The real perspective on prosperity for Moldovan economy

The real perspective on prosperity for Moldovan economy
Sursa foto: DCFTA.MD

After more than four years after the entry into force of the Free Trade Agreement between the Republic of Moldova and the European Union, despite the positive results in the trade area, there are voices that still challenge its importance for the Republic of Moldova.

There is nothing surprising in this approach, as the agreement was, from the beginning, qualified by a part of the public opinion, as having a pessimistic impact for Moldovan economy.
How the gloomy prognoses of Moldovan Eurosceptics did not come true and why it is important for us to take maximum advantage of the Free Trade Agreement with the European Union, either as businessmen or as simple consumers, let's see based on some concrete examples.

Statistics speak for themselves

In order to elucidate the progress made by this agreement in the commercial field, it is sufficient to consult the statistics of the last years on the evolution of the external trade of the Republic of Moldova. According to the National Bureau of Statistics, Moldovan exports reached 2.425 billion dollars last year.

Only in 2013, the Republic of Moldova registered a slightly higher export, with three million dollars, but this happened before the Russian Federation’s embargoes and the economic crisis that followed. The trade restrictions imposed by Russian Federation have obviously led to an economic downturn during the coming years, which negatively affected exports as well.

Thus, as a result of the embargo imposed by the Russian Federation in the second half of 2014, that year Moldovan goods in value of 2.339 billion dollars were exported, thus decreasing by 86 million. In 2015, they decrease even further up to 1.96 billion, as trade restrictions were kept throughout the year. However, in 2016 a recovery occurred, with exports up to 2.044 billion and last year they were only one step away from recording the highest value in the history. Statistics show again that the rapid recovery is primarily due to the Free Trade Agreement that transformed the European Union by far into the largest trading partner of the Republic of Moldova.

If we look at the structure of exports per country of destination, we find that in 2005 the CIS countries absorbed half of Moldovan exports, while the EU countries covered only 40 percent. In 2015, the ratio was already in proportion of 61.9% to 25% in favor of the EU in order to reach the last year 65.8% of goods exported to the EU and 19.1% to CIS.

In the first seven months of current year (n. 2018) Moldovan exports to CIS countries dropped to a share of 16% and to the European Union reached a share of 68.7%. The figures speak for themselves. Nevertheless, the purpose of DCFTA was not to divert Moldovan exports from Russia to the European Union.

Diversification of markets - strategic objective for the Republic of Moldova.

The EU market is enormous, with 500 million consumers, and the entry on it ensures a diversification of Moldovan exports so that it does not depend on deliveries to Russian Federation, which used to operate this dependence as a lever of pressure. Ultimately, the Free Trade Agreement with the European Union offers the same benefits as the ones offered by the CIS to which the Republic of Moldova is part and the agreement recently concluded with Turkey, cancelling the tariff barriers for the import of goods in the partner countries.

The conclusion of Free Trade Agreements with as many countries as possible is in the interest of our country, evaluate the experts from the German Economic Team (GET), who described Moldova's trade policy as an intelligent one. Obviously, the opening of the EU market under the Agreement is expressly conditional on linking the quality of Moldovan products to the EU standards, as European legislators want to ensure that those who consume Moldovan products are protected by quality standards and clear traceability of the products that reach the shelves of shops in the EU countries.

The automotive industry - one of the largest contributors for increasing exports

Overall, Moldovan exports increased by 18 percent last year and 70% of this growth were due to deliveries to the EU. From a sectoral perspective, the biggest contribution to this growth is due to products of plant origin and cabling produced within the enterprises from the automotive sector located in free economic zones. Together, these two export categories contributed with 59% to the total growth.

And if deliveries of plant products have grown uniformly in all directions due to a good agricultural year and higher international raw materials prices, then the automotive industry products are almost entirely exported to the EU. There is a direct link between the increased trade with the European Union and investments in the cable industry. This is why GET experts recommend continuing attracting investments in this sector that offers new jobs, decent remuneration and makes a significant contribution in the improvement of the trade balance.

"The development of the automotive sector was the consequence of a successful foreign direct investment (FDI) policy in combination with an intelligent trade policy. In this context, it would make sense to deepen further the trade relations with the EU by continuing implementing the free trade agreement with the EU and pursuing an active policy to attract FDI in order to ensure this long-term development ", experts recommend.

It is worth to note that almost a third part of the export’s growth was ensured by services, especially the travelling and transportation related ones, but also by informational services, these both being important branches with growth potential, which were not really taken into consideration. A predictable fiscal framework, investment in infrastructure and education are needed
Regarding the economic relations between Republic of Moldova and the EU, the European PM Siegfried Mureşan, who follows closely and in a critical manner the evolutions in our country, concludes that the increase of exports to the EU show where the true friends of Moldova are.

"The Republic of Moldova exported last year three times more products in terms of value in the European Union (EU) countries than in the Commonwealth of Independent States (CIS). All this shows that the prosperity comes from the relationship with the European Union. That is why the politicians in Chisinau have to make more efforts to implement the reforms agreed within the Association Agreement with the EU.", stated Mureșan in a press release.

However, in order to continue the growth trend, the EU PM recommends to the Government in Chisinau to provide a stable and predictable fiscal framework, to develop the infrastructure, especially taken into consideration that 85% of all exports were made by road means, and to invest in education, these being the main areas on which the development of the business environment and the creation of new jobs depend. "Only in this way, the well-being will be felt in the everyday life of the citizens," says Mureşan.

Adaptation to the market requirements - the safe strategy of winners

However, we cannot state that the Free Trade Agreement has produced immediate results in all directions. Some export quotas on European markets cannot be yet met by Moldovan exporters. In particular, the horticultural products quotas are concerned. According to Moldova Fruit Association’s director, Iurie Fala, fruits and grapes continue to be exported mainly to the Russian Federation, which has readmitted entries of Moldovan products two years ago.

The European market is quite difficult to conquer because of fierce competition, but also because of the lack of adaptation of Moldovan products to European standards, the process requiring more time and effort. Farmers, however, have to be persistent, says Iurie Fala, and recommends them to focus on cultivating other horticultural products, the ones that are easier to deliver to European markets due to lighter competition. Mr. Fala is of opinion that farmers should diversify their products and replace apples, which have an overwhelming share in the total horticultural production, with cherries, plums and grapes, which enter easier the EU markets.

Side effect: products reach more and more third markets

Although the European market is becoming a difficult fortress to conquer for Moldovan horticulturists, the effects of adapting fruits and grapes production to European standards were felt when entering other markets. And this is due to the fact that if the production meets the European standards, the most demanding standards in the world, it can easily enter all the other markets. For example, a group of producers from Costesti, Ialoveni rayon, managed to deliver in January, 18 tons of grapes on the United Arab Emirates market. Contacts were established at World of Perishables exposition in Dubai.

The grapes have traveled through the sea to Dubai for 25 days and arrived in perfect condition at destination. "We have participated in the exhibition in the United Arab Emirates three times. There, we managed to establish relationships with potential buyers and exported a grape container as sample. Grapes are to be distributed in stores, on markets. We look forward to the consumers’ opinion from this market. If the grapes are appreciated, in autumn we shall deliver larger quantities.” explains Iurie Bivol, manager of the FructBioImpex cooperative.

It should be noted that producers from Costeşti are oriented towards the diversification of markets. Last year they exported 400 tons of grapes to Poland, smaller quantities went to Mongolia and Iraq. The farmer says that in order to succeed in business, one must constantly test new markets, invest in the quality and product promotion. He recognizes that a failure on Dubai market could cost him 25,000 Euro, but such a failure could not stop him. Already this year, Mr. Bivol shall test the US market, with another grapes container sent from Costesti to Chicago.

"Livada Moldovei" aims to change the situation

Ultimately, even if it takes time for Moldovan goods to enter the European markets, an extensive process for upgrading, modernizing and adapting agricultural and food industries to the highest standards has begun. The process is strongly supported by European and international funds.

Currently there are 29 projects ongoing, involving cheap loans and non-reimbursable financing offered by international financing bodies and Western partners, including the European Union and some EU countries, with the aim to help re-technologizing Moldovan enterprises and increase the competitiveness of domestic products. The value of funding reaches 86.8 million dollars, 325.3 million euros and 1.5 billion Moldovan lei.

One of the largest projects of this kind is “Livada Moldovei”, launched in July 2016 and which provides loans and preferential leasing in the amount of 120 million euros, offered by the European Investment Bank (EIB) for the recovery of the horticultural sector. Beneficiaries of the project, which shall last until 2021, may be horticultural enterprises (fruits, nuts, table grapes producers), processor enterprises (packaging, calibration, freezing, drying and other horticultural products processing) as well as nurseries enterprises or those related to the sector such as the ones producing packaging, labels, equipment, specialised educational institutions, laboratories for quality control of production, etc.

Beneficiaries can receive funding up to 5 million Euro for purchasing equipment and production equipment, including laboratories, for the construction and renovation of production halls, restructure and revitalization of planted areas and the setting up of new planted areas, as well as for a number of auxiliary actions that contribute to the increase of the quality and productivity.

”Filiera Vinului” demonstrates that it can be

“Livada Moldovei” is an ambitious project, aiming to repeat the success of another program, “Filiera Vinului”, also financed by the EIB and which has contributed crucially to the recovery of Moldovan wine sector, affected by Russian embargoes twice imposed on Moldovan wines. The restructuring program of the Viticulture Sector (Wine Branch) run during 2012-2017, was developed by the Moldovan government and the same EIB, financed by the EIB and co-financed by the EU, already harvests its fruits.

Through the Program, the EIB granted to the Republic of Moldova a loan of 75 mil. Euro over 12-year with an interest rate of approximately 5%. As a result, many winemakers who were struggling for survival, were able to breathe much easier, enjoying opportunities for the development of the sector. The restructuring of the wine sector, which is largely due to this program, involved the diversification of sales markets, in other words the conquest of new markets, the objective being achieved only by increasing the quality and ensuring the authenticity of the produced wine production. In order to achieve these objectives, Moldovan winemakers set up new vine plantations, updated the technology of their enterprises to the highest European standards, improved wine quality and promoted wine production under a common country brand.

Although it was a laborious process, the results worth the entire effort and the winemakers qualified last year as being one of a real success for the branch. In 2017, the wine sector in Moldova has reached the highest production volume in the last four years, namely 18 million decals, and the value of exports reached over 128 million dollars. Domestic winemaking companies have improved their grape harvests and gained ground abroad. Moldovan wine is more appreciated and rated on foreign markets and the cost per liter is higher than  the indicators from 2016 and 2015.

"The wine of Moldova is becoming an increasingly popular product on international markets and is increasingly demanded by foreign consumers. The volume of exports has grown steadily, but the great performance is that we have managed to increase the value of wine exported abroad. The current cost per bottle is clearly higher than the 2016, i.e. with 8.2 percent higher. This means that foreign markets are prepared to pay more for a high-quality product, such as Moldovan Wine is", said Gheorghe Arpentin, director (at that time) of the National Office of Vine and Wine.

Statistics reveal that last year, Moldovan winemakers have continued to diversify their sales markets in favor of those from Europe and Asia, which now account for almost 60 percent of the volume of bottled wine exports. Almost half of bottled wines, 46 percent, reached the EU markets over deliveries on the CIS market, which represented 32%.

It should be noted that in 2006 the CIS market and, in particular, the Russian Federation, absorbed no less than 90 percent of Moldovan wine exports, which were shipped mostly in bulk or at quite low prices. Now among the largest buyers of bottled wines from the Republic of Moldova are Poland (14 percent of total exports), China (12%), Romania (12%), Russian Federation (12%), Czech Republic (11%), Ukraine (7%), Kazakhstan (7%), Belarus (5%), Canada (4%) and Slovakia (3%).

The winemaking industry is an eloquent example for all Moldovan companies how to become sufficient competitive to face the more and more fierce competition on international markets. Namely the increase of competitiveness of Moldovan enterprises, would be, on long term, the most important objective of the Free Trade Agreement between the Republic of Moldova and EU, a target that is impossible to achieve on their own or together with partners from the CIS, as themselves need profound modernization of their economies.

Can we turn into a country exporting high-quality products? The example of the wine industry proves that yes, we can. The DCFTA, in this sense, is a trigger, which opens for Moldovan farmers a certain perspective on prosperity, hard to be imagined a decade ago.

Ion Chișlea