IMF Executive Board Approves US$574 million ECF/EFF Arrangements for MoldovaPress Release No.10/21
January 29, 2010
The Executive Board of the International Monetary Fund (IMF) today approved three-year arrangements for the Republic of Moldova under the Extended Credit Facility and the Extended Fund Facility.1 With each facility providing an equal amount, the combined financial assistance will be equivalent to SDR 369.6 million (about US$574.4 million) to support the country’s economic program aimed at restoring fiscal and external sustainability, preserving financial stability, reducing poverty, and raising growth.
The approval makes an amount equivalent to SDR 60 million (about US$93.2 million) immediately available, with the remainder available in installments subject to semiannual reviews.
The new arrangements follow a three-year program supported by a Poverty Reduction and Growth Facility, which was approved by the IMF Executive Board in May 2006 and expired in May 2009 (see Press Release No. 06/91).
Following the Executive Board discussion, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chairman, said:
“The global economic crisis led to a rapid deterioration in the Moldovan economy in 2009. Falling demand in trading partners caused a severe downturn in exports and workers’ remittances; FDI and other capital inflows fell dramatically as well. As a result, domestic demand collapsed, causing a sharp GDP contraction and deflationary pressures. Fiscal pressures were exacerbated by pre-election spending hikes.
“The authorities’ program for 2010–12 aims to restore fiscal and external sustainability and boost growth. Fiscal policy targets a gradual return to a sustainable position by 2012, or earlier if possible. Monetary policy will focus on maintaining price stability. Structural reforms will support the recovery, including by increasing the flexibility of the highly regulated economy. The program will also increase spending for essential social services and poverty reduction.
“Fiscal policy in 2010 seeks to balance a much-needed adjustment with large public investment and social spending needs. To reduce the deficit, the authorities have rescheduled unaffordable wage increases and rationalized spending on materials and subsidies. At the same time, the budget envisages a rise in targeted social assistance spending to help protect vulnerable households.
“Taking advantage of low inflation, monetary policy will be supportive of the nascent economic recovery. To ensure that the exchange rate is in line with fundamentals, intervention in the foreign exchange market will be limited to smoothing short-run fluctuations. The central bank is closely monitoring banks’ financial soundness and stands ready to take preemptive action if needed.
“Structural reforms are designed to unlock the economy’s growth potential and support the fiscal program. A wide-ranging program of liberalization and deregulation is aimed at stimulating competition and fostering private sector-led growth. To keep the social insurance system financially sustainable, early retirement privileges of the civil servants will be gradually phased out, and sick leave compensation will be revamped. The authorities will also address the large quasi-fiscal arrears in the heating sector.”
Recent Economic Developments
The global economic crisis hit Moldova hard, leading to a sharp weakening of the economy. In the first half of 2009, falling demand in trading partners led to a severe downturn in exports and remittances. While GDP dropped by nearly 8 percent over the same period, domestic demand declined even faster, and the current account deficit contracted to about 11 percent of period GDP. At the same time, the balance of payments moved from a surplus to a large deficit as Foreign Direct Investments (FDI) and other capital inflows fell dramatically. Deflation pressures persisted for most of 2009.
The program aims to restore fiscal and external sustainability, preserve financial stability, and raise growth. To facilitate the adjustment, the program provides for adequate budget financing.
Specifically, program objectives include:
(i) reversing the structural fiscal deterioration that occurred in 2008–2009 while safeguarding funds for public investment and priority social spending;
(ii) keeping inflation under control while rebuilding foreign reserves to cushion the economy from external shocks;
(iii) ensuring financial stability by enabling early detection of problems and strengthening the framework for bank rehabilitation and resolution; and
(iv) raising the economy’s potential through structural reforms.
The program will also help mobilize resources for successful implementation of the poverty reduction agenda. To promote poverty reduction, the program sets a floor on priority social spending. Moreover, social assistance spending will be increased by 36 percent in 2010 relative to 2009 to support vulnerable households.