## cr18205 ## Source details **Canonical URL:** [cr18205](https://www.imf.org/-/media/files/publications/cr/2018/cr18205.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18205.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18205.pdf.json) --- ### Real sector developments (2010–18) — recent outcomes - Growth - Growth surprised on the upside at 4.5 percent in 2017. - Domestic demand picked up sharply, driven by an increase in investment growth (which turned positive for the first time since the 2014 crisis) and in private consumption. - Net trade was a drag on growth as imports accelerated faster than exports. - Inflation - After peaking at 7.9 percent in late 2017, CPI inflation declined to 2.8 percent in May 2018, below the NBM’s target. - Inflation fell marginally outside the inner band of the inflation consultation clause in March. - Slowdown driven largely by changes in regulated services, falling input prices, and fuel prices. Underlying inflation remains relatively stable, largely driven by the recent exchange rate appreciation. - Fiscal developments - The 2017 augmented overall deficit was 1.0 percent of GDP (better than targeted), due to under-execution of capital and current spending and higher than expected revenues. - Under-execution reflected implementation delays in road transportation projects, reorganization of ministries, and delays in external financing. - In 2018Q1 spending continued to lag plans while revenues over-performed, including CIT that grew by 42 percent year-on-year. - Priority social spending has been protected and, since program inception, has risen by almost 10 percent through end-2017. - Banking sector - Banks remain highly liquid, well capitalized, and profitable. - Depositor confidence is steady and credit growth is less negative than in 2016. - The stock of nonperforming loans (NPL) for the three largest banks that are not part of foreign banking groups remained broadly stable. - External sector - The current account deficit widened to 7.9 percent of GDP in 2017, driven by lower net transfers and a weaker trade balance. - Real effective exchange rate appreciated by 10.3 percent in 2017. - Exports buoyed by strong agricultural production and increased manufacturing exports to the EU. - At end-April, reserves were US$2.8 billion (equivalent to 5.0 months of prospective imports). ### Outlook and risks - Growth projections and drivers - Growth forecast for 2018 revised up to 3¾ percent (up from 3 percent in the second review). - Near-term support: rising real incomes, continued remittance inflows, and previous monetary policy easing. - Private investment is expected to slow ahead of the elections. - Medium term: growth projected to be close to 4 percent, contingent on ongoing structural reforms addressing low capital stock, slow productivity growth, limited financial intermediation, the shadow economy, and adverse demographics. - Inflation outlook - CPI inflation expected to average under 4 percent in 2018 (down from 4.3 percent in the second review), breaching the lower bound of the range around the NBM’s target. - Inflation forecast to pick up notably in early 2019, exceeding 5 percent later in the year as the effect of tariff cuts drops out of annual comparisons. - External balances and debt - Current account deficit projected to improve modestly during 2018. - Medium term: current account deficit expected to narrow to about 6.5 percent of GDP. - FDI inflows, remittances and compensation of employees, and other capital inflows will contribute to further accumulation of gross international reserves. - Total external and public and publicly guaranteed debt to GDP ratios projected to gradually decline, preserving Moldova’s low risk of debt distress. - Risks (selected) - Near-term upside risk to growth from domestic demand momentum; downside risk from uncertain, weather-dependent agricultural prospects. - Program implementation risks in the run-up to the November parliamentary elections; banking sector reform progress depends on sustained political commitment. ### Financial sector cleanup and governance — program policy discussions - Shareholder transparency, fitness, and probity — progress - Victoriabank (VB): Sale of 39 percent by a non-transparent shareholder to Banca Transilvania in January 2018; new management certified as fit and proper by the NBM. - Moldova-Agroindbank (MAIB): Negotiations with an EBRD-led consortium for acquisition of “problem” shares representing 41.09 percent; agreement on pre-contract terms concluded in early June, transaction expected in late summer. - Moldindconbank (MICB): Newly issued shares valued by an international firm and offered for sale; discussions with potential buyers, including strategic investors, but no firm buyer yet. - NBM’s Bank Supervision Department completed investigations into concerted activities and fitness/probity of shareholders in non-systemic banks. - Strengthening the shareholder removal framework - December 2017 legal amendments completed first step but required further action to incentivize timely removals and avoid open-ended processes. - Revised framework (prior action) will provide for: - immediate removal from effective control or decision-making of concerted or unfit shareholders; - strict limits on possible recertification of existing shareholders; - price incentives to facilitate early sale of shares; - clear steps to deal with unsold shares while protecting bank capital and governance. - NBM to impose sanctions and exercise special supervision as needed. - Non-systemic banks and UBOs - Following amendments, NBM will apply legal enforcement to remove any unfit shareholders in domestic non-systemic banks before end-March 2019 (proposed structural benchmark). - NBM will identify ultimate beneficiary owners (UBOs) of all qualified shareholders (≥1 percent ownership) in non-systemic domestic banks. - Central Securities Depositary (CSD) - Verification of legal records of shares completed in March by the National Commission for Financial Markets (NCFM). - CSD to become operational in end-October 2018; transfer of government securities registry from NBM to CSD and implementation of a software platform planned. - NBM to develop transfer methodology by October; Supervisory Board established by NBM to oversee CSD. ### Completing bank diagnostics and balance-sheet clean-up — policies and timelines - Diagnostics progress - NBM Executive Board approved list of related party (RP) exposures for the largest three banks and ordered time-bound plans to bring RP exposures into compliance. - On-site inspections completed in non-systemic banks (with some delays); inspections of banks that are part of foreign groups completed by end-May 2018. - Identification of RPs, transactions, and exposures in progress. - NBM issued guidelines for RP risk management programs and instructed all banks to conduct self-assessments of corporate governance. - Policies and timelines - NBM will ensure full compliance of RP exposures with prudential limits in all banks as soon as possible and in line with the law. - Credible time-bound action plans for unwinding RP exposures in all domestic banks not part of foreign groups (proposed structural benchmark, end-July 2018). - Unwinding of excessive exposures to occur as quickly as possible but in any case no longer than 24 months. - Next round of on-site inspections in the largest three banks to investigate counterparties lacking sufficient evidence of relatedness during previous diagnostics. - NBM will publish guidelines for bank RP risk management including policies, procedures, and systems for identification of RPs’ transactions and exposures. - Updated NBM regulation: final on-site inspection report and enforcement decision should be completed within 60 days from finalizing an inspection. ### Further reforms to strengthen financial sector resilience - Non-bank financial sector - Sector is growing quickly, with micro-credit institutions increasingly serving households and SMEs. - Law on non-bank credit organizations (in force March 30, 2018) allows micro-credit institutions to attract certain types of funds close to deposit substitutes—contrary to Fund staff advice—creating scope for regulatory arbitrage. - Authorities to consider amending the law to fully prohibit micro-credit institutions from attracting funds that are deposits or close substitutes; institutions collecting such funding should be supervised as banks. - Financial safety nets and crisis preparedness - Authorities implementing Fund TA recommendations on Emergency Liquidity Assistance (ELA) and preparing to update the deposit insurance law. - Planned reforms to support crisis preparedness and management include: - ensuring backup funding for the Deposit Guarantee Fund (DGF), expanding coverage to corporates, and allowing support of the transfer of liabilities in liquidation; - strengthening the ELA operational framework, governance, and oversight; - improving the bank liquidation framework to facilitate orderly exit in the event of failure. - Authorities intend to maintain an administrative liquidation framework for financial institutions, in line with Fund advice. ### Fiscal sustainability and spending orientation - Fiscal outturn and composition - Augmented overall deficit at end-2017 was 1.0 percent of GDP (versus 3.2 percent targeted), resulting from under-execution of capital and current spending by 1.8 percent of GDP and higher than expected revenues by 0.4 percent of GDP. - Underspending linked to heavy reliance on external financing and delays in project appraisal, selection, and implementation. - Wage bill remained within indicative target; domestic state arrears were virtually eliminated, marginally exceeding the indicative target by some 0.002 percent of GDP. - Priority social spending was slightly below the indicative floor by about 0.03 percent of GDP, reflecting lower registered unemployment and lower social transfers following an increase in pension payments. - In 2018Q1, expenditures lagged plans and revenues over-performed, resulting in an augmented surplus of 0.7 percent of GDP. - Debt metrics - PPG debt to GDP declined to 37 percent in 2017 (down from close to 45 percent in 2015). - Debt service to exports of goods and services remained low at 10.5 percent. ### Monetary and exchange rate policies — stance and institutional improvements - Recent stance and targets - Monetary policy has remained on hold and reserves continue to accumulate. - NBM kept both its base rate and the required reserve ratio unchanged in recent months. - Lending rates have fallen since their 2016 peak, but credit growth remains negative, largely due to impaired financial intermediation. - Negative credit growth identified as the largest contributor to drag on economic growth since the 2014 banking crisis. - Commitments and operational changes - NBM committed to maintaining price stability and not resisting exchange rate movements driven by fundamentals. - Monetary policy stance remains appropriate for now; authorities will act proactively, using all available policy instruments, if the inflation outlook changes. - Inflation consultation bands were revised reflecting the updated inflation forecast and supply-side factors. - NBM interventions in the foreign exchange market aimed only at smoothing excess volatility. - NIR targets under the program were revised upward to reflect higher reserves accumulation through March 2018. - NBM reduced the number of monetary policy decisions from 12 to 8 per year to allow deeper policy analysis; accompanying measures include refining forecasting, improving coordination, and strengthening communications. - Authorities requested Fund TA on changing the reference currency for FX market intervention from the US dollar to euro. - NBM considering reforms to the system of reserve remuneration against a backdrop of high reserve requirements. ### Central Securities Depository (CSD) — establishment and role - Legal and operational steps - NBM Executive Board approved actions for establishment of the CSD on March 14, 2018; state registration followed. - CSD objectives: guarantee the safety of securities; ensure transparency of financial markets; help develop new financial market instruments; facilitate NBM in achieving shareholders’ transparency in licensed banks. - Operational timeline: CSD will become fully operational by end-October 2018; transfer of government securities registry from NBM to CSD and implementation of software platform planned. - Banks and insurance companies’ registries will be transferred to the CSD in October. - A Supervisory Board has been established; methodology to oversee transfer of registries to be developed. ### Program modalities, financing, and capacity to repay - Monitoring and conditionality - Monitoring guided by semi-annual reviews, semi-annual and continuous performance criteria and indicative targets, and structural benchmarks. - Authorities committed to three prior actions