IMF Reaches Staff-Level Agreement with Moldova on Third Review of Extended Credit Facility/Extended Fund Facility Arrangements

Press Release No. 11/175
May 12, 2011

An International Monetary Fund (IMF) team, led by Nikolay Gueorguiev visited Chişinău April 27–May 12 to hold discussions on the third review under the Extended Credit Facility/Extended Fund Facility (ECF/EFF) arrangements with Moldova.

At the conclusion of the visit, Mr. Gueorguiev made the following statement:

“The mission and the Moldovan authorities have reached a staff-level agreement on the completion of the third review under the ECF/EFF arrangements. The agreement is subject to approval by IMF Management and the Executive Board. Board consideration is expected in early July. Completion of the review will enable Moldova to draw SDR 50 million (about US$77 million) in support of its external reserve position.

“The program remains on track. All end-March performance criteria and applicable structural benchmarks were met. Although two indicative targets—the ceilings on accumulation of domestic expenditure arrears and on reserve money—were missed, we are encouraged by the authorities’ commitment to implement appropriate corrective measures.

“Moldova’s economy continues its vigorous recovery with key indicators of economic activity posting strong gains so far this year. Inflation has been declining, but may face upward pressures from the recent spike in international energy prices and accelerating domestic demand. In 2011-12, we expect a strong economic growth rate of 5 percent; some widening of the external current account deficit; and inflation of 8 percent in 2011 and 5¾ percent by end-2012.

“Mid-way through its IMF-supported program, Moldova has largely overcome the economic crisis. Helped by the credible stabilization program, significant liberalization efforts, and improved external environment, output already reached its pre-crisis level, the National Bank of Moldova (NBM) rebuilt its international reserves, and the budget deficit was reduced by over 3¾ percent of GDP last year while funds for social assistance increased considerably. Nevertheless, a lot remains to be done. The immediate policy priorities are to maintain macroeconomic stability, continue on the path of fiscal adjustment, and accelerate structural reforms aimed at promoting competitiveness and export-led growth.

“In this context, we welcome the authorities’ continued commitment to the parameters of the adopted 2011 budget and a medium-term budget framework that is consistent with reaching and maintaining fiscal sustainability in 2012-14. The authorities’ fiscal strategy will be supported by the planned introduction of a new fiscal responsibility framework and implementation of a comprehensive tax policy reform.

“The planned tax policy reform aims to establish a tax regime that is competitive, simple, transparent, and equitable. To promote investment, the reform will extend the option to receive value-added tax (VAT) refunds for purchases of investment goods to Chişinău and Bălți, and accelerate amortization of selected productive assets. At the same time, the corporate income tax will be re-introduced with a single rate of 12 percent and a broad base to ensure adequate resources in support of the authorities’ fiscal strategy.

“Monetary policy will continue to be guided by the NBM’s medium-term inflation objective of 5 plus/minus 1½ percent. In this regard, the recent spike in international energy prices and surging domestic demand call for continuing the gradual monetary tightening to anchor expectations and to contain acceleration of domestic credit. Specifically, we support the NBM’s intention to raise the required reserve ratio to 14 percent in the coming months.

“The mission also discussed specific reforms aimed at raising the efficiency of the public sector, improving tax collection, ending accumulation of arrears in the energy sector, improving the business environment, and removing barriers on external trade.”



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