News Brief: IMF Completes First Review of Moldova's PRGF-Supported Program
Republic of Moldova and the IMF
Country's Policy Intentions Documents
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Republic of Moldova—Letter of Intent, Supplement to the Memorandum of Economic and Financial Policies, and Technical
Memorandum of Understanding
Mr. Horst Köhler
First, we would like to express our gratitude for the continued support that the International Monetary Fund (IMF) is providing to Moldova under the Poverty Reduction and Growth Facility (PRGF). Furthermore, we would like to assure you of our commitment to the policies outlined in the Memorandum of Economic and Financial Policies (MEFP), signed in late 2000, which formed the basis for Moldova's three-year arrangement under the PRGF. The attached Supplement to the MEFP reports on the implementation of policies during 2001 and so far during 2002 and describes our policies for the remainder of this year and for 2003.
Regrettably, the 2001 elections resulted in delays in the implementation of measures needed to advance the transformation process to a market economy. Financial policies remained on a sound footing, however, and in the past several months we have taken strong measures to regain the momentum in the reform process, including the prior actions described in Section VI of the attached Supplement. We have also agreed with the World Bank on a set of structural measures that aim at reducing poverty, strengthening social protection, and improving the business environment. In light of this, we request that the IMF consider our request for continued support under the PRGF and that the IMF complete the first review under the arrangement. Given the delay in completing this review, we also request a rephasing of the disbursements, so that the remainder of the loan provided for under the arrangement could be made available in equal amounts of SDR 9.24 million on a quarterly basis, except for 2002, when disbursement would be higher to take into account the high debt service payments during this year.
We furthermore request that waivers be granted for the non-observance of (i) the end-March 2001 performance criterion for the National Bank of Moldova's (NBM) net international reserves and (ii) the continuous performance criterion on the non-accumulation of external arrears. The net international reserves target was missed because projected privatization proceeds failed to materialize. The margin by which the target was missed was very small. We have accumulated some external arrears on commercial debt because of shortfalls in external financing. We have been negotiating to reach a collaborative agreement with creditors and expect to resolve this issue by the end of 2002.
We believe that the policies and measures set forth in the attached Supplement are adequate to achieve the objectives of our economic program for 2002-03. The Government and the NBM stand ready, however, to take any additional measures, in consultation with the IMF staff, that may become necessary to ensure that the objectives of the program can be achieved. The Government and the NBM will also provide the IMF with all the information needed to assess progress in implementing the policies and reaching the objectives of our program. Moldova will conduct discussions with the Fund for the second review of its program under the PRGF arrangement before December 15, 2002.
1. Following parliamentary elections in late February 2001, a new president was elected and a new government appointed in April. The government's work program for 2001-05, approved in April 2001, places emphasis on fighting corruption, strengthening the legal framework, and promoting sound financial policies. In addition, we are developing a full-fledged poverty reduction strategy in close cooperation with the presidency, parliament, local governments, nongovernmental organizations, and the international donor community.
2. The government intends to continue to pursue market-oriented policies and provide the necessary environment for private entrepreneurship and private-sector-led growth. We are committed to reducing administrative interference in the economy and maintaining a liberal exchange and trade regime. We will continue to pursue sound financial policies and move forward with the privatization program and other market-oriented reforms, including in the agricultural sector; these policies are needed to attract investment and spur growth. We realize that growth is imperative in order to make headway with an anti-poverty program consistent with our social priorities.
3. This supplement to the Memorandum of Economic and Financial Policies (MEFP) signed on November 30, 2000 summarizes our policy objectives and priorities for 2002-03. The emphasis in the MEFP on economic stability and structural policies conducive to private sector growth and poverty alleviation is well placed. Accordingly, we intend to adhere to the policies outlined in that memorandum. If it becomes necessary to modify this supplement, we will first consult with Fund staff to reach a common understanding.
II. Recent Developments
4. Economic and financial indicators since end-2000 have been encouraging. Real GDP growth picked up from 2 percent in 2000 to 6 percent in 2001. Preliminary information for early 2002 points to continuing growth, with industrial production in January through April up 18 percent compared to the previous year. CPI inflation dropped significantly from 18½ percent in 2000 (end of period) to 6 percent in 2001; twelve-month inflation in April 2002 was 6½ percent. The current account deficit improved to about 7½ percent of GDP in 2001 from 8½ percent of GDP in 2000, in large part due to higher transfers from Moldovans working abroad. The exchange rate has moved broadly in line with relative inflation.