for review completion: - Adopt legal amendments to the new shareholder removal model to incentivize effective and timely action. - Adopt amendments to budget 2018 consistent with the augmented deficit ceiling. - General Prosecutor’s Office to publish a high-level asset recovery strategy setting out a time-bound action plan for recovery of stolen assets. - Three new structural benchmarks proposed ahead; one structural benchmark in the financial sector is being reset. - Financing and reserves - Program remains fully financed, with firm financing assurances in place for the next 12 months, and good prospects for the remainder of the program period. - Size of external financing package estimated at US$320.7 million for the remaining period under the program. - This financing will allow reserves to be built up to the top end of the Fund’s ARA metric (148.3 percent of the metric by end-2018). - Relative to the second review, external support in 2018 is lower by about US$100 million, and higher in 2019 by some US$50 million. - Fund disbursement: SDR 24.0 million (US$34.9 million) of which SDR 9.5 million (about US$13.8 million) will be disbursed for budget support (ECF: SDR 8.0 million and EFF: SDR 1.5 million). - Capacity to repay and risks - Moldova expected to meet repayment obligations to the Fund; remains at low risk of debt distress. - Obligations to the Fund estimated to have peaked at 1.2 percent of GDP in 2017 and projected to decline to 0.2 percent by 2023. - Payments to the Fund were 2.8 percent of exports of goods and services in 2017 and projected to decline to below 1 percent by 2020. - Risks to the program remain significant but mitigated by accumulated external reserves and program implementation to date. ### Staff appraisal — key findings and recommendations - Overall assessment - Program remains on track and the economy continues to strengthen. - Important structural impediments remain to achieve strong and sustainable growth; recent progress is not irreversible. - Critical to maintain prudent policies and advance reforms in the remaining program period, notably: complete cleansing of the financial sector; ensure transparency and stability in the energy sector; maintain macroeconomic stability. - Financial sector recommendations (selected) - Continue actions to secure shareholder transparency, fitness, and probity in systemic banks and implement amended framework for removing unfit shareholders. - Critical next steps include: - (i) exit of the second largest bank (MICB) from temporary administration in an orderly manner, - (ii) UBO identification and removal of unfit shareholders in all domestic non-systemic banks, - (iii) addressing related party issues in all domestic banks, including credible time bound plans to unwind excessive exposures, - (iv) improvement in banks’ risk management procedures to allow effective financial intermediation. - Non-bank financial sector: NCFM should fully prohibit micro-credit institutions from accepting deposit-like funds. - Insurance sector: NCFM should ensure strong governance, ownership transparency, and financial strength; align regulatory framework with European standards. - Fiscal and budgetary recommendations (selected) - Manage wage bill carefully to prevent increase in percent of GDP and avoid constraining priority investments and social spending. - Avoid budget overruns ahead of the election. - Fully institutionalize spending reviews and advance local administration reform. - Intensify arrears repayment inspection and monitoring improvements to facilitate arrears elimination. - Monetary policy recommendations (selected) - Continue to focus on maintaining price stability within a flexible exchange rate regime. - Monetary policy should remain data dependent; NBM to monitor inflation outlook closely given upside risks in an election year and downside risks from potential second round effects and exchange rate appreciation. - Limit FX market intervention to smoothing excess volatility. - Continue progress on recommendations from the 2017 safeguards assessment; implement Fund TA on ELA and finalize internal governance regulations on interaction between Supervisory Board and Executive Board. - Other sectoral recommendations - Move the 2014 bank fraud investigation into the recovery phase to demonstrate commitment to no longer tolerate abuses by owners and managers. - Re-align AML/CFT frameworks and regulations with international standards, including effective application of proportionate and dissuasive sanctions. - In energy, ensure viability, transparency and predictability by setting electricity tariffs in line with the new methodology and outstanding commitments. ### Quantitative performance criteria and TMU — key program numbers and definitions - Selected performance instruments (as presented) - Augmented cash deficit of the general government (mil. MDL, sequence shown): 5,513; 5,308; 1,444; 1,339; -1,099; 3,548; 4,290; 4,986; 5,681; 1,985. - Floor on net international reserves of the NBM (stock, US$ mil): 2,131; 2,131; 2,463; 2,368; 2,518; 2,349; 2,431; 2,592; 2,629; 2,752. - Ceiling on the general government wage bill (mil. MDL): 12,657; 12,657; 12,506; 3,287; 3,282; 7,244; 7,616; 10,935; 14,030; 3,968. - Floor on priority social spending (mil. MDL): 17,660; 17,660; 17,615; 4,598; 4,461; 9,463; 9,291; 13,985; 19,280; 4,873. - Inflation consultation bands (percent) — examples: 2018 center point 3.2; 2018 inner band upper 4.2; 2018 inner band lower 2.2; 2019 center points and bands specified for Mar/Jun/Sep/Dec (Mar 3.0; Dec 3.8; inner/outer limits as listed). - TMU valuation and reporting rules (selected) - Program exchange rate: 19.8698 MDL/US$ (official rate as of June 30, 2016). - NIR definition: gross reserves in convertible currencies minus reserve liabilities in convertible currencies; gross reserves include monetary gold, SDRs, reserve position in the Fund, and holdings of foreign exchange in convertible currencies or securities with minimum credit rating AA-. - Reporting: NIR stock reported as US2,292.6 as of end-September 2017 (as presented). - Augmented overall cash deficit includes overall cash deficit plus net on-lending to SOEs; adjusters apply for shortfalls in donor financing and for payments maintaining financial sector stability, with specified caps (e.g., MDL 596 million grants and MDL 894 million loans for 2018). - Inflation consultation mechanism: inner band = +/- 1 percentage point around center; outer band = +/- 2 percentage points; consultation triggers and specified quarterly band values given for 2018–2019. ### Risk Assessment Matrix — selected risks and policy responses - Policy and geopolitical uncertainties - Risk: Regional political instability; policy response: exchange rate flexibility, build fiscal space, strengthen external buffers, accelerate structural reforms. - Risk: Weaker-than-expected global growth; policy response: exchange rate flexibility, build fiscal space, accelerate structural reforms. - Domestic risks - Political risks around parliamentary elections end-2018: potential delays in banking sector cleansing; policy response: apply resolution tools, enforce shareholder transparency, restructure banks with unfit management/shareholders, enhance regulator independence, step up anti-corruption and AML/CFT efforts. - Financial sector risks: progress depends on continued political commitment; policy responses as above. - Broader reform risks: insufficient progress on infrastructure, investment efficiency, human capital, and regulatory reforms; impact: weaker potential growth, adverse impacts on emigration, investment climate, and shadow economy. ### Data reporting, selected numerical indicators, and recent statistics (selected series as presented) - Real growth rate (series as presented): -0.4; 4.3; 4.5; 3.0; 3.8; 3.8; 3.8; 3.8; 3.8. - Nominal GDP (billions of Moldovan lei, series as presented): 122.6; 135.4; 150.4; 160.1; 163.0; 177.9; 193.9; 211.5; 230.7; 251.7. - Consumer price index (average, series as presented): 9.6; 6.4; 6.6; 4.3; 3.6; 4.9; 5.0; 5.0; 5.0; 5.0. - Gross reserves (millions of U.S. dollars, series as presented): 1,757; 2,206; 2,791; 2,778; 2,947; 3,085; 3,191; 3,247; 3,365; 3,501. - Current account balance (millions of U.S. dollars, series as presented): -372; -315; -645; -381; -748; -731; -770; -782; -795; -825. - Public and publicly guaranteed debt (percent of GDP, series as presented): 44.8; 41.9; 37.0; 42.1; 37.4; 38.5; 38.8; 38.6; 39.8; 39.8. - Banking sector indicators (selected): Capital adequacy ratio (percent, selected values): 24.8; 23.4; 13.2; 26.2; 27.8; 27.0; 28.7; 30.1; 29.7; 28.9; 30.7; 33.2. Nonperforming loans as a share of total loans (percent, selected values): 14.5; 11.6; 11.7; 9.9; 11.1; 16.1; 15.8; 16.4; 16.2; 17.6; 17.4; 16.2. - Fund financing schedule (selected lines displayed): Board approval November 7, 2016 — Amount: 26.0 (Total), EC: 8.7, EFF: 17.3. March 20, 2018 (third review): 24.0 (Total), EC: 8.0, EFF: 16.0. *INTERNATIONAL MONETARY FUND — Republic of Moldova, Recent Economic Developments (excerpt).* ### 1. Real Sector Developments, 2010–18 __________________________________________________________ 17 ### 1. Real Sector Developments, 2010–18 __________________________________________________________ 17 ### Recent economic developments - Growth - Growth surprised on the upside at 4.5 percent in 2017. - Domestic demand picked up sharply, driven by an increase in investment growth (which turned positive for the first time since the 2014 crisis) and in private consumption. - Net trade was a drag on growth as imports accelerated faster than exports. - Inflation - After peaking at 7.9 percent in late 2017, CPI inflation declined to 2.8 percent in May 2018, below the NBM’s target. - Inflation fell marginally outside the inner band of the inflation consultation clause in March. - The slowdown was driven largely by changes in regulated services, falling input prices, and fuel prices. Underlying inflation1 remains relatively stable, largely driven by the recent exchange rate appreciation. - Fiscal developments - The 2017 augmented overall deficit was 1.0 percent of GDP (better than targeted), due to under-execution of capital and current spending and higher than expected revenues. - Under-execution reflected implementation delays in road transportation projects, reorganization of ministries, and delays in external financing. - In 2018Q1 spending continued to lag plans while revenues over-performed, including CIT that grew by 42 percent year-on-year. - Priority social spending has been protected and, since program inception, has risen by almost 10 percent through end-2017. - Banking sector - Financial statements indicate banks remain highly liquid, well capitalized, and profitable. - Depositor confidence is steady and credit growth is less negative than in 2016. - The stock of nonperforming loans (NPL) for the three largest banks that are not part of foreign banking groups remained broadly stable. - External sector - The current account deficit widened to 7.9 percent of GDP in 2017, driven by lower net transfers and a weaker trade balance. - Real effective exchange rate appreciated by 10.3 percent in 2017. - Exports were buoyed by strong agricultural production and increased manufacturing exports to the EU. - At end-April, reserves were US$2.8 billion (equivalent to 5.0 months of prospective imports). 