Transnistria devaluates currency by 25%

Transnistria devaluates currency by 25%
By Iulian Ernst in Bucharest June 20, 2017

The central bank in the Moldovan separatist republic of Transnistria shifted the exchange rate corridor from 11.1-11.3 rubles to the US dollar previously to 15.0-15.5 on June 16, state news agency NovostiPMR.com reported

This corresponds to a 25% devaluation of the local currency issued by the unrecognised separatist republic. It is expected to result in a 33% increase in import prices. 

The move is aimed at bringing the official exchange rate of the central bank in line with the one on the grey market of the exchange offices. It will act as a balance of payments stabiliser as well. 

The de facto devaluation makes permanent the 30% cut in public wages and pensions carried out last year by the government. At the time, the authorities promised to return the rest of the 30% when more public funds became available, and the new government returned some of the withheld money this year. However, the expected inflationary shock from the devaluation will mean that while they are maintained at their current nominal value, public wages and pensions will be 30% lower at comparable prices.

The central bank’s foreign currency reserves completely depleted last year and the monetary authority started distributing its scarce forex revenues (including the 7% mandatory forex quota levied on exporters’ revenues) to banks under a pro-rata system, through daily “auctions”. Last June, it set a 10% fee on the forex purchases, equivalent to a 9% devaluation, in a last ditch attempt to curb the gap between demand and supply.

On June 16, the central bank also abrogated the auctioning system and set up a system under which banks will be sold foreign currency individually on the basis of their customers’ proven needs (for imports).

Speaking on June 19, President Vadim Krasnoselski assured citizens that the government will do its best to mitigate the inflationary impact of the devaluation. He has good reasons to do this: public sector wages and the pensions in Transnistria have to be adjusted, by law, in line with consumer prices if headline inflation exceeds 5%. Utilities prices will not be raised, he promised. Last year, when previous President Evgheni Shevchuk and central bank governor Eduard Kosovsky advocated a 10% devaluation, they were estimating a 4.6pp inflationary impact (interestingly, just under the 5% benchmark above which wages should have been increased).  

Kosovsky in fact evaluated the size of the needed devaluation at roughly same level as carried out by his successor Vladislav Tidva. However at time, the political party behind the current president (who acts as head of government as well), Obnovlenie, opposed the devaluation. The Transnistria central bank is subordinated to lawmakers.

Tidva says the devaluation is needed because of the massive amount of money printed by his predecessor (monetary aggregates soared by 50%, he claimed). The central bank has printed money and extended loans to the government (to finance the budget deficit) and banks (to allow them to extend loans to customers), Tidva explained. The situation was not revealed until last autumn’s elections, he added.

Another factor cited by Tidva is the lower foreign currency revenues generated by the Cuciurgan power plant. Moldova suspended imports from the plant in April, then resumed imports on June 1 but at a 30% lower level than previously.

Obnovlenie, the political arm of Sheriff industrial group that dominates the separatist republic’s economy, holds all the political power in Transnistria after last autumn’s presidential elections. But its ambition for independence from Moldova with a view of later uniting with Russia has received only moderate attention from Moscow officials who instead support the federalist vision of Moldovan President Igor Dodon. 

Obnovlenie’s powerful position within Transnistria has somehow insulated the radical authorities in Tiraspol from the increasingly tough line taken by the Moldovan ruling coalition (helped by Ukraine). One recent example is the creation of joint Moldova-Ukraine checkpoints that replaced Tranisitria's checkpoints and cut a significant part of the revenues to Tiraspol's budget. However, if the low standard of living falls further, they risk facing protests from those who for one reason or another have not migrated to Russia or Moldova already.  

 

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