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Gagauzia in search for financial autonomy

As the Parliament press-service announced (28.02.2006), soon “a special parliamentary committee will be formed to examine distribution of functions and rights between central and local bodies, inter-budgetary relations, as well as ways to monitor execution of local and district budgets”[1].

The step was made in the right direction. Let us remember that it has been 1997 when the Parliament ratified the European Charter of Local Self-Government. Later, though, very controversial actions followed: the break of the system of enlarged regions (10 judetses, ATO Gagauzia and Transnistria) and the return to 32 small raions of soviet delimitation, plus ATO Gagauzia and Transnistria. The potential of these raions is obviously insufficient for self-financing and all they, including Gagauzia, fill up their budgets thanks to transfers from the “center” – the Ministry of Finance.
Meanwhile, according to the European Charter of Local Self-Government “Local authorities shall be entitled, within national economic policy, to adequate financial resources of their own, of which they may dispose freely within the framework of their powers” [2]

The reality of Moldova is such that Gagauzia is the one that searches most actively for a way towards financial autonomy. And it has a good reason for that: under the Constitution of RM (article 111) “Gagauzia is an autonomous-territorial unit with a special status being a form of self-determination of the Gagauz, it is an integral and constituent part of the Republic of Moldova and, within its competence and under provisions of the Constitution of the Republic of Moldova, independently solves problems in the field of politics, economics and culture in the interests of whole population”, “the budget of the autonomous-territorial unit is formed according to the norms established by the organic law that regulates the special status of Gagauzia”.[3] 

As it is well known, during the mid-90s the Republic of Moldova has managed to solve the “Gagauz issue” quite constructively and ensure legally the autonomous status of Gagauzia, and the Council of Europe and its bodies (Venetian Committee and other) appreciated such solution quite positively as an example of peaceful democratic settlement of ethno-political conflicts. But before that, rather dramatic events (ethno-political conflict, proclamation of the “independent Gagauz Republic, introduction of the state of emergency, etc.) and the subsequent painstaking work to find a compromise occurred. It was accomplished by holding a referendum (March 1995) in settlements with predominant Gagauz population (50% and more), passing the Code of Gagauzia (Gagauz Eri) and forming bodies of government. The territory of three districts (Comrat, Ciadar-Lunga, Vulcanesti) belongs to the autonomy, its total area is 1,85 thou sq. km. with the population of 159 thou. pers. (2005), including Gagauz – 78.7%, Bulgarians – 5.5%, Moldovans – 5.4%, Russians – 5.0%, Ukrainians – 4.1%.  

Democratization and reform of the system of state administration both at the central and local levels are the key-elements of the EU – RM Action Plan (2005-2007) and the most important directions of Moldova’s “europeanization”. For Moldova that comprises two “problem regions” (Transnistria and Gagauzia), which require special approach as regards both legal point of view and the practice of socio-economic development, this process is vitally important for strengthening its the young state-system.  

Therefore, right after the ratification of the European Charter of Local Self-Government the Parliament of the Republic of Moldova improved the national law-collection adopting a series of new laws: on administrative-territorial system; on local public finances; on local taxes and over the last years these laws have been repeatedly modified and amended. Among these two laws rank particularly: the Law on Special Legal Status of Gagauzia (Dec. 1994) and the Law on Principles of the Special Legal Status of Settlements situated on the Left Bank of the Dniestr (Transnistria) (July 2005).  

While implementing these laws the Moldovan Government starts from the fact that European Union and its Member States currently function under the conditions of the new legal, political and socio-economic reality – regionalism, showing through consolidation of rights and entitlements of regions within a country. The main problems, at that, lie in the following:

·        How rights and entitlements should be divided between the central and local levels with the highest possible benefit for both parties – the country and the region;

·        How governance should be decentralized without undermining the state as a whole.

It should be mention that, unlike most EU countries where local taxes (real estate tax, land tax, payments for services, etc.) are the main part of local budgets revenues, in CIS countries, including Moldova, about 35-50% of local budget revenues are formed at the expense of transfers from the central government. Owing to the inertia of Soviet times the considerable attention is paid to financial leveling, which – while smoothing away social disproportions – suppresses initiative of local authorities in supporting SME development, their own tax collection and efficient use of credits.  

Another problem is the existence of “unfunded mandates” of sub-national governments that make proclaimed social rights and entitlements fiscally unfeasible. It is necessary to change the situation, despite the traditional fears of the Ministry of Finance that fiscal decentralization could create obstacles in ensuring a stable budget process for the country as a whole. 

Thus, what degree of financial autonomy of Gagauzia is there in the modern financial/budget system of Moldova? As for Gagauzia, this problem has been permanently topical for more than 10 years. At first, before 2003, central and local authorities argued about interpretation of the article 18 of the Law on Special Legal Status of Gagauzia (Gagauz Eri), which states that the budget of Gagauzia is formed of all types of in-payments set up by the Moldovan legislation and the People’s Assembly of ATU. After a series of discussions and agreements with a view to strengthen Gagauzia’s autonomy, the Moldovan Parliament amended the Constitution (articles 73, 110 and 111) that have lead to unambiguous understanding of the article 18 of the Law on Special Legal Status of Gagauzia. The main novelty that Gagauzia obtained after the Constitution has been amended consists in its right (unlike other administrative-territorial units of Moldova) to get 100% assignments from such capacious national revenues, as VAT and excises.  