1 Headline inflation, excluding food, regulated prices, and non-regulated energy prices. ### Outlook and risks - Growth projections and drivers - Growth forecast for 2018 revised up to 3¾ percent (up from 3 percent in the second review). - Near-term support: rising real incomes, continued remittance inflows, and previous monetary policy easing. - Private investment is expected to slow ahead of the elections. - Over the medium term growth is projected to be close to 4 percent, contingent on ongoing structural reforms addressing low capital stock, slow productivity growth, limited financial intermediation, the shadow economy, and adverse demographics. - Inflation outlook - CPI inflation is expected to average under 4 percent in 2018 (down from 4.3 percent in the second review), breaching the lower bound of the range around the NBM’s target. - Inflation is forecast to pick up notably in early 2019, exceeding 5 percent later in the year as the effect of tariff cuts drops out of annual comparisons. - External balances and debt - Current account deficit projected to improve modestly during 2018. - Over the medium term, the current account deficit is expected to narrow to about 6.5 percent of GDP. - FDI inflows, remittances and compensation of employees, and other capital inflows will contribute to further accumulation of gross international reserves. - Total external and public and publicly guaranteed debt to GDP ratios are projected to gradually decline, preserving Moldova’s low risk of debt distress. - Risks - Near-term upside risk to growth from domestic demand momentum; downside risk from uncertain, weather-dependent agricultural prospects. - Program implementation risks in the run-up to the November parliamentary elections; banking sector reform progress depends on sustained political commitment. ### Program policy discussions — financial sector cleanup and governance - Shareholder transparency, fitness, and probity — progress - Victoriabank (VB): Sale of 39 percent by a non-transparent shareholder to Banca Transilvania in January 2018; new management certified as fit and proper by the NBM. - Moldova-Agroindbank (MAIB): Negotiations with an EBRD-led consortium for acquisition of “problem” shares representing 41.09 percent; agreement on pre-contract terms concluded in early June, transaction expected in late summer. - Moldindconbank (MICB): Newly issued shares valued by an international firm and offered for sale; discussions with potential buyers, including strategic investors, but no firm buyer yet. - NBM’s Bank Supervision Department completed investigations into concerted activities and fitness/probity of shareholders in non-systemic banks. - Strengthening the shareholder removal framework - December 2017 legal amendments completed first step but required further action to incentivize timely removals and avoid open-ended processes. - Revised framework (prior action) will provide for: - immediate removal from effective control or decision-making of concerted or unfit shareholders; - strict limits on possible recertification of existing shareholders; - price incentives to facilitate early sale of shares; - clear steps to deal with unsold shares while protecting bank capital and governance. - NBM to impose sanctions and exercise special supervision as needed. - Non-systemic banks and UBOs - Following amendments, NBM will apply legal enforcement to remove any unfit shareholders in domestic non-systemic banks before end-March 2019 (proposed structural benchmark). - NBM will identify ultimate beneficiary owners (UBOs) of all qualified shareholders (≥1 percent ownership) in non-systemic domestic banks. - Central Securities Depositary (CSD) - Verification of legal records of shares completed in March by the National Commission for Financial Markets (NCFM). - CSD to become operational in end-October 2018; transfer of government securities registry from NBM to CSD and implementation of a software platform planned. - NBM to develop transfer methodology by October; Supervisory Board established by NBM to oversee CSD. ### Completing bank diagnostics and balance-sheet clean-up - Diagnostics progress - NBM Executive Board approved list of related party (RP) exposures for the largest three banks and ordered time-bound plans to bring RP exposures into compliance. - On-site inspections completed in non-systemic banks (with some delays); inspections of banks that are part of foreign groups completed by end-May 2018. - Identification of RPs, transactions, and exposures in progress. - NBM issued guidelines for RP risk management programs and instructed all banks to conduct self-assessments of corporate governance. - Policies and timelines - NBM will ensure full compliance of RP exposures with prudential limits in all banks as soon as possible and in line with the law. - Credible time-bound action plans for unwinding RP exposures in all domestic banks not part of foreign groups (proposed structural benchmark, end-July 2018). - Unwinding of excessive exposures to occur as quickly as possible but in any case no longer than 24 months. - Next round of on-site inspections in the largest three banks to investigate counterparties lacking sufficient evidence of relatedness during previous diagnostics. - NBM will publish guidelines for bank RP risk management including policies, procedures, and systems for identification of RPs’ transactions and exposures. - Updated NBM regulation to stipulate that the final on-site inspection report and enforcement decision should be completed within 60 days from finalizing an inspection. ### Further reforms to strengthen financial sector resilience - Non-bank financial sector - Sector is growing quickly, with micro-credit institutions increasingly serving households and SMEs. - Law on non-bank credit organizations (in force March 30, 2018) allows micro-credit institutions to attract certain types of funds close to deposit substitutes—contrary to Fund staff advice—creating scope for regulatory arbitrage. - Authorities to consider amending the law to fully prohibit micro-credit institutions from attracting funds that are deposits or close substitutes; institutions collecting such funding should be supervised as banks. - Financial safety nets and crisis preparedness - Authorities implementing Fund TA recommendations on Emergency Liquidity Assistance (ELA) and preparing to update the deposit insurance law. - Planned reforms to support crisis preparedness and management include: - ensuring backup funding for the Deposit Guarantee Fund (DGF), expanding coverage to corporates, and allowing support of the transfer of liabilities in liquidation; - strengthening the ELA operational framework, governance, and oversight; - improving the bank liquidation framework to facilitate orderly exit in the event of failure. - Authorities intend to maintain an administrative liquidation framework for financial institutions, in line with Fund advice. ### Fiscal sustainability and spending orientation - Fiscal outturn and composition - Augmented overall deficit at end-2017 was 1.0 percent of GDP (versus 3.2 percent targeted), resulting from under-execution of capital and current spending by 1.8 percent of GDP and higher than expected revenues by 0.4 percent of GDP. - Underspending linked to heavy reliance on external financing and delays in project appraisal, selection, and implementation. - Wage bill remained within indicative target; domestic state arrears were virtually eliminated, marginally exceeding the indicative target by some 0.002 percent of GDP. - Priority social spending was slightly below the indicative floor by about 0.03 percent of GDP, reflecting lower registered unemployment and lower social transfers following an increase in pension payments. - In 2018Q1, expenditures lagged plans and revenues over-performed, resulting in an augmented surplus of 0.7 percent of GDP. - Debt metrics - PPG debt to GDP declined to 37 percent in 2017 (down from close to 45 percent in 2015). - Debt service to exports of goods and services remained low at 10.5 percent. *INTERNATIONAL MONETARY FUND — Republic of Moldova, Recent Economic Developments (excerpt).* ### 24. The Criminal Procedures Code was amended to grant the STS powers to establish ### 24. The Criminal Procedures Code was amended to grant the STS powers to establish ### Criminal Procedures and STS - The STS has been operational since April 1, 2017, but could not exercise powers to establish tax crimes without amendments to the Criminal Procedure Code. - Enabling legislation was passed on March 23, 2018, allowing the STS to expand the current Division of Violations Discovery and Review to include criminal investigation attributes. ### Fiscal Policies and 2018–2019 Budget Framework - 2018 Budget Amendment (prior action) - Deficit expected to reach 3.5 percent of GDP, 0.2 percent higher than initially planned, driven by changes in the disbursement of expected grants. - Amendment provides for: - Increase in priority social spending of 0.1 percent of GDP. - Additional spending on roads infrastructure financed by EU grants received earlier than expected (in 2017Q4, versus 2018Q1). - Wage bill limited to 8.6 percent of GDP while accommodating: - (i) legally mandated increases in salaries and medical insurance contributions; - (ii) inclusion of various public-sector entities as budgetary institutions; - (iii) staffing costs for agencies implementing donor-financed projects. - Tax policy measures remain broadly unchanged. - Higher capital budget in 2018 deemed appropriate to address large infrastructure needs; current spending to be contained as expected under the program. - 2019 Budget and 2019–2021 Medium-Term Budget Framework (MTBF) - Agreed parameters are in line with program commitments. - Tax policy decisions will be consistent with the agreed revenue path and progressivity of the tax system. - Spending decisions will accommodate infrastructure spending on roads and projects that enhance energy security and reliability. - Authorities published their first Fiscal Risk Statement at end-2017. - A pilot spending review in the education sector was initiated and will be finalized by end-2018. - Intention to fully institutionalize spending reviews into the regular annual and medium-term budget process over the next two MTBF cycles. - Local administration reform to be advanced in 2019 to streamline funding and improve project implementation at the municipality level. - Public wage scale unification (2019) - Unification intended to improve budget planning and management by making the salary scale of all employees in the budgetary sector more manageable and transparent. - Plans include replacing non-base payments with a performance-based component to help improve service delivery. - Authorities will carefully assess the budgetary impact prior to implementation and consider transitional measures to prevent possible budget slippages. - Arrears management - Authorities plan to amend Article 67 of the Law on Public Finances and Fiscal Accountability to incentivize local and other authorities to contain arrears by year-end to be eligible for state budget financing in the following fiscal year. - Staff advised intensifying inspection of arrears repayment and improving monitoring to facilitate elimination. ### Strengthening the Effectiveness of Monetary and Exchange Rate Policies - Background and recent stance - Monetary policy has remained on hold and reserves continue to accumulate. - The NBM kept both its base rate and the required reserve ratio unchanged in recent months. - Inflation slowed sharply since its 2016 peak; underlying inflation remained relatively more stable. - End-December 2017 Net International Reserves (NIR) performance criteria (PC) and end-March 2018 indicative target under the program were met. - Lending rates have fallen since their 2016 peak, but credit growth remains negative, largely due to impaired financial intermediation. - Negative credit growth identified as the largest contributor to drag on economic growth since the 2014 banking crisis. - Policy commitments and forecasts - NBM committed to maintaining price stability and not resisting exchange rate movements driven by fundamentals. - Inflation is forecast to remain relatively low and below the lower end of the range around NBM’s target in 2018 before rising notably in 2019; slowdown and upswing largely driven by changes to regulated prices. - Monetary policy stance remains appropriate for now; authorities will act proactively, using all available policy instruments, if the inflation outlook changes. - Inflation consultation bands were revised reflecting the updated inflation forecast and supply-side factors. - NBM interventions in the foreign exchange market aimed only at smoothing excess volatility. - NIR targets under the program were revised upward to reflect higher reserves accumulation through March 2018. - Operational framework improvements - NBM reduced the number of monetary policy decisions from 12 to 8 per year to allow deeper policy analysis. - Accompanying measures include: - (i) refining the forecasting process to strengthen outputs and decision-making, - (ii) improving coordination across agencies, - (iii) strengthening internal and external communications, including adhering to a regular calendar of monetary policy decisions. - Authorities have requested Fund technical assistance on changing the reference currency for FX market intervention from the US dollar to euro. - NBM considering reforms to the system of reserve remuneration against a backdrop of high reserve requirements. ### Addressing Other Sectoral Issues - Energy - Structural benchmark on energy was met: new electricity tariff methodology developed and approved by ANRE and published in the official gazette. - Methodology aligns with the new Energy law and best European practice; provides basis for determining costs, capital investment plans, and profitability, with tariffs generally set annually. - Energy companies submitted requests for tariff cuts of around 5 percent, reflecting lower input prices. - Authorities committed to setting electricity tariffs fully based on the February 2018 methodology; proposed structural benchmark end-June 2018: tariffs should reflect differences in assessment of financial deviations from April 2017-February 2018. - Setting tariffs on new methodology intended to safeguard fiscal sustainability of the sector and ensure a stable environment for investors. - Recovery of stolen assets (2014 banking fraud) - Progress has been slow. - Kroll summary report published December 