5. Fiscal policy remained tight in 2000 and 2001. The general government commitment balance (excluding project loans) improved to a surplus of ½ percent of GDP in 2001 from a deficit of 0.8 percent of GDP in 2000. All fiscal performance criteria and indicative targets for end-December 2000 and end-March 2001 under the PRGF-supported program were observed. The indicative targets for end-June and end-September were also met. However, while domestic expenditure arrears were cleared in excess of program targets in 2000, new arrears of 0.3 percent of annual GDP were accumulated in the fourth quarter of 2001. While the general government continued to post a small surplus on a commitment basis during the first quarter of 2002, external arrears were accumulated.
6. Monetary policy was tightened in 2000 and remained appropriately cautious through March 2002. All monetary performance criteria and indicative targets for end-December 2000 through end-September 2001 were observed, or missed only by very small margins. As demand for domestic currency recovered forcefully, broad money grew by 18 percent in real terms in 2000 and by 28 percent in 2001. Credit to the economy grew at a similar pace, the first such increase in several years. The NBM's gross international reserves, which had risen to about $220 million by end-2000, remained broadly unchanged through end-April 2002, despite sizable external debt service obligations and lower-than-expected external financing.
III. Fiscal Policy
7. Fiscal policy will aim at achieving a primary budget surplus (excluding project loans) of about 2 percent of GDP in 2002. Our objective is to stabilize and subsequently reduce Moldova's heavy external debt burden, while at the same time ensuring sufficient financing for social expenditures and a steady clearance of arrears on domestic expenditures and external debt payments. Meeting these objectives requires: (i) further strengthening of revenue collection; (ii) rationalizing noninterest expenditures; and (iii) securing support from the international financial community.
8. Under current projections, general government revenues (including grants) are expected to reach MDL 6,305 million in 2002, while the projected available financing allows for a cash deficit of MDL 380 million. With the domestic budgetary expenditure arrears projected to decline by MDL 120 million in 2002, the budget deficit on a commitment basis would be limited to MDL 260 million, or about 1 percent of GDP. We will seek an amendment to the 2002 Budget Law to take into account recent developments, including unbudgeted wage increases recently granted to some categories in the social sector as part of our efforts to retain high-quality staff. We expect that these payments will be offset by lower-than-expected interest payments and cuts in capital expenditure.
9. We have started to develop preliminary projections for the 2003 budget. The broad parameters of the budget for the general government were formulated in consultation with the Fund staff. It is our intention to achieve a primary budget surplus of 3.2 percent of GDP. Therefore, we will limit the general government cash budget deficit to about 1.2 percent of GDP. In order to avoid undermining financial discipline, we intend to steadily clear domestic expenditure arrears. As a result, we expect the commitments deficit to be about 0.2 percent of GDP. To reach these goals, we will limit wage increases to an amount that can be accommodated in the 2003 budget without sacrificing capital expenditures further. If necessary, we will scale down/postpone the additional wage adjustment planned for September 2002, in order to ensure that the 2003 wage bill grows in line with the available financing.
10. Expenditure savings will be achieved by rationalizing expenditures in key sectors, including health and education, in line with the recommendations of the World Bank. In particular, no debt restructuring or forgiveness will be granted in the agricultural sector outside the National Land Program and the Law on Restructuring of Agricultural Enterprises. We will draft a new law on deposit indexation targeting only the poorest segments of the population, in line with IMF recommendations. In view of the cost of the scheme to the budget, we will spread the payment of benefits over a period of at least 15 years, and only if sufficient budgetary revenues are available (structural benchmark). Privatization proceeds will be used to reduce the stock of external and internal government debt (including credit from the NBM) and budgetary arrears, as well as to boost capital expenditure, in proportions decided in consultation with Fund staff.
11. Strengthening revenue collection will be done primarily through improving tax and customs administration. The large taxpayer unit (LTU) has been given exclusive responsibility for key aspects of large taxpayer compliance; further steps will be taken to make the LTU fully operational by September 1, 2002 (structural benchmark). We remain committed to eliminating netting operations and in-kind collections of current taxes, social fund contributions, as well as of arrears on taxes and social contributions. We will refrain from introducing any new tax exemptions, holidays, amnesties, or deferrals of any kind. In particular, we will not introduce any changes to the tax system without reaching an understanding with the IMF. To avoid jeopardizing revenue collection in the short term, any reductions in income tax rates, as well as other changes in tax policy, would be done in consultation with the IMF.
12. Since taxes on imports (VAT, excise, import tariff) are crucial for attaining our revenue targets, we attach great importance to improving the effectiveness of customs administration. We have recently implemented a preshipment inspection (PSI) program for imported goods. We will ensure that the program remains effective by closely monitoring its implementation and by strictly limiting any exemptions from PSI in coordination with the company providing PSI services. In particular, we will maintain PSI on pharmaceuticals and will not introduce any new exemptions beyond those applied as of May 21, 2002, until the completion of a full assessment of the program is made (after June 30, 2002).
IV. Monetary Policy and Financial Sector Reform
13. The government recognizes the importance of a strong and independent central bank. Thus the NBM will retain its current legal status as an independent public legal entity in accordance with the Law on the National Bank of Moldova, which will not be amended. The NBM will continue to follow a policy of allowing the leu to float freely, with interventions limited to smooth out short-term exchange rate fluctuations and to meet reserve targets.
14. The monetary policy of the NBM will continue to be directed at achieving and maintaining low inflation. We will target inflation at 8 percent in 2002 and 2003. Consistent with this objective, base money is programmed to increase by about 15 percent in these two years. The monetary program also aims at restoring gross international reserves to a level of about $250 million by end-2002, equivalent to 2.5 months of imports. Reserves are projected to increase further to $315 million, or 2.9 months of imports, by end-2003.
15. The increase in central bank net credit to the government will be limited to MDL 81 million in 2002, to be used to help finance the government's external debt service obligations. While we do not envisage use of NBM credit in 2003, it can be extended to the government to smooth cash flow fluctuations during the year. In view of the credit expansion projected for this year, the reserve requirement ratio will remain unchanged in 2002. At the same time, the NBM will use the deposit facility introduced in February 2002 to absorb excess liquidity. The NBM will continue to act as the fiscal agent for the Ministry of Finance regarding the issuance of treasury bills. Treasury bills will not be required to be registered at the National Securities Commission or traded at the Stock Exchange.
16. The NBM will continue its efforts to strengthen banking supervision. Significant progress in the consolidation of the banking sector was achieved following the increase in minimum capital requirements for existing banks in December 31, 2000. In accordance with Article 14 of the Law on Financial Institutions, which will not be amended, the NBM will remain solely responsible for the granting and revoking of commercial bank licenses. In that capacity, the NBM will revoke the banking license of all banks that continue to fail to meet the minimum capital requirements one month after the noncompliance has been established.
V. External Sector Issues
17. The high external debt stock (about 90 percent of GDP in 2001) continues to be a problem, especially in view of dwindling external financing. Accordingly, we are seeking to restructure Moldova's commercial debt (Eurobond and Gazprom promissory notes). We will also ask for Paris Club rescheduling if warranted by an unexpected balance of payments need. In the meantime, we are continuing negotiations with Gazprom to restructure our debt service obligations.
18. The government and NBM will refrain from contracting nonconcessional external debt except for a limited amount yet to be determined for the workout and termination of the Gurguliesti oil terminal project and for administrative expenses related to the restructuring of commercial debt. We will also refrain from issuing guarantees on nonconcessional terms for commercial ventures, whether state-owned or private.
19. We will continue to maintain a liberal exchange and trade regime. The continuous structural benchmark regarding import tariffs will remain as specified in paragraph 33 of the November 30, 2000 MEFP. We will also refrain from introducing export bans, quotas and licenses.
VI. Structural Policies
20. While significant progress has been achieved in financial policies, the implementation of structural reforms has accelerated only recently. The following structural measures that were included in the November 2000 MEFP have been completed:
21. We have also recently reached agreement with the World Bank on a timetable for the privatization of major state-owned enterprises, including Moldtelecom, two electricity distribution networks, and major wineries.
22. In light of recent developments in the energy sector, we emphasize the importance of maintaining a manageable level of energy-related external debt. We undertake not to enter into international agreements that could lead to an increase in energy sector-related external debt, unless it is consistent with the understandings in our program of economic reform that is supported by the Fund, World Bank and other relevant international financial institutions. To underscore the priority afforded to this issue we have adopted and published a cabinet decision outlining our undertaking (prior action).
23. Parliament approved a new civil code broadly in line with a market-based approach, specifically in the areas of properties, contracts, and secured transactions. The civil code was promulgated by the President on June 11 (prior action).
24. By September 1, 2002, we will complete additional structural measures, as described in Table 1 (structural benchmarks).
VII. Program Monitoring and Reporting
25. Program monitoring for the period of July 1, 2002 to December 31, 2002 will be carried out on the basis of quarterly quantitative performance criteria and structural benchmarks established for end-September and end-December 2002, and a semi-annual review based on performance as of September 30, 2002 expected to be completed by December 15, 2002; in addition, a subsequent semi-annual review expected to be completed by June 15, 2003 will be based on performance as of March 31, 2003. In line with the current policy regarding lending into arrears, and while outstanding official arrears to private creditors persist, Fund disbursements in 2002 will be subject, in the context of financing assurances reviews, to satisfactory progress towards agreement in restructuring commercial debt. The quantitative performance criteria and indicative targets are listed in Table 2; details on the levels, definition, and monitoring of quantitative performance criteria and indicative targets are provided in the updated Technical Memorandum of Understanding (Appendix to this document). The Ministry of Finance and the NBM will report all data necessary for the effective monitoring of the program in a timely manner to the Fund.
