Moody's Investors Service was of only B3 on 13 January 2017 (with stable outlook) and this was possible only after a new agreement with the IMF (as compared to the Ba2 rating in 1996).
Figure 2: Moldova - the Moldovan leu vs. the US dollar, euro and Romanian leu
Source: Compiled based on data published by the NBM (Interactive Data Base)
A strong economic recovery is now required to bring stability for the leu. This implies the restructuring of large state owned companies which currently register losses or receive subsidies from the budget, and a substantial increase in exports, including to the CIS countries, and control of imports. Land should be distributed to farmers and in turn the farmers should produce more organic foods for both the internal market and more for export to the EU and other international markets. Serious issues in the banking sector should also be resolved.
Foreign debt: a cause for concern?
Simple answer: almost, and strong control is recommended now. In a more elaborate response, it should be noted that the economic potential of this country has been quite good if compared to its geographic and human dimensions, but it has not been used to the highest level. Moldova started its transition to a market economy with zero foreign debt, but by mid-1997, this had reached $1bn, according to the figures published by the NBM. This represented 50% of the Moldovan GDP which was quite concerning. Moreover, over the next 20 years, the foreign debt would build up to a staggering level of $6.55bn as of end-June 2017. This is already equal to some 100% of GDP. The Moldovan authorities recently announced an extra $1bn increase over the next three years.
Moldova has been and will continue to be externally vulnerable because of its almost total dependence on energy imports from the Russian Federation and other CIS countries. In more recent years (up to and including 2017), Moldova had another type of difficulties generated by restrictions and/or the total prohibition of exports of some traditional products (wine, cognac, meat, vegetables, fruits, etc.) on the Russian market. This was supposedly done for phytosanitary reasons, but all external analysts of Moldovan developments agree that the restrictions were mainly geopolitically motivated. Chronic trade deficits have been accumulated, which finally rendered Moldova as a Heavily Indebted Country. Moreover, specifically for Moldova, the debt accumulated by companies established in the separatist republic of Transnistria has been and will continue to be a topic of heated discussions in Moldovan society. The unrecognised breakaway republic has been supported by the Russian Federation ever since Moldova’s independence in 1991.
Figure 3: Moldova’s trade deficits
Source: Biroul National de Statistica al Moldovei; 2017 - estimations
One positive factor concerning both foreign debt and the leu’s exchange rate was remittances. During the last 10 years, Moldova received an average of $1.3-1.4bn on an annual basis from its citizens currently living and working in the Russian Federation, the EU, the US, the UK, Israel and many other countries, as presented below:
Source: NBM Interactive Data Base (net basis, without Transnistria)
In some years, this represented up to 20% of the Moldovan GDP, but the large majority of this money is going for consumption/subsistence, which is not ideal. As such, the exchange rate of the leu is clearly related to the volume of remittances. The large transfers considerably helped the leu to stay afloat and keep foreign debt under control so far, but if the total level of remittances will decline (as seems to be the tendency of the last few years), the exchange rate of the leu will clearly be negatively impacted. There are no doubts that pressure on the currency will continue without a solid stream of remittances. The ratio of consumption/investments will also be influential and the increase of the investment share will help support the leu.
In November 2016, Moldova signed a new programme with the IMF for $178.7mn. The conditionality of this last programme is rich, especially on the banking sector supervision and restructuring of this key sector. As of end-October 2017, $58.6mn was disbursed to Moldova.
Strong control of foreign debt should be a priority for the current Moldovan authorities. An adequate structure of the foreign debt is desirable, but realistically maybe Moldova is not in the position to choose amongst its creditors. It simply has not got enough borrowing capacity to be able to diversify the sources of its external financing. The latest loan granted by Romania, of €150mn in three tranches, in October 2015 (fully disbursed by September 27, 2017) was more of an emergency loan extended by a friendly neighbouring country than a normal access to international capital markets. In a way, the same goes for the recent macro-financing granted by the European Union of €100mn, in three tranches (the agreement was signed on November 23, 2017).
Banking issues and fighting corruption
The status of the leu, both internally and externally, has been under heavy pressure during the last five years. The supervision of the NBM up to end-March 2016 was weak. The banking sector was plagued by severe scandals, of which the so-called “the Moldovan laundromat” and the huge $1bn banking fraud were the most damaging for the leu. According to independent analysts, some $22bn were “laundered” from the Russian Federation to offshore jurisdictions in rather sophisticated schemes. All these transactions had been made for years up to May 2014, when the whole scheme became public. Many judges and bailiffs involved were arrested and many managers of the involved banks (and from the NBM) were fired and/or arrested, or had their banking administrator licences revoked.
However, this was too little, too late. The damage was done and the Moldovan leu entered into a continuous process of depreciation. A new governor was appointed by the Moldovan parliament effective from April 11, 2016, and measures to correct this unacceptable situation started to be implemented, but this issue is not over yet.
Fighting corruption in Moldova is sometimes more of a national “show” for which the mass media creates an audience. The actual results are modest, if any. There is a need for a strong political will to fight corruption and it is obvious that this is lacking in the case of Moldova. This plague should be eliminated as soon as possible as it has determined the fate of the leu and, most likely, will continue to do so if not crushed. By the way of concluding, though, it would be fair to say that Moldova’s increasing foreign debt and its “young” leu, while challenging, could still be managed, but measures to correct the situation should be implemented now. The fate of the leu is directly dependent on the level of foreign debt of the country. Keeping the foreign debt at manageable levels and building a robust economy should be national goals for Moldova. Its current good potential is there waiting to be harnessed.
Alex M. Tanase is an independent consultant and former associate director, senior banker at the European Bank for Reconstruction and Development (EBRD) and former International Monetary Fund (IMF) advisor. The assessments and views expressed are not those of the IMF, the National Bank of Moldova (NBM), the EBRD or any other institution quoted.