Moldova C. Bank Switches to Western-Style Policies

CHISINAU — Moldova's central bank will pursue a Western European-style monetary policy based on an inflation target, underscoring the country's integration into the European mainstream, its new chairman said.

Moldova, a country of 4.5 million people where the average monthly pay is about $300, has seen a radical shift in political leadership from the communists to a Western-leaning coalition since a snap election in July.

Central bank chief Dorin Dragutanu said under the communists, Europe's poorest country tried to keep a strong hand on the national currency, the lei, and hold down inflation at the same time.

He told Reuters the central bank, where he took over earlier this month, would now "adopt best policies and practices that are applied in the European Union," which included targeting inflation and a free-floating currency.

"In the past, it was not clear what the central bank was actually trying to do … we were declaring we were targeting inflation but it was obvious for some period of time that we were very concerned and focused on foreign exchange," he said.

This lead to a haphazard policy, he said in an interview. "Now we intend to make our policy really functioning and we intend to stick to the targets," he said.

The 35-year-old ex-financial chief of PriceWaterhouseCooper in Serbia said inflation would be targeted at 5 percent, plus or minus 1 percent. The government expects deflation this year of 2 percent against inflation of 7.3 percent in 2008.

"[The target] is a little higher than in some EU countries but a lower target will increase the risk of significant depreciation of the currency, which we would like to avoid," he said.

The four-party Alliance for European Integration, which broke the communists' grip on power in a snap election in July, has put together a government and controls a key post in parliament but is yet to secure the most important post of state president.

Late last month it agreed on a $590 million bailout program from the International Monetary Fund to help it overcome the shock of the global recession, which is expected to lead to economic contraction of 9 percent this year.

One half of the bailout money will go to supporting the central bank's reserves and the other half "for the needs of the country," said Dragutanu who declined to give further details ahead of the IMF deal being signed in January.

He said external factors could prove obstacles to monetary policy, since the small, but very open, Moldovan market had been hit by currency depreciations among its biggest trading partners in Russia, Ukraine and EU member Romania.

But Moldova would continue to allow a floating exchange rate with the central bank intervening only in rare instances.

"As unbelievable as it sounds, the foreign exchange rate is set by a normal demand-and-supply relationship," he said. "We have a floating system. We have no intervention. We are like any other participant on the market."

Bearing hard on the Moldovan economy is a dramatic drop in the level of remittances sent back home by hundreds of thousands of Moldovans working in Russia and EU countries — cash that makes up about a third of the Moldovan economy.

These fell 35 percent in the first 9 months of this year down to about $840 million, Dragutanu said.

"Remittances are crucial — they are oxygen for us, very important," he said, but Moldovan "guest-workers" abroad face big difficulties because of the global crisis.

A Moldovan now is sending back just enough money for basics, leaving thoughts of buying a refrigerator or television set to another day, he said, adding that he did not expect the inflow of remittances to pick up much in the future.