## 1mdaea2019002

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### HORECA — Trends and policy considerations
- HORECA accounts for about 1 percent of formal employment (of which about 80 percent is in restaurants).
- By comparison, HORECA accounts for about 4 percent of employment in Romania.
- Restaurant sector employment growth: annual employment growth averaging about 4.5 percent in 2017–19.
- Wages:
  - Average wage in the sector has grown by almost a half since 2016.
  - Sector wage growth outpaced economy-wide wage growth by 20 percentage points.
  - Sector average wage reached about 70 percent of the economy-wide level, compared to 60 percent ratio in Romania.
- October 2018 tax changes:
  - VAT rate applicable to HORECA industries halved to 10 percent from the standard rate.
  - Industry benefitted from economy-wide PIT and SSC rate cuts.
  - Broader tax-package effects elsewhere: introduction of a flat-rate PIT system (revenue loss of 0.5 percent of GDP) and a cut in private employers’ social security contribution rates (0.8 percent of GDP).
- Outcomes and de-shadowing:
  - Growth of Health Fund contributions—unaffected by policy changes—indicates no level or trend shift in the tax base.
  - Post-reform weighted average VAT rate on sales declined from about 19 to 13 percent.
  - Average VAT rate on inputs remained at about 19 percent.
  - Despite strong growth of sales, VAT due to the budget has dropped by 60 percent.
  - Stock of VAT input tax credit surged from the average of about 5 percent of turnover to almost 20 percent.
- Fiscal and business implications:
  - Large stock of tax credits costly for thin-margin businesses and can encourage informality.
  - VAT reduction and wage-related tax cuts did not deliver intended de-shadowing benefits while imposing fiscal costs through lower VAT remittances.

### Fiscal adjustments, amended 2019 budget, and 2020 revenue measures
- Amended 2019 fiscal stance:
  - Authorities adopted amendments consistent with augmented general government deficit of 3 percent of GDP (prior action).
  - Amended deficit target tighter than 3.3 percent of GDP envisaged in the approved budget.
- Expenditure-side measures (0.6 percent of GDP):
  - Redistributed gains from savings on employee vacancies to cover higher wage bill needs from local governments.
  - Reduced net on-lending to SOEs in line with expected project disbursements.
  - Rationalized capital spending to reflect lower execution during 2019H1.
- Revenue-side measures (0.1 percent of GDP):
  - Increased excises for heat-not-burn and fine-cut tobacco products.
  - Reduced exemptions on income from lotteries and sports betting.
  - Limited tax-free sales at duty-free shops to travelers leaving Moldova by sea or air.
  - Removed tax exemptions on petroleum products sold in the customs control area.
- Tax and Customs Code amendments (effective January 1, 2020):
  - Broadened the capital gains tax base.
  - Increased the VAT rate for HORECA.
  - Phased out the personal allowance for higher incomes.
  - Removed tax exemptions applied to meal vouchers provided by employers.
  - Removed VAT exemptions on goods imported by PPPs.
  - Unified excise duty rates for cigarettes with and without filter.
  - Consolidated environmental taxes.
  - Increased PIT rates on tax withheld in advance.
  - Reduced tax-free personal exemptions on merchandise shipped by mail.
- Expected revenue yield: about 0.3–0.6 percent of GDP (not presently included in staff’s projections due to costing ambiguity).
- Tax administration and compliance prior actions:
  - Tax Code amended to withdraw deduction of up to MDL 500,000 from indirect method assessment and to sunset the carryover provision from the 2012 “capital liberalization scheme”.
  - Capital and tax amnesty law amended to allow STS to perform audits and exercise investigative functions prior to January 1, 2018.
  - Authorities to propose a date for automatic exchange of information with OECD’s Global Forum (new end-December SB), aiming to start automatic exchange by end-2022.

### Wage bill control, staffing, and fiscal institutions
- Commitments:
  - Adopt a time-bound plan to phase out multiple reference values to improve medium-term planning.
  - Develop and operationalize an IT-based staff registry (technical specifications by December 2019; fully operational by end-2020).
- Staff recommendations:
  - Integrate spending review findings (education and agriculture) into MTBF and annual budgets.
  - Expand fiscal risk statement to improve coverage and monitoring of SOE and PPP risks.
  - Develop comprehensive public investment management strategy with IMF technical assistance.

### Financial sector reforms, banking developments, and non-bank risks
- Banking ownership and recovery:
  - Sale of VictoriaBank shares to a Romanian banking group in January 2018.
  - MAIB stake sold to an EBRD-led consortium in October 2018.
  - Majority shares of MICB sold to a Bulgarian non-bank investor in March 2019.
  - NBM suspended legal rights of shareholders acting in concert in two non-systemic banks and appointed a temporary administrator in one bank (January 2019).
  - Result: revival of credit with total lending registering double-digit growth for the first time since 2016.
- Unwinding related-party exposures and CSD:
  - Time-bound action plans approved (end-July 2018 SB); by end-April, four out of seven banks aligned exposures with prudential limits.
  - Regulations updated to calculate related-party exposures net of loan-loss provisions.
  - Central Securities Depository (CSD) fully operational; legal records of banks and insurance companies transferred to CSD in May; transfer of joint-stock company records scheduled by end-2019 and end-2020.
- Deposit insurance and safety nets:
  - Deposit Guarantee Fund governance strengthened; coverage limit raised to MDL 50 thousand (about 31 percent and 97 percent of total deposits and depositors, respectively).
  - Coverage expanded to legal entities effective January 1, 2020.
  - National Financial Stability Committee inaugural meeting January 2019.
- Non-bank financial sector risks:
  - Sharp increase in lending by microfinance organizations exploiting regulatory arbitrage.
  - Concerns: weak supervisory capacity, absence of mandatory credit history checks, ineffective consumer protection, non-transparent UBOs, opaque non-resident funding.
  - Potential spillovers to banking sector via confidence and funding channels.
- Policies to address risks (timing and measures):
  - MICB exit from temporary administration expected end-December SB (reset from end-October 2018).
  - Removal of unfit shareholders in domestic non-systemic banks (end-March SB; prior action executed).
  - NBM Act amendments to ensure ELA extended only to solvent and viable banks (prior action); modified ELA framework expected implemented before end-2019.
  - Legislation governing non-bank credit organizations to be amended (new end-October SB) to:
    - Prohibit accepting deposits from the public.
    - Oblige reporting new credit activity to credit bureaus.
    - Introduce limits on total cost of consumer credits.
    - Introduce effective, proportionate, and dissuasive sanctions.
  - Staff urged implementation of risk-based supervision, strengthened ownership transparency, asset classification, risk management, and internal controls.
  - Review NCFM capacity to strengthen regulatory framework and supervisory capacity.

### Monetary and exchange rate policy
- Policy actions:
  - NBM tightened monetary policy in June and July; policy rate raised by 100 basis points to 7.5 percent.
  - Required reserve ratio on banks’ convertible currencies raised by 3 percentage points to 17 percent; reserve requirement on nonconvertible currencies unchanged at 42.5 percent.
  - NBM reduced footprint in FX market following leu oscillations in 2019.
- Policy recommendations:
  - Stand ready to adjust policy rate further to maintain inflation within the corridor.
  - Adopt a less accommodative stance given expected inflationary pressures from expansionary fiscal impulse, nominal currency fluctuations, and adjustments to regulated prices.
  - Support with greater exchange rate flexibility; FX interventions limited to smoothing excessive volatility and maintaining adequate reserve coverage.
  - Strengthen inflation-targeting operational framework by:
    - Adhering to the policy rate as primary tool.
    - Gradually recalibrating reserve requirement ratios on domestic and foreign currency to disincentivize foreign currency intermediation while monitoring liquidity.
    - Adopting an FX intervention strategy consistent with the inflation targeting regime (new end-December SB).
  - Strengthen public communication to improve market signaling and policy credibility.
  - Protect NBM’s policy and institutional independence against political pressure.

### Structural reforms: energy, asset recovery, AML/CFT, and governance
- Energy sector:
  - 2019 tariffs were delayed despite electricity tariffs set in line with new methodology published June 29, 2018 (end-June 2018 SB).
  - Regulator failed to promptly approve 2019 gas tariffs.
  - Authorities committed to adopt by end-October:
    - New electricity tariffs based on February 2018 methodology.
    - Gas tariffs based on existing methodology and purchase price of natural gas (new end-October SB).
  - Regular updates to eligibility and benefit parameters of targeted social assistance programs (Ajutor Social and Heating Allowance).
- Asset recovery from 2014 banking fraud:
  - By end-March 2019, recovered assets from liquidation and confiscation: MDL 3.1 billion vs. MDL 8.7 billion under investigation.
  - Authorities plan international investigation and to evaluate modalities to recover stolen proceeds by end-October, including engaging independent international legal and forensic experts.
- AML/CFT:
  - Need for effective risk-based supervision and effective, proportionate and dissuasive sanctions.
  - Improve quality of suspicious transaction reports (STRs) and enhance capacities of the Service for Prevention and Fight against Money Laundering.
  - Adopt Law on Sanctions for violations of ML/TF rules by end-2019 and initiate new National ML/TF Risks Assessment.
  - Develop new guidelines for AML/CFT information exchange and new IT reporting system for suspicious transactions.

### Program assessment, financing, conditionality, and next steps
- Staff supports:
  - Completion of combined fourth and fifth reviews under ECF/EFF.
  - Completion of the inflation consultation.
  - Extension of arrangements to March 20, 2020.
  - Addition of a sixth program review based on end-December 2019 quantitative performance criteria and new structural benchmarks.
  - Rephasing of outstanding program purchases with SDR 33.6 million and SDR 14.4 million to be disbursed at the combined fourth/fifth and sixth reviews, respectively.
- External financing and gaps:
  - External financing gap estimated at US$171 million in 2019 to be fully covered by:
    - Resumption of EU’s MFA and budget grants totaling US$124 million (of which up to US$71 million set aside for MFA budget support grants and loans).
    - Fund disbursement of SDR 33.6 million (US$ 46.5 million), of which SDR 20.1 million (US$27.9 million) disbursed for budget support (ECF: SDR 6.7 million and EFF: SDR 13.4 million).
  - External financing gap in 2020 of US$132 million to be financed mainly by EU funds (US$72 million) and World Bank DPO (US$40 million), residual closed via SDR 14.4 million (US$20 million).
  - External financing would allow reserves to reach the top of the Fund’s ARA metric by end-2019 (165 percent of the metric).
- Program conditionality and structural measures:
  - Six prior actions for fourth/fifth reviews (listed exactly in source).
  - One structural benchmark reset: MICB exit temporary administration by end-December.
  - Four new SBs: end-October gas tariffs; end-October amendment of non-bank credit organization legislation; end-December proposal/adoption of date/action plan for automatic exchange of information with OECD Global Forum; end-December adoption of FX intervention strategy.

### Debt sustainability, carrying capacity, and risk assessment
- Debt carrying capacity:
  - Composite Indicator (CI) = 3.34 → strong debt-carrying capacity.
- Applicable thresholds (as presented):
  - PV of debt in % of Exports: 70
  - PV of total public debt in percent of GDP: 240
  - Debt service in % of Exports: 55
  - Debt service in % of Revenue: 21
  - TOTAL public debt benchmark (percent of GDP): 23
- Baseline projections and selected figures:
  - PV of PPG external debt-to-GDP: 12.1 percent in 2019, 13.4 percent by 2029.
  - Moldova expected to meet Fund repayment obligations; obligations to the Fund peaked at 0.9 percent of GDP in 2017 and projected to decline to 0.2 percent by 2024.
  - Payments to the Fund estimated at 2.1 percent of exports of goods and services in 2019 and projected to decline to below 1 percent by 2024.
- Public and publicly guaranteed debt: 30.6 percent of GDP (total public and publicly guaranteed debt: US$3,394.7 mln).
  - A. Domestic debt: US$1,456.0 (12.9% of GDP).
    - Domestic marketable debt: US$461.6 (4% of GDP).
    - T-bills: US$323.5 (3% of GDP).
    - Bonds: US$138.1 (1% of GDP).
  - B. External debt: US$1,938.6 (17.5% of GDP).
    - Central Government external: US$1,689.0 (15.2% of GDP).
    - NBM debt to IMF: US$217.8 (2.0% of GDP).
- Debt sustainability indicators (select):
  - Public sector debt (percent of GDP): 2019: 31.5; 2020: 32.3; 2024: 32.5; 2039: 31.5.
  - PV of public debt-to-GDP ratio: 2019: 26.2; 2024: 26.2; 2039: 27.9.
  - Risk of external debt distress: Low.
  - Overall risk of debt distress: Low.
- Stress tests:
  - Under baseline and alternative scenarios, all external debt indicators remain below policy-relevant thresholds.
  - Extreme shock (growth shock) substantially raises indicators but does not breach thresholds under presented scenarios.
- Policy recommendations:
  - Pursue prudent fiscal policy; improve debt statistics and debt management frameworks; lengthen average maturity of domestic debt; develop domestic debt market; continue structural reforms to increase growth potential and reduce vulnerability to shocks.

