Via IMF (Den Internationale Valutafond)

IMF Executive Board Concludes 2020 Article IV Consultation with Moldova







March 18, 2020















The Executive Board of the International Monetary Fund (IMF) concluded the
Article IV consultation

[1]

with the Republic of Moldova on March 11, 2020. The Board also completed
the sixth and final review of Moldova’s economic performance under the
Extended Credit Facility (ECF) and Extended Fund Facility (EFF)
arrangements. A related

press release

was issued separately.

Moldova’s economic growth remained solid in the first three quarters of
2019, with output expanding nearly 5 percent, supported by strong domestic
demand. External demand remained favorable but net trade continued to be a
drag on growth. Unemployment remained low by historical standards, at
around 4 percent. Inflation breached the upper bound of the band around the
National Bank of Moldova (NBM)’s target in late 2019, reaching 7.5 percent,
largely driven by food prices and a turnaround in regulated prices—as the
effect of previous tariff cuts dissipated—and by the impact of robust
aggregate demand on core inflation. The fiscal deficit significantly
overperformed the program target, despite widening to 1.5 percent of GDP in
2019. While revenues slightly underperformed, this was more than offset by
under-execution in both current and capital expenditure, partly linked to
uncertainty about external financing. Public debt declined and remains low,
below 30 percent of GDP. The current account deficit likely narrowed
slightly to 9.5 percent but remains large as remittance inflows fell short
of compensating for the structural trade deficit. Despite heightened
political uncertainty, the leu remained relatively stable, and foreign
exchange reserves remained adequate.

The macroeconomic outlook is subject to risks. Growth is forecast to slow
to 3.8 percent in 2020, driven by weaker external demand and more modest
agricultural output. Domestic demand should remain robust, supported by a
widening of the fiscal deficit to 3.9 percent of GDP due to a large
increase in budgeted capital spending (although the growth impact of this
spending will be limited due to public investment management weaknesses).
While this growth composition will put pressure on the trade deficit, the
current account is expected to widen only moderately given improved income
inflows. Inflation is projected to return to the 5 percent target in 2020,
largely driven by fading food price pressures. With the output gap broadly
closed and in the absence of structural reforms, medium-term growth is
projected to remain near 4 percent. Risks, however, are on the rise. The
recent global outbreak of the coronavirus disease (COVID-19) could slow
economic growth in 2020 further. Domestically, the resurfacing of political
instability, policy reversals, or reform fatigue could hurt confidence and
limit external financing options. Regional and global spillovers from a
protracted slowdown in major trading partners and geopolitical and trade
tensions cannot be ruled out.

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Resolute progress in tackling outstanding and widespread governance and
institutional vulnerabilities in Moldova would strengthen public trust in
state institutions and popular support for the reform agenda. Despite
successful stabilization efforts and significant progress made on banking
sector supervision, weak oversight of the non-bank financial sector, gaps
in Moldova’s AML/CFT framework, and lack of progress on asset recovery are
recurring sources of concern. Furthermore, perceptions of corruption and
weak rule of law are entrenched, the regulatory framework is not properly
implemented or enforced, informality is high, and a large state-owned
enterprise (SOE) sector poses fiscal risks and undermines competition and
productivity.

Executive Board Assessment

[2]

The Executive Directors welcomed the completion of the three-year ECF/EFF
arrangements, which have been successful in rehabilitating Moldova’s
financial sector and restoring financial sector stability. This progress
has been made possible by broad support for the reforms among various
stakeholders from across the political spectrum. Directors noted, however,
that the country still faces structural weaknesses, and growth remains
insufficient to boost income levels. They emphasized that prudent and
well-coordinated policies, including further strengthening the financial
sector, pursuing growth-friendly fiscal policy, and addressing governance
and institutional weaknesses will be important to address risks to the
outlook and improve the economy’s resilience.

Directors noted the authorities’ 2020 fiscal plans to address Moldova’s
significant infrastructure and developmental needs. Given the ambitious
plans, they encouraged the authorities to continue to engage with external
developmental partners to secure the needed financing. Directors also
stressed the importance of improving revenue mobilization, streamlining tax
expenditures, increasing the efficiency of public investment management,
and reforming SOEs to preserve fiscal discipline and ensure debt
sustainability.

Directors welcomed the significant progress made under the program to
strengthen the National Bank’s governance, transparency and accountability
as well as its operational framework for emergency assistance as a lender
of last resort. Noting that the inflation targeting regime remains
appropriate, they concurred on the need for the National Bank to step up
efforts to improve policy credibility and promote exchange rate
flexibility. Directors also called on the authorities to closely monitor
rising risks in the non-bank financial sector, promptly implement MONEYVAL
recommendations to strengthen the AML/CFT framework and make decisive
progress on asset recovery. They underscored the importance of safeguarding
the National Bank’s independence to preserve hard-won gains in banking
sector rehabilitation, stressing that the NBM’s independence is critical
for its ability to deliver on its mandates of maintaining price and
financial sector stability.

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Directors emphasized that structural reforms aimed at enhancing governance
and addressing institutional vulnerabilities are important to boost the
economy and support income convergence with the rest of Europe. In this
regard, they encouraged the authorities to give priority to strengthening
the rule of law and reforming the judiciary. Reform efforts should also
focus on SOEs and enhancing institutional capacity and improving public
sector transparency.


