IEPR
Institute of European Policies and Reforms
ANALYTICAL NOTE: Agricultural Package
Experts from the Institute for European Policies and Reforms qualify these projects
mainly as a series of populist actions that will not solve the core problems of
farmers. These laws violate the principles of a market economy and contradict the
economic reality of the country.
ANALYTICAL NOTE: AGRICULTURAL PACKAGE
Authors: Eugen Ghiletchi, Sergiu Tofilat, Dumitru Vicol
On 20 May 2015 the Chairman of the Parliament, Adrian Candu, after a meeting
with representatives of farmers, promised a set of measures to help them, taking into
account the local difficulties and the regional context. The draft laws (282, 283, 285,
286, 287) developed by the Chairman of the Parliament and signed by the coalition
colleagues have come to be discussed and approved in plenary session of the
Parliament on 30 July 2015.
Experts from the Institute for European Policies and Reform qualify these
projects mainly as a series of populist actions that will not solve the core problems of
farmers. These laws violate the principles of a market economy and contradict the
economic reality of the country.
The state budget deficit for 2015 is estimated at over 3.5% (about 4 bln. MDL).
Most likely, it will be revised when the effect of the banking crisis will be taken into
account and the effect of cessation of external funding will be absorbed. Granting a
whole range of tax incentives uncovered by the budget, is therefore unacceptable,
especially taking into account the country's economic difficulties, the inevitable
recession in 2015 and the existing arrears in paying subsidies to farmers. All these lead
to the conclusion that the Government should promote a fiscal consolidation, while the
support to farmers should first arise from the existing programmes such as the Polish
credit.
PROJECT NO. 282 – On amendment of the Tax Code
The income tax paid in 2014 by farmers made up 32 mln. MDL. Zero rate of the
income tax for the entire agricultural sector set up in the project is not sustainable in
budget terms. In circumstances where all farmers reinvest their profits, the country
will miss the entire amount paid earlier by farmers, which will total approx. 100 mln.
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MDL for 3 years. This gap will need to be covered from other sources (at the expense
of citizens), or granting of some tax incentives without coverage means populism.
At the same time, the measure provides for a 0% tax for only 3 years, a period
coinciding with an election cycle. Farmers need medium and long-term safety not only
during the term of an electoral cycle, being indirectly forced to vote for the same
parties if they want to continue to benefit from these incentives.
Alternative solutions:
We opt for measures to be extended for at least 5-6 years, and if it comes to
certain incentives, they should be targeted and structured in such a way as to bring
long-term benefits to the whole economy and to be granted only when sources to cover
the budget losses are identified. Gradual granting some tax incentives depending on
particular indicators (ex.: export share in the turnover of the business) are possible.
PROJECT NO. 283 – On the agricultural credit
The agricultural credit project allows the state to intervene in an unduly manner in
the activity of banking institutions, trying to distort the market in favor of a particular
group of companies. Each banking institution has its own lending policy and sets interest
rates on loans based on the cost of resources in the financial market. In an effort to reduce
the rate on loans for farmers, the state will provide tax incentives to banks, thereby
reducing the revenues to the state budget. There are no estimates on the value of tax
incentives, but, according to the project, they will be equal to the profit lost by banks. The
current rates on loans for farmers fluctuate depending on several factors, which are
different for each bank, which will make almost impossible the calculation of the lost profit.
Today, banks attract deposits at 15-16% annually (before the NBM base rate was
increased up to 17.5%). The date of statutory reserves for resources attracted in MDL is
22% and will increase up to 26% from 8 August, and from September – up to 32%.
Respectively, of the 100 MDL attracted, the bank can use only 68 MDL. Thus the real cost of
resources attracted in MDL is 16/68 = 23.5%, while the draft decision stipulates that the
banks will grant agricultural loans at a rate of 12.5% annually (the NBM base rate, minus 5
percentage points).
During 2014, the portfolio of loans granted to the agricultural sector increased by
some 380 mln. MDL. If the same dynamics of lending are kept, then each 1% subsidized
directly or indirectly by the state will cause a reduction in budget revenues by 3.8 mln.
MDL. Since the NBM monetary policy is extremely restrictive, interest rates on bank loans
might reach 25-30% annually, in these conditions the amount of subsidies of interest on
agricultural loans will be 45-65 mln. MDL annually. The mechanism for identifying and
determining the commercial rate for banks is also uncertain, thus creating an uncertainty
in the accurate determination of subsidies/tax incentives.
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Also, by introducing the agricultural loan for the banking system only, rather than
for the microfinance organizations, the legislator demonstrates a bias attitude in favour of
banks. It is important to note that for many leasing and microfinance organizations,
farmers represent a large group of customers and by offering tax exemptions provided for
by the project only to banks, authorities will put the microfinance sector in a considerable
disadvantage.
Therefore, we can find out that the proposed project does not have reasonable and
sufficient economic fundamentals. And if the government fails to develop an effective and
functional mechanism able to cover all losses incurred by banks in the provision of
agricultural loans, the objective exactly opposed to that one aimed by the project will be
achieved and namely the banks will definitely cease to fund farmers.
Alternative solutions:
1. A security fund for farmers, helping them to obtain credits, but without distorting
the market, can achieve much safely the project objective.
2. Direct subsidies for payment of the interest to farmers obtaining credits for
irrigation, for example, which could bring much more benefits in the long term.
3. Effective implementation of existing programs. For example, the project with the
Polish credit was announced late last year, but the procedure for funding the farmers is
delayed.
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info@ipre.md
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