### TMU, program monitoring, and reporting requirements
- Quantitative performance criteria cover:
  - Floor on NIR of NBM.
  - Ceiling on augmented overall cash deficit of general government.
  - Ceiling on accumulation of external payment arrears (continuous).
  - Ceiling on absorption by government of losses/liabilities and payments on behalf of utilities/companies (continuous).
- Indicative targets include:
  - Ceiling on general government wage bill.
  - Floor on priority social spending.
  - Ceiling on stock of accumulated domestic government arrears (continuous).
  - Floor on project spending funded from external sources.
- Program exchange rate and cross rates:
  - Program exchange rate of MDL/US$ set at 19.8698 MDL/US$ (official rate as of June 30, 2016).
  - Cross rates listed: 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.
  - Holdings of monetary gold valued at US$1,320.75 per one troy ounce.
- NIR adjustment rule:
  - Floor on NIR lowered by shortfall in official external grants and loans at equivalents of US$77 million and US$47 million respectively.
  - NIR targets adjusted by surplus/shortfall in IMF budget support purchases.
- Reporting schedule (selected):
  - Fiscal data: Monthly, within three weeks of end of month.
  - Monetary survey of NBM: Weekly, within one week of end of week.
  - Financial position of commercial banks: Monthly, within four weeks of end of month.
  - FX market data: Daily, within 12 hours of end of day.
  - CPI: Monthly, within two weeks of end of month.
  - National accounts: Quarterly, within three months of end of quarter.
- Adjusters:
  - Augmented overall cash deficit adjusted upward by cash paid for maintaining financial sector stability or face value of government securities issued for same purpose.
  - Upward adjustment for shortfall in programmed budget support from external donors capped at equivalent of MDL 721.3 million for 2019 (valued at program exchange rate).

### Key macro projections and outlook (select numeric entries preserved)
- Real GDP growth: 4 percent in 2018; 3.5 percent in 2019; about 3.8 percent thereafter (medium term).
- CPI inflation: averaged 3.1 percent in 2018; expected to temporarily overshoot upper bound and return to 5 percent by mid-2020; projected towards 7.5 percent by end-2019 and stabilize at 5 percent afterwards.
- Unemployment: projected to remain low at 3.0 percent.
- Current account deficit: over 10 percent of GDP in 2018; expected 9.5 percent of GDP in 2019; below 7 percent in the medium term.
- External financing needs and coverage:
  - External financing need in 2019: US$171 million.
  - External financing gap in 2020: US$132 million.
- Monetary policy parameters referenced: Upper bound(6.5), Lower bound (3.5), NBM target (5.0).
- Amended augmented cash deficit ceiling: MDL 6,219 million, equivalent to 3.0 percent of GDP (prior action).
- Selected financial soundness indicators (May 2019 unless stated otherwise):
  - Capital adequacy ratio: 26.3 percent.
  - Liquid instruments: Over 51.6 percent of assets.
  - NPLs: 10.9 percent across the banking system.
- Public and publicly guaranteed debt: 31.5 percent of GDP in 2019.

*Source: Moldova program documentation (excerpts) as presented in the supplied content unit.*

### 1. Hotels, Restaurants, and Cafes (HORECA) – Trends and Policy Considerations __________________ 9

### 1. Hotels, Restaurants, and Cafes (HORECA) – Trends and Policy Considerations

### Overview and industry structure
- HORECA accounts for about 1 percent of formal employment (of which about 80 percent is in restaurants).
- By comparison, HORECA accounts for about 4 percent of employment in Romania.
- The restaurant sector is expanding, with annual employment growth averaging about 4.5 percent in 2017–19, underpinned by robust domestic demand.

### Employment and wages
- Average wage in the sector has grown by almost a half since 2016.
- Sector wage growth outpaced economy-wide wage growth by 20 percentage points.
- The sector’s average wage reached about 70 percent of the economy-wide level, compared to 60 percent ratio in Romania.

### October 2018 tax changes (context)
- The VAT rate applicable to HORECA industries was halved to 10 percent from the standard rate.
- The industry also benefitted from the economy-wide PIT and SSC rate cuts.
- Broader tax-package effects noted elsewhere in the document include: an introduction of a flat-rate PIT system (revenue loss of 0.5 percent of GDP) and a cut in private employers’ social security contribution rates (0.8 percent of GDP).

### Outcomes of tax changes and de-shadowing attempt
- Wage-related tax policy measures did not lead to a material de-shadowing of labor in the industry:
  - Growth of the Health Fund contributions—unaffected by policy changes—indicates no level or trend shift in the tax base.
- De-shadowing of sales did not pay off considering VAT revenue loss:
  - Post-reform weighted average VAT rate on sales declined from about 19 to 13 percent.
  - Average VAT rate on inputs remained at about 19 percent.
  - Despite strong growth of sales, VAT due to the budget has dropped by 60 percent.
  - The stock of VAT input tax credit surged from the average of about 5 percent of turnover to almost 20 percent.

### Fiscal and business implications
- For businesses that operate under relatively thin margins, carrying a large stock of tax credits is costly in terms of profitability.
- A large stock of tax credits can also encourage the rise of informality.
- The observed patterns imply that the VAT reduction and wage-related tax cuts did not deliver the intended de-shadowing benefits while imposing fiscal costs through lower VAT remittances.

*Source: IMF — Box 1, "Hotels, Restaurants, and Cafes (HORECA) – Trends and Policy Considerations", 1mdaea2019002.*

### 13. To contain fiscal risks, the

### 13. To contain fiscal risks, the

### Fiscal adjustments and amended 2019 budget
- Authorities adopted in August amendments to the 2019 budget consistent with the augmented general government deficit of 3 percent of GDP (prior action).
- The amended deficit target is tighter than 3.3 percent of GDP envisaged in the approved budget.
- The amended budget updated for 2019H1 revenue trends and introduced new measures.
- Expenditure-side measures (0.6 percent of GDP):
  - Redistributed gains from savings on employee vacancies in the budget sector to cover higher wage bill needs from local governments.
  - Reduced net on-lending to SOEs in line with expected project disbursements.
  - Rationalized capital spending to reflect lower execution during 2019H1.
- Revenue-side measures (0.1 percent of GDP):
  - Increased excises for heat-not-burn and fine-cut tobacco products.
  - Reduced exemptions on income from lotteries and sports betting.
  - Limited tax-free sales at duty-free shops to travelers leaving Moldova by sea or air.
  - Removed tax exemptions on petroleum products sold in the customs control area.

### Revenue mobilization and 2020 measures
- Amendments to the Tax and Customs Codes were adopted in August (prior action) to raise revenue on CIT, PIT, VAT, excises, and property taxes and rationalize tax expenditures; effective January 1, 2020.
- Specific changes:
  - Broadened the capital gains tax base.
  - Increased the VAT rate for HORECA.
  - Phased out the personal allowance for higher incomes.
  - Removed tax exemptions applied to meal vouchers provided by employers.
  - Removed VAT exemptions on goods imported by PPPs.
  - Unified excise duty rates for cigarettes with and without filter.
  - Consolidated environmental taxes.
  - Increased PIT rates on tax withheld in advance.
  - Reduced tax-free personal exemptions on merchandise shipped by mail.
- Expected revenue yield: about 0.3–0.6 percent of GDP in revenue; these amounts are not presently included in staff’s projections due to costing ambiguity.
- An agreement on the 2020 budget, inclusive of these measures and consistent with program objectives, will be a key precondition for the final program review.

### Tax administration and compliance measures
- Tax Code amended (prior action) to:
  - Withdraw provisions that provided for the deduction of up to MDL 500,000 from the indirect method assessment of estimated taxable income.
  - Sunset the carryover provision from the 2012 “capital liberalization scheme”.
- Capital and tax amnesty law amended (prior action) to allow the State Tax Service (STS) to perform audits and exercise its investigative functions prior to January 1, 2018.
- Authorities will formally propose a date for the automatic exchange of information with the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes (new end-December SB), with a view to start the automatic exchange of information with other countries by end-2022.

### Wage bill control and budgetary staffing
- Authorities recognize need to strengthen the unified wage system in the budgetary sector and improve control over the wage bill.
- Commitments:
  - Adopt a time-bound plan to phase out multiple reference values to improve budgetary process and medium-term planning.
  - Develop and operationalize a comprehensive IT-based staff registry.

### Institutional fiscal frameworks and public investment management
- Staff recommended:
  - Integrate findings from spending reviews (education and agriculture sectors) into the medium-term budget framework and annual budget processes.
  - Expand the fiscal risk statement to improve coverage, monitoring, and reporting of risks emanating from SOEs and PPPs.
  - Develop a comprehensive strategy to strengthen public investment management, supported by forthcoming IMF technical assistance, to improve the efficiency of public investment and scale up public infrastructure.

### Financial sector: banking reforms and non-bank risks (summary)
- Ownership improvements in banks supported credit recovery:
  - Sale of VictoriaBank shares to a Romanian banking group in January 2018.
  - MAIB stake sold to an EBRD-led consortium in October 2018.
  - Majority shares of MICB sold to a Bulgarian non-bank investor in March 2019.
  - NBM suspended legal rights of shareholders acting in concert in two non-systemic banks and appointed a temporary administrator in one bank (January 2019).
- Result: revival of credit with total lending registering double-digit growth for the first time since 2016.

### Unwinding related-party exposures and CSD
- Time-bound action plans for unwinding related-party exposures were approved (end-July 2018 SB).
- By end-April, four out of seven banks had aligned exposures with prudential limits; remaining banks continue reductions.
- Regulations updated to calculate related-party exposures net of loan-loss provisions.
- Central Securities Depository (CSD) is fully operational; legal records of shares of banks and insurance companies transferred to the CSD in May.
- Records of joint-stock companies traded at the exchange and all other joint stock companies to be transferred by end-2019 and 2020, respectively.

### Financial safety net and deposit insurance
- Deposit Guarantee Fund governance strengthened; coverage limit raised to MDL 50 thousand (about 31 percent and 97 percent of total deposits and depositors, respectively).
- Coverage expanded to legal entities effective January 1, 2020.
- National Financial Stability Committee held inaugural meeting in January 2019.

### Risks in the non-bank financial sector
- Non-bank risks rising: sharp increase in lending by microfinance organizations exploiting regulatory arbitrage.
- Concerns: weak supervisory capacity, absence of mandatory credit history checks, ineffective consumer protection mechanisms, non-transparent UBOs, opaque non-resident funding.
- Potential spillovers to banking sector via confidence and funding channels.

### Policies to address banking and non-bank sector risks
- MICB’s exit from temporary administration expected once adequate governance structures are in place (end-December SB, reset from end-October 2018); NBM to ensure prudent management and enhanced monitoring of related-party exposures and cross-border transactions.
- Removing unfit shareholders in domestic non-systemic banks (end-March SB); NBM rejected request to extend sale deadline in July, triggering cancellation of problem shares (prior action).
- NBM’s operational framework for emergency liquidity assistance (ELA) strengthened via amendments to the NBM Act and other legislation approved in August (prior action); ELA can be extended only to solvent and viable banks; modified ELA framework expected to be implemented before end-2019.
- Legislation governing activities of non-bank credit organizations to be amended (new end-October SB) to:
  - Prohibit them from accepting deposits from the public, per provisions of the Law on Bank Activity.
  - Oblige them to report new credit activity to credit bureaus.
  - Introduce limits on total cost of consumer credits.
  - Introduce an effective, proportionate, and dissuasive sanctioning regime.
- Staff urged implementation of risk-based supervision and strengthening of ownership transparency, governing bodies, asset classification, risk management, and internal control frameworks.
- Review NCFM capacity to strengthen regulatory framework and supervisory capacity.

