## 1mdaea2022004

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### Context and recent developments
- Economy: real GDP contracted by over 8 percent in 2020 and expanded by 13.9 percent in 2021.
- Pandemic recovery supported by a record agricultural harvest and strong private consumption growth.
- War in Ukraine and sanctions on Russia and Belarus have generated significant spillovers to Moldova.
- Refugees: Moldova received inflows equal to 17 percent of the total population; about 100,000 refugees (4 percent of the total population) remain in Moldova.
- Inflation: end-year 2021 inflation stood at 13.9 percent (yoy), rising to 22.2 percent in March 2022.
- Current account: deficit worsened to 11.7 percent of GDP in 2021 from about 8 percent in 2020.
- Public debt: public debt reached 32.5 percent of GDP in 2021 (slightly lower than 33.7 percent in 2020).
- Gross FX reserves: US$3.9 billion (about 174 percent of the Fund’s composite reserve adequacy metric) as of end-2021.
- Banking sector: banks entered the crisis with strong capital and liquidity positions above regulatory requirements; aggregate capital adequacy ratio about 26 percent at end-2021; system-wide NPLs about 6 percent of total loans by end-2021.

### Channels of transmission of the war (summary)
- Trade disruptions:
  - Russia, Ukraine, and Belarus represent about 24 percent and 15 percent of total imports and exports of goods and services, respectively.
  - Export difficulties for agricultural products (e.g., apples and grains) for which Russia was the main importer.
  - Trade-related revenues represent more than a third of total government revenue.
- Energy price increase and security:
  - Energy import cost expected to increase to US$1.8 billion (13.1 percent of GDP—the highest level since 2008), accounting for 25 percent of total goods imports in 2022.
  - All natural gas imports originate from Russia; main electricity supplier based in Transnistria operates with Russian natural gas.
  - Petroleum product supply not reliant on Russia but accounts for the largest share of energy imports in value terms.
- Confidence effects:
  - Pressure on FX reserves, bank liquidity, and government borrowing capacity; expected negative effects on private consumption and investment.
- Refugees and humanitarian costs:
  - Humanitarian support costs currently estimated at around 0.4 percent of GDP (assuming six months’ duration and some external support).
- Remittances:
  - Remittances are over 15 percent of GDP; Russia accounts for close to 20 percent of remittances while the EU accounts for a half.

### Outlook, projections, and key macro numbers (baseline)
- Real GDP growth: projected 0.3 percent in 2022, and 2 percent in 2023.
- Real economy scarring: real GDP estimated to be about 7 percent below pre-conflict forecast in 2026.
- Inflation: average annual inflation expected to reach 23.5 percent in 2022; projected to remain well above the NBM’s target band until end-2023.
- Fiscal:
  - Budget deficit projected to widen to 7.2 percent of GDP in 2022.
  - Public debt expected to increase to 38.4 percent of GDP in 2022; public debt envisaged to peak at 43 percent of GDP in 2024 (DSA) and decline to about 41 percent of GDP in 2027.
  - Debt risk: overall risk of debt distress reclassified to moderate due to high sensitivity to adverse growth shocks.
- External:
  - Current account deficit projected to widen to 13 percent of GDP in 2022; medium-term current account expected to narrow to 8.5 percent of GDP.
- Selected projections (exact series from Table 1, 2020–2027):
  - Real GDP growth: 4.7 4.3 3.7 -8.3 13.9 0.3 2.0 5.8 5.4 5.0 5.0
  - Consumer price index (average): 6.5 3.6 4.8 3.8 5.1 23.5 6.7 5.0 5.0 5.0 5.0
  - Nominal GDP (billions of Moldovan lei): 178.9 192.5 210.4 199.7 241.9 273.5 295.7 330.0 366.9 406.4 450.2
  - Gross international reserves (millions of U.S. dollars, 2017–2022): 2,803 2,995 3,060 3,784 3,902 3,353

### Key downside risks (tilted to the downside and exceptionally large)
- A sharper-than-anticipated increase in energy prices or disruptions in energy supplies.
- Worsening confidence effects leading to accelerated MDL depreciation and system-wide liquidity pressures.
- Further tightening of government financing constraints and lower rollover rates.
- Social risks: popular unrest over rising utility tariffs, worsening living standards, and deepening political divisions.
- Escalation of the war increasing refugee inflows and triggering confidence shocks.
- Materialization would add indirect spillovers and further adverse shocks.

