Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.

Republic of Moldova—Concluding Statement for the 2014 Article IV Consultation Mission and First Post-Program Monitoring Discussions1

April 30, 2014

The Moldovan economy strongly recovered from the drought-related contraction of 2012, but activity will significantly slow down in 2014 and considerable risks exist. Disciplined economic policies in the run up to the elections and addressing vulnerabilities in the banking sector are now key policy priorities to preserve stability. Returning to a path of fiscal consolidation, and maintaining low inflation and a flexible exchange rate regime are essential to mitigate the impact of downside risks. Steady implementation of the National Development Strategy—Moldova 2020 will be instrumental to promote economic growth and poverty reduction.

Recent Economic Developments, Outlook and Risks

Economic activity is projected to slow down significantly after a strong recovery last year. The economy expanded by 8.9 percent in 2013, led by a strong rebound in agriculture and related industries. In 2014, output growth is expected to decelerate to 2¼ percent, reflecting a moderation in agriculture production and weaker economic activity in main trading partners. Inflation is projected to remain within the National Bank of Moldova’s (NBM) inflation target range of 5 percent +/- 1.5 percentage points. The external accounts temporarily improved in 2013 but will deteriorate in 2014 as a consequence of lower exports growth and a projected decline in remittances.

Domestic and external risks are to the downside. Key risks to the near-term outlook relate to serious vulnerabilities and governance issues in the banking sector, policy slippages in the run up to the elections, a further slowdown in activity in main trading partners, and intensification of geopolitical tensions. The main transmission channels through which external shocks impact the economy are: remittances, external trade, and cross-border banking sector exposures. Strong buffers, in the form of high international reserves and low public debt, combined with prudent policies would help mitigate the impact of these risks.

Financial Sector Policies

Significant weaknesses in the legal and regulatory frameworks must be urgently addressed to ensure stability and soundness of the financial sector. The government, NBM and National Commission for Financial Markets (NCFM) should cooperate closely in this endeavor. The government needs to prepare draft legislation that strikes a balance between ensuring the effectiveness of the NBM and NCFM as regulators, supervisors, and resolution authority and the judicial review of their decisions. In particular, the NBM and NCFM must be empowered to take effective regulatory and supervisory actions, without such actions being suspended by court action or staff fearing criminal prosecution for carrying out their duties. This draft legislation must be passed as a matter of urgency. The NBM and NCFM must resolutely and effectively implement the legal norms pertaining to identification and adequate fit-and-proper requirements of ultimate beneficial owners and controllers in banks, which should also help enhance the monitoring of related- party transactions and overall risk management framework of banks. The enforcement of the anti-money laundering framework needs to be strengthened.

Prompt action is required by regulators to improve banking sector fundamentals.

In particular, resolute enforcement of capitalization and liquidity requirements is important to reduce vulnerabilities. Following the recapitalization of Banca de Economii (BEM) by minority shareholders, the NBM needs to maintain a very high level of scrutiny of its operations until the situation is normalized. Despite the dilution of the government’s share, the Ministry of Finance needs to ensure strong representation at the BEM’s board in order to safeguard public interest. Moreover, the NBM should abstain from regulatory forbearance and the government from providing commercial banks privileged access to additional public sector deposits. Banks that fail to meet regulatory requirements must be required by the NBM to develop and implement a time-bound plan to address the shortcomings.

Fiscal Policy

Fiscal policy should be geared towards a gradual reduction of the budget deficit to a level compatible with the official assistance available over the medium term. The projected increase in the budget deficit in 2014 (2½ percent of GDP) represents a step in the opposite direction. While the deficit could be allowed to widen in the near term to accommodate revenue shortfalls stemming from weaker economic activity, the expenditure envelope envisaged in the 2014 budget should be maintained. In particular, pressures to grant ad hoc tax benefits and to increase salaries and pensions must be resisted even if one-off revenues materialize. Going forward, fiscal policy should aim at narrowing the deficit to 1½ percent of GDP (about 2½ percent excluding grants) by 2018. This level of deficit would put public debt as a share of GDP on a downward trend and be consistent with projected financing availability. As a first step to return to a path of fiscal consolidation, the 2015 budget should be predicated on a budget deficit of 2¼ percent of GDP and the Medium-Term Budget Framework commit to an annual reduction of ¼ percent of GDP in the budget deficit thereafter. Given the large infrastructure needs, the medium-term fiscal objective could in principle be relaxed to accommodate productivity-enhancing investment projects if financing on reasonable terms is secured, and the additional investment is consistent with the economy’s absorption capacity.

Over the medium term, fiscal consolidation needs to be achieved through structural fiscal reforms. In this context, administrative reform is paramount to enhance efficiency of the public sector and improve the quality of services delivered to the population. The fiscal decentralization model should be strengthened by tightening sub-national governments’ debt limits and consolidating the number of local governments. Social security reform is also essential to put the pension fund on a sound financial basis, deal with demographic pressures, and reverse the decline in pension benefits relative to wages. Utility tariffs need to be adjusted to cost-recovery levels to avoid further accumulation of arrears with energy suppliers and ensure an adequate level of investment in the sector. The draft law on fiscal responsibility is a welcome step but needs to be revised to provide better medium-term policy guidance. In particular, a fiscal policy rule should be introduced setting a ceiling on the general government budget deficit of 2½ percent of GDP excluding grants, combined with a limit to the annual growth of public spending, excluding targeted social assistance. The Law on Public Debt and State Guarantees needs to be amended to set the stage for the development of local capital markets and promote financial stability. In particular, the Ministry of Finance needs to be endowed with statutory powers to provide funding, guarantees or indemnities to protect the stability of the financial system.

Monetary and Exchange Rate Policy

Monetary policy has been successful in maintaining inflation within the target range. In the context of disinflationary pressures, the NBM’s current monetary policy stance has remained appropriate, and the build-up of international reserves in 2013 is welcome as it strengthened Moldova’s resilience to external shocks. Going forward, the NBM needs to remain vigilant and be ready to adjust policies, including adopting a tightening bias to counter emerging inflation risks stemming from the second-round effects of the recent nominal exchange rate depreciation and looser fiscal policy. Exchange rate flexibility has served Moldova well in mitigating the impact of external pressures. NBM’s interventions in the foreign exchange market should therefore continue aiming at preventing disorderly exchange rate adjustments while not resisting the trend.

Structural Reforms

Steady implementation of structural reforms is critical to boost potential growth and reduce poverty. The National Development Strategy—Moldova 2020 aims at an appropriate shift to a medium-term growth model based on raising investment and increasing productivity and competitiveness. In order to achieve these goals, special attention needs to be paid to improving the business environment, physical infrastructure, and human resources development. Refocusing the education system to labor market needs would play an important role in raising productivity, job creation and reversing migration trends.


1 An IMF mission led by Max Alier conducted these discussions in Chisinau during April 22-30, 2014. The first round of Post-Program Monitoring discussions were held in Chisinau during September 18-30, 2013.



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