### Monetary and exchange rate policy
- NBM tightened monetary policy in June and again in July; policy rate raised by 100 basis points to 7.5 percent.
- Required reserve ratio on banks’ convertible currencies raised by 3 percentage points to 17 percent; reserve requirement on nonconvertible currencies unchanged at 42.5 percent.
- NBM reduced its footprint in the foreign exchange market following leu oscillations in 2019.
- Policy recommendations:
  - NBM should stand ready to adjust policy rate further as needed to maintain inflation within the corridor.
  - Adopt a less accommodative stance given expected inflationary pressures from expansionary fiscal impulse, nominal currency fluctuations, and adjustments to regulated prices.
  - Support with greater exchange rate flexibility; FX interventions limited to smoothing excessive volatility and maintaining adequate reserve coverage.
  - Strengthen inflation-targeting operational framework by:
    - Adhering to the policy rate as primary tool.
    - Gradually recalibrating reserve requirement ratios on domestic and foreign currency to disincentivize foreign currency intermediation while monitoring liquidity.
    - Adopting an FX intervention strategy consistent with the inflation targeting regime (new end-December SB).
  - Strengthen public communication to improve market signaling and policy credibility.
- Emphasis on protecting NBM’s policy and institutional independence given recent incidents of political pressure.

### Structural reforms: energy, asset recovery, and AML/CFT
- Energy sector:
  - 2019 tariffs were delayed despite electricity tariffs being set in line with the new methodology and published June 29, 2018 (end-June 2018 SB).
  - Regulator failed to promptly approve 2019 gas tariffs against higher-than-expected import costs, political developments, and changes to regulator management.
  - Authorities committed to regular reviews of energy tariffs; by end-October adopt:
    - New electricity tariffs based on the February 2018 methodology.
    - Gas tariffs based on the existing methodology and purchase price of natural gas (new end-October SB).
  - Regular updates to eligibility and benefit parameters of targeted social assistance programs (Ajutor Social and Heating Allowance) to mitigate adverse effects of tariff increases on vulnerable households.
- Recovery of stolen assets from the 2014 banking fraud:
  - By end-March 2019, recovered assets in proceeds from bank liquidation and confiscation of assets of convicted persons were MDL 3.1 billion vs. MDL 8.7 billion under investigation.
- AML/CFT framework:
  - Need to ensure AML/CFT supervision is effectively risk-based and sanctions are effective, proportionate and dissuasive.
  - Improve quality of suspicious transaction reports (STR) filed by reporting entities.
  - Enhance capacities and resources for the Service for Prevention and Fight against Money Laundering to analyze STRs.
  - Authorities encouraged to address deficiencies and implement recommendations in relation to MONEYVAL’s 2019 comprehensive AML/CFT assessment, expected to be published following the July Plenary.

*Source: 1mdaea2019002 - 13. To contain fiscal risks, the*

### 34. The new government signaled strong commitment to investigating the 2014 bank

### 34. The new government signaled strong commitment to investigating the 2014 bank

### Investigation, asset recovery, and coordination
- Authorities plan to initiate an international investigation to prosecute the perpetrators of the 2014 bank fraud.
- By end-October, authorities intend to evaluate modalities to recover stolen proceeds, including engaging independent international legal and forensic experts.
- Staff urged to step up coordination among all relevant stakeholders, including the NBM, the Prosecutor’s office, the National Anticorruption Center, Criminal Asset Recovery Agency, and the AML agency.
- Staff notes that decisive progress on the long-delayed process of asset recovery is critical to regain public trust in state institutions.

### AML/CFT framework and related reforms
- Authorities committed to strengthening Moldova’s AML/CFT framework, including by implementing the 2018 AML Law and MONEYVAL recommendations.
- By end-2019, plan to adopt the Law on Sanctions for violations of ML/TF rules, developed in coordination with the Council of Europe and European Union.
- Plans include engaging international partners to initiate a new National ML/TF Risks Assessment.
- Development of new guidelines for exchange of AML/CFT information among relevant stakeholders and a new IT system for reporting suspicious transactions for all types of reporting entities.
- Recommendation to leverage AML tools such as enhanced due diligence for politically exposed persons to detect and deter corruption.

### Governance, anti-corruption, and institutional strengthening
- Efforts to enhance governance and anti-corruption measures expected to improve the business climate and level the playing field.
- Independence and capacities of anti-corruption institutions, including the National Integrity Authority, should continue to be enhanced.
- Strengthening the asset declaration system (scope of ownership information and timely and credible verification) should be prioritized.

### Program modalities, timing, and financing
- Staff supports: completion of the inflation consultation, extension of current arrangements, and rephasing of access.
- Support for (i) extension of the ECF/EFF arrangements to March 20, 2020; (ii) addition of a sixth program review based on end-December 2019 quantitative performance criteria and new structural benchmarks; and (iii) rephasing of outstanding program purchases with SDR 33.6 million and SDR 14.4 million to be disbursed at the time of the combined fourth/fifth and sixth reviews, respectively.
- Reprofiling reflects changes in Moldova’s BOP needs due to expected timing of World Bank Development Policy Operation disbursement.
- Program remains fully financed with firm financing assurances for the remainder of the program period and the next 12 months.
- External financing gap estimated at US$171 million in 2019 will be fully covered by:
  - Resumption of disbursement of EU’s MFA and budget grants totaling US$124 million (of which up to US$71 million set aside for MFA budget support grants and loans);
  - Fund disbursement of SDR 33.6 million (US$ 46.5 million), of which SDR 20.1 million (US$27.9 million) disbursed for budget support (ECF: SDR 6.7 million and EFF: SDR 13.4 million).
- External financing would allow reserves to reach the top of the Fund’s ARA metric by end-2019 (165 percent of the metric).
- In 2020, external financing gap of US$132 million will be financed mainly by EU funds (US$72 million) and the World Bank’s Development Policy Operation (US$40 million), with the residual gap closed via a disbursement equivalent to SDR 14.4 million (US$20 million) under the ECF/EFF.

### Program conditionality, benchmarks, and structural measures
- Six prior actions for completion of the fourth/fifth reviews:
  - (i) adoption of amendments to the 2019 budget consistent with the augmented general government deficit ceiling;
  - (ii) approval of amendments to the Tax and Customs Codes (effective January 1, 2020) to rationalize tax expenditures and raise revenues;
  - (iii) approval of amendments to the Tax Code to remove provisions for the deduction of up to MDL 500,000 from the indirect method assessment of estimated taxable income, and to sunset by 2022 the carryover provision from the 2012 capital liberalization scheme;
  - (iv) approval of amendments to the 2018 Capital and Tax Amnesty Law to remove the provision that STS cannot perform audits prior to January 1, 2018;
  - (v) approval of amendments to the NBM Act and other laws to ensure that ELA is extended only to solvent banks;
  - (vi) removal of unfit shareholders in two domestic non-systemic banks.
- One structural benchmark (SB) proposed to be reset: the systemic bank (MICB) is expected to exit temporary administration in an orderly manner by end-December.
- Four new SBs proposed to support structural reform in 2019:
  - End-October: adoption of 2019 gas tariffs;
  - End-October: amendment of legislation governing activities of non-bank credit organizations;
  - End-December: proposal of a date and adoption of an action plan for automatic exchange of information with the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes;
  - End-December: adoption of an FX intervention strategy to facilitate two-way exchange rate flexibility and reduce the NBM’s market footprint, consistent with IMF technical assistance.

### Debt, reserves, and risk assessment
- Moldova expected to meet its repayment obligations to the Fund and remains at low risk of debt distress.
- Obligations to the Fund peaked at 0.9 percent of GDP in 2017 and are projected to decline to 0.2 percent by 2024.
- Payments to the Fund are estimated at 2.1 percent of exports of goods and services in 2019 and are projected to decline gradually to below 1 percent by 2024.
- Risks to the program remain high but are mitigated by strong prior actions, adequate buffers, and normalization of relations with donors.
- Authorities cognizant of risks from reform fatigue or resurgence of domestic political instability.
- Moldova’s external reserve buffer described as adequate to safeguard against abrupt external adjustment in the event of intensification of spillovers from regional geopolitical and global trade tensions.

### Staff appraisal—macroeconomic policy priorities and structural reforms
- Pre-election policy reversals have been addressed and program is back on track to achieve objectives, but macro-financial vulnerabilities and structural impediments remain significant.
- Critical that prudent and well-coordinated macroeconomic policies are pursued, and reforms continue, notably to:
  - Complete the cleansing of the financial sector;
  - Improve governance and strengthen institutional frameworks;
  - Ensure transparency and predictability in the energy sector.
- Financial sector progress noted: measures to secure shareholder transparency, fitness, and probity; improved supervision and regulatory frameworks; unwinding bank related-party exposures; strengthening financial safety nets.
- Remaining critical steps: exit of the second largest bank from temporary administration; addressing rising risks in the non-bank financial sector; improving the AML/CFT framework.
- Fiscal stance: amended 2019 budget and measures to rationalize tax expenditures and raise revenue help mitigate immediate fiscal pressures; strong implementation and monitoring of revenue performance emphasized.
- Need to avoid policy reversals, carefully cost new initiatives, strengthen tax administration and compliance, streamline tax expenditures, and reduce risks from SOEs and PPPs.
- Recommendation to develop a comprehensive strategy to strengthen public investment management to improve efficiency of public investments and scale up public infrastructure.
- Monetary policy recommendations:
  - Continue focus on maintaining price stability within a flexible exchange rate regime;
  - Reinstate the policy rate as the primary signal of stance of monetary policy and stand ready to adjust it as needed;
  - Gradually recalibrate the reserve requirement framework to favor intermediation in domestic currency;
  - Limit FX intervention to smoothing excess volatility;
  - Strengthen the NBM’s operational capacity, decision-making, coordination across agencies, and internal and external communication.
- Safeguarding the NBM’s independence is critical; political decision makers should refrain from initiatives that weaken the NBM’s operational independence or governance framework.
- Progress on governance and anti-corruption critical for boosting long-term growth and unlocking Moldova’s economic potential by addressing structural bottlenecks such as weak bank intermediation, non-transparent energy policy, and an uncompetitive business environment.

*REPUBLIC OF MOLDOVA — INTERNATIONAL MONETARY FUND (excerpt).*

### 48. In  light of progress so far and the  authorities’ policy commitments, staff supports the

### 1mdaea2019002 - 48. In  light of progress so far and the  authorities’ policy commitments, staff supports the

### Program assessment and staff recommendation
- Staff supports:
  - completion of the fourth and fifth reviews under the ECF/EFF-supported program,
  - completion of the inflation consultation,
  - the extension of arrangements, and
  - the rephasing of access.
- Rationale:
  - The program remains broadly on track, with strong ownership.
  - The firm commitment by the new government to sound economic management and ongoing reforms warrants continued Fund support.
- Acknowledged caveat:
  - While risks to the program remain, continued Fund support is warranted given progress and policy commitments.

### Real sector developments
- Broad messages extracted from Figure 1:
  - Growth remains solid.
  - Domestic demand strengthened in 2018.
  - Exports rebounded in early 2019.
  - The labor market continues to tighten (unemployment rate, real wage growth, employment growth shown in indicators).
  - Growth in key trading partners projected to slow, which should weigh on remittance inflows.
- Selected numeric indicators shown (as presented in figures and tables):
  - Real GDP growth line and contributions to growth illustrated across 2010–19 (visual charts in source).

### Money, prices, and interest rates
- Inflation dynamics (from Figure 2):
  - Inflation recovering after dipping below the lower bound.
  - Rebound driven by food and core inflation; contributions broken down by food, fuels, regulated services & medicine, and other.
  - Policy framework references: Upper bound(6.5), Lower bound (3.5), NBM target (5.0).
- Monetary policy and market rates:
  - Policy tightening and reserve requirement recalibration have started.
  - These measures should feed through to market interest rates (charts show NBM base rate, MDL required reserve ratio, FX required reserve ratio; interest rates on new NC deposits, new loans, 3-month T-bill yield).
- Financial intermediation:
  - Lending picking up as financial sector cleanup progresses.
  - Reduced NBM intervention in recent months (NBM's net FX purchases and exchange rate shown).

