+373 22 278 701

What would have been if… …or why the Free Trade Agreement with the EU is good for Moldova

The Free Trade Agreement with the EU has lately become increasingly discredited, in an attempt to review the first two years of its implementation. And as factual data show that the Free Trade Agreement is beneficial to our country and provides a range of opportunities for sustainable development in a competitive environment, opponents of the Agreement put forward a series of arguments of a deeply propagandistic nature. The most notorious topics veiled at the time, following 2 years of DCFTA implementation are as follows:

  • Russian embargoes and imposed customs duties were brought on by signing the DCFTA
  • Shortly after signing the DCFTA the Billion Dollar Theft occurred
  • As a result of the DCFTA implementation the domestic market is flooded with European goods

First, it should be pointed out the fact that under international requirements, the Free Trade Agreement with the EU does not cause any conflict situations or contradictions with the Free Trade Agreement of Moldova within the CIS and that Russian embargoes and customs duties imposed on most exported Moldovan goods to Russia were discretionary and against all international trade rules. Therefore, the allegations that Moldova has lost part of the Russian market as a consequence of the DCFTA implementation are invalid. In fact, the official reasons put forward by Russia, particularly the concern over re-exports through Moldova, are a little strange. An analysis of the export dynamics between 2011-2015 reveals that the yearly share of re-exports in total exports to Russia was about 60% and that most of them are classic re-exports. Throughout 2014-2015 the fall in these re-exports was inevitable given the multiple mutual sanctions between the EU and Russia that narrowed down the trade flows.

As for the exports of domestic goods that account for the largest share of value added of the country, if we consider the value of goods exported to Russia in 2013 – up to the imposition of trade restrictions – and compare their trend in 2014 and 2015 with the average growth rate of total imports of these products made by Russia we find that in two years our exporters have missed total revenues amounting to about 125 million USD.

Source: Authors’ estimates based on data by UN Comtrade

Another deeply biased statement is that the Billion Dollar Theft occurred shortly after signing the DCFTA. To begin with, the supervision of banks and money laundering policies rests solely with the National Bank and other competent government authorities. Involving the Agreement with the EU in this regard is totally irrelevant and ridiculous. Moreover, the bank fraud itself, which was followed by a significant depreciation of the Moldovan Leu (MDL) and a decline in the purchasing power of the population, but mostly the substantial obstruction of the access to finance and the political instability are the main factors that prevented Republic of Moldova to fully exploit the opportunities opened up by the Free Trade Agreement.

In this regard, the restricted access to finance has been a constraint factor of enormous magnitude that hampered the export growth and the opportunities on the EU market. On the one hand, in the aftermath of the banking fraud the NBM was forced to gradually increase both the base rate from 3,5 to 19,5% and the minimum required reserves ratio to 35% in domestic currency. These factors made the process of obtaining a loan an almost impossible task. On the other hand, the external financing freeze has limited companies’ access to international resources with acceptable interest rates that are lower compared to the interest rates offered by domestic banks. This situation occurred when companies needed capital at reasonable costs to start exporting to the EU or expanding their scope of exports by either making investments or financing the working capital.

Official data show that in 2015 the loan portfolio for businesses fell by 2,8 billion MDL and by 3,8 billion in 2016. Also, estimates on the loans actually granted in 2015 show that companies have absorbed around 7,5 billion MDL less than in 2014 and the financial deleveraging trend continued in 2016 when the total value of loans granted by banks to companies operating in Moldova amounted to 17,9 billion MDL or 3,7 billion less compared to 2015 and 11 billion less compared to 2014. At the same time, more than two thirds of the loan portfolio in the banking sector is assimilated by companies engaged in export-import operations. Had domestic businesses in the first 2 years of DCFTA implementation been able to reach a lending level similar to the 2014 figures, exports to the EU could have increased by another 100 -150 million USD annually.

The above estimate is realistic enough if we consider that following the first two years of implementation of the DCFTA:

  • The number of companies entering the EU market has increased significantly, to 1 360 in 2016, which is 30% more compared to the situation prior to the Agreement coming into force
  • The trend of export diversification of goods to the EU, which is seen increasing steadily, from 1 756 tariff items exported in 2014 to 2 102 tariff items last year
  • In recent years there has been a greater diversification of the EU markets, which can be observed from the gradual decreasing share of the top 5 markets in total exports to EU markets – from 82% in 2010 to 77% in 2016.

In other words, the first 2 years of DCFTA saw an improving market access to EU, though domestic uncertainties and lack of access to cheap capital did not allow for the full optimization of these performances.

Another cliché used mostly by those who systematically write off the Free Trade Agreement with the EU is the apocalyptical fear that after the entry into force of the Agreement, European imports would flood the local agri-food marketplace. For this, quoting out of context or presenting incomplete data is often used to show alarming trends in the dynamics of imports of such goods from the EU. However, statistical data on agri-food imports from the EU end any speculations on this subject, given that in 2014 and 2015 were reported significant decreases in all major categories of such products.

Dynamics of Moldovan imports from the EU on certain categories of food and agriculture goods, thousand USD

Source: UN Comtrade data

The Agreement critics who invoke the seemingly modest growth rate of exports to the European Union fail to also mention the unfavourable international conjuncture in the first two years of implementation. The oil prices decrease and the strengthening of dollar against all currencies in 2015 led to a sharp decline in prices for commodities worldwide, including key products in Moldovan exports such as: sunflower seeds, insulated cables, wine or textiles.

Moreover, as shown in the figure below, the quantities exported to the European Union de facto continued to grow consistently even in 2015 (+16%). On the other hand, the export volume to CIS markets experienced a 16-17% decline.

Indices of physical volume of Moldovan exports

Source: NBS data

Despite all internal and external circumstances, exports to the EU proved to be the most stable and viable and their increasing share in total exports from 46,8% in 2013 to 65,1% in 2016 is the most relevant argument. Had the Russian Federation not mixed politics with foreign trade, particularly, had Russia not imposed unilateral sanctions on Moldovan export; and had the institutions overseeing banks and money laundering not admitted the banking sector fraud and the negative consequences that followed, the Moldovan economy would be booming under the auspices of the Association Agreement with the European Union – the best roadmap for the sustainable development of the country.

Our estimates show that in the absence of restrictions imposed by the Russian Federation, as well as of the bank fraud, which had devastating effects on businesses’ access to finance, even in difficult international circumstances (currency devaluation, economic recession of the Eastern partners and the significant decrease in international commodity prices), the Republic of Moldova could have managed to mitigate the fall of 2015 total exports by almost 10 percentage points, from -15,9% de facto to only -7,3%. At the same time, exports to the EU, which in 2015 fell by 2,3% in value in USD could have continued to increase by about 5,7% and the 9.4% increase in 2016 could have been improved to 12,6%, provided that we start from a higher base for 2015.