Inflation is being curbed with expensive loans. But who will save Moldova's economy?

Annual inflation in Moldova reached 10.77% in October—the highest level since July 2023, when the country was still emerging from an inflation crisis. For the first time in more than three years, prices have once again begun to rise at double-digit rates, more than doubling the National Bank's (NBM) target of 5% (±1.5 percentage points, i.e., ranging from 3.5% to 6.5% annually). In response, the NBM raised its base rate to 11% per annum—more than double the rate from last December. At the same time, energy prices are rising, the tax burden is increasing, and employers are being asked to raise the minimum wage by another 20.6% starting in January—from 6,300 to 7,600 lei per month. Government decisions are increasing costs for businesses and households; the NBM is trying to mitigate the consequences by raising interest rates, while the economy itself is barely growing.

Inflation is rising, and loans are becoming more expensive

In October, consumer prices rose by 2.65% in just one month, compared to 1.66% in September. Annual inflation accelerated from 8.6% to 10.77%. Since the beginning of the year, prices have increased by 9.45%. The rise in the cost of utilities is particularly noticeable: year-over-year, gas prices rose by 56.2%, heating by 33.7%, and electricity by 23.7%. The cost of services overall rose by 18.12%.

But the structure of October's inflation is even more telling. Over the course of the month, regulated heating rates rose by 61.2%, and natural gas rates by 28.8%. According to calculations by the National Bureau of Statistics, these two increases alone added about 1.3 percentage points to the monthly inflation rate of 2.65%. In other words, nearly half of October's price increase was attributable to these two regulated rates.

This raises a key question regarding monetary policy. When prices rise due to excessive consumer demand, raising interest rates can indeed cool the economy and slow inflation. But if a significant portion of the price increases is linked to regulated rates, energy costs, and administrative decisions, expensive loans do not address the root cause of rising prices. They may curb the further spread of inflation, but at the same time they add to the costs of businesses that are already paying for expensive energy, transportation, and servicing their obligations.

Back in December 2025, the NBM's base rate stood at 5%. In May 2026, it reached 6.5%, in June—7%, in August—7.5%, in September—9%, and as of November 5—11%. In less than a year, the cost of money for the economy has changed dramatically. This sequence of decisions raises serious doubts about the quality of forecasting and the timeliness of the response by the current leadership of the NBM. If inflationary risks were building up gradually, why did the regulator need to tighten policy so sharply?

At the same time, the NBM does not promise a quick return to price stability. According to its current forecast, inflation will not return to the target range until the third quarter of 2027. The forecast for average annual inflation next year has been raised from 6.2% to 6.9%. But what if this forecast doesn't come true either? The NBM will likely once again attribute the failure to external circumstances, utility rates, and other factors over which it has no direct control. At the same time, there is effectively no mechanism in place to hold the regulator's leadership personally accountable for failures in monetary policy. Formal accountability exists, but who is responsible for the outcome? For now, it is businesses and the public who pay the price for these mistakes and miscalculations.

Minimum wage: a pay raise for workers, a cost for employers

Against this backdrop, labor unions and employer associations have agreed to raise the minimum wage in the real sector from 6,300 to 7,600 lei starting in January 2027. The increase amounts to 20.6%. For employees who actually receive the raise, this is an opportunity to partially offset the rising cost of living. For employers, it is an additional obligation not directly linked to either increased sales or higher labor productivity.

However, the actual cost of this decision for businesses is significantly higher than the raise itself. Nine percent of the gross salary is withheld for mandatory health insurance, and 12 percent is withheld for income tax, taking into account the deductions provided for by law. In addition, a typical private-sector employer pays 24 percent in social security contributions. As a result, an employee earning the minimum wage of 6,300 lei costs the company 7,812 lei per month, and an employee earning 7,600 lei costs 9,424 lei. The difference amounts to 1,612 lei per month, or 19,344 lei per year per employee. For a company with five such employees, the additional costs would total 96,720 lei annually.

At the same time, employees generally evaluate their salary based on the amount they actually take home, while viewing the payment of taxes and mandatory contributions as the employer's problem. For a large company, these additional costs may be relatively small, but for a store, café, workshop, or family business, they can represent a significant portion of the financial bottom line.

The Tax Service does not take part-time employment into account

This highlights another peculiarity of government policy. The State Tax Service sends letters to taxpayers stating that, according to data from its information system for January–July 2026, the average declared monthly salary per employee at certain businesses was below the established minimum of 6,300 lei. Businesses are encouraged to voluntarily ensure compliance with the law, including the correct calculation and reporting of salaries and tax obligations.

However, there is a circumstance that fundamentally changes the meaning of such a comparison. The minimum monthly wage is set for a full-time workweek. The Labor Code permits part-time work and a part-time workweek with proportional pay. Therefore, an average wage below the established minimum is not, in and of itself, evidence of a violation.

For small businesses, part-time employment may not be a way to hide income, but rather a way to keep the business and jobs afloat. When expenses grow faster than revenue, an employer is forced to choose between laying off staff, reducing working hours, or ceasing operations. Shifting employees to a three- or four-day workweek or to part-time positions allows employers to reduce payroll costs while preserving at least some employment.