### Fiscal developments
- Key messages from Figure 3 and Tables 3a/3b:
  - Rising revenues likely partially reflect improved tax administration.
  - External grants have been on a declining path.
  - Expenditures underperformed largely due to under-execution of capital spending.
  - Public investments remain sub-par, hindering the ability to meet urgent developmental needs.
  - Government deficit overperformed relative to some targets, while public debt remained manageable.
- Selected budget aggregates (as reported):
  - Revenues and grants, Expenditure and net lending, Current expenditure, Capital expenditure and Transfers illustrated in Tables 3a/3b (detailed fiscal tables provided in source).

### Banking sector developments
- High-level findings from Figure 4 and financial soundness tables:
  - Strong delivery by the authorities on financial sector commitments under the program are starting to pay off.
  - Financial soundness indicators remain strong (assets-to-GDP, capital adequacy, liquidity).
  - Lending to the economy is picking up as banks regain health.
  - Profitability indicators are steady (ROA, NIM, ROE).
  - Gradually improving NPL ratios, notably for banks previously under NBM surveillance and for foreign banks.
- Supporting numeric and trend indicators are shown in the source figures and Table 7.

### External sector developments
- Key points from Figure 5 and Tables 2a/2b:
  - Both the NEER and REER appreciated since 2017.
  - The current account deficit widened notably for the second year in a row as import demand remained broadly strong while exports slowed.
  - Reserve adequacy metrics are broadly favorable.
  - Insignificant changes to Moldova’s net IIP overall.
- Balance of payments and reserve metrics:
  - Current account balance (levels and percent of GDP) and merchandise trade balance are reported in Tables 2a/2b.
  - Gross official reserves and months of imports series are provided in the tables and figures.

### Key cross-cutting statistics and program numbers (as presented)
- Monetary policy parameters shown explicitly in figures: Upper bound(6.5), Lower bound (3.5), NBM target (5.0).
- Fiscal and external aggregates, and time series for GDP, inflation, reserves, credit, and balance of payments are presented in Tables 1, 2a/2b, 3a/3b, 4, and 5 (source contains detailed numerical series and projections).

### Policy implications and next steps (as supported by staff)
- Complete the fourth and fifth reviews under the ECF/EFF-supported program.
- Complete the inflation consultation.
- Approve the extension of arrangements and rephasing of access to continue Fund support, given progress and authorities’ commitments.
- Continue monitoring risks to the program and implementation of ongoing reforms, including fiscal consolidation, public investment execution, financial sector cleanup, and external vulnerabilities.

*Source: IMF staff report and associated figures and tables for the Republic of Moldova (as provided in the supplied content).*

### Appendix I.  Letter of Intent

### Appendix I.  Letter of Intent

### Government commitments and reform priorities
- Complete clean-up of the financial sector, including transfer of control of the last of the three systemic banks to a fit and proper investor by end-2019, removal of unfit shareholders in domestic non-systemic banks, and strengthening the AML/CFT regime.
- Mitigate risks arising from the non-bank financial sector.
- Maintain sustainable fiscal policy while protecting priority spending; priorities include:
  - Mobilizing domestic resources.
  - Broadening the tax base.
  - Strengthening tax administration and tax compliance.
  - Enhancing public investment management.
  - Improving allocation of social spending.
- Strengthen the NBM’s monetary policy framework, guided by its inflation targeting regime and underpinned by exchange rate flexibility.
  - Reinforce the NBM’s emergency liquidity assistance framework.
  - Refrain from any initiative that would undermine the NBM’s institutional and policy independence.
- Accelerate efforts to recover assets stolen in the 2014 bank fraud:
  - Engage international partners to investigate and prosecute perpetrators.
  - Engage independent and reputable asset recovery experts to recover stolen assets.
- Pursue a predictable and transparent energy tariff policy based on sound methodologies and enforced by an independent and professionally qualified regulator.

### Requests to the IMF and program adjustments
- Request the following on the basis of performance to date and prior actions:
  - (i) Completion of the combined fourth and fifth reviews under the Extended Credit Facility and Extended Fund Facility arrangements.
  - (ii) Completion of the inflation consultation.
  - (iii) Extension of the arrangements to March 20, 2020.
  - (iv) Addition of a sixth program review based on end-December 2019 quantitative performance criteria (Table 1) and new structural benchmarks (Table 2).
  - (v) Rephasing of the outstanding program purchases with SDR 33.6 million and SDR 14.4 million to be disbursed at the time of the combined fourth/fifth and the sixth reviews, respectively.
- Commitment to consult with the Fund in advance on the adoption of additional measures and to provide requested information to assess program implementation.
- Consent to publication of this letter, the attached SMEFP, and accompanying Executive Board documents on the IMF’s website.

### Recent economic developments and outlook
- Political: Transition of power to the new government peacefully achieved; urgent steps to correct policy slippages, strengthen democratic institutions, and restore international support.
- Growth and inflation:
  - Real GDP grew by 4 percent in 2018.
  - CPI inflation averaged 3.1 percent in 2018.
  - Forecast: growth at 3.5 percent in 2019 and around 4 percent thereafter.
  - CPI inflation expected to temporarily overshoot the upper bound of the NBM’s target variation interval towards end-2019 and to return to the NBM’s 5 percent target by mid-2020.
- External and fiscal:
  - External trade deficit continued to widen as imports significantly outpaced growth of exports.
  - Robust financial account inflows facilitated accumulation of international reserves despite leu appreciation through 2018.
  - 2018 fiscal balance: augmented overall deficit undershot program target by 2 percent of GDP due to stronger-than-projected revenues and significant under-execution of capital spending.
  - Public debt declined to about 30 percent of GDP.

### Financial sector assessment and actions taken
- Banking sector resilience and soundness indicators (May 2019 unless stated otherwise):
  - Capital adequacy ratio at 26.3 percent.
  - Over 51.6 percent of assets held in liquid instruments.
  - Nonperforming loans (NPLs) at 10.9 percent across the banking system.
- Regulatory reform progress:
  - Law on Bank Activity (transposing EU CRD IV/CRR) in force since January-2018.
  - First COREP reports presented in August 2018; first ICAAP reports in April 2019.
  - Regulation on large exposures entered into force in June 2019; related parties regulation updated.
  - Regulations on banking supervision enacted: SREP (February 2019) and organization of on-site inspections (January 2019).
  - Regulation on consolidated bank supervision undergoing public consultation review.
  - Recognition by the European Banking Authority among non-EU jurisdictions with confidentiality regimes equivalent to EU CRD IV.
- Rehabilitation of systemic banks:
  - Victoriabank: transfer of control concluded; special supervision regime lifted in August 2018. Banca Transilvania and EBRD jointly hold a controlling stake of 66.7 percent.
  - Moldova-Agroindbank: sale of 41.1 percent of shares to consortium (EBRD, Horizon Capital, AB Invalda) in July 2018; special supervision lifted in April 2019.
  - Moldindconbank (MICB): acquisition of controlling 63.89 percent stake in February 2019 by Doverie United Holding; consolidated majority stake to 77.62 percent after mandatory tender; Supervisory Board elected June 28, 2019 and submitted for NBM review and confirmation.
  - Commitment to ensure fit-and-proper certification of incoming managers and orderly exit from temporary administration.
- Actions on non-systemic banks and related exposures:
  - Detailed investigations of shareholders of all domestic non-systemic banks; suspensions and temporary administration applied where warranted (January 2019 prior action).
  - Time-bound action plans adopted in July 2018 for domestic banks not part of foreign groups; as of May 2019, three out of seven banks brought exposures in line with prudential limits; remaining banks reduced exposures per action plans.
  - Regulation updated to calculate related-party exposures net of loan loss provisions for prudential requirements.
- Safety nets and market infrastructure:
  - Deposit Guarantee coverage limit raised to 50 thousand lei and coverage expanded to legal entities (effective January 1, 2020).
  - Strengthened governance and operational capacity of the Deposit Guarantee Fund; Supervisory Board appointed.
  - Law on National Financial Stability Committee adopted; inaugural meeting on January 23, 2019.
  - Central Securities Depository (CSD) fully operational:
    - Began operations end-July 2018 with transfer of public debt securities.
    - Transfer of registers of bank and insurance companies completed in May 2019.
    - Shareholder records in joint-stock companies traded at Moldova Stock Exchange to be transferred to CSD by end-2019; all other joint stock companies by end-2020.

### Near-term financial sector actions and structural benchmarks
- Legislative and supervisory enhancements:
  - Amend the Law on the NBM, the Law on Bank Activity, and other relevant legislation to ensure NBM’s supervisory function is unhindered.
  - Strengthen NBM governance and independence; grant broader and stronger legal powers and legal protection for NBM staff.
- MICB exit from temporary administration:
  - NBM will allow MICB to exit temporary administration in an orderly manner (end-December 2019 structural benchmark, reset from end-October 2018) once adequate governance structures are in place.
  - NBM to enforce rigorous professional standards for new management and enhanced monitoring of related party exposures and cross-border transactions.
  - Supervisory powers (e.g., dividend payout restrictions) to be exercised based on supervisory judgment.
- Clean-up of ownership in two domestic non-systemic banks:
  - NBM adopted decisions requesting removal of unfit shareholders in two domestic non-systemic banks (prior action).
  - Implement sequential share price reduction mechanism for newly issued shares to attract sound investors and ensure fit-and-proper qualifications.
- Continued enforcement of time-bound unwinding plans for related party exposures and prudential effectiveness of regulation on banks’ transactions with related parties.
- Emergency liquidity assistance (ELA) and crisis-preparedness:
  - Approve amendments to the Law on the NBM and other relevant legislation to ensure ELA is extended only to solvent banks (prior action).
  - Adopt related secondary legislation and implement modified ELA operational framework before end-2019.
  - Fully operationalize the National Financial Stability Committee and improve policy coordination.

### Non-bank financial sector measures
- Non-bank credit organizations (structural benchmark, end-October 2019):
  - Amend legislation governing activities of non-bank credit organizations to:
    - (i) Prohibit such entities from accepting deposits from the public, as per provisions of the Law on Bank Activity.
    - (ii) Oblige non-bank credit organizations to report new credit activity to the credit bureaus.
    - (iii) Introduce limits on total cost of consumer credits.
    - (iv) Introduce an effective, proportionate, and dissuasive sanctioning regime.
  - Enhance risk-based supervision and adopt regulations to strengthen ownership transparency, governing bodies, asset classification, risk management, and internal control frameworks.
- Insurance sector:
  - Implement recommendations of the World Bank’s 2018 diagnostics mission.
  - Tighten regulatory requirements and enhance supervision of capital adequacy and solvency, reserving, and asset valuation.
  - Take appropriate actions against insolvent companies and imprudent business practices.
  - In collaboration with the World Bank, develop and adopt a legislative framework to shift from compliance-based to risk-based supervision over the medium-term.

### Monetary and exchange rate policies
- Inflation developments:
  - CPI inflation slowed to 0.9 percent in December 2018—0.1 percentage point below the outer band of the consultation clause—before rising to 2.2 percent in the following month.
  - NBM judged it appropriate not to ease monetary policy despite the slowdown because:
    - (i) monetary policy operates with lags and would have mostly affected 2019 inflation; and
    - (ii) NBM’s forecast pointed to a sharp inflation pick-up in 2019.
- Policy stance:
  - Maintain inflation targeting regime with exchange rate flexibility as underpinning.
  - Strengthen emergency liquidity assistance framework and ensure ELA is provided only to solvent banks (prior action and legislative amendments).

