Public Information Notices
Republic of Moldova and the IMF
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The IMF Executive Board on April 20, 1998 concluded the Article IV consultation1 with Moldova.
Following successful efforts during 1993-95 to establish financial stability, with the support of international financial institutions and bilateral donors (including resources under the IMF’s Systemic Transformation Facility, the Compensatory and Contingency Financing Facility, and two stand-by arrangements), progress toward a market economy slowed in 1996 and 1997. A three year program supported under the Extended Fund Facility was approved by the IMF’s Executive Board in May 1996, but lagging structural reforms and fiscal slippages have led to delays in purchases and completion of the program’s reviews.
Macroeconomic performance in 1997 was mixed, although important progress was made in several areas. Annual inflation continued to decline, ending the year at 11 percent, down from 15 percent at end-1996. It has fallen further in the first quarter of 1998, to 8 percent. Real GDP grew modestly for the first time since independence in 1991, as better weather than in previous years resulted in a recovery in agriculture, especially grain production; this was partly offset by a continued decline in industrial production. However, the external current account deficit remained stubbornly high at 13 percent of GDP, and the cash fiscal deficit remained at its 1996 level of 6¾ percent of GDP.
The unchanged cash fiscal deficit masked a very significant reduction in the budget commitments deficit (that is, the underlying deficit including any increases in expenditure arrears) by almost 7 percent of GDP, reflecting cuts in real expenditure commitments resulting from a freeze on budget sector wages and pensions. The high cash deficit partly reflected the use of resources to clear budgetary arrears, which were reduced by nearly 3 percent of GDP. Pension and public sector wage arrears were both cut by over half. However, expenditure commitments were also higher than programmed. Deficit financing came from higher-than-programmed net external drawings as well as additional borrowing from commercial banks. The cash deficit was sharply reduced in the first quarter of 1998 to about ½ percent of GDP, although preliminary indications are that this was at the cost of some renewed increase in pension and wage arrears.
The budgetary financing profile, and especially large and lumpy official inflows in the summer and late in the year, complicated monetary policy implementation. As a result, reserve money accelerated from the second quarter onward and rose 32 percent through the year. Broad money followed a similar path, rising 34 percent. Nevertheless inflation declined in line with the program, as velocity fell by about 10 percent, twice as fast as projected. Monetary policy was significantly tightened in the first quarter of 1998, with reserve money declining 8 percent. The nominal exchange rate fluctuated in a narrow range against the dollar. Banking supervision has been strengthened and international accounting standards were introduced in January 1998.
The external current account deficit in 1997 is estimated to have been just over 13 percent of GDP, close to the 1996 outturn and well above the programmed level. Exports showed little growth, partly because of poor grape and sunflower harvests. Nonenergy import growth slowed sharply but the expected easing of energy imports did not materialize, reflecting a continued failure to impose hard-budget constraints in the energy sector. The higher-than-projected current account deficit was financed by a marked increase in capital inflows, including the proceeds of a heavily oversubscribed US$75 million Eurobond offering in mid-year. Foreign purchases of treasury bills were strong until the fourth quarter, amounting to nearly 40 percent of total net sales. Financing was also provided by a further rise in energy arrears to suppliers. Given these developments, official reserves rose to 3.3 months of imports. The leu appreciated by about 6 percent in real effective terms in 1997 (end-period), continuing an upward trend. However, this appreciation occurred early in the year, and since February 1997 the rate has remained broadly unchanged.
Reflecting the large financing needs of the government, external debt has increased rapidly since independence and currently stands at just over US$1 billion or 48 percent of GDP. Debt service jumped to 17 percent of exports of goods and nonfactor services in 1997 from 6 percent in 1996. Fiscal pressures led the authorities to postpone some external debtpayments in late 1997 and early 1998, mostly with the agreement of creditors. Several payments, however, have fallen into arrears.
Following delays in 1996 and the first half of 1997, the pace of structural reform picked up in the second half, particularly in the key sectors of energy and agriculture. Energy sector reforms included tariff increases to cost recovery levels and unification of household and nonhousehold tariffs for gas and electricity. In preparation for privatization of the sector, the government also adopted a debt management plan, debt-restructuring measures, and established an energy regulatory commission. In early-1998 the electricity supplier was broken-up into generation, transmission and distribution companies, although so far this has not led to any visible improvement in collection rates and payment arrears to suppliers continue to mount.