September 1, 2002
A. Program Assumptions
B. Program Targets
Definitions and adjustors
1. Net international reserves of the NBM in convertible currencies are defined as gross reserves minus reserve liabilities in convertible currencies. For program monitoring purposes, gross reserves of the NBM are defined as monetary gold, holdings of SDRs, reserve position in the Fund, and holdings of foreign exchange in convertible currencies that are readily available, including holdings of securities denominated in convertible currencies issued by governments or central banks of OECD member states. Excluded from reserve assets are capital subscriptions to foreign financial institutions, long-term nonfinancial assets, funds disbursed by the World Bank assigned for onlending and project implementation, assets in nonconvertible currencies, and foreign assets pledged as collateral or otherwise encumbered. Reserve liabilities in convertible currencies are defined as use of Fund credit, and convertible currency liabilities of the NBM to nonresidents with an original maturity of up to and including one year. Excluded from reserve liabilities are liabilities with original maturities longer than one year.
2. The net international reserves and gross reserves targets will be raised, pari-passu, by the equivalent of any external budgetary financing exceeding the amounts specified under the program assumptions (Section A) and lowered for shortfalls resulting from temporary delays in any disbursements beyond the assumed dates, respectively.
3. The targets will be monitored from the accounts of the NBM. Data in the agreed format will be reported to the Fund within seven days of the end of each month by the NBM.
Definitions and adjustors
4. Net domestic assets of the NBM are defined as the difference between reserve money (defined as the sum of currency issued, total required and excess reserves of banks3, and nonbank nongovernment deposits) and net foreign assets of the NBM, (net international reserves of the NBM as defined in Table 1 plus the net position of the NBM correspondent accounts with the central banks of the Baltics, Russia, and other countries of the former Soviet Union (BRO), all expressed in Moldovan lei). Net international reserves shall be valued as noted in Section A.
5. The targets for reserve money are based on a programmed reserve requirement ratio of 10 percent of total deposits subject to reserve requirements and will be adjusted for any deviation of the actual reserve requirement ratio from the programmed ratio, based on the following formula: (actual ratio—programmed ratio) * reservable base. The reservable base includes all commercial bank liabilities subject to reserve requirements.
6. The NDA targets will be adjusted upwards by 100 percent of the Moldovan lei equivalent of temporary delays in any of the disbursements specified under the program assumptions (Section A), except for Fund disbursements. The targets will be lowered by the Moldovan lei equivalent of the receipt of external budgetary financing (not including grants, but including rescheduling and restructuring of official debt) exceeding the amounts specified under the program assumptions (Section A).
7. The targets for the net domestic assets of the NBM and reserve money will be monitored from the accounts of the NBM. Data in the agreed format will be reported to the Fund within 7 days of the end of each month by the NBM.
Definitions and adjustors
8. The general government is defined as comprising the consolidated budget (the republican and local government budgets) and the Social Fund. Any new extra budgetary funds created will be included in the general government. Excluded are any government-owned entities with separate legal personality. Net credit to general government is defined as outstanding claims of the NBM on the general government exclusive of accumulated interest, including overdrafts, direct credit and holdings of government securities, less deposits of the general government.4
9. The targets on net credit to general government will be adjusted upwards by 100 percent of the Moldovan leu equivalent of temporary delays in any of the disbursements specified under the program assumptions (Section A), except for Fund disbursements. The targets will be lowered by the Moldovan leu equivalent of the receipt of external budgetary financing (not including grants, but including rescheduling and restructuring of official debt) exceeding the amounts specified under the program assumptions (Section A).
10. The limits will be monitored from the accounts of the NBM. Data in the agreed format will be reported to the Fund within 10 days of the end of each month by the NBM.
Definitions and adjustors
11. The quarterly limits on the overall cash deficit of the general government are cumulative and will be monitored from the financing side as the sum of net credit of the banking system to the general government5, the general government's net placement of securities outside the domestic banking system, other net credit from the domestic nonbanking sector to the general government, the general government's receipt of disbursements from external debt6 for direct budgetary support (i.e., excluding disbursements from external loans for specific projects) minus amortization paid, and privatization proceeds stemming from the sale of the general government's assets, after deduction of the costs directly associated with the sale of these assets.