*Republic of Moldova — Letter of Intent and Supplementary Memorandum of Economic and Financial Policies, September 3, 2019*

### 5.4 percent  in July, driven by a lower exchange rate at the turn of  the year and higher  regulated,

### 1mdaea2019002 - 5.4 percent  in July, driven by a lower exchange rate at the turn of  the year and higher  regulated,

### Monetary policy framework and actions
- Inflation: "5.4 percent in July, driven by a lower exchange rate at the turn of the year and higher regulated, food and tobacco price inflation."
- Policy stance:
  - The NBM’s monetary policy framework is anchored by its inflation target of "5 percent".
  - "The June 2019 policy rate increase signifies entering the monetary policy tightening phase."
  - A "policy tightening bias" is in place due to emerging inflationary pressures.
- Key near-term inflation drivers:
  - public and private sector wage growth;
  - expansionary fiscal measures unveiled over the past year;
  - exchange rate fluctuations;
  - expected adjustments to energy tariffs.
- Exchange rate policy:
  - "The NBM will not resist exchange rate movements driven by fundamentals, intervening in the foreign exchange market only to smooth excessive volatility."
  - Commitment to a flexible exchange rate as a shock absorber.
  - "The NIR targets set under the program are consistent with this commitment."
  - Structural benchmark: "develop and adopt a FX intervention strategy consistent with the inflation-targeting regime and IMF technical assistance guidance (structural benchmark, end-December 2019)."
- Operational improvements to strengthen transmission, liquidity management, and MDL intermediation:
  - "Adhere to the base rate as its primary monetary policy tool;"
  - "Gradually recalibrate the reserve requirement ratios and remuneration policy by simultaneously reducing the MDL reserve requirement ratio and increasing the reserve requirement ratio on foreign currency liabilities, to be maintained in MDL, if market conditions allow;"
  - "Allow further reductions in MDL reserve requirement ratio as structural excess liquidity normalizes."
- Communication and institutional independence:
  - Enhance policy communication to anchor inflation expectations and refine forecasting processes.
  - Establish regular information exchanges with counterparts and stakeholders.
  - Commit to refrain from initiatives that would endanger the NBM’s institutional and policy independence.
  - "Commit to not amend the law regulating the securitization of emergency loans extended by the NBM to the three failed banks."

### Fiscal policy: 2019–2020 plans and measures
- 2019 budget amendments:
  - Amended deficit ceiling: "MDL 6,219 million (prior action), equivalent to 3.0 percent of GDP."
  - Budget adjustments include:
    - redistribute gains from savings on employee vacancies to cover higher local government wage bill needs;
    - reduce net on-lending to SOEs in line with expected project disbursements;
    - rationalize capital spending to reflect lower execution in the first six months of the year;
    - increase excises for heat-not-burn and fine-cut tobacco products;
    - remove exemptions on income from lotteries and sports betting for winnings above "MDL240";
    - limit tax-free sales at duty-free shops to travelers leaving Moldova by sea or air;
    - remove tax exemptions on petroleum products sold in the customs control area.
- 2020 fiscal plans (augmented deficit of "3.0 percent of GDP"):
  - Tax and Customs Code amendments effective "January 1, 2020" (prior action) to:
    - broaden the capital gains tax base to "100 percent for legal persons and 50 percent for individuals";
    - increase the reduced VAT rate for HORECA from "10 to 20 percent";
    - remove the personal allowance for annual incomes above "MDL 360 thousand";
    - remove tax exemptions applied to meal vouchers provided by employers;
    - remove VAT exemptions on goods imported by public-private partnerships;
    - unify excise duty rates for cigarettes with and without filter;
    - consolidate environmental taxes to increase tax on plastic packaging products by "20 percent";
    - increase rates on personal income tax withheld in advance, from "7 to 12 percent";
    - reduce tax-free personal exemptions on merchandise shipped by mail to "200 euros".
- Tax administration and compliance:
  - Amend the Tax Code (prior action) to:
    - remove provisions that provide for the deduction of up to "MDL 500,000" from the indirect method assessment of estimated taxable income;
    - sunset by "2022" the carryover provision that allows offsetting expenditures exceeding reported income against cash declared under the 2012 ‘Capital liberalization scheme’.
  - Amend the 2018 Capital and Tax Amnesty Law to remove the provision that the STS cannot perform audits prior to "January 1, 2018" (prior action).
  - "Formally propose a date and adopt an action plan for the automatic exchange of information with the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes (structural benchmark, end-December 2019) with a view to start the automatic exchange of information on financial assets with other countries by end-2022."
  - Enhance the integrated taxpayer register (in collaboration with IMF and World Bank).
  - Undertake a comprehensive review of tax audits to focus on risk-based approaches and improve tax debt collection.
- State Tax Service (STS) institutional strengthening:
  - Align STS organizational structure around tax administration functions and enhance the role of the executive council.
  - Crime Establishment and Control Division to prioritize investigation of most serious tax crime cases.
- Pay and pensions:
  - Develop technical specifications for a comprehensive IT-based staff registry by "December 2019", with the registry fully operational by "end-2020".
  - Develop and adopt a time-bound plan by "mid-2020" to phase out multiple reference values in the unitary pay system.
  - Consult with the World Bank on reducing the employer social contribution rate in the private sector and "refrain from ad hoc measures that put the pension system at risk."
- Social assistance and targeting:
  - Update eligibility and benefit parameters of targeted social assistance programs (Ajutor Social and Heating Allowance) to prevent decline in coverage and maintain benefits adequacy.
  - Revisit required documents for targeted benefits and expand active labor market programs to beneficiaries.
- Fiscal institutions and public investment:
  - Integrate findings from the 2018 spending review of Higher Education and Vocational Training into MTBF and annual budget processes starting with the MTBF "2021–23".
  - Pilot a second spending review in the agriculture sector.
  - Undertake a Public Investment Management Assessment (PIMA) with IMF technical assistance.
- Fiscal risk management and arrears:
  - Expand fiscal risk statement coverage, especially risks from state-owned enterprises and PPPs.
  - Commit to eliminating audited state and local government arrears and enforce full implementation of Article 67 of the Law on Public Finances and Fiscal Responsibility.
- Domestic government bond market:
  - Ministry of Finance to enhance communication with state securities market participants and extend maturity of state securities.

### Structural reforms and governance
- Energy sector transparency and tariff policy:
  - Objective: predictable and transparent tariff policy enforced by an independent regulator.
  - Electricity sector: "adopt in October 2019 tariffs fully based on the February 2018 methodology, including: (i) the settlement of the differences in the assessment of past financial deviations from April 2017-February 2018, and (ii) the approval of the basic costs for the first financial year of the 2018 methodology."
  - Gas sector: "adopt 2019 tariffs fully based on the existing methodology and purchase price of natural gas (structural benchmark, end-October 2019)."
  - Align regulatory framework to best European practices; continue collaboration with Energy Community Secretariat and World Bank.
- Economic governance and rule of law:
  - Promote fair competition, ease business entry, ensure transparent government procurement, strengthen rule of law and regulatory quality.
  - Promote strong tax, customs, and AML/CFT frameworks; implement Moldova’s commitments under the DCFTA and the EU Association agreements.
- Asset recovery and anti-corruption:
  - Accelerate recovery of assets stolen in the 2014 bank fraud; parliamentary committee established.
  - Actions to include:
    - request international investigation and prosecution cooperation from EU and USA;
    - evaluate by "end-October" modalities to recover proceeds, including engaging independent international legal and forensic experts to initiate civil and criminal proceedings in key foreign jurisdictions, make claims against facilitators/beneficiaries, and support regulatory and law enforcement bodies;
    - step up coordination under Prime Minister among NBM, prosecutor’s office, National Anticorruption Center, Criminal Asset Recovery Agency, and AML Agency.
  - Strengthen National Integrity Authority (ANI) with World Bank cooperation; timely and credible review of asset and interest declarations; adopt guidelines on beneficial ownership disclosure in declarations.
- AML/CFT strengthening (implement 2018 AML Law and MONEYVAL recommendations):
  - Promote better reporting of suspicious transactions and equip reporting entities to apply risk-based assessments and customer due diligence.
  - Develop and implement a new suspicion-based transaction reporting IT system for all reporting entities.
  - NBM to implement an IT solution for monitoring bank shareholders’ transparency and off-site analysis for AML/CFT purposes by "end-2020".
  - Adopt the Law on Sanctions for violations of ML/TF rules by "December 2019"; take interim legislative actions to ensure NBM’s sanctioning ability.
  - Initiate a new National ML/TF Risks Assessment (NRA), to be completed by "October 2020".
  - Adopt guidelines for AML/CFT information exchange among stakeholders by "mid-2020".
- Human capital and data:
  - Continue reforms in education, health, and social policies to raise human capital and address migration and demographic pressures.
  - Commit to allocating adequate resources to the National Bureau of Statistics to ensure timely, accurate, and comprehensive data.

### Program monitoring, performance criteria, and benchmarks
- Monitoring mechanisms:
  - Program monitored 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.
- Selected quantitative targets and statuses (as reported in Table 1 and Table 2):
  - Amended augmented cash deficit ceiling: "MDL 6,219 million", equivalent to "3.0 percent of GDP" (prior action).
  - Net international reserves (NIR) targets adjusted as per TMU for shortfall in EU Grants and Loans and IMF budget support.
  - Inflation consultation bands and center points reported (examples):
    - Outer Band (upper limit): "5.6 5.2 5.0 5.0 5.8 8.2 9.5" (table rows reflect periods).
    - Center point examples: "3.6 3.2 3.2 3.0 2.4 3.0 0.9 3.8 2.8 6.2 7.5" (table rows reflect periods).
- Structural benchmarks and prior actions (selected):
  - Prior actions listed as "Met" for several measures.
  - Structural benchmarks include:
    - Electricity sector tariffs fully based on February 2018 methodology and reflecting differences for April 2017–February 2018.
    - Formal proposal and action plan for automatic exchange of information with OECD Global Forum (MEFP ¶22, third bullet).
    - Amend legislation on non-bank credit organizations to prohibit accepting deposits from the public, oblige reporting new credit activity to credit bureaus, introduce limits on total cost of consumer credits, and strengthen sanctioning regime (MEFP ¶13, first bullet).
    - Develop an FX intervention strategy to facilitate two-way flexibility and reduce the NBM’s market footprint (MEFP ¶16).
    - Adopt 2019 gas tariffs fully based on existing methodology and purchase price of natural gas (MEFP ¶32, second bullet).
    - Approve amendments to the NBM Act and other laws to ensure that ELA is extended only to solvent banks (MEFP ¶12, fifth bullet).
    - Approve amendments to the 2019 budget consistent with the augmented deficit ceiling (MEFP ¶20).
    - Approve amendments to the Tax and Customs Codes effective Jan. 1, 2020 (MEFP ¶21).
    - Amend the Tax Code and the 2018 capital and tax amnesty law as specified in MEFP ¶22.

*Source: Moldova program documentation (excerpts) as presented in the supplied content unit.*

### 1.      This Technical  Memorandum of Understanding (TMU) defines  the variables subject to

### 1.      This Technical  Memorandum of Understanding (TMU) defines  the variables subject to

### A. Quantitative program targets
- Program monitoring through performance criteria and indicative targets.
- Performance criteria set with respect to:
  - the floor on the net international reserves (NIR) of NBM;
  - the ceiling on the augmented overall cash deficit of the general government (overall cash deficit of the general government augmented by on-lending agreements with external creditors to state-owned enterprises (SOEs));
  - the ceiling on accumulation of external payment arrears of the general government (continuous);
  - the ceiling on absorption by the government of losses or liabilities and making of payments on behalf of utilities and other companies (continuous).
- Indicative targets set on:
  - the ceiling on the general government wage bill;
  - the floor on priority social spending of the general government;
  - the ceiling on stock of accumulated domestic government arrears (continuous);
  - the floor on project spending funded from external sources, to comply with the Article 15.1 of the Fiscal Responsibility Law, starting in 2017 for the 2018 budget.
- Program includes a consultation clause on the 12-month rate of inflation.

### B. Program assumptions
- All foreign currency-related assets valued in U.S. dollars at program exchange rates.
- Program exchange rate of the Moldovan leu (MDL) to the U.S. dollar set at 19.8698 MDL/US$ (the official rate as of June 30, 2016).
- Cross rates as of end-June 2016 (as published on the IMF web site) used to convert other currencies:
  - 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
- Holdings of monetary gold valued at US$1,320.75 per one troy ounce.

### C. Institutional definitions
- General government comprises the central government and local governments.
  - Central government includes the state budget (including foreign-financed projects), state social insurance budget, and health insurance budget.
  - Local governments include local budgets (including foreign-financed projects).
- No new special or extrabudgetary funds will be created during the program period.
- Excluded: any government-owned entities with a separate legal status.

### D. Program definitions
- NIR of the NBM defined as gross reserves in convertible currencies minus reserve liabilities in convertible currencies.
- For program monitoring, gross reserves defined as monetary gold, holdings of SDRs, reserve position in the Fund, and holdings of foreign exchange in convertible currencies readily available for intervention or in securities issued by sovereigns, IFIs and explicitly guaranteed government agencies with a minimum credit rating of AA-.
  - 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 of the NBM defined as use of Fund credit by the NBM, convertible currency liabilities of the NBM to nonresidents with an original maturity of 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 arising from use of Fund credit by the NBM do not include liabilities arising from the use of SDR allocation.
- Stock of reserve assets and reserve liabilities valued at program exchange rate.
- Data source for gross reserves and liabilities: Monetary Survey published by NBM in Moldovan Lei, with adjustments for program purposes.
- On this basis, and consistent with the definition above, 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 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).
  - Excludes securities issued under Law 235/2016 on issuance of government bonds for execution of Ministry of Finance’s payment obligations derived from the State Guarantees Number 807 of November 17, 2014 and Number 101 of April 1, 2015.
  - Monitoring based on NBM’s monetary survey and Treasury data; Ministry of Finance provides data on foreign-financed projects and balances in adjustment accounts.
  - On this basis, and consistent with the definition above, 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.
  - Defined as the sum of net credit of the banking system to the general government (as defined), 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, the general government’s receipt of disbursements from external debt for direct budgetary support and for project financing minus amortization paid, and privatization proceeds stemming from the sale of the general government’s assets.
- Ceiling on the augmented overall cash deficit of the general government:
  - 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 and monitored from the financing side at the current exchange rate established by NBM at the date of transaction.
  - Net on-lending to SOEs defined as the disbursements of on-lending financing from external creditors to SOEs minus their loan repayments.
- Government securities in the form of coupon-bearing instruments sold at face value treated as financing items in 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 for program monitoring follows 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 for which official guarantees have been extended and which constitute a contingent liability of the public sector.
  - Excludes normal import-related credits as defined in the text.
  - External debt defined by the residency of the creditor.
- Guarantee of a debt for program purposes arises from explicit legal obligation of the general government or the NBM or any other agency acting on behalf of the general government to service such debt in event of nonpayment, or from implicit legal or contractual obligation to finance shortfalls.
  - Onlending from external creditors to SOEs treated as public guarantee and monitored explicitly above-the-deficit line.
  - Onlending from external creditors to the private sector through commercial banks (collateralized and with credit risks explicitly borne by commercial banks) treated as contingent liabilities.
- External payments arrears defined as all overdue debt service obligations (principal or interest, taking into account contractual grace periods) arising in respect of any debt contracted or guaranteed or assumed by the central government, or the NBM, or any agency acting on behalf of the central government.
  - Ceiling on new external payments arrears applies continuously throughout the arrangement.
  - Does not apply to external payments arrears arising from external debt being renegotiated with external creditors, including Paris Club creditors, or arrears for which a creditor has agreed that no payment needs to be made 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).
  - Aligns with current spending reported in line “Wages” of the general government budget according to the program classification of the annual budget except for salaries of SOEs and health care providers compensated from the Health Insurance Fund (FAOAM) itself.
- Priority social spending of the general government 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) and heating allowance (9015/00322) during the cold season from the central government budget, as well as 94 percent of health expenditures from the main fund of the Health Insurance Fund.
- General government 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.
  - Local government arrears excluded for the purpose of calculating domestic expenditure arrears under the program.
  - Overdue debt arises from non-payment of obligations with a fixed payment term; where contract lacks payment term, calculated according to provisions of Article 80 Paragraph (2) of the Law on Public Finance and Fiscal Responsibility.
  - Term for honoring commitments towards a public institution shall not exceed 30 days from the date of receipt of funds in the settlement account (except for construction works and capital repairs).
  - Assessment and reporting of accounts receivable and accounts payable (arrears) based on Methodology of Assessment and Reporting of Overdue Receivables and Overdue Accounts Payable (Arrears), approved through 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 the government and making of payments on behalf of utilities and other companies:
  - Program sets a continuous ceiling of zero on absorption by the public sector of losses or liabilities from outside the budgetary sector.
  - Absorption of losses or liabilities defined as direct payment by the government of the losses or liabilities of other parties or coverage of losses or liabilities by other transactions such as accumulated stock of the financial deviation of utility companies, debt-for-equity swaps or a write-off of tax obligations or other state claims.

### E. Inflation consultation mechanism
- Monetary conditionality includes a set of quarterly inflation targets measured as the inflation of the headline consumer price index (CPI) published by the Moldovan National Bureau of Statistics, set within tolerance bands.
  - Inner band: +/- 1 percentage point around the central point.
  - Outer band: +/- 2 percentage point around the central point.
- Deviations from bands trigger consultation:
  - If observed year-on-year CPI inflation falls outside the inner bands specified for the end of each quarter, NBM will consult with IMF staff on reasons and proposed policy response.
  - If observed year-on-year CPI inflation falls outside the outer bands specified for the end of each quarter, authorities will consult with IMF Executive Board on reasons and proposed policy response before further purchases could be requested under the ECF/EFF.
- Inflation Consultation Bands (as presented in the source):
  - Outer Band (upper limit)5.88.29.5
  - Inner Band (upper limit)4.87.28.5
  - Center point3.86.27.5
  - Inner Band (lower limit)2.85.26.5
  - Outer Band (lower limit)1.84.25.5
  - 2019
  - Mar Sep Dec

### F. Adjusters
- Adjusters apply for assessing compliance with the program’s quantitative targets starting from end-December 2016.
- The ceiling on the augmented overall cash deficit of the general government will be increased by the amount paid in cash for the purposes of maintaining the financial sector stability or by the face value of government securities issued for the same purpose.
- The ceiling on the augmented overall cash deficit of the general government will be adjusted upward by the amount of any shortfall between the total amount of actually disbursed and programmed budget support from external donors, including MFA (grants) from the European Commission.
  - The upward adjustments for 2019 is capped at the equivalent of MDL 721.3 million, valued at the program exchange rate.
- The ceiling on the augmented overall cash deficit of the general government will be adjusted downward by the amount of any shortfall between the total amount of actually disbursed and programmed onlending from external creditors to SOEs.
- Programmed Onlending to SOEs and Adjustments to Augmented Fiscal Deficit (table referenced in source).

*Source: 1mdaea2019002 - 1.      This Technical  Memorandum of Understanding (TMU) defines  the variables subject to*

### 21.      The floor on NIR of the NBM will  be  lowered  by  any  shortfall  in  the  official   external  grants

### 21. The floor on NIR of the NBM will be lowered by any shortfall in the official external grants

### Adjustment rule for NIR floor
- The floor on net international reserves (NIR) of the NBM will be lowered by any shortfall in the official external grants and loans at the equivalent of US$77 million and US$47 million respectively, valued at the program exchange rates.
- NIR targets will also be adjusted upward (downward) by the surplus (shortfall) in IMF budget support purchases relative to the baseline projection reported in Table 3.

### Reporting requirements (Section G)
- Macroeconomic data necessary for assessing compliance with performance criteria and indicative targets and benchmarks will be provided to Fund staff, including data specified in this memorandum and in Table 1.
- The authorities will transmit promptly to Fund staff any data revisions.

### Selected program adjustments and values
- Onlending to SOEs (programmed amount, millions of U.S. dollars): Q3: 11.2; Q4: 16.8
- Maximum downward adjustment on the augmented overall cash deficit (millions of Moldovan lei): Q3: 198.8; Q4: 298.7
- Exchange rate used for 2019 evaluations: 17.74 MDL/USD (the forecast of the Ministry of Economy).

### Data to be reported to the IMF (high-level schedule from Table 1)
- Fiscal data (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 and functional groups: Monthly, within three weeks of the end of each month.
- Number of budgetary sector positions and employees: Monthly, within four weeks of the end of each month.
- Social expenditure (pensions, unemployment payments, Ajutor Social, heating allowance, health expenditures): 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 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 (balance sheets, income statement, regulatory indicators, capital, liquidity, data on credits and deposits): Monthly, within four 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.
- Balance of Payments (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.
- 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 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; Local/SOEs: Quarterly, within three weeks of the end of each quarter.
- 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.

### Public debt coverage and composition (selected figures)
- Total public and publicly guaranteed debt (US$ mln): 3,394.7 which is 30.6% of GDP.
- A. Domestic debt: US$1,456.0 which is 12.9% of GDP.
  - Domestic marketable debt: US$461.6 which is 4% of GDP.
  - T-bills: US$323.5 which is 3% of GDP.
    - 3-month: US$24.4 which is 0% of GDP.
    - 6-month: US$98.2 which is 1% of GDP.
    - 12-month: US$201.0 which is 2% of GDP.
  - Bonds: US$138.1 which is 1% of GDP.
    - 1-year: US$0.0 which is 0% of GDP.
    - 2-year: US$81.5 which is 1% of GDP.
    - 3-year: US$40.2 which is 0% of GDP.
    - 5-year: US$16.3 which is 0% of GDP.
- B. External debt: US$1,938.6 which is 17.5% of GDP.
  - Central Government external: US$1,689.0 which is 15.2% of GDP.
    - Official multilateral: US$1,393.4 which is 12.6% of GDP.
    - Official bilateral: US$295.6 which is 2.7% of GDP.
  - Local Government: US$17.1 which is 0.2% of GDP.
    - Official multilateral (local): US$17.0 which is 0.2% of GDP.
  - Financial and non-financial public corporations: US$14.7 which is 0.1% of GDP.
  - NBM debt to IMF: US$217.8 which is 2.0% of GDP.
- Domestic arrears to suppliers included in domestic debt: MDL 54.7 million (0.03 percent of GDP) by end-2018.
- Debt of SOEs (majority owned by the state) with maturity longer than a year: 1 percent of GDP as of 2018.

### Debt sustainability assessment (key points)
- Risk of external debt distress: Low.
- Overall risk of debt distress: Low.
- Moldova’s risk of debt distress remains low—unchanged from the previous Debt Sustainability Analysis (DSA) published in December 2017.
- Baseline projections show that Moldova’s PV of total PPG debt (external plus domestic)-to-GDP ratio remains below the new debt distress benchmark of 70 percent.
- Private sector external debt remains relatively high for a low-income country and could pose risks to external debt sustainability despite mitigating factors.
- Fiscal discipline is critical given the country’s significant vulnerability to shocks.
- Recommended structural priorities to unlock growth potential: improving governance and fighting corruption; strengthening banking intermediation; creating a business-friendly environment; ensuring a transparent and efficient energy sector; addressing adverse impacts from demographic trends and labor migration.
- Approved by: Julie Kozack (IMF) and Marcello Estevão (WB). Prepared by staffs of the IMF and the World Bank. Date referenced in document: September 6, 2019.

### Background on macro forecasts and baseline assumptions
- Real GDP:
  - Real GDP grew by 4 percent in 2018.
  - Robust growth continued in 2019Q1.
  - Over the medium-term, growth is expected to average about 3.8 percent.
- Inflation:
  - Over the medium-term, inflation is expected to remain anchored at 5 percent—the authorities’ inflation target.
- Fiscal:
  - The fiscal position deteriorated sharply in 2019 due to shortfalls in EU grants, under-performance of CIT and excises, and wage bill overruns.
  - Fiscal deterioration is projected to be fully reversed by measures to strengthen tax administration and compliance; revise/remove certain tax exemptions and streamline subsidies; mobilize resources for developmental and social spending; and strengthen the unified public wage system and control over the wage bill.
- External sector:
  - Current account deficit (CAD) deteriorated to over 10 percent of GDP in 2018.
  - CAD is expected to moderate to 9.5 percent of GDP in 2019 and adjust to below 7 percent of GDP throughout the medium term.
  - Reserves remain adequate at about 170 percent of the IMF composite reserve adequacy metric in 2018.
- External borrowing and financing:
  - The DSA assumes all contracted-but-undisbursed concessional loans will be fully disbursed as planned.
  - Grant element of new borrowing projected at about 36.4 percent.
  - External financing need in 2019 estimated at US$171 million.
    - Covered by resumption of EU's MFA and budget grants (US$124 million, of which up to US$71 million set aside for MFA budget support grants and loans), and Fund disbursement of SDR 33.6 million (US$ 46.5 million), of which SDR 20.1 million (US$27.9 million) disbursed for budget support (ECF: SDR 6.7 million and EFF: SDR 13.4 million).
  - External financing gap in 2020 estimated at US$132 million.
    - To be financed mainly by EU funds (US$72 million) and World Bank DPO (US$40 million), with the residual closed via disbursement equivalent to SDR 14.4 million (US$20 million) under the ECF/EFF.
- Domestic borrowing:
  - Assumed to remain limited over the medium-term.
  - Domestic borrowing is expected to remain about 10 percent of GDP in 2039.