But the situation is still debatable. Analysis of the Gagauzia’s legislation makes it clear that some local laws (On Foundations of the Tax System, On the Fixed Tax on Enterprises Engaged in Retail Trade and Catering, On Licensing of Certain Types of Activity on the Territory of Gagauzia, On Write-Off of Fines and Penalties, etc.) still conflict with the national legislation. 

Is Gagauzia ready for self-financing? Given the current procedure of its budget formation the answer, to a greater extent, is no. Thus, in 2005 the total amount of assessed revenues (including VAT and excises) to be collected in Moldova’s regions were at 3699,5 mil MDL, and those to be collected in Gagauzia – at 856,1 mil MDL, or 2.3%, which is noticeably less than its share in the overall population of Moldova (4.4%). Considering this, it was planned to leave 98.4% of the total amount of assessed revenues at the region’s disposal, while all other regions got 67.0% on average. In addition to this, Gagauzia received transfers from the state budget, which has been making up 17-35% of its budget during the last years. The table shows the structure of Gagauzia’s budget during 2000-2005.   

                            Structure of ATU Gagauzia budget in 2000-2005,

                            as % to total amount of revenues/ expenditures   

Source: Ministry of Finance, CISR

Social expenditures dominate within the budget structure of Gagauzia: they made up about 70% of the budget during 2000-2005. 7.6-10.9% of all budgetary expenditures of the region were directed to investments. 

From the evaluation of Gagauzia’s “financial autonomy” one could conclude:

·        the region, meanwhile, does not have an economic potential sufficient to support itself from the financial and budgetary point of view. Even if under the current methodology of budget formation of the region, all revenues formed on its territory are left at the region’s disposal it will remain dependent on subsidies all the same. And all this when the state budget covers refunding of VAT and excises, while execution of national functions, such as maintenance of central bodies of power, payment of external debt, etc. is done without participation of this region;

·        local authorities of Gagauzia (Gagauz Eri) are entitled both to demand execution of obligations from central bodies and undertake actions stipulated by the Law on Special legal Status of Gagauzia, as well as bring the local legislation in force in conformity with the national legislation of the Republic of Moldova;

·      it is expedient to direct efforts at expansion of the Gagauzia’s fiscal basis through creation of conditions for economic growth in the region; revise paid services rendered in the budget-funded sphere; use local taxes and duties more efficiently and completely; attract and use efficiently grants and sponsor funds directing them at solution of local purpose programmes[4].

For all that, Gagauzia’s “financial autonomy” requires essential improvements rather than “cosmetic” changes. Based on interests of both the country and the region, including the Law on Special Legal Status of Gagauzia, these changes should be aimed at increasing the role of the region itself in realization of social and economic development tasks of the region, stimulating expansion of the tax basis and building-up of own financial resources

But now, annual and mainly volitional establishment on amounts of assignments from national revenues (VAT and excises) and portion of transfers from the state budget taken annually at the stage of drafting of national budget does not stimulate the local authorities’ intentions to pile up economic potential and increase the effectiveness of its utilization in order to improve both social security and the welfare of the population.

In such conditions the following could be assume as rational:

Firstly, to design based on real state resources (means) the country average standard indicators of autonomy’s budget expenditures considered the age, social, etc structure of its population. These indicators could be use as basic one for reckoning of the budget expenditures.

Secondly, to establish taking into consideration both the needs for expenditures and the region’s tax basis the sources of budget revenues in the following order: a) local taxes and fees, which can be use by the autonomy in full; b) assignments to the budget from national revenues (as relative number); c) transfers from the state budget (as absolute value) as the source to balance the revenue and expenditure sides of the autonomy’s budget. At that, the latter should be used only when the first two sources do not cover the budget expenditures. 

It is very important to design both ATU’s budget expenditures and, as well as of other administrative-territorial units of the country for a future period (for example – 3 years), with corrections in accordance with forecasted inflation rate. In this case, even if other conditions will not changed, the development of the region economic potential and piling up of its tax potential will create the background for additional increase of autonomy’s budget revenues, and as a result the region’s capacities to self-financing will be improved. Moreover, the subjective influence to the volume of budget revenues, today this is on of the sources to maintain the corruption at all levels of state administration, will reduced to a minimum.  

Development of economic potential and tax basis, on the assumption that the standard indicators of assignments from national revenues to the budget of territory are secured, will resulted in increase of region’ allocations to the state fisc. So not only the autonomy but and the state as whole will be the gainer. Let us mention that the implementation of this practice of budget planning and interrelations between the central and local budgets in other transition economy countries (Hungary, for example) had positive effect allowing to activize initiative of local authorities.   

Cyclic recurrence of production and sales, and, consequently, in-payments of revenues to the budget as well, that has objectively formed in Moldova and Gagauzia in particular given the topping rank of agro-industrial complex within the economy, require improvement of crediting procedures of short-term cash deficit of the autonomy’s budget. It requires simplification, increase in self-dependence and responsibility of the autonomy’s authorities. 

As for the future, issue of norm-setting for all second level administrative-territorial units, including ATU Gagauzia, in financing national expenditures should be examined. This norm will become an initial basis for defining minimal amount of budgetary revenue sources formed at regional level and directed to the state budget.


[1] Informarket News Agency, March 1, 2006

[2] European Charter of Local Self-Government. Council of Europe, Strasburg, 1985

[3] Monitorul Oficial al RM, 2003, 8 august, #170-172, p. 45

[4] Regional Programme “Gagauz-Eri”. UNDP-Moldova/CISR, 2001. See