### Fiscal policy stance, supplementary budget, and energy-related costs
- Fiscal buffers as of end-2021:
  - General government budget deficit narrowed to 2.6 percent of GDP (compared to approved 5.1 percent of GDP under the program).
  - Authorities ended the year with MDL 11.9 billion (4.9 percent of GDP) in cash buffers.
  - As of April 8, MDL 4.3 billion (1.6 percent of GDP) of freely usable funds remain in the central government’s single treasury account.
- Supplementary budget (approved to respond to the war shock; consistent with deficit of 7.2 percent of GDP):
  - Revenues expected to be 1  percent of GDP higher relative to the previously approved budget.
  - High inflation boosts revenues by 0.7 percent of GDP; higher external grants add 0.3 percent of GDP.
  - Consumption-based taxes comprise around 45 percent of revenues.
  - Expenditures increased by 2.5 percent of GDP relative to the previously approved budget.
  - Fiscal cost to support households and businesses amid surge in energy prices and higher energy costs for public entities: 1. 2 percent of GDP (in addition to 0.7 percent of GDP in the original budget).
  - Budgeted for humanitarian needs of refugees: 0.4 percent of GDP.
  - Indexation of wages, pensions, social protection payments, and departmental budgets will create additional fiscal costs of about 0.9 percent of GDP.
  - Flexible emergency funds replenished (0.3 percent of GDP).
- Energy policy response (Box 2 key points):
  - Natural gas tariffs increased by 300 percent: from around 5 lei per m3 to 11 lei in November 2021, then to 15 lei in January 2022.
  - Subsidized tariff for households’ initial 150 m3/month between November 2021 and March 2022; the reduced rate covered 70 percent of household consumption; household consumption accounts for about half of total consumption.
  - Government budgeted a total of 1.9 percent of GDP in 2022 to shield economy from rising energy costs:
    - Subsidy for household natural gas consumption over January–March: 0.6 percent of GDP.
    - Increased budgetary allocations to public institutions to cover annual energy costs: 0.6 percent of GDP.
  - Planned more targeted household natural gas subsidy scheme next winter (November), cutting monthly cost by 50 percent to 0.1 percent of GDP by explicitly targeting low-income households.
  - A soon-to-be-finalized loan with the EBRD of over EUR 300 million will allow buying and storing one winter month worth of natural gas consumption in Romania.
  - Emergency synchronization of the Moldovan Power System with ENTSO-E Continental Europe noted as an important step.

### Monetary and exchange rate policy assessment
- NBM actions and indicators:
  - Policy rate increased by a cumulative 600 basis points to 12.5 percent (by end-March); later references note increases to 15.5 percentage points in early May 2022 (authorities’ update).
  - Increased reserve requirements for MDL deposits by 2 percentage points (reserve requirement ratio raised to 28 percent in January; later: 30 percent for MDL and non-convertible foreign currency assets; 33 percent for foreign currency as of early May change).
  - FX interventions equivalent to about 10 percent of FX reserves to limit excessive exchange rate volatility; lei depreciated by 3 percent since onset of hostilities.
  - In first three months of the year the NBM: raised policy rate by cumulative 600 basis points to 12.5 percent and increased reserve requirements for MDL deposits by 2 percentage points.
- Policy guidance and trade-offs:
  - FX interventions appropriate as immediate crisis response but should be limited to preventing disorderly adjustment and curbing excess volatility.
  - Move away from full-allotment liquidity provision and partially (rather than fully) sterilize FXIs to absorb excess liquidity and strengthen monetary transmission.
  - Monetary policy decisions should remain data dependent; staff recommends cautious tightening to anchor expectations and contain second-round effects.
  - Trade-offs: tightening versus maintaining banking system liquidity and supporting economic growth while preserving FX buffers.
  - Communication: clear communication about policy responses crucial to maintain market confidence.