*Source: 1mdaea2019002 - 21. The floor on NIR of the NBM will be lowered by any shortfall in the official external grants and loans (excerpt).*

### 7.      Moldova’s debt carrying capacity is strong. The composite indicator (CI), which captures the

### 7. Moldova’s debt carrying capacity is strong

### Debt carrying capacity assessment
- Moldova’s Composite Indicator (CI) is 3.34, which corresponds to a strong debt-carrying capacity as confirmed by the April 2019 WEO data and 2018 Country Policy and Institutional Assessment (CPIA).
- The CI captures the impact of several factors through a weighted average of an institutional indicator (The World Bank’s Country Policy and Institutional Assessment (CPIA)), real GDP growth, remittances (Remittances for Moldova comprise of two Balance of Payments (BoP) accounts: compensation of employees and remittances), international reserves, and world growth.
- The classification of “strong” is unchanged from the previous two DSA rounds.
- The debt carrying capacity determines the PPG external debt thresholds and total public debt benchmarks.

### Applicable thresholds and key numeric indicators
- Applicable thresholds (as presented):
  - PV of debt in % of Exports: 70
  - PV of total public debt in percent of GDP: 240
  - Debt service in % of Exports: 55
  - Debt service in % of Revenue: 21
  - TOTAL public debt benchmark (percent of GDP): 23
- Under the baseline scenario:
  - The present value of PPG external debt is projected at 12.1 percent of GDP in 2019 and increases marginally to 13.4 percent by 2029.
  - The ratio remains below the 55 percent threshold under the baseline scenario throughout the projection period.
- Public debt:
  - PV of public debt–to-GDP in 2019 stands below the benchmark level of 70 percent.
  - Moldova’s PV of total public debt-to-GDP is expected to be stable round 26 percent in the medium-term, remaining below the benchmark in the medium-to-long term.

### Stress tests and scenarios
- Stress test design:
  - Standardized stress tests applied; all PPG external debt indicators remain below policy-relevant thresholds.
  - Moldova does not have prominent economic features that require additional tailored stress tests (e.g., natural disasters, significant reliance on commodity exports, market financing).
  - Contingent liability stress test uses a shock of 12 percent of GDP, calibrated to the most recent domestic banking crisis event.
- Results:
  - Under baseline and alternative scenarios, all external debt indicators continue to remain below their policy-relevant thresholds.
  - Debt service indicators remain well below their respective thresholds and on a broadly downward trend.
  - A tailored contingent liability shock does not cause any breach of relevant thresholds.
  - Under the most extreme scenario (growth shock), most PPG debt indicators show significant increases, coming closer to indicative thresholds but not breaching them.
  - Under the most extreme shock scenario (growth shock), the PV of public debt-to-GDP shoots up significantly throughout all or most of the projection period as the country accumulates more debt to finance larger fiscal and current account deficits.
  - A significant contingent liabilities shock (to state-owned enterprises) would increase debt levels notably, though such risks are difficult to quantify exactly due to lack of good data on SOEs and PPPs.

### Financing composition and outlook
- Post-2020 financing:
  - Starting in 2020, after the conclusion of the ECF/EFF arrangement, new external loan financing will consist primarily of borrowing from multilateral and bilateral lenders by 2030.
  - Commercial borrowing is expected to start playing a larger role in the long-term, reaching about 70 percent of total public sector borrowing by 2039.

### Risk rating, vulnerabilities, and policy recommendations
- Risk assessment:
  - Moldova remains at low risk of external and overall debt distress, in line with the previous DSA assessment.
  - External indicators for PPG debt remain well below indicative debt thresholds under standardized and alternative stress tests.
  - However, significant private external debt poses potential roll-over risks.
- Policy recommendations and priorities:
  - Pursue prudent fiscal policy to contain vulnerabilities and maintain sustainability.
  - Improve the quality of institutional frameworks; the World Bank’s 2018 Debt Management Performance Assessment (DeMPA) provides a diagnostic basis regarding debt management aspects.
  - Advance structural reforms to increase growth potential and reduce vulnerability to shocks.
  - Develop the domestic debt market to strengthen the outlook for debt sustainability, considering developmental needs and dependence on foreign assistance in the form of grants and concessional loans.
  - Lengthen the average maturity of domestic debt and deepen the secondary market to reduce PPG domestic debt roll-over and interest rate risks.
  - Improvements in debt-management practices envisaged under the authorities’ reforms will give further resilience to shocks affecting debt service needs.

*Source: 1mdaea2019002 - 7. Moldova’s debt carrying capacity is strong.*

### 13.      The authorities broadly agreed with staff's assessment of Moldova's public debt situation

### 13. The authorities broadly agreed with staff's assessment of Moldova's public debt situation

### Authorities' views and recommendations
- The authorities broadly agreed with staff's assessment of debt composition, projections, risk ratings and distress level.
- They recognize that preserving fiscal policy prudency is critical for keeping public debt at sustainable level.
- While making progress on debt management, the authorities highlighted the need for further improvement in:
  - debt statistics, and
  - debt management frameworks,
  by making full use of IMF technical assistance and training resources.

### External Debt Sustainability Framework — Baseline scenario (selected figures, 2018–2039)
- External debt (nominal) (In percent of GDP):
  - 2018: 64.9
  - 2019: 64.9
  - 2020: 65.5
  - 2021: 65.1
  - 2022: 64.4
  - 2023: 64.1
  - 2024: 63.6
  - 2029: 63.4
  - 2039: 64.6
- of which: public and publicly guaranteed (PPG) (In percent of GDP):
  - 2018: 17.5
  - 2019: 17.5
  - 2020: 18.8
  - 2021: 19.3
  - 2022: 19.3
  - 2023: 19.6
  - 2024: 19.8
  - 2029: 19.7
  - 2039: 19.5
- Change in external debt (year-on-year, percent of GDP):
  - 2018: -5.5
  - 2019: 0.0
  - 2020: 0.6
  - 2021: -0.4
  - 2022: -0.7
  - 2023: -0.4
  - 2024: -0.5
  - 2029: -0.1
  - 2039: -0.3
- Identified net debt-creating flows (percent of GDP):
  - 2019: 3.2
  - 2020: 4.4
  - 2021: 3.8
  - 2022: 3.1
  - 2023: 2.5
  - 2024: 2.0
  - 2029: 0.8
  - 2039: 0.4
- Non-interest current account deficit (percent of GDP):
  - 2018: 9.3
  - 2019: 9.0
  - 2020: 8.5
  - 2021: 7.9
  - 2022: 7.1
  - 2023: 6.3
  - 2024: 5.8
  - 2029: 4.6
  - 2039: 4.2
- Exports (percent of GDP):
  - 2018: 34.8
  - 2019: 36.5
  - 2020: 37.4
  - 2021: 38.0
  - 2022: 38.2
  - 2023: 38.3
  - 2024: 38.3
  - 2029: 38.7
  - 2039: 39.5
- Imports (percent of GDP):
  - 2018: 60.5
  - 2019: 62.4
  - 2020: 63.3
  - 2021: 63.3
  - 2022: 63.0
  - 2023: 62.3
  - 2024: 61.5
  - 2029: 61.8
  - 2039: 62.5
- Net current transfers (negative = inflow) (percent of GDP):
  - 2018: -10.4
  - 2019: -11.0
  - 2020: -11.2
  - 2021: -11.3
  - 2022: -11.4
  - 2023: -11.3
  - 2024: -11.3
  - 2029: -11.3
  - 2039: -11.3
- Net FDI (negative = inflow) (percent of GDP):
  - 2018: -1.4
  - 2019: -4.2
  - 2020: -2.3
  - 2021: -2.3
  - 2022: -2.4
  - 2023: -2.4
  - 2024: -2.4
  - 2029: -2.4
  - 2039: -2.4
- Endogenous debt dynamics (percent of GDP):
  - 2018: -9.4
  - 2019: -1.7
  - 2020: -1.8
  - 2021: -1.8
  - 2022: -1.6
  - 2023: -1.5
  - 2024: -1.4
  - 2029: -1.4
  - 2039: -1.4
- Residual (percent of GDP):
  - 2018: -4.0
  - 2019: -3.2
  - 2020: -3.9
  - 2021: -4.1
  - 2022: -3.8
  - 2023: -2.8
  - 2024: -2.5
  - 2029: -0.9
  - 2039: -0.6
- Sustainability indicators:
  - PV of PPG external debt-to-GDP ratio:
    - 2018: 12.2
    - 2019: 12.1
    - 2020: 12.6
    - 2021: 12.7
    - 2022: 12.7
    - 2023: 13.0
    - 2024: 13.2
    - 2029: 13.4
    - 2039: 15.5
  - PV of PPG external debt-to-exports ratio:
    - 2018: 35.2
    - 2019: 33.3
    - 2020: 33.6
    - 2021: 33.5
    - 2022: 33.3
    - 2023: 33.9
    - 2024: 34.5
    - 2029: 34.7
    - 2039: 39.3
  - PPG debt service-to-exports ratio:
    - 2018: 6.0
    - 2019: 4.9
    - 2020: 4.6
    - 2021: 4.0
    - 2022: 3.1
    - 2023: 2.3
    - 2024: 2.3
    - 2029: 2.7
    - 2039: 6.6
  - PPG debt service-to-revenue ratio:
    - 2018: 6.9
    - 2019: 6.0
    - 2020: 5.9
    - 2021: 5.1
    - 2022: 4.1
    - 2023: 3.0
    - 2024: 3.0
    - 2029: 3.6
    - 2039: 8.8
- Gross external financing need (Million of U.S. dollars):
  - 2018: 3152.1
  - 2019: 3182.3
  - 2020: 3431.5
  - 2021: 3570.3
  - 2022: 3780.0
  - 2023: 3981.2
  - 2024: 4096.7
  - 2029: 5964.4
  - 2039: 12997.3
- Key macro assumptions:
  - Real GDP growth (in percent):
    - 2018: 4.0
    - 2019: 3.5
    - 2020: 3.8
    - 2021: 3.8
    - 2022: 3.8
    - 2023: 3.8
    - 2024: 3.8
    - 2029: 3.8
    - 2039: 3.8
    - Average: 3.3 (presented in table under “Actual / Projections”)
  - GDP deflator in US dollar terms (change in percent):
    - 2018: 12.4
    - 2019: -0.1
    - 2020: 1.2
    - 2021: 1.8
    - 2022: 1.9
    - 2023: 1.9
    - 2024: 2.1
    - 2029: 1.9
    - 2039: 1.9
  - Effective interest rate (percent) 4/:
    - 2018: 1.4
    - 2019: 0.9
    - 2020: 0.9
    - 2021: 0.9
    - 2022: 1.1
    - 2023: 1.3
    - 2024: 1.4
    - 2029: 1.4
    - 2039: 1.5
  - Growth of exports of G&S (US dollar terms, in percent):
    - 2018: 12.4
    - 2019: 8.4
    - 2020: 7.9
    - 2021: 7.1
    - 2022: 6.6
    - 2023: 6.0
    - 2024: 5.9
    - 2029: 6.0
    - 2039: 6.0
  - Growth of imports of G&S (US dollar terms, in percent):
    - 2018: 19.2
    - 2019: 6.7
    - 2020: 6.5
    - 2021: 5.6
    - 2022: 5.3
    - 2023: 4.7
    - 2024: 4.6
    - 2029: 5.9
    - 2039: 5.9
- Grant-equivalent financing (in percent of GDP):
  - 2019: 1.6
  - 2020: 2.0
  - 2021: 1.5
  - 2022: 1.3
  - 2023: 1.3
  - 2024: 1.2
  - 2029: 1.2
  - 2039: 0.8
  - Average (presented): 1.4
- Nominal GDP (Million of US dollars):
  - 2018: 11,309
  - 2019: 11,688
  - 2020: 12,281
  - 2021: 12,975
  - 2022: 13,725
  - 2023: 14,512
  - 2024: 15,376
  - 2029: 20,398
  - 2039: 35,899
- Memorandum items:
  - PV of external debt (percent of GDP):
    - 2018: 59.7
    - 2019: 59.5
    - 2020: 59.2
    - 2021: 58.6
    - 2022: 57.8
    - 2023: 57.5
    - 2024: 57.0
    - 2029: 57.1
    - 2039: 60.6
  - Total external debt service-to-exports ratio:
    - 2018: 57.5
    - 2019: 61.4
    - 2020: 58.0
    - 2021: 57.8
    - 2022: 59.5
    - 2023: 61.2
    - 2024: 60.6
    - 2029: 69.9
    - 2039: 87.2
  - PV of PPG external debt (Million of US dollars):
    - 2018: 1,384.1
    - 2019: 1,417.5
    - 2020: 1,545.9
    - 2021: 1,650.2
    - 2022: 1,747.8
    - 2023: 1,887.9
    - 2024: 2,033.4
    - 2029: 2,740.9
    - 2039: 5,569.7

