Gutted

WHEN Alina, a Moldovan student, had her bank card rejected by a cash machine last week, her first thought was to wonder whether the bank had quietly gone under. Happily, the cause was a fleeting technical glitch—but her reaction was not far-fetched. The country’s financial system is limping badly. In November, thieves stole $1 billion from Moldova’s three biggest banks through a series of fraudulent loans and transfers. Moldova, sandwiched between Romania and Ukraine, is the poorest country in Europe; the theft amounted to more than an eighth of GDP. It has set in train a series of events that will leave the government unable to pay salaries by the end of the summer, according to the recently departed finance minister.

The fraud left the three banks insolvent, so the National Bank of Moldova, the central bank, has taken them over, injecting 12.5 billion Moldovan lei ($660m) in new capital. It did not have such a sum to hand, however—it had to create it. The huge expansion of the money supply caused inflation to double to 8% and the currency to drop. It has fallen by 20% against the dollar this year.

In response to the jump in inflation, the central bank began raising its benchmark interest rate sharply. It has vaulted from 8.5% in January to 15.5% now. That, along with the addled state of the banks, is causing businesses to rein in their investments.

It does not help that Russia, one of Moldova’s biggest trading partners and source of almost $800m in remittances from Moldovan workers last year, is facing an economic crisis. Russia’s recession has caused Moldova’s GDP growth to fall by 4.6 percentage points, the World Bank reckons. That accounts for a big part of the economy’s reversal from growth of 5% in 2014 to a contraction projected at 2% this year.

In addition to all these disasters, the country is in the grip of political upheaval. The prime minister, Chiril Gaburici, resigned in June after state prosecutors and fellow politicians accused him of forging his high-school diploma. A replacement was only agreed this week.

Meanwhile, many of the foreign countries and international agencies that bankroll Moldova’s government say they are suspending assistance until it gets to grips with corruption and mismanagement in the financial sector. The European Union was the most recent donor to pull out, announcing on July 5th that it was freezing its €40m ($44m) aid programme. The World Bank has stipulated that it will resume lending only if the three stricken banks are closed, since it considers them open targets for future fraud, even in the hands of the central bank.

The government relies on concessionary loans and aid to plug its deficit, which is projected to be 7% of GDP this year. The loss of tax revenue caused by the recession will only make the shortfall grow. The government has slashed spending, disbursing 20% less than planned in the first five months of the year and freezing all investment projects from July. Two public hospitals in the capital, Chisinau, briefly closed all departments except emergency services and surgery earlier this year. Suspending basic services, however, will only exacerbate Moldova’s problems.

It is not clear that the country’s political elite has much interest in sorting out this mess. It was not until April that much information about the bank scandal became public, after the speaker of parliament leaked a report on the crime by Kroll, a security firm. The judiciary is not strong enough to clamp down on corruption. A week before Mr Gaburici stepped down, he called for the chief prosecutor to resign over his failure to act on the bank scandal.

“The heist was obviously covered up,” says Francis Malige of the European Bank of Reconstruction and Development (EBRD). The EBRD recently tried to buy a majority stake in Victoriabank, one of the largest remaining private banks, to try to ensure a continued flow of lending to local businesses; the government inexplicably blocked the acquisition.

Moldova’s fortunes do not need to be so grim, says Alex Kremer of the World Bank’s local office. It has a long border with the EU, and an extremely competitive average monthly wage of just over €200. “This should be a booming export economy,” he says. “If they sort out the governance and corruption, it will be.”

Correction: An earlier version of this article incorrectly said that Moldova's parliament inexplicably blocked the EBRD's acquisition of Victoriabank. Moldova's government in fact did this.