20, 2017; final Kroll investigation documents transmitted to the Anti-Corruption Prosecutors Office in March 2018. - These documents will serve as the basis for time-bound actions for recovery of stolen assets. - General Prosecutor’s Office published a high-level strategy setting out a time-bound action plan for recovery of stolen assets (prior action, previous structural benchmark). The strategy includes responsible agencies, coordination, and reporting requirements. - AML/CFT frameworks - New AML Law published in the official Gazette in February 2018. - AML Agency strengthened as an independent entity under the government with operational capacity. - Institutional setup plus upcoming regulatory and legislative changes expected to better address ML/TF risks. - MoUs on cooperation and exchange of information across relevant domestic agencies are being concluded. - Authorities will amend legal AML/CFT frameworks to ensure effective application of proportionate and dissuasive sanctions in line with Financial Action Task Force standards. - Authorities will issue regulations on identification of suspicious transactions and activities, terrorism financing, and politically exposed persons. - Effectiveness of AML/CFT frameworks to be assessed by MONEYVAL in October 2018; report expected to be discussed in the April 2019 plenary. ### Program Modalities, Financing, and Capacity to Repay - Program monitoring and conditionality - Monitoring guided by semi-annual reviews, semi-annual and continuous performance criteria and indicative targets, and structural benchmarks. - Attached LOI and SMEFP describe authorities’ progress; updated conditionality presented in SMEFP Tables 2 and 3; revised TMU attached. - Authorities committed to three prior actions for review completion: - Adopt legal amendments to the new shareholder removal model to incentivize effective and timely action. - Adopt amendments to budget 2018 consistent with the augmented deficit ceiling. - General Prosecutor’s Office to publish a high-level asset recovery strategy setting out a time-bound action plan for recovery of stolen assets. - Three new structural benchmarks proposed ahead; one structural benchmark in the financial sector is being reset. - Financing and reserves - Program remains fully financed, with firm financing assurances in place for the next 12 months, and good prospects for the remainder of the program period. - Size of external financing package estimated at US$320.7 million for the remaining period under the program. - This financing will allow reserves to be built up to the top end of the Fund’s ARA metric (148.3 percent of the metric by end-2018). - Relative to the second review, external support in 2018 is lower by about US$100 million, and higher in 2019 by some US$50 million, reflecting reprofiling of expected timing of EC grants, Macro Financial Assistance, and World Bank Development Policy Operation disbursements. - Fund disbursement: SDR 24.0 million (US$34.9 million) of which SDR 9.5 million (about US$13.8 million) will be disbursed for budget support (ECF: SDR 8.0 million and EFF: SDR 1.5 million). - Capacity to repay and risks - Moldova expected to meet repayment obligations to the Fund; remains at low risk of debt distress. - Obligations to the Fund estimated to have peaked at 1.2 percent of GDP in 2017 and projected to decline to 0.2 percent by 2023. - Payments to the Fund were 2.8 percent of exports of goods and services in 2017 and projected to decline to below 1 percent by 2020. - Moldova has a strong track record in repayments to the Fund as indicated by timely repurchases to date. - Risks to the program remain significant but mitigated by accumulated external reserves and program implementation to date. - Internal risks contained by policy framework: inflation-targeting monetary policy and medium-term fiscal framework. - Fiscal risks associated with the energy sector have been reduced. - Financial sector strengthening under way: dismantling opaque bank ownership, strengthening supervision and regulation. ### Staff Appraisal — Key Findings and Recommendations - Program status and macroeconomic outlook - Program remains on track and the economy continues to strengthen. - Important structural impediments remain to achieve strong and sustainable growth; recent progress is not irreversible. - Critical to maintain prudent policies and advance reforms in the remaining program period, notably: - Complete cleansing of the financial sector, - Ensure transparency and stability in the energy sector, - Maintain macroeconomic stability. - Financial sector recommendations - Continued action and vigilance required despite significant progress in cleansing the financial sector. - Authorities are securing shareholder transparency, fitness, and probity in systemic banks and amended framework for removing unfit shareholders. - NBM strengthening supervisory and regulatory frameworks, finalizing bank diagnostics, and bolstering financial safety nets. - Critical next steps include: - (i) exit of the second largest bank (MICB) from temporary administration in an orderly manner, - (ii) UBO identification and removal of unfit shareholders in all domestic non-systemic banks, - (iii) addressing related party issues in all domestic banks, including credible time bound plans to unwind excessive exposures, - (iv) improvement in banks’ risk management procedures to allow effective financial intermediation. - Non-bank financial sector: NCFM should fully prohibit micro-credit institutions from accepting deposit-like funds. - Insurance sector: NCFM should ensure strong governance, ownership transparency, and financial strength; align regulatory framework with European standards. - Fiscal and budgetary recommendations - 2018 budget amendment consistent with program objectives, but care needed to manage wage bill to prevent increase in percent of GDP and avoid constraining priority investments and social spending. - Budget overruns ahead of the election should be avoided. - 2019 Budget and MTBF should remain in line with program commitments; tax policy decisions should sustain agreed revenue paths and progressivity. - Manage public wage scale unification process carefully to prevent budget slippages. - Fully institutionalize spending reviews and advance local administration reform. - Intensify arrears repayment inspection and monitoring improvements to facilitate arrears elimination. - Monetary policy recommendations - Continue to focus on maintaining price stability within a flexible exchange rate regime. - Monetary policy should remain data dependent; NBM to monitor inflation outlook closely given upside risks in an election year and downside risks from potential second round effects and exchange rate appreciation. - Improve operational capacity of monetary policy by strengthening decision-making, improving coordination across agencies, and reinforcing communications. - Limit FX market intervention to smoothing excess volatility. - Continue progress on recommendations from the 2017 safeguards assessment; implement Fund TA on ELA and finalize internal governance regulations on interaction between Supervisory Board and Executive Board. - Other sectoral recommendations - Move the 2014 bank fraud investigation into the recovery phase to demonstrate commitment to no longer tolerate abuses by owners and managers. - Re-align AML/CFT frameworks and regulations with international standards, including effective application of proportionate and dissuasive sanctions. - In energy, ensure viability, transparency and predictability by setting electricity tariffs in line with the new methodology and outstanding commitments. *IMF staff report content provided in the source PDF chapter.* ### 51. Staff supports the authorities’ request for the completion of the third reviews under ### cr18205 - 51. Staff supports the authorities’ request for the completion of the third reviews under ### Program support and conditionality - Staff supports the authorities’ request for the completion of the third reviews under the ECF/EFF-supported program, and the request for modification of two QPCs. - Modification requested: - Deficit PC: modification reflecting an updated macro framework and quarterly revenue and expenditure paths (¶26). - NIR PC: modification in light of the updated framework and changes in the expected timing of external support. - Assessment: - These modifications do not undermine the achievement of the program’s objectives. - The program remains broadly on track, with strong ownership. - While risks to the program remain significant, the authorities’ firm commitment to sound economic management and financial sector and structural reforms warrant continued Fund support. ### Real sector developments (highlights from Figures and Table 1) - Growth drivers and outlook: - Despite weaker agricultural production, growth should remain solid in 2018, driven by robust domestic demand and supported by a favorable external environment. - Growth momentum picked up in H2-2017 as exports, domestic demand, and agricultural output picked up. - Selected historical and projected indicators (from Table 1): - Real growth rate: -0.4; 4.3; 4.5; 3.0; 3.8; 3.8; 3.8; 3.8; 3.8 (series as presented). - Demand: -4.0; 3.5; 5.3; 3.5; 5.1; 4.5; 3.9; 3.5; 3.6; 3.6 (series as presented). - Exports of goods and services (percent change): 2.9; 8.7; 12.7; 6.1; 9.1; 6.6; 4.5; 4.9; 4.9; 4.8 (series as presented). - Imports of goods and services (percent change): -4.7; 5.2; 11.4; 5.8; 9.3; 6.7; 4.4; 3.9; 4.1; 4.0 (series as presented). - Nominal GDP (billions of Moldovan lei): 122.6; 135.4; 150.4; 160.1; 163.0; 177.9; 193.9; 211.5; 230.7; 251.7 (series as presented). - Consumer price index (average): 9.6; 6.4; 6.6; 4.3; 3.6; 4.9; 5.0; 5.0; 5.0; 5.0 (series as presented). ### Money, prices, and interest rates (Figure 2 and Table 4) - Inflation and drivers: - Headline inflation has slowed sharply, while underlying inflation has remained relatively more stable. - The slowdown has been largely driven by regulated prices. - Monetary policy and credit: - Monetary policy has remained on hold recently. - Despite lower interest rates, credit growth remains in negative territory. - Exchange rate appreciation was accompanied by continued FX purchases. - Selected monetary aggregates and central bank positions (from Table 4): - Net foreign assets (National Bank of Moldova, millions of lei): 24,690; 30,969; 27,540; 27,826; 37,695; 42,153; 44,746 (series as presented). - Gross reserves (millions of U.S. dollars, Table 1/Table 2): 1,757; 2,206; 2,791; 2,778; 2,947; 3,085; 3,191; 3,247; 3,365; 3,501 (series as presented). - Reserve money (millions of lei): 20,531; 26,078; 27,722; 29,689; 33,276; 36,997; 40,319 (series as presented). - Broad money (M3, millions of lei): 49,513; 62,632; 65,973; 64,006; 70,520; 77,056; 85,853 (series as presented). - Credit to the economy (millions of lei): 35,948; 42,633; 41,273; 42,721; 39,455; 38,102; 37,761 (series as presented). ### Fiscal developments (Figure 3, Tables 3a–3b) - Revenue and expenditure performance: - Revenue over-performed owing to higher receipts from VAT, excise taxes, and Social Fund contributions, while grants were lower than expected. - Overall spending increased marginally, albeit with broad under-execution relative to the Budget. Spending composition remained in line with the previous year’s execution. - Deficit and public debt: - Deficit contracted and remained well below the program target. - Public debt declined owing to lower deficit and external debt. - Selected fiscal numbers (Table 3a, Table 3b): - Revenues and grants (millions of lei): 43,670; 45,947; 53,379; 56,999; 57,963; 62,157; 66,960; 72,611; 79,072; 86,130 (series as presented). - Expenditure and net lending (millions of lei): 46,502; 48,774; 54,823; 62,264; 63,644; 69,097; 74,135; 78,745; 85,532; 93,178 (series as presented). - Overall balance (percent of GDP, augmented): -2.3; -11.9; -1.0; -3.3; -3.5; -3.9; -3.7; -2.9; -2.8; -2.8 (series as presented). - Public and publicly guaranteed debt (percent of GDP): 44.8; 41.9; 37.0; 42.1; 37.4; 38.5; 38.8; 38.6; 39.8; 39.8 (series as presented). ### Banking sector developments (Figure 4, Table 5) - Structure and performance: - The size of the banking sector relative to GDP remains low. - Banks continue to strengthen capital and liquidity; loans-to-deposits remain low, although profitability was maintained. - System wide NPLs dropped slightly, although they remain elevated for the largest banks. - Selected banking sector indicators (Table 5 and Figure 4): - Total bank assets (billions of lei, end-period series): 58.3; 76.2; 97.5; 69.5; 91.7; 70.6; 72.7; 74.0; 75.0; 77.5; 79.5; 81.0 (series as presented across reported dates). - Capital adequacy ratio (percent, selected values): 24.8; 23.4; 13.2; 26.2; 27.8; 27.0; 28.7; 30.1; 29.7; 28.9; 30.7; 33.2 (series as presented). - Nonperforming loans as a share of total loans (percent, selected values): 14.5; 11.6; 11.7; 9.9; 11.1; 16.1; 15.8; 16.4; 16.2; 17.6; 17.4; 16.2 (series as presented). ### External sector developments (Figure 5, Table 2) - Exchange rate, trade, and reserves: - The real exchange rate has continued to appreciate, largely driven by nominal exchange rate developments. - The current account deficit widened in 2017, due to weaker net transfers and a slightly wider trade deficit. - Import and export growth accelerated rapidly during 2017, with much of the increase in exports driven by strong agricultural production and exports. - Reserves continued to accumulate during 2017, reaching 148 percent of the Fund’s metric. - Selected external sector numbers (Table 2): - Current account balance (millions of U.S. dollars): -372; -315; -645; -381; -748; -731; -770; -782; -795; -825 (series as presented). - Merchandise trade balance (millions of U.S. dollars): -1,995; -1,945; -2,393; -2,494; -2,868; -3,063; -3,219; -3,358; -3,502; -3,638 (series as presented). - Exports of goods and services (millions of U.S. dollars): 1,985; 2,061; 2,431; 2,559; 2,795; 3,057; 3,249; 3,435; 3,617; 3,801 (series as presented). - Imports of goods and services (millions of U.S. dollars): -3,980; -4,006; -4,823; -5,053; -5,664; -6,120; -6,468; -6,792; -7,118; -7,439 (series as presented). - Gross official reserves (memorandum, millions of U.S. dollars): 1,757; 2,206; 2,791; 2,778; 2,947; 3,085; 3,191; 3,247; 3,365; 3,501 (series as presented). ### Fund financing, reviews, and disbursements (Tables 6–7) - Schedule of reviews and disbursements (Table 6, selected lines): - Board approval of the Arrangement: November 7, 2016 — Amount: 26.0 (Total), EC: 8.7, EFF: 17.3 (Percent of Quota: 15%/10% as shown). - March 20, 2017: 15.7 (Total), EC: 5.2, EFF: 10.5 (Observance of end-December 2016 performance criteria and completion of first review). - September 20, 2017: 15.7 (Total), EC: 5.2, EFF: 10.5 (Observance of end-June 2017 performance criteria and completion of second review). - March 20, 2018 (third review): 24.0 (Total), EC: 8.0, EFF: 16.0 (Observance of end-December 2017 performance criteria and completion of third review). - Total program amount: 129.4 (Total), 43.1 (EC), 86.3 (EFF); 25% of Quota; 50% of Quota breakdown as shown. - Indicators of Fund credit (Table 7, selected items): - Fund obligations based on existing and prospective credit (millions of SDRs, total obligations): 4.7; 11.7; 15.8; 20.9; 30.6; 53.9; 65.4; 65.8; 62.8; 56.8; 38.3; 25.9; 19.4 (series as presented). - Outstanding Fund credit based on existing and prospective credit (millions of SDRs): 308.7; 398.2; 384.0; 364.7; 335.6; 309.1; 277.0; 262.6; 227.5; 174.2; 138.9; 115.7; 98.0 (series as presented). - Outstanding Fund credit (millions of U.S. dollars): 472.4; 628.8; 592.0; 556.4; 529.8; 473.4; 421.0; 399.0; 345.8; 264.7; 211.1; 175.8; 148.9 (series as presented). *Source: IMF staff report excerpts and supporting figures and tables contained in the provided content.* ### 1. Quantitative performance criteria ### 1. Quantitative performance criteria ### Quantitative performance ceilings and floors - Ceiling on the augmented cash deficit of the general government: - Sequence of values shown: 5,513 5,308 1,444 1,339 -1,099 3,548 4,290 4,986 5,681 1,985 - Of which: on-lending agreements with external creditors to state-owned enterprises: - Values shown: 504 504 299 170 322 572 753 096 18 30 - Floor on net international reserves of the NBM (stock, millions of U.S. dollars): - Sequence of values shown: 2,131 2,131 2,463 2,368 2,518 2,349 2,431 2,592 2,629 2,752 ### Continuous performance criteria - Ceiling on accumulation of external payment arrears (millions of U.S. dollars): 0 0 0 0 0 0 0 0 0 - Ceiling on absorption by the government of losses or liabilities and making of payments on behalf of utilities and other companies: 0 0 0 0 0 0 0 0 0 ### Indicative targets - Ceiling on the stock of accumulated domestic government arrears: - Values shown: 0 0 30 70 00 0 0 - Ceiling on the general government wage bill: - Sequence of values: 12,657 12,657 12,506 3,287 3,282 7,244 7,616 10,935 14,030 3,968 - Floor on priority social spending of the general government: - Sequence of values: 17,660 17,660 17,615 4,598 4,461 9,463 9,291 13,985 19,280 4,873 - Floor on project spending funded from external sources (N/A where indicated): - Values shown: N/A N/A N/A 262 986 474 331 1,366 2,963 148 ### Inflation Consultation Bands (in percent) - Outer Band (upper limit): 9.0 9.0 7.8 5.6 5.2 5.0 5.0 5.8 - Inner Band (upper limit): 8.0 8.0 6.8 4.6 4.2 4.0 4.0 4.8 - Center point: 7.0 7.0 7.3 5.8 4.7 3.6 3.2 3.0 3.0 3.8 - Inner Band (lower limit): 6.0 6.0 4.8 2.6 2.2 2.0 2.0 2.8 - Outer Band (lower limit): 5.0 5.0 3.8 1.6 1.2 1.0 1.0 1.8 *Dec 2018; Dec 2017 Adjusted Target; Proposed Target; Revised Target; EBS/17/130 Target; Jun 2018; Mar 2018; Sept 2018; Mar 2019 noted in source.* --- ### 2. Prior actions, structural benchmarks, and implementation status ### Prior actions and structural benchmarks (timing as given) - Prior Actions for Board Consideration of the Review included: - The General Prosecutor’s Office to publish a high-level asset recovery strategy, setting out a time-bound action plan for the recovery of stolen assets. - Adopt amendments to budget 2018 consistent with the augmented deficit ceiling. - NBM to allow a systemic bank to exit temporary administration in an orderly manner. - Adopt legal amendments to the new shareholder removal model to incentivize effective and timely action. - NBM to remove unfit shareholders in domestic non-systemic banks. - NBM to ensure credible time-bound action plans are in place for unwinding RP exposures for all domestic banks that are not part of foreign groups. - In the electricity sector, new tariffs will be fully based on the February 2018 methodology and will also reflect differences in the assessment of financial deviations from April 2017-February 2018. - Structural Benchmarks timing examples: End-October 2018; End-March 2019; End-July 2018; End-June 2018. - Note: "Additional structural benchmarks will be set at the time of subsequent program reviews." ### Status of existing structural benchmarks (selected items and outcomes) - Finalize onsite inspections in: - two small domestic banks not part of foreign banking group — End-January 2018 — Met with delay. - banks that are part of foreign groups — End-May 2018 — Not met. - Finalize investigations into concerted activities, and fitness and probity of shareholders in non-systemic banks — End-March 2018 — Met. - Several other financial sector benchmarks with dates and statuses reported, including items Reset to end-October 2018; Met with delay; Met. - Energy sector benchmark dated Mid-February 2018 — Met with delay. --- ### 3. External financing requirements and identified sources (Millions of U.S. dollars) - Identified financing sources (2016 2017 2018 2019 Projection values shown together): 943 1280 1024 1137 - Financing requirements: 607 944 1093 1126 - of which: fiscal financing requirements: 334 810 412 8 (values presented in source) - Change in gross reserves (increase = +): 531 531 156 138 - Financing gap: 194 196 225 127 - Official Financing: 195 196 225 127 - Identified program financing: 160 152 156 92 - European Commission: 47 43 12 66 2 (values as listed) - World Bank: 45 03 03 0 (values as listed) - Romania: 68 10 80 0 - Fund Program: 35 44 70 35 - of which: budget support: 24 27 28 28 - Sources: Moldovan authorities and IMF staff projections. --- ### 4. Risk Assessment Matrix — key risks and policy responses ### Policy and geopolitical uncertainties - Risk: Regional political instability. - Impact if realized: An escalation could lead to changes in trade patterns and commodity markets, remittances, and capital flows with significant impacts on the Moldovan economy. - Policy response: - Exchange rate flexibility should be main response to external shocks. - Continue to build fiscal space to respond to adverse shocks and strengthen external buffers. - Accelerate structural reforms to increase external competitiveness and diversify international trade and energy sources. - Risk: Weaker-than-expected global growth (structurally weak growth in U.S., euro Area, Japan). - Impact if realized: Lower export demand, declining remittances and other financial flows, lower growth, weakened fiscal position, exacerbated banking sector difficulties. - Policy response: - Exchange rate flexibility as main response. - Continue to build fiscal space and strengthen external buffers. - Accelerate structural reforms to increase external competitiveness, diversify the economy, and boost productivity. - Risk: Significant U.S. slowdown and its spillovers. - Impact if realized: Global spillovers from a sharper-than-expected slowdown could lower growth abroad and affect Moldova. ### Domestic risks - Political risks around parliamentary elections end-2018. - Impact if realized: Delays in banking sector cleansing/restructuring could reduce business sentiment, FDI, and credit supply. - Policy response: - Apply promptly appropriate tools under the new resolution framework. - Enforce shareholder and beneficial ownership transparency. - Restructure banks with unfit management and shareholders. - Enhance regulator’s independence. - Step up anti-corruption and AML/CFT efforts. - Early successes from reform implementation can build support for further reforms. - Financial sector risks: Progress depends on continued political commitment to strengthen the sector. - Policy responses as above. - Broader reform risks: Insufficient progress on infrastructure, investment efficiency, human capital, and regulatory reforms. - Impact if realized: Weaker potential growth, adverse impacts on emigration, investment climate, and shadow economy. *Note: The RAM reflects staff views on risk likelihood and severity as of discussions with authorities; likelihood categories explained in source.* --- ### 5. Letter of Intent — key commitments and outcomes ### Program performance and requests - Authorities report: "We met all quantitative performance criteria and 9 of 11 structural benchmarks." - Growth: picked up in 2017 to "4.5 percent" and expected to remain solid into 2018. - Request: completion of the third review under the blended Extended Credit Facility and Extended Fund Facility arrangements; modification and establishment of Quantitative Performance Criteria and Indicative Targets through March 2019; establishment of Structural Benchmarks through end-December 2018; and associated disbursement of "SDR 24.0 million." ### Policy commitments summarized - Financial sector: - Update framework for removing shareholders in banks. - Address related party lending. - Improve banks’ corporate governance. - Operationalize the new central securities depository. - Verify integrity of share registration. - Strengthen regulatory and supervisory frameworks, including for non-bank financial institutions. - Fiscal policy priorities: - Public investment and social spending, tax and customs reforms, and improving spending efficiency. - Energy sector: - Improve transparency, predictability and good governance. - New tariffs in electricity sector will be fully based on the new methodology and reflect past financial deviations. --- ### 6. Supplementary Memorandum of Economic and Financial Policies — Recent developments, outlook, and banking sector actions ### Recent developments and outlook - Macroeconomic performance: - Growth in 2017: "4.5%". - CPI inflation: peaked at "7.9 percent" in late 2017 and declined to "2.8 percent" in May 2018. - Base inflation evolving around "5%," at center of NBM inflation target corridor. - Fiscal outturn: - Augmented overall deficit reached "1 percent of GDP" compared with "3.1 percent" envisaged in 2017 Budget amendment. - Wage bill remained below program ceiling. - Domestic state arrears declined, marginally exceeding the December target by about "0.002 percent of GDP." - Priority social spending was below the indicative floor by about "0.03 percent of GDP" in December. - Forecasts: - Growth expected at "around 3¾ percent in 2018." - CPI inflation forecast to reach the lower end of the range around the NBM’s target in 2018. ### Policy framework — Financial sector rehabilitation - Overarching goals: strengthen bank governance and risk management; decisive cleansing of the banking system. - Progress made (selected actions and outcomes): i. Transfer of ownership in Victoriabank from a non-compliant shareholder to a strategic investor; new management certified as fit and proper by the NBM. ii. Negotiations on acquisition of "41.09% percent" share in MAIB by an EBRD-led consortium concluded; laws adopted to facilitate pre-agreed back-to-back purchase and sale of shares in systemic banks by the Government. iii. In MICB, cancellation of suspended shares and issuance of new shares in line with Article 111 of the Law on Capital Markets; new shares valued by a reputable international firm and exposed for sale on the stock exchange. iv. NBM Executive Board adopted decisions on Related Party (RP) Reviews for the three largest banks, ordered time-bound plans for unwinding RP exposures, and the relevant department accepted those plans. v. Full-scope onsite inspections finalized in the remaining two banks not part of foreign banking groups and undertaken in banks that are part of foreign banking groups. vi. Following onsite inspections, NBM is finalizing RP Reviews in four banks that are not part of foreign banking groups. vii. NBM finalized investigations into concerted activities and fitness and probity of shareholders in non-systemic banks; NBM Executive Board decisions are being prepared. viii. NBM instructed all banks to conduct a self-assessment of corporate governance. - Legal and regulatory: - The New Banking Law came into force on "January 1, 2018," introducing international standards in line with EU CRD IV/CRR Directives. Supporting regulations drafted and to be approved in stages per NBM’s time-bound action plan. *Supplementary Memorandum of Economic and Financial Policies and Technical Memorandum of Understanding attached to Letter of Intent as noted in source.