With new PM in place, Moldova looks to recover from rocky start to 2015?

By bne IntelliNews August 7, 2015

Kit Gillet in Bucharest -

 

On July 30, Moldova appointed a new prime minister, career politician Valeriu Strelet, to replace Chiril Gaburici, who had resigned back in June over allegations that he forged his high school diplomas. Many hope the appointment of Strelet as premier marks a turning point for the country after a turbulent and unsettling period, though that is anything but assured.

After the country’s parliamentary elections last November, several months of uncertainty followed while the country’s pro-EU political parties jostled to create a working coalition to lead the country. In February, a minority coalition, propped up by the Communist Party, came to power, but it was quickly proven to be weak and inefficient.

At the same time, a major banking scandal came to light that had, in the run-up to the elections, seen an estimated $1bn removed from the country (over 10% of Moldova’s GDP) in what appears to have been an elaborate fraud perpetrated by a Moldovan businessman and his associates.

Moldova’s Liberal Democrat Party (PLDM) had initially nominated Maia Sandu, who has a reputation of being a radical reformist, for the position of prime minister. But after she failed to get the required level of support from the other coalition parties, Strelet, who is head of the Liberal Democrat Party (PLDM) caucus in the parliament, was put forward. Strelet is seen as a more centrist, consensus figure. Hardly someone who can shake the country up, but with the ruling coalition holding a fragile 55-seat majority in the 101-seat parliament he could be a pragmatic choice.

First steps

As a first step in righting the ship, Moldova’s newly appointed prime minister, in his first government meeting on July 31, said he had already sent an invitation to the International Monetary Fund (IMF) for talks in Chisinau on a new stand-by arrangement and a financial package. The previous visit of an IMF mission to Chisinau, planned for mid-June, had been cancelled after the resignation of Gaburici.

Moldova desperately needs foreign financial aid. International rating agency Moody’s changed its outlook on Moldova’s ‘B3’ sovereign bond rating to negative from stable on July 31, invoking the government's liquidity position in light of the expected political challenges in securing further multilateral financing support, and the possible impact of the banking sector crisis on public finances.

Moldova's public debt servicing costs are expected to triple to 3% of GDP, from 1% of GDP currently. In the first five months of this year, exports totalled $812.3mn, 16.2% down on the year; imports also dropped, by 22% to $1.63bn.

Much discussion has taken place about the future of the three banks at the centre of the scandal: Banca Economii (BEM), Banca Sociala and Unibank. Moldovan officials have previously hinted that the IMF has set as a pre-requisite of a new arrangement for the liquidation of the three banks.

Speaking at a press conference on the quarterly inflation report in early August, the National Bank of Moldova governor, Dorin Dragutanu, said the central bank would withdraw the operating licenses of the three banks, currently under special administration, within the next two months. He added, however, that the liquidation of the banks, including the evaluation of assets and the recovery of claims, might take years.

After having their licenses withdrawn, the three banks will still owe to the central bank and the finance ministry a startling amount, equal to 24% of the country’s GDP, Dragutanu said. “These banks are zombies and should be liquidated,” he added.

The need to liquidate the banks seems to be accepted by an increasing number of Moldovan politicians, after the main ruling parties initially advocated for the nationalisation of the banks, which would be more costly and would maintain the risk of a further siphoning off of money.

The new prime minister also declared on July 31 that the government had moved on to the second stage of investigations into the scandal, drafting and approving the procedures for picking a consultancy firm to continue the investigations that were started by the audit firm Kroll.

While these are good first steps, Strelet’s nomination, however, is unlikely to boost the credibility of the pro-European parties, which have lost ground in voters’ preferences after failing to deal with key unresolved issues such as the banking fraud since the parliamentary elections last November. Major reforms, especially in transparency of government and the judiciary are needed, and sooner rather than later.

The next few months will be a clear sign of the effectiveness of Moldova’s new government and the ability of the new coalition to push the country forward and help it recover from a pretty disastrous start to 2015.

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