Moldova: Selected Economic Indicators, 2016–2021 1/

2016

2017

2018

2019

2020

2021

Country Report
19/305

Proj.

Proj.

(Percent change, unless otherwise indicated)

Real sector indicators

Gross domestic product

Real growth rate

4.4

4.7

4.0

3.5

4.2

3.8

3.8

Demand

2.6

6.8

6.4

5.8

6.3

5.7

4.0

Consumption

2.6

4.7

3.2

4.4

3.0

2.9

3.1

Private

2.9

5.3

3.8

3.6

3.4

3.3

3.5

Public

0.6

1.1

-0.1

9.3

0.9

1.0

1.0

Gross fixed capital formation

-0.9

8.0

14.0

2.7

13.6

8.9

4.7

Net Exports of goods and services

5.9

-11.2

-14.3

-5.8

-5.4

-13.0

-4.9

Exports of goods and services

9.8

10.9

4.8

8.8

7.8

5.0

6.7

Imports of goods and services

2.8

11.0

8.9

7.5

6.7

8.6

5.9

Nominal GDP (billions of Moldovan lei)

160.8

178.9

190.0

207.3

208.7

228.4

248.9

Nominal GDP (billions of U.S. dollars)

8.1

9.7

11.3

11.7

11.9

12.4

13.1

Consumer price index (average)

6.4

6.6

3.1

4.9

4.9

5.7

5.0

Consumer price index (end of period)

2.4

7.3

0.9

7.5

7.5

5.0

5.0

GDP deflator

5.7

6.3

2.1

5.4

5.4

5.4

5.0

Average monthly wage (Moldovan lei)

5,084

5697

6,446

7,320

7,320

7,953

8,619

Average monthly wage (U.S. dollars)

255

308

384

413

417

432

454

Unemployment rate (annual average, percent)

4.2

4.1

3.0

3.0

3.0

3.0

3.0

(Percent of GDP)

Saving-investment balance

Foreign saving

4.1

6.1

10.7

9.5

9.5

9.7

9.5

National saving

18.1

16.2

13.6

14.7

16.6

18.9

19.2

Private

16.4

13.7

11.3

13.6

14.7

18.4

17.8

Public

1.8

2.4

2.3

1.1

1.9

0.5

1.4

Gross investment

22.2

22.3

24.3

24.3

26.2

28.6

28.7

Private

19.1

19.1

20.9

20.2

22.7

23.6

24.3

Public 2/

3.1

3.2

3.4

4.1

3.4

5.0

4.5



Fiscal indicators (general government)

Primary balance 3/

-0.7

0.3

-0.4

-2.2

-0.8

-3.1

-2.1

Overall balance 3/

-1.8

-0.8

-1.1

-3.0

-1.5

-3.9

-2.9

Stock of public and publicly guaranteed debt

36.9

32.7

30.6

31.5

29.3

30.8

31.2

(Percent change, unless otherwise indicated)

Financial indicators

Broad money (M3)

10.2

9.4

7.8

16.1

8.2

14.4

Velocity (GDP/end-period M3; ratio)

2.3

2.3

2.3

2.1

2.3

2.2

Reserve money

12.1

11.2

17.7

13.1

7.6

14.4

Credit to the economy

-7.6

-3.4

4.1

4.4

11.5

4.2

Credit to the economy, percent of GDP

24.5

21.3

20.9

20.0

21.2

20.2

(Millions of U.S. dollars, unless otherwise indicated)

External sector indicators 4/

Current account balance

-330

-592

-1211

-1116

-1134

-1204

-1251

Current account balance (percent of GDP)

-4.1

-6.1

-10.7

-9.5

-9.5

-9.7

-9.5

Remittances and compensation of employees (net)

1,326

1,494

1,672

1,813

1,759

1,890

2,012

Gross official reserves

2,206

2,803

2,995

3,025

3,060

3,071

3,034

Gross official reserves (months of imports)

4.9

5.3

5.5

4.7

5.2

4.9

5.1

Exchange rate (Moldovan lei per USD, period average)

19.9

18.5

16.8

17.6

Exchange rate (Moldovan lei per USD, end of period)

20.0

17.1

17.1

17.3

Real effective exchange rate (average, percent change)

2.4

10.5

9.1

1.5

2.1

External debt (percent of GDP) 5/

76.8

70.5

66.4

64.9

63.6

64.7

64.9

Debt service (percent of exports of goods and services)

13.1

11.8

14.4

14.2

12.9

14.0

13.5

Sources: Moldovan authorities; and IMF staff estimates.

1/ Data exclude Transnistria.

2/ Includes externally financed on-lending to SOEs as of
2016.

3/ Includes net on-lending to SOEs.

4/ Balance of Payments (BOP) classification is revised in
line with the Sixth Balance of Payments Manual (BPM6).
Review columns reflect BOP according to BPM5
classification.

5/ Includes private and public and publicly guaranteed
debt.


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[1]

Under Article IV of the IMF’s Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country’s economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the
Executive Board.


[2]

At the conclusion of the discussion, the Managing Director, as
Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country’s authorities. An
explanation of any qualifiers used in summings up can be found
here:

http://www.IMF.org/external/np/sec/misc/qualifiers.htm

.


IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Gediminas Vilkas

Phone: +1 202 623-7100Email: MEDIA@IMF.org

@IMFSpokesperson