* *Source: IMF staff report materials for the Republic of Moldova (content unit: cr18205 - 1. Quantitative performance criteria).* ### 6. Central Securities Depository (CSD): We have completed the verification of the legal ### 6. Central Securities Depository (CSD): We have completed the verification of the legal ### Central Securities Depository (CSD): establishment, scope, and timeline - NBM Executive Board approved a set of actions for establishment of the CSD on March 14, 2018, after which state registration took place. - CSD objectives: - Guarantee the safety of securities. - Ensure the transparency of financial markets. - Help develop new financial market instruments. - Facilitate NBM in achieving shareholders’ transparency in licensed banks. - Operational timeline and steps: - The CSD will become fully operational by end-October 2018. - Operationalization of the software platform for government securities will allow transfer of their registry from NBM to the CSD. - Banks and Insurance companies’ registries will be transferred to the CSD in October. - A Supervisory Board has been established to ensure effective oversight and operations. - A methodology will be developed to oversee the transfer of registries. ### Financial sector: verification, shareholder actions, related-party (RP) exposures, and contingency planning - Verification and inspections: - NCFM completed the verification of the legal records of all banks and insurance companies. - Exit from temporary administration: - NBM will allow a systemic bank to exit temporary administration in an orderly manner (reset structural benchmark, end-October-2018). - Exit will entail a private sector solution following price valuation and exposure of newly issued shares for sale at the stock exchange. - A contingency plan is in place should this approach face substantive impediments or delays that would undermine financial stability. - Ultimate beneficial owners and shareholder removal: - NBM will identify the UBOs of all domestic banks. - Legal enforcement actions will be applied vis-à-vis concerted shareholders. - NBM will remove unfit shareholders in domestic non-systemic banks before end-March 2019 (proposed structural benchmark). - To ensure timely removal of unfit shareholders, and in consultation with Fund staff, legal amendments to the new shareholder removal model will be adopted to incentivize effective and timely action (prior action). - Related party (RP) exposure management: - NBM will ensure credible time-bound action plans are in place for unwinding RP exposures for all domestic banks that are not part of foreign groups before end-July 2018 (proposed structural benchmark). - Guidelines for RP risk management programs are being developed and will be issued for consultation with the banks (structural benchmark, end-June 2018). - These guidelines will be published, including policies, procedures, and systems for identification of RPs’ operations. - Supervisory powers and capital conservation: - Supervisory powers, such as dividend payout restrictions and capital add-ons, will be exercised based on the degree of impact of regulatory capital requirements (e.g., transition to Basel III and other risk exposures identified by the NBM). - Financial safety nets and resolution frameworks: - Legal and operational frameworks for emergency liquidity assistance, deposit insurance, and bank liquidation are under review, with intention of adopting reforms by end-year 2018 to complement the Bank Recovery and Resolution Law (to be developed in consultation with the Fund). ### Monetary and exchange rate policies - Framework and near-term stance: - Continued implementation of monetary policy within an inflation-targeting framework and a flexible exchange rate regime. - Inflation is expected to slow further in 2018 due to exchange rate appreciation and price level shocks to food and regulated prices more than offsetting higher growth and prior monetary easing. - In the near term, monetary policy will remain on hold, looking through first-round effects from transitory changes to food and regulated prices. - FX interventions and reserves: - Authorities will not resist exchange rate movements driven by fundamentals; interventions only to smooth excessive volatility. - Two-sided interventions in the foreign exchange market to smooth excessive volatility. - The NIR targets set under the program are consistent with this commitment. - Institutional and operational improvements: - Enhance communication within and outside NBM. - Reduce the number of monetary policy decisions accompanied by broader measures: - (i) refine forecasting process, - (ii) improve coordination across agencies, - (iii) strengthen internal and external communications, including adhering to a regular calendar of monetary policy decisions. - Commitment not to amend the law regulating securitization of emergency loans extended by NBM to now failed banks. - Once NBM’s statutory capital level reaches 10 percent of monetary liabilities, NBM profit transfers to government will be used to repurchase these securities, starting with the longer dated tranches, allowing reduction in domestic public debt. - These securities will also be used for mopping up bank liquidity via outright sales and reverse repo transactions to address structural excess liquidity. - NBM will consider possible improvements to liquidity management and reserve remuneration frameworks. ### Fiscal policy: 2018 amendments, revenues, wages, arrears, and 2019 MTBF - 2018 budget amendment and deficit ceiling: - Amendments to budget 2018 will be adopted consistent with the augmented deficit ceiling of 5,681 mil. lei (3.5 percent of GDP) (prior action). - The amended budget maintains focus on investment and priority social spending. - Additional spending on road projects of about 303.1 mil. lei will be financed using cash balances from grants received in 2017 that had been expected in 2018. - Tax and customs reforms: - Revised revenue projections reflect improved macroeconomic conditions, better than expected collection, and sustained dividends from on-going reforms in the Customs and State Tax Services. - Tax administration initiatives were taken in January 2018 to further improve revenue collection, including increasing information submitted to the State Tax Service (STS) by financial institutions and expanding information sources. - The Criminal Procedures Code was amended to enable investigation of tax crimes by the STS. - Wages and pensions: - Public wage bill will be 14,030 million lei (2018), somewhat higher than initially planned to accommodate: (i) legally mandated public salary increases; (ii) increases in medical insurance contributions; (iii) commitments related to donor projects; and (iv) inclusion of seven public sector agencies as budgetary institutions. - The amended budget for the Social Fund includes funds to cover pension indexation. - Domestic arrears and monitoring: - Commitment to eliminating audited state arrears and approving legislation to reduce local government arrears beyond central government control. - Aim to improve monitoring of arrears and prevent accumulation, including by amending Article 67 of the Law on Public Finances and Fiscal Accountability with immediate effect subject to parliamentary approval during the Spring 2018 session. - 2019 budget and MTBF 2019–21: - MTBF 2019–21 committed for adoption in June 2018 to preserve Moldova’s low risk of public debt distress while facilitating growth-enhancing public investment and other priority spending. - Plan to adopt the 2019 budget in July 2018 in line with revenues, the wage bill, and deficit parameters of the MTBF. - Institutional fiscal frameworks and reforms: - Integrate spending reviews into MTBF and annual budget processes starting with MTBF 2021–23; plan to amend Law no. 181 on Public Finance and Fiscal Responsibility with a provision on spending reviews. - Pilot spending review in the education sector. - Plan to unify the salary system in the budgetary sector as of 2019; wage bill in 2019 will be 14,947 mil lei, with 246 mil lei designated to facilitate the first phase of the reform. - Public investment priorities: rehabilitate road network, reform railway system, enhance energy security and reliability; strengthen budgetary processes and public investment management. - Social spending: enhance targeting and coverage of Ajutor Social and Heating Allowance; improve employability prospects for vulnerable groups. - Tax reform: intend to revise PIT and social contribution rates in consultation with the Fund to strengthen fiscal and pension sustainability, promote employment, and reduce labor emigration. - Public debt management: develop domestic government bond market for 2018–21; Ministry of Finance to enhance communication with state securities market participants and extend maturity of state securities. ### Structural reforms: energy sector, governance, asset recovery, and AML/CFT - Energy sector reforms: - Priority on greater transparency, predictability, and good governance in energy sector to prevent legal disputes and enhance regulator independence. - Electricity sector: new tariffs fully based on February 2018 methodology and reflect differences in assessment of financial deviations from April 2017-February 2018 (proposed structural benchmark, end-June 2018). - Heating sector: support full implementation of action plan agreed between ANRE and the World Bank, including approving new tariff-setting methodology, asset valuation and depreciation procedures, revised methodology for determining heat losses, determination of tariff deviation (accumulated deficit) and recovery mechanisms. - Continue stakeholder collaboration (Energy Community Secretariat, electricity distribution companies, World Bank). - Economic governance and business environment: - Continue measures to strengthen economic governance: shrink shadow economy, reduce regulatory and administrative burdens, implement judicial reforms, improve business environment while ensuring sound financial sector supervision and strong tax, customs, and AML/CFT frameworks, and implement DCFTA and EU Association commitments. - Recovery of assets: - Final Kroll investigation documents transmitted to the Anticorruption Prosecutor’s Office as basis for asset recovery. - General Prosecutor’s Office will publish a high-level asset recovery strategy with a time-bound action plan for recovery of stolen assets (prior action), including outline of responsible agencies, coordination, and reporting requirements. - AML/CFT framework: - New AML Law published in the official Gazette in February 2018. - AML Agency (SPCSB) strengthened as an independent entity under the government with operational capacity. - Authorities will amend legal AML/CFT framework to ensure effective application of proportionate and dissuasive sanctions for AML/CFT violations by banks or other reporting entities in line with FATF standards. - Regulations to be issued on identification of suspicious transactions and activities, terrorism financing, and politically exposed persons. - AML/CFT framework to be assessed by MONEYVAL in October 2018. - MoUs on cooperation and exchange of information across all relevant domestic agencies are being concluded. ### Program monitoring: reviews, targets, and structural benchmarks - Program monitoring mechanisms: - Continued monitoring through semi-annual reviews, prior actions, quantitative and performance criteria, indicative targets, and structural benchmarks. - Quantitative performance criteria, inflation consultation clause, and indicative targets are set out in Table 1 and specified in the Technical Memorandum of Understanding (TMU). - Prior actions and proposed structural benchmarks are set out in Table 2; status updates in Table 3. - Selected numeric