Significant progress was also made on agricultural land reform. Parliament approved legislation in July making agricultural land tradeable and a law establishing a national land cadastre was passed in early 1998. In the industrial sector, the passage of amendments to the bankruptcy law in mid-1997 led to the first bankruptcy actions by the government against several large enterprises. The privatization program has moved on from voucher privatization, which was successful in privatizing over four-fifths of residential housing and most small scale enterprises, to cash sales. However, attempts to find buyers for several large enterprises, notably the telecommunications company, Moldtelecom, have so far proved unsuccessful.
Executive Board Assessment
Executive Directors commended the authorities for the continued progress made toward a market economy in several areas during 1997, despite a difficult political background. They welcomed in particular the further reduction in inflation, the first annual increase in GDP since independence, and progress in energy and agriculture sector reforms. However, Directors expressed concern that fiscal targets had been missed throughout 1997 by increasingly large margins, and noted that this had contributed to a deterioration in the outlook for the external current account position, causing monetary aggregates to exceed their end-year targets and external indebtedness to rise. Directors welcomed the progress in reducing the budget deficit on a commitment basis, and the reduction of the cash deficit in the first quarter of 1998, but they expressed concern that this had been achieved at the cost of a renewed increase in arrears.
Directors stressed that high priority should be given to a tightening of the fiscal stance. In this regard, Directors urged the authorities to adopt a fiscal action plan along the lines set out by the staff. They stressed that comprehensive structural fiscal reforms were needed to tackle the underlying fiscal problems, including a fundamental restructuring of public expenditure and stronger tax administration. They also underscored the need to halt the accumulation of external debt and improve the transparency of government policies. Directors recommended that the fiscal framework for 1998 be reinforced by rationalizing social fundexpenditure and by eliminating the use of commodities in payments of contributions and benefits. They also stressed the need to begin work on restructuring the health and education services, tighten spending and borrowing controls on local authorities, and end the practice of granting tax amnesties and write-offs.
Directors commended the National Bank of Moldova for adhering to its monetary program for much of 1997 and achieving its inflation objectives, despite fiscal slippages. They also welcomed the sharp reversal of monetary growth during the first quarter of 1998. Directors stressed, however, that recent developments underlined the need to strengthen monetary policy instruments, especially open market operations. While acknowledging the success of anti-inflation policy so far, they stressed that fiscal policy should carry a greater share of the adjustment burden. Directors welcomed the further progress made in effective supervision of the banking system and enforcement of prudential regulations. They also welcomed the orderly closure of several small- and medium-sized insolvent banks, and encouraged the authorities to deal resolutely with all problem banks, including the larger former state banks.
Directors expressed serious concern about the large external current account deficit, growing external debt, and the increasing difficulties in making external debt-service payments. They stressed that urgent steps were needed to halt the accumulation of external debt, clear all external arrears, and strengthen the management of debt-service payments.
Directors welcomed the progress made on structural reforms, particularly in the key sectors of energy and agriculture. They noted that good progress had been made in preparing the energy sector for privatization, in using the new bankruptcy law, and in issuing land titles and breaking up former collective farms. They stressed the importance of maintaining the pace of reform in these areas, so as to strengthen payments discipline and foster the development of a vibrant private farming sector. Directors noted that the efforts to attract foreign interest in large-scale privatizations had so far produced disappointing results. They urged the authorities to address investor concerns about lack of transparency in the tax system and inadequate legal protection, in order to restore momentum to the privatization process. They also urged the authorities to continue their efforts to strengthen the statistical database, especially the measurement of GDP and fiscal reporting by local authorities and the social fund.
Directors expressed the hope that the new government currently being formed would adopt a strong reform program, which could attract an early resumption of support under the Extended Fund Facility.
|Moldova: Selected Economic Indicators|
|Inflation (annual percentage rate, end-period)||116.1||23.8||15.1||11.1|
|GDP growth (annual average, percent)||-31.2||-1.4||-7.8||1.3|
|External current account|
|percent of GDP||-6.9||-8.7||-12.9||-13.3|
|External debt stock (percent of GDP)||36.0||39.9||42.4||47.5|
|External debt service (percent of exports)||4.0||10.5||6.2||17.4|
|Gross official reserves (end-period)|
|months of imports||3.0||3.0||3.0||3.3|
|Exchange rate (Mdl/US$, end-period)||4.27||4.50||4.65||4.66|
|Reserve money growth|
|Interest rate (3-month T-bill, percent, end-period)||...||56.2||32.1||28.0|
|General government budget (percent of GDP)|
Sources: Moldovan authorities; and IMF staff estimates.
1Under 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. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.
IMF EXTERNAL RELATIONS DEPARTMENT