### Public Sector Debt Sustainability Framework — Baseline scenario (selected figures, 2018–2039)
- Public sector debt (percent of GDP):
  - 2018: 30.6
  - 2019: 31.5
  - 2020: 32.3
  - 2021: 32.8
  - 2022: 32.7
  - 2023: 32.6
  - 2024: 32.5
  - 2029: 32.6
  - 2039: 31.5
  - Average: 31.2 (presented) and Projections: 32.4 (presented)
- of which: external debt (percent of GDP) mirrors external DSA figures (see above).
- Change in public sector debt (percent of GDP):
  - 2018: -2.1
  - 2019: 0.9
  - 2020: 0.8
  - 2021: 0.5
  - 2022: -0.1
  - 2023: 0.0
  - 2024: -0.2
  - 2029: 0.0
  - 2039: -0.3
- Identified debt-creating flows (percent of GDP):
  - 2019: 1.2
  - 2020: 1.3
  - 2021: 0.9
  - 2022: 0.2
  - 2023: 0.1
  - 2024: -0.1
  - 2029: 0.1
  - 2039: -0.3
- Primary deficit (percent of GDP):
  - 2018: 0.3
  - 2019: 2.1
  - 2020: 2.1
  - 2021: 2.0
  - 2022: 1.3
  - 2023: 1.2
  - 2024: 1.1
  - 2029: 1.3
  - 2039: 0.7
  - Average/projection entries: 1.3 and 1.5 (presented)
- Revenue and grants (percent of GDP):
  - 2018: 30.5
  - 2019: 30.7
  - 2020: 30.5
  - 2021: 30.0
  - 2022: 29.8
  - 2023: 29.9
  - 2024: 29.9
  - 2029: 29.9
  - 2039: 29.9
- Primary (noninterest) expenditure (percent of GDP):
  - 2018: 30.8
  - 2019: 32.8
  - 2020: 32.5
  - 2021: 31.9
  - 2022: 31.1
  - 2023: 31.2
  - 2024: 31.0
  - 2029: 31.1
  - 2039: 30.6
- Automatic debt dynamics (percent of GDP):
  - 2018: -1.0
  - 2019: -0.8
  - 2020: -0.8
  - 2021: -1.0
  - 2022: -1.1
  - 2023: -1.1
  - 2024: -1.1
  - 2029: -1.1
  - 2039: -1.0
- PV of public debt-to-GDP ratio (percent of GDP):
  - 2018: 25.6
  - 2019: 26.2
  - 2020: 26.4
  - 2021: 26.5
  - 2022: 26.4
  - 2023: 26.3
  - 2024: 26.2
  - 2029: 26.7
  - 2039: 27.9
- PV of public debt-to-revenue and grants ratio:
  - 2018: 84.0
  - 2019: 85.6
  - 2020: 86.6
  - 2021: 88.5
  - 2022: 88.6
  - 2023: 88.0
  - 2024: 87.7
  - 2029: 89.2
  - 2039: 93.4
- Debt service-to-revenue and grants ratio 3/:
  - 2018: 13.6
  - 2019: 23.7
  - 2020: 23.2
  - 2021: 23.6
  - 2022: 23.0
  - 2023: 22.5
  - 2024: 22.6
  - 2029: 23.2
  - 2039: 25.1
- Gross financing need 4/ (percent of GDP):
  - 2018: 4.3
  - 2019: 9.3
  - 2020: 9.1
  - 2021: 9.0
  - 2022: 8.1
  - 2023: 7.9
  - 2024: 7.8
  - 2029: 8.2
  - 2039: 8.2
- Key macro and fiscal assumptions (select):
  - Real GDP growth (in percent): same series as external DSA (2018: 4.0; 2019: 3.5; 2020–2029: 3.8; 2039: 3.3; average: 3.8)
  - Inflation rate (GDP deflator, in percent): 2018: 2.1; 2019: 5.4; 2020: 5.4; 2021–2029: 5.0; 2039: 8.5; average: 5.1
  - Primary deficit that stabilizes the debt-to-GDP ratio (percent of GDP):
    - 2018: 2.3
    - 2019: 1.3
    - 2020: 1.2
    - 2021: 1.5
    - 2022: 1.4
    - 2023: 1.3
    - 2024: 1.3
    - 2029: 1.2
    - 2039: 1.0
    - Average/projection entry: 3.2 and 1.3 (as presented)

### Sensitivity analysis and stress tests (selected results)
- Table 3 (Public and Publicly Guaranteed External Debt, 2019–2029) presents baseline and alternative scenarios with indicators including:
  - PV of debt-to-GDP ratio, PV of debt-to-exports ratio, Debt service-to-exports ratio, Debt service-to-revenue ratio.
- Examples from sensitivity outputs (2019–2029, select series):
  - Baseline PV of debt-to-GDP ratio entries show repeated values of "12" (presented in table header).
  - Bound tests and tailored tests include shocks to Real GDP growth, Primary balance, Exports, Other flows, Depreciation, and combinations (B1–B6, C1).
  - A bold value indicates a breach of the threshold.
- Figure summaries (2019–2029):
  - Most extreme shocks identified include one-time depreciation (affecting debt service-to-revenue ratio) and export shocks (affecting PV of debt-to-exports and PV of debt-to-GDP ratios).
  - Stress tests assume additional financing needs generated by shocks are covered by PPG external MLT debt in the external DSA.

### Key policy implications and recommended actions (as reported)
- Preserve fiscal policy prudency to keep public debt at sustainable levels.
- Continue improvements in debt management.
- Improve debt statistics and debt management frameworks.
- Make full use of IMF technical assistance and training resources to enhance capacity.

*Sources: Country authorities; and staff estimates and projections.*

### 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the

### 1mdaea2019002 - 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the

### Economic outlook
- GDP growth is solid, estimated at 3.5 percent in 2019 and 3.8 percent in subsequent years.
- Labor market:
  - Increasing labor force participation.
  - Rising wages.
  - Unemployment projected to remain low at 3.0 percent.
- Banking sector recovery:
  - Results in a return of credit growth after a prolonged contraction following the 2014 banking crisis.
- Inflation:
  - Strong wage growth, resumed credit growth, and a fiscal impulse contribute to a projected increase in inflation towards 7.5 percent by end-2019.
  - Inflation is expected to stabilize at the target of 5 percent afterwards.

### Fiscal policy — prior actions, targets, and reforms
- Prior actions implemented:
  - The government implemented 6 prior actions, including measures to correct past policy slippages.
  - Implemented four prior actions in the area of fiscal policy to correct for fiscal slippages, repair pre-election policy reversals and create space in the 2020 budget for social spending.
- Specific fiscal prior actions:
  1. The government amended the 2019 Budget to target a 3 percent of GDP deficit.
     - Corrective actions were required due to pre-election expansionary fiscal measures and shortfalls in EU grants.
     - The amended Budget targets a deficit of 3 percent of GDP in 2019, consistent with the augmented general government deficit ceiling under the program.
  2. The government amended the 2018 Capital and Tax Amnesty Law and the tax code to fight tax evasion.
     - Reversed a ban on tax audits prior to 2018.
     - Removed the MDL 500,000 deduction from the indirect method assessment of taxable income (discrepancies below MDL 500,000 can also be taxed).
  3. The government legislated 9 amendments in the Tax and Customs Codes, taking effect in 2020, to create room for social spending and reverse pre-election fiscal impulses (example: reversal of the reduction in the VAT rate of HORECA).
- Budget composition and public spending management:
  - Authorities plan to increase efficiency of public expenditure to improve composition towards social and investment spending.
  - Public and publicly guaranteed debt remains low at 31.5 percent of GDP in 2019.
  - Measures to reduce risks related to the government wage bill:
    - Develop a comprehensive staff registry.
    - Adopt a plan to reduce the number of reference values.
  - Integrate findings from the 2018 spending review of Higher Education and Vocational Training in the medium-term budgetary framework for 2021-2023.
  - Plan to undertake a Public Investment Management Assessment.

### Financial sector — reform progress and remaining benchmarks
- Banking sector reform and rehabilitation following the 2014 banking crisis has progressed significantly:
  - Banking sector in good shape with strong capital and liquidity ratios, changed ownership structure, and reductions in related party exposures.
  - Healthy credit growth observed.
- Prior actions taken:
  - Authorities amended the NBM Act to prevent ELA to insolvent institutions.
  - NBM adopted decisions to request removal of unfit shareholders in two non-systemic banks (structural benchmark for end-March).
- Remaining structural benchmark:
  - Allow a systemic bank to exit temporary administration in an orderly manner (reset from end-October 2018 to end-December 2019); this is the only benchmark from the third review still outstanding.
- Asset recovery and AML/CFT:
  - Authorities will make progress on asset recovery of stolen proceeds from the 2014 bank fraud and strengthen the AML/CFT framework.
  - Recognize financial receipts from asset recovery could be limited over time.
  - Committed to prosecute perpetrators with international legal and forensic experts.
  - Will adopt the Law on Sanctions for violations of ML/TF rules by end-2019 and initiate a National ML/TF Risks Assessment.
- Non-bank sector vigilance and regulatory measures:
  - Increase in financial intermediation by non-banks, particularly microfinance organizations, requires regulatory response.
  - Authorities will:
    - Prohibit non-bank credit organizations from accepting public deposits.
    - Require reporting of new credit activity to credit bureaus.
    - Introduce limits on the cost of consumer credit.
    - Introduce a sanctioning regime.

### Monetary policy
- NBM targets an inflation rate of 5 percent.
- Monetary policy stands ready to gradually adjust interest rates if needed to stem inflationary pressures.
- Measures to strengthen the inflation-targeting framework:
  - Develop an FX intervention strategy that reduces the NBM’s market footprint.
  - Adhere to the policy rate as primary tool.
  - Recalibrate reserve requirements on domestic and foreign currency liabilities.

### Towards completion of the ECF/EFF — remaining structural benchmarks and forward plans
- Authorities committed to implementing the final set of five structural benchmarks to pave the way for successful completion of the program.
- Benchmarks by sector:
  1. Fiscal sector:
     - Government will propose a date and adopt an action plan for the automatic exchange of information with the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes (to help fight tax evasion).
  2. Financial sector:
     - Implement three benchmarks discussed above:
       - Reduce risks stemming from non-bank credit organizations.
       - NBM will allow a systemic bank to exit temporary administration in an orderly manner.
       - NBM will develop an FX intervention strategy.
  3. Energy sector:
     - Authorities will adopt gas tariffs based on the existing methodology and on the purchase price of natural gas (to increase transparency and predictability).
- Forward engagement with IMF:
  - Government intends to continue cooperating with the IMF to anchor its reform program.
  - Authorities intend to start discussions with staff on a possible follow-up arrangement during the Annual Meetings.
  - Potential follow-up arrangement could guide commitment to a more social and growth-friendly budget composition through reforms such as:
    - Pension system reforms to ensure long-term sustainability.
    - Public investment management reforms.
    - Improved reporting and management of risks related to SOEs and PPPs.

### Key statistics and figures (preserved exactly as in source)
- GDP growth: 3.5 percent in 2019; 3.8 percent in subsequent years.
- Unemployment: 3.0 percent (projected).
- Inflation projections: towards 7.5 percent by end-2019; stabilize at target of 5 percent afterwards.
- Public and publicly guaranteed debt: 31.5 percent of GDP in 2019.
- Prior actions implemented: 6 prior actions total; 4 prior actions in fiscal policy area.
- Specific numeric measures referenced:
  - MDL 500,000 deduction removed from indirect method assessment.
  - 3 percent of GDP deficit target for 2019.
  - 9 amendments to the Tax and Customs Codes taking effect in 2020.
  - End-2019 deadline for adoption of the Law on Sanctions for violations of ML/TF rules.

*Statement by Richard Doornbosch, Alternate Executive Director for Republic of Moldova and Jesper Hanson, Advisor — September 20, 2019*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1mdaea2019002.pdf_