program parameters and targets (as presented): - Augmented cash deficit of the general government: targets include 5,513; 5,308; 1,444; 1,339; -1,099; 3,548; 4,290; 4,986; 5,681; 1,985 (units: millions of Moldovan lei, cumulative from the beginning of calendar year where indicated). - On-lending agreements with external creditors to state-owned enterprises: 504; 504; 299; 170; 322; 572; 753; 0; 960; 1830 (millions of Moldovan lei). - Floor on net international reserves of the NBM (stock, millions of U.S. dollars): 2,131; 2,131; 2,463; 2,368; 2,518; 2,349; 2,431; 2,592; 2,629; 2,752. - Ceiling on the general government wage bill: 12,657; 12,657; 12,506; 3,287; 3,282; 7,244; 7,616; 10,935; 14,030; 3,968 (millions of Moldovan lei, as presented in Table 1). - Floor on priority social spending of the general government: 17,660; 17,660; 17,615; 4,598; 4,461; 9,463; 9,291; 13,985; 19,280; 4,873 (millions of Moldovan lei). - Inflation consultation bands (percent): Outer Band (upper limit) 9.0; 9.0; 7.8; 5.6; 5.2; 5.0; 5.0; 5.8; Inner Band (upper limit) 8.0; 8.0; 6.8; 4.6; 4.2; 4.0; 4.0; 4.8; Center point 7.0; 7.0; 7.0; 7.3; 5.8; 4.7; 3.6; 3.2; 3.0; 3.0; 3.8; Inner Band (lower limit) 6.0; 6.0; 4.8; 2.6; 2.2; 2.0; 2.0; 2.8; Outer Band (lower limit) 5.0; 5.0; 3.8; 1.6; 1.2; 1.0; 1.0; 1.8. - Structural benchmarks and prior actions (selected): - General Prosecutor’s Office to publish a high-level asset recovery strategy, setting out a time-bound action plan for the recovery of stolen assets. - Adopt amendments to budget 2018 consistent with the augmented deficit ceiling. - NBM to allow a systemic bank to exit temporary administration in an orderly manner. - Adopt legal amendments to the new shareholder removal model to incentivize effective and timely action. - NBM to remove unfit shareholders in domestic non-systemic banks. - NBM to ensure credible time-bound action plans are in place for unwinding RP exposures for all domestic banks that are not part of foreign groups. - In the electricity sector, new tariffs to be fully based on the February 2018 methodology and reflect differences in assessment of financial deviations from April 2017-February 2018. - Status reporting (Table 3 highlights): - Various structural benchmarks listed with timeframes and statuses including "Met with delay", "Not met", "Met", and instances where deadlines were reset (e.g., Reset to end-October 2018). *Source: Content unit cr18205 - 6. Central Securities Depository (CSD): We have completed the verification of the legal* ### 1. This Technical Memorandum of Understanding (TMU) defines the variables subject to ### cr18205 - 1. This Technical Memorandum of Understanding (TMU) defines the variables subject to ### Quantitative program targets - Program assessment instruments: - Performance criteria (binding): - Floor on the net international reserves (NIR) of NBM. - Ceiling on the augmented overall cash deficit of the general government (overall cash deficit augmented by on-lending agreements with external creditors to state-owned enterprises (SOEs)). - Ceiling on accumulation of external payment arrears of the general government (continuous). - Ceiling on absorption by the government of losses or liabilities and making of payments on behalf of utilities and other companies (continuous). - Indicative targets: - Ceiling on the general government wage bill. - Floor on priority social spending of the general government. - Ceiling on stock of accumulated domestic government arrears (continuous). - Floor on project spending funded from external sources (to comply with Article 15 of the Fiscal Responsibility Law, starting in 2017 for the 2018 budget). - Consultation clause: 12-month rate of inflation (inflation consultation mechanism). ### Program assumptions and valuation - Exchange rates and valuation rules: - Program exchange rate of the Moldovan leu (MDL) to the U.S. dollar: 19.8698 MDL/US$ (the official rate as of June 30, 2016). - Foreign currency-related assets valued in U.S. dollars at program exchange rates; amounts in other currencies converted using cross rates as of end-June 2016 published on the IMF web site. - Cross rates and asset valuations (end-June 2016): - US$/EUR = 1.1102 - JPY/US$ = 102.9 - CHF/US$ = 0.976 - US$/GBP = 1.3488 - CNY/US$ = 6.6445 - RUB/US$ = 64.1755 - SDR/US$ = 0.711134876 - Monetary gold valued at US$1,320.75 per one troy ounce. - Reporting basis: stock of reserve assets and reserve liabilities of the NBM shall be valued at program exchange rate (as described above). ### Institutional definitions - General government comprises central government and local governments. - Central government includes: state budget (including foreign-financed projects), state social insurance budget, and health insurance budget. - Local governments include: local budgets (including foreign-financed projects). - Prohibitions and exclusions: - No new special or extrabudgetary funds will be created during the program period. - Excluded: government-owned entities with a separate legal status. ### Program definitions and measurement rules - NIR of the NBM: - Defined as gross reserves in convertible currencies minus reserve liabilities in convertible currencies. - Gross reserves (for program monitoring): monetary gold, holdings of SDRs, reserve position in the Fund, holdings of foreign exchange in convertible currencies readily available for intervention or in securities issued by sovereigns, IFIs and explicitly guaranteed government agencies with minimum credit rating AA- (average of Fitch, Moody’s, and Standard & Poor’s). - Excluded from reserve assets: capital subscriptions to foreign financial institutions, long-term non-financial assets, funds disbursed by international institutions and foreign governments assigned for on-lending and project implementation, assets in non-convertible currencies, NBM’s claims on resident banks and nonbanks, and foreign assets pledged as collateral or otherwise encumbered, including claims in foreign exchange arising from transactions in derivative assets (futures, forwards, swaps, and options). - Reserve liabilities: use of Fund credit by the NBM, convertible currency liabilities of the NBM to nonresidents with original maturity up to and including one year, and convertible currency liabilities of the NBM to residents (excluding to the general government and the mandatory FX reserves of domestic banks in the NBM). Liabilities from use of Fund credit do not include liabilities arising from the use of SDR allocation. - Data source: Monetary Survey published by NBM in Moldovan Lei, with program adjustments. - Reported stock: "the stock of NIR of the NBM amounted to US2,292.6 as of end- September 2017." - Net domestic credit of the banking system to the general government (for calculation of overall cash deficit and augmented overall cash deficit): - Defined as outstanding claims of the banking system on the general government (exclusive of claims associated with accrued interest, tax and social contribution payments by commercial banks, and foreign financed on-lending by banks), including overdrafts, direct credit and holdings of government securities, less deposits of the general government (excluding accrued interest on government deposits, and including the accounts for foreign-financed projects). - Exclusions: securities issued under Law 235/2016 for execution of Ministry of Finance’s payment obligations derived from specific State Guarantees (Number 807 of November 17, 2014 and Number 101 of April 1, 2015). - Monitoring sources: NBM’s monetary survey and Treasury data; Ministry of Finance provides data on foreign-financed projects and balances in adjustment accounts. - Reported stock: "the stock of the net domestic credit of the banking system shall be measured from below the line and as of end-June 2016 amounted to MDL 3,508 billion." - Overall cash deficit of the general government: - Cumulative from the beginning of a calendar year and monitored from the financing side at the current exchange rate established by NBM at the date of transaction. - Financing-side definition: sum of net credit of the banking system to the general government (paragraph 6), the general government’s net placement of securities outside the banking system, other net credit from the domestic non-banking sector to the general government, general government’s receipt of disbursements from external debt for direct budgetary support and for project financing minus amortization paid, and privatization proceeds from sale of general government assets. - Note: specific account exclusions for calculation of the net credit of the banking system are enumerated in the TMU (list of account numbers). - Augmented overall cash deficit: - Sum of the overall cash deficit and net on-lending to SOEs. - Net on-lending to SOEs: cumulative from the beginning of a calendar year, monitored from the financing side at current exchange rate, defined as disbursements of on-lending financing from external creditors to SOEs minus their loan repayments. - Treatment of government securities: - Coupon-bearing instruments sold at face value treated as financing items in the fiscal accounts in the amount actually received; on redemption date, sales value recorded as amortization; coupon payments recorded as domestic interest payments. - Definition of debt: - As in point no. 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements (Decision No. 15688-(14/107) adopted on December 5, 2014). Applies to commitments contracted or guaranteed for which value has not been received, and to private debt with official guarantees (contingent liabilities). Excludes normal import-related credits as specified. - Guarantees and on-lending: - Guarantee of a debt arises from any explicit legal obligation of general government or NBM or agency acting on behalf of general government to service debt in event of nonpayment, or implicit legal/contractual obligation to finance shortfalls. - On-lending from external creditors to SOEs treated as public guarantee and monitored explicitly from above-the-deficit line. - On-lending to private sector through commercial banks that are collateralized and where credit risks are borne by commercial banks are treated as contingent liabilities. - External payments arrears: - Defined as all overdue debt service obligations (principal or interest, taking into account contractual grace periods) in respect of any debt contracted or guaranteed or assumed by central government, NBM, or any agency acting on behalf of central government. - Ceiling on new external payments arrears applies continuously; does not apply to arrears arising from external debt being renegotiated with external creditors, including Paris Club creditors, or arrears where creditor has agreed no payment is required pending negotiations. - General government wage bill: - Defined as sum of budget spending on wages and salaries of public sector employees—according to economic budgetary classification, including employer pension contributions and other social security contributions, and other remunerations (such as bonus payments). - Excludes salaries of SOEs and health care providers compensated from the Health Insurance Fund (FAOAM) itself. - Calculation accounts: category 210000 personnel expenditure for central government, local government, and special funds from the Treasury system in the Ministry of Finance. - Priority social spending: - Defined as sum of essential recurrent expenditures including pension and unemployment insurance payments from the Social Insurance Fund (BASS, 9008/00286), the Ajutor Social (social assistance program 9015/00320), heating allowance (9015/00322) during the cold season from the central government budget, and 94 percent of health expenditures from the main fund of the Health Insurance Fund. - Domestic expenditure arrears: - Defined as non-disputed (in or out-of-court) payment obligations whose execution term has expired and became overdue; can arise on any expenditure item including debt service, wages, pensions, energy payments and goods and services. - For program calculation, local government arrears are excluded. - Overdue debt arises from non-payment of obligations with a fixed payment term; when contract lacks payment term, calculated per Article 80 Paragraph (2) of the Law on Public Finance and Fiscal Responsibility. Contract term for public institution commitments shall not exceed 30 days from receipt of funds in the settlement account (except for construction works and capital repairs). - Assessment and reporting based on Methodology of Assessment and Reporting of Overdue Receivables and Overdue Accounts Payable (Arrears), Minister of Finance’s Order No. 121 as of September 14, 2016. - Arrears between the state, local government, and social and health insurance budgets are not counted towards the expenditure arrears’ ceiling on the general government. - Absorption of losses or liabilities by government: - Continuous ceiling of zero on absorption by public sector of losses or liabilities from outside the budgetary sector. - Defined as direct payment by government of losses or liabilities of other parties or coverage of losses/liabilities via transactions (e.g., accumulated stock of financial deviation of utility companies, debt-for-equity swaps, write-off of tax obligations or other state claims). ### Inflation consultation mechanism (monetary conditionality) - Targets and bands: - Quarterly inflation targets measured as year-on-year headline CPI published by Moldovan National Bureau of Statistics. - Inner band: specified as +/- 1 percentage point around the central point. - Outer band: specified as +/- 2 percentage point around the central point. - Consultation triggers: - If observed year-on-year CPI inflation falls outside inner bands at end of quarter: NBM will consult with IMF staff on reasons and proposed policy response. - If observed year-on-year CPI inflation falls outside outer bands at end of quarter: authorities will consult with IMF Executive Board on reasons and proposed policy response before further purchases could be requested under the ECF/EFF. - Specified quarterly band values (center point, inner and outer limits) for 2018 and 2019: - 2018 center point: 3.2 - 2018 inner band (upper limit): 4.2 - 2018 inner band (lower limit): 2.2 - 2018 outer band (upper limit): 5.2 - 2018 outer band (lower limit): 1.2 - 2019 center point: 3.0 (Mar), 3.0 (Jun), 3.0 (Sep), 3.8 (Dec) - 2019 inner band (upper limit): 4.0 (Mar), 4.0 (Jun), 4.0 (Sep), 4.8 (Dec) - 2019 inner band (lower limit): 2.0 (Mar), 2.0 (Jun), 2.0 (Sep), 2.8 (Dec) - 2019 outer band (upper limit): 5.0 (Mar), 5.0 (Jun), 5.0 (Sep), 5.8 (Dec) - 2019 outer band (lower limit): 1.0 (Mar), 1.0 (Jun), 1.0 (Sep), 1.8 (Dec) ### Adjusters (application to quantitative targets from end-December 2016) - General application: Adjusters apply for assessing compliance with the program’s quantitative targets starting from end-December 2016. - Augmented overall cash deficit adjusters: - Increased (upward adjustment) by amount paid in cash for maintaining financial sector stability or by face value of government securities issued for same purpose. - Increased (upward adjustment) by the amount of any shortfall between actually disbursed and programmed budget support from external donors, including MFA (grants and loans) from the European Commission. - Upward adjustments for 2018 are capped at the equivalent of MDL 596 million (grants) and MDL 894 million (loans), valued at program exchange rates. - Decreased (downward adjustment/tightened) by the amount of any shortfall between actually disbursed and programmed on-lending from external creditors to SOEs. (SOEs explicitly included: Termoelectrica, Moldelectrica, Moldovan Railways, and CET-NORD.) - NIR adjusters: - Floor on NIR of the NBM will be lowered by any shortfall in official external grants and loans capped at the equivalent of US$30 million and US$45 million respectively, valued at program exchange rates. - NIR targets will be adjusted upward (downward) by the surplus (shortfall) in IMF budget support purchases relative to the baseline projection reported in Table 3. ### Reporting requirements - (Reporting requirements section present in TMU; specific reporting rules and frequencies are set out in the TMU text.) *Source: cr18205 - 1. This Technical Memorandum of Understanding (TMU) defines the variables subject to* ### 23. Macroeconomic data necessary for assessing compliance with performance criteria and ### 23. Macroeconomic data necessary for assessing compliance with performance criteria and indicative targets and benchmarks ### Data reporting requirements and immediate items - Macroeconomic data necessary for assessing compliance with performance criteria and indicative targets and benchmarks will be provided to Fund staff, including, but not limited to data specified in this memorandum and Table 1. The authorities will transmit promptly to Fund staff any data revisions. - Raw reporting excerpt (as presented in source): - 2019 Q1Q2 Q3 Q4Q1 Onlending to SOEs (programmed amount, millions of U.S. dollars)1.9 16.3 18.336.71.8 - Maximum downward adjustment on the augmented overall cash deficit (millions of Moldovan lei) 1/ 2/32.0274.9308.5618.130.4 - 1/ The adjustments for the year 2018 is evaluated at the exchange rate: 16.83 MDL/USD (the forecast of the Ministry of Economy). - 2/ The adjustments for the year 2019 are evaluated at the exchange rate: 16.99 MDL/USD (the forecast of the Ministry of Economy). - 2018 - Cumulative ### Table 1 — Required data items and periodicity (by reporting agency) - Fiscal data (to be provided by the MoF) - General budget operations for revenues, expenditure and financing (economic and functional classifications): Monthly, within three weeks of the end of each month - General government wage bill at the level of budgets (state budget, local budgets, Social Insurance Fund and Health Insurance Fund) and functional groups: Monthly, within three weeks of the end of each month - Number of budgetary sector positions and employees at the level of budgets (state budget, local budgets, Social Insurance Fund and Health Insurance Fund) and functional groups: Monthly, within four weeks of the end of each month - Social expenditure including pension and unemployment payments from the Social Insurance Fund, the Ajutor Social (social assistance program) and heating allowance for the cold season from the central government budget, and health expenditures from the main fund of the Health Insurance Fund: Monthly, within three weeks of the end of each month - Domestic debt: Monthly, within three weeks of the end of each month - Domestic arrears: Monthly, within three weeks of the end of each month - Onlending to SOEs by type of onlending projects and external creditors (including loan disbursements and repayments): Monthly, within three weeks of the end of each month - Onlending via commercial banks by type of onlending projects and external creditors (including loan disbursements and repayments): Monthly, within three weeks of the end of each month - Monetary data (to be provided by the NBM) - Monetary survey of the NBM: Weekly, within one week of the end of each week - Monetary survey for the whole banking system: Weekly, within two weeks of the end of each week - Net claims on general government (NBM and commercial banks): Weekly, within two weeks of the end of each week - Financial position of commercial banks, including balance sheets, income statement, banking regulation indicators, capital, liquidity, data on credits and deposits (from NBM’s Banking Supervision): Monthly, within four weeks of the end of each month - Foreign exchange operations (NBM data): Monthly, within two weeks of the end of each month - Foreign exchange cash flows of NBM: Monthly, within two weeks of the end of each month - Foreign exchange market data (volume of trades, interventions, exchange rates): Daily, within 12 hours of the end of each day - NBM’s sterilization operations: Weekly, within one week of the end of each week - Interbank transactions (volumes, average rates): Weekly, within one week of the end of each week - Balance of Payments (to be provided by the NBM) - Current, capital, and financial account data: One quarter after the end of the previous quarter - Transfers of individuals from abroad through the banking system: Monthly, within six weeks of the end of each month - External debt data (to be provided by MoF and NBM) - Information on all new external loans contracted by the general government or guaranteed by the government: Monthly, within three weeks of the end of each month - Total public and publicly guaranteed private sector outstanding debt, debt service due, and debt service paid, by creditor: Quarterly, within three weeks of the end of each quarter - Disbursements of grants and loans by recipient sector (state/local/SOEs), and by creditor: - State: Monthly, within three weeks of the end of each month - Other: Quarterly, within three weeks of the end of each quarter - Other data (to be provided by NBS) - Overall consumer price index: Monthly, within two weeks of the end of each month - National accounts by sector of production, in nominal and real terms: Quarterly, within three months of the end of each quarter - Export and import data on value, volume, and unit values, by major categories and countries: Monthly, within two months of the end of each month ### Key macroeconomic findings, projections, and developments - Real GDP and national accounts - Real GDP growth slowed to 3.7 percent year-on-year in 2018Q1. - NBS revised upwards the level of both nominal and real GDP by about 17 percent in 2016–17 due to implementation of the 2008 SNA and ESA 2010 and statistical improvements. - Recent and projected growth - Economic growth was 4.5 percent in 2017. - Authorities now project real GDP growth of 3.8 percent in 2018, compared to 3 percent at the time of the second review. - Fiscal and public debt outcomes - The fiscal deficit was reduced to 1 percent of GDP in 2017 (compared to projected 3.2 percent). - Public debt is estimated to have decreased to 37 percent of GDP, from 41.9 percent in 2016. - Program augmented deficit ceiling is 3.5 percent. - Inflation, monetary policy, and reserves - Inflation declined from 7.3 percent at end-2017 to about 3 percent in May 2018; projected to return to target in 2019. - NBM policy rate reduced from 9 to 6.5 percent. - Gross reserves reached 2,9 billion US dollars in April 2018, equal to 5.2 months import coverage. - Banking sector indicators and intermediation - Capital adequacy ratio stands solidly above 30 percent (prudential requirement of 16 percent). - Liquidity in the system about 57 percent as end of March 2018. - Credit to the economy remained subdued despite improving lending activity since mid-2017 and y-o-y increase in total loan portfolio since March 2018. - Asset recovery - MDL 1.14 billion of stolen assets recovered up to date from the failed banks. - General Prosecutor’s Office published a recovery strategy on June 13, 2018, including a time-bound action plan. ### Structural reforms, actions, and policy priorities - Banking sector cleanup and governance - Sale of “problem” shares in MAIB: EBRD participation approved; pre-contract signed on June 22, 2018 for acquisition of a 41.09 percent stake. - Transfer of ownership in the third largest bank to Banca Transilvania, Romania in January 2018. - Sale of 64 percent share in the second largest bank initiated via stock exchange. - Parliament approved legal amendments to the new shareholder removal model, completing the three prior actions for the review. - New Law on banking activity effective January 1, 2018, transposes Basel III principles and aligns with EU CRD IV/CRR Directives; package of by-laws approved by NBM. - NBM finalizing on-site inspections and related party exposure controls; will work to bring exposures into compliance with prudential limits and strengthen governance and risk management. - Operationalization of Central Security Depository (CSD) envisaged for end-October 2018 to enhance transparency. - Fiscal and institutional reforms - 2018 budget amendments incorporate higher-than-planned fiscal revenues; additional resources to be channeled to investment (mostly in infrastructure) and priority social spending. - Medium-Term Budget framework (2019-21) to be based on realistic revenue assumptions and progressive tax system. - Continued efforts: spending reviews, unifying the salary system in the public sector, strengthening public investment management, modifying PIT and social contribution rates, developing the domestic government bond market. - Development of the Single Account module within the Single Taxpayer Account system and advancing online service for paying taxes and fees by individuals. - Anti-corruption, AML/CTF, and business climate - Authorities will focus on improving customs and AML/CTF frameworks, attracting investment, enhancing competitiveness, reducing the shadow economy. - A new strategy “Moldova 2030” is under discussion covering priorities in economy, infrastructure, education, health, and social protection. ### Staff and Executive Director statements - IMF staff: All three prior actions for the review have been completed; sale of problematic bank shares progressing; NBS released 2018 Q1 GDP and revised historical data; Fund staff will continue close contact with NBS as new information and revisions are released. - Anthony De Lannoy, Executive Director for the Republic of Moldova: Economic stabilization continues since the 2015 recession; program implementation progressing, with emphasis on macroeconomic and financial stability and structural reforms to support private sector growth and job creation. *IMF staff report excerpt (Statement by the IMF Staff Representative and Statement by Anthony De Lannoy), June 29, 2018.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18205.pdf_