Of course, part-time employment must correspond to the actual hours worked. If a person is officially employed part-time but actually works a full day, this constitutes a violation. However, the tax authority must distinguish between a fictitious reduction in working hours and a legitimate adaptation of the business to economic conditions. Comparing the average wage to the full monthly minimum wage without taking the duration of employment into account does not account for this distinction.

As a result, at the urging of labor unions, the government is increasing employers' mandatory expenses, while the tax authority is simultaneously targeting businesses that report wages below the established monthly minimum. At the same time, lawful part-time employment may not be a sign of tax evasion, but rather a consequence of the economic conditions under which businesses are forced to operate.

Trade unions: workers' interests and their own revenues

The position of the labor unions, which consistently advocate for raising the minimum wage, deserves special attention. Their mission is to protect workers' incomes and labor rights. However, the trade unions themselves are funded, in part, by membership dues, the amount of which is often determined as a percentage of wages.

For example, the charter of the Federation of Moldovan Communications Trade Unions stipulates a membership fee of 1% of monthly income, of which 30% is transferred to the federation. A similar principle of percentage-based deductions is also provided for in the documents of other trade union organizations.

Thus, an increase in wages—assuming the number of union members and the contribution rate remain constant—increases not only workers' incomes but also the revenues of union organizations. It would seem unreasonable to claim that unions demand an increase in the minimum wage solely for the sake of their own revenue. But a financial interest does exist, and it cannot be ignored when discussing the position of organizations acting on behalf of workers.

At the same time, unions do not bear the business risks of an employer. They do not need to ensure a store's profitability, find buyers for a factory's products, or take out a loan to pay wages. Therefore, in the debate over the minimum wage, it is necessary to assess not only the desired level of earnings but also the ability of businesses to finance them. This is especially true for micro- and small businesses, which cannot automatically pass on additional costs to customers without risking losing them.

Wage growth could once again fuel inflation

There is another consequence of raising the minimum wage by 20.6% that must be taken into account in a high-inflation environment. An increase in labor costs, not backed by a corresponding rise in productivity, may push businesses to raise prices for goods and services. This creates additional inflationary pressure, which the NBM is trying to combat by raising interest rates. A vicious cycle emerges: the government raises the minimum wage to compensate workers for the rising cost of living, but the additional costs borne by businesses are partially passed on to consumers, driving prices up once again. As a result, inflation gradually erodes the value of the pay increase, and workers' purchasing power grows significantly less than their nominal wages.

At the same time, the authorities are planning further increases in certain taxes and excise taxes. For 2027, a 20% increase in excise taxes on diesel fuel is planned, and a 10% increase on a number of other excise-taxable goods. Changes in energy taxation are also likely to affect the costs borne by businesses and households. Each such measure has its own budgetary or regulatory justification, but for businesses, their combined effects add up to a total cost burden.

Meanwhile, the economy is not showing the kind of growth that would allow it to absorb these costs without difficulty. In the first half of 2026, Moldova's GDP grew by only 0.6%. The International Monetary Fund forecasts economic growth of 1.5% for the full year and 2.3% for 2027, having lowered its previous estimate for next year from 3.2%.

Under these conditions, some businesses may refrain from creating new jobs or may need to adjust their workforce. The government risks achieving the opposite of the intended result: instead of increasing workers' incomes, there will be a reduction in employment, and instead of growth in tax revenues, there will be a narrowing of the tax base.

Expensive loans—even more expensive than public debt

The cost of government borrowing is creating additional pressure. By the end of August, Moldova's national debt had reached 147.73 billion lei, up 17.5% over the past year. From January through August, approximately 3.99 billion lei were allocated to service the debt, compared to 2.65 billion lei a year earlier—up about 50.6%. The revised budget allocated approximately 6.51 billion lei for debt servicing in 2026.

The government and the private sector have different financing options. The government can take out new loans, issue securities, and reallocate budget funds. A business that cannot cover its expenses with revenue cannot survive for long. But government borrowing also comes at a cost: the more the budget spends on interest, the fewer resources remain for other purposes, assuming revenue remains constant.

The National Bank of Moldova's (NBM) increase of the base rate to 11% creates an additional risk that new borrowing and the refinancing of obligations will become more expensive. This applies not only to the private sector but also to public finances. Moreover, more expensive government borrowing is ultimately paid for by taxpayers as well.

Economic policy is internally contradictory. The government seeks to increase budget revenues and the minimum wages of workers. The NBM is trying to bring inflation back under control by limiting money demand. The tax service is working to ensure more complete reporting of wages. Each agency is addressing its own objectives, but their combined actions are increasing pressure on businesses, on whose operations both jobs and tax revenues depend. Government agencies are sawing off the branch they're sitting on.

The fight against inflation cannot be reduced solely to raising interest rates if, at the same time, government policy continues to increase production costs. Nor can an increase in the minimum wage be evaluated solely by the size of the raise, without analyzing how many businesses will be able to maintain full employment.

The main problem today is not that workers are demanding higher incomes or that the government is demanding tax payments. The problem is that the economy must first generate the resources from which these wages and taxes will be paid. If businesses' mandatory expenses continue to grow faster than their revenues and productivity, the result may not be an increase in prosperity, but rather a reduction in working hours, jobs, and the tax base itself.

And then the government will have to contend not only with inflation, but also with the consequences of its own decisions on employment, entrepreneurship, and economic growth. // 12.11.2026 - InfoMarket.