### Financial sector vulnerabilities and policy measures
- Liquidity and deposits:
  - Individuals withdrew close to 10 percent of their bank deposits in FX and MDL since war onset; total deposits declined close to 8 percent relative to mid-February banking system stocks (trough by end-March).
  - System-wide LCR decreased to 282 percent at end-February 2022 from over 390 percent at end-2021 (regulatory level 80); still well above requirement.
- Capitalization and asset quality:
  - Aggregate capital adequacy ratio about 26 percent at end-2021.
  - System-wide NPLs decreased to about 6 percent of total loans by end-2021 (sectoral heterogeneity: higher NPLs among energy and agricultural sectors which account for 2 and 13 percent of the system-wide credit portfolio, respectively).
- Non-bank sector:
  - NBCO loans account for about 15 percent of total financial sector assets; about 30 percent of NBCO lending in FX (end-2021Q3).
- Policy and reform actions:
  - Amend NBM Law to enhance institutional autonomy and provide explicit legal mandate for financial stability by end-June 2022.
  - Update macro-solvency stress testing and resolution tools; targeted review of BRRL by end-June 2023.
  - Introduce prudential limits on DSTI and LTV ratios; consideration of LCR in FX; guidance limiting dividend payouts until shock is weathered.
  - Improve ELA framework with enhanced collateral eligibility, risk controls, and procedures.

### Rule of law, anti-corruption, and governance reforms
- Background: pervasive and entrenched corruption has eroded trust and weakened rule of law.
- Recent and planned measures:
  - Extraordinary vetting of judges and prosecutors began in March 2022.
  - April 2022: legislation passed improving selection process for heads of specialized prosecution bodies, including the Anti-Corruption Prosecutor (APO).
  - Commitments to appoint new head of APO via special pre-selection committee and fill position by end-December 2022 (end-December 2022 SB).
  - Commit to amend Criminal and Criminal Procedure Codes to add plea bargaining criteria and prohibit reduction of imprisonment terms in corruption cases below statutory minimum (end-December 2022 SB).
  - Commit to narrow focus of key anti-corruption bodies to high-level corruption (end-December 2022 SB).
- Expected gains from governance reforms:
  - Improve business environment, foster competition and innovation, unlock private investment, curb brain drain, accelerate human capital accumulation, and increase productivity.

### Program modalities, augmentation, disbursement schedule, and financing
- Authorities requested an ad-hoc review under the ECF/EFF arrangements and augmentation and rephasing of access:
  - Augmentation: SDR 194.26 million (112.6 percent of quota), of which SDR 64.79 million under the ECF and SDR 129.47 million under the EFF.
  - Increasing total access under the blended 40-month ECF/EFF arrangements approved in December 2021 to SDR 594.26 million (344.5 percent of quota).
  - Immediate disbursement equivalent to SDR 108.15 million (62.70 percent of quota), of which SDR 64.75 million under the ECF and SDR 43.40 million under the EFF.
- Staff supports augmentation and disbursement schedule:
  - May 11, 2022: Amount 108,150,000; Percent of Quota 62.70% (ECF 64,750,000; EFF 43,400,000).
  - Subsequent disbursements listed for July 14, 2022; October 14, 2022; January 24, 2023; July 24, 2023; January 24, 2024; July 24, 2024; January 24, 2025 with exact amounts and ECF/EFF breakdowns preserved in the program tables.
  - Total proposed augmentations and disbursements: Total 594,262,500; ECF 198,087,500; EFF 396,175,000; Total percent of Quota 344.50%; ECF percent of Quota 114.83%; EFF percent of Quota 229.67%.
  - Note: Moldova's quota is SDR 172,500,000.
- Balance-of-payments and financing needs:
  - Under agreed policies, BOP need estimated at a combined US$1.4 billion over 2022–24 (some US$0.6 billion greater than at approval).
  - Projection elsewhere: BOP financing requirement of US$1.7 billion in 2022–24.
  - Identified donors and financing include World Bank, European Commission, Agence Française de Développement, EBRD, and other bilateral partners; World Bank DPO US$150 million; EBRD EUR 300 million credit line earmarked for gas purchases.

### Program conditionality, monitoring, and performance
- Review schedule: higher-frