The volume of gross transfers from abroad to Moldovan households (mainly wage remittances) increased by 20% y/y to $319mn in Q1, after a 13% y/y advance posted in Q1 2017, according to data published by the central bank.
Last year, the gross transfers to Moldova’s households hit $1.27bn, or 15.6% of GDP. This is a large volume for a small country like Moldova, but a modest 9% y/y advance and a moderate volume compared to previous years (the transfers were $1.7bn in 2014).
The increase was considered the main reason for the local currency’s strengthening through the year (from MDL20 to the US dollar at the end of 2016 to MDL17.1 to the US dollar at the end of 2017). The money from wage remittances in Moldova largely finances half of the imports — with the exports financing the other half. But households’ higher propensity to consume by cashing part of their savings kept in foreign currency might have equally strengthened the local currency and pushed up imports. The fading political turmoil visibly improved consumer sentiment.
Rising inflows are likely to maintain pressure for the strengthening of the local currency (already visible through 2017) and help the central bank builds up foreign currency reserves this year. The country already has a robust external position mainly due to the scarce foreign financing: Moldova vastly relies on international financial institutions, plus loans from Romania and Poland.
Indeed, the government, under the forecast drafted with the International Monetary Fund, expects the local currency to strengthen from an average rate of MDL18.5 to the US dollar last year to MDL16.8 to the US dollar in 2018. GDP would thus increase, expressed in US dollars, by nearly 20% to $9.7bn, despite the moderate 3.8% real GDP increase forecast.