12. Government securities in the form of zero-coupon obligations sold at a discount to face value will be treated as financing items in the fiscal accounts, in the amount actually received from buyers. At the time of redemption, the sales value will be recorded as amortization, and the difference between amortization so defined and the face value will be recorded as domestic interest payments.
13. Commodity loans will be treated as financing items in the fiscal accounts, at the value of the loan in foreign exchange converted into Moldovan lei at market exchange rates the date of the receipt of the loan. The amounts on lent to domestic enterprises minus domestic counterparts received from these enterprises will be recorded in net lending. Interest payments by the government on these loans to external creditors will be recorded as interest payments on foreign debt and interest paid by domestic enterprises to the government on these loans will be recorded in non-tax revenues. Repayments of principal from domestic borrowers to the government will be treated as negative net lending and repayments of principal by the government to foreign creditors will be recorded as amortization.
14. For monitoring these limits, data in the agreed format will be reported to the Fund within 30 days of the end of each quarter by the Ministry of Finance of Moldova.
Definitions and adjustors
15. The term debt has the meaning set forth in point No. 9 of
the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision
No. 12274-(00/85), adopted
16. This performance criterion applies not only to debt as defined above, but also to commitments contracted or guaranteed for which value has not been received.
17. For purpose of the program, the guarantee of a debt arises from any explicit legal obligation of the government or the NBM or any other agency acting on behalf of the government to service such a debt in the event of nonpayment by the recipient.
18. Concessionality will be calculated using currency-specific discount rates based on the OECD commercial interest reference rates (CIRRs). The ten-year average of CIRRs will be used as the discount rate to assess the concessionality of loans of an original maturity of at least 15 years, and a six-month average of CIRRs will be used to asses the concessionality of loans with original maturities of less than 15 years. To both the ten-year and six-month averages, the following margins will be added: 0.75 percent for repayment periods of less than 15 years; 1 percent for 15-19 years; 1.15 percent for 20-30 years; and 1.25 percent for over 30 years. Under this definition, only loans with a grant element equivalent to 35 percent or more will be excluded from the borrowing limits. The debt limits will not apply to loans classified as international reserve liabilities of the NBM.
19. External-debt limits apply to the net disbursement of short term nonconcessional external debt (with an original maturity of up to and including one year) and contracting or guaranteeing of nonconcessional medium- and long-term debt with original maturities of more than one year, with sublimits on the contracting or guaranteeing of such debt with original maturities of up to and including five years. Short-term debt includes all short term obligations, excluding IMF disbursements to the NBM and import trade credits. Short term debt denominated in currencies other than the U.S. dollar shall be valued in U.S. dollar at the exchange rate prevailing at the time of disbursement. Medium and long term debt denominated in currencies other than the U.S. dollar shall be valued in U.S. dollars at the exchange rate prevailing at the time of contracting or guaranteeing.
20. The performance criterion on external arrears includes all arrears to multilateral and official bilateral creditors and applies on a continuous basis. The program assumes that the Eurobond and Gazprom promissory note will be rolled over; payments due but unpaid after the expiration of the grace period will not constitute arrears.
Definitions and adjustors
21. Expenditure arrears are defined as the difference between obligations for goods and services for which an invoice has been received and actual payments made. Obligations include, but are not limited to, wage, pension, and energy payments. Arrears between the republican budget, local governments and all extra budgetary funds are not counted toward the ceiling.
22. For monitoring these limits, data in the agreed format will be reported to the Fund within 30 days of the end of each month by the Ministry of Finance of Moldova.
1Two structural benchmarks that had been previously included in the Supplement to the MEFP proposed in November 2001 have been dropped because they are now part of the World Bank SAC III program: (i) the preparation of necessary documentation (bidding package) for the privatization of Moldtelecom, and (ii) the conclusion of an agreement with a qualified financial advisor for the preparation for sale of key wineries to strategic investors.
2The use of any additional funds will be determined in consultation with Fund staff in the context of the second or third review under the program.
3As recommended by the MAE mission of May 2002, auctioned bank deposits should not be included in reserve money.
4Accumulated interest is included under "Other Items Net".
5 Net credit of the banking sector to the general government includes net credit to the National House of Social Insurance.
6Debt will have the meaning set forth in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000 (see paragraph 16).
7Excluded from this limit is up to $18 million for the workout and termination of the Giurgiulesti oil terminal project.
8The definition of debt set forth in point No. 9 of the guidelines reads as follows: "(a) For the purpose of this guideline, the term "debt" will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property. (b) Under the definition of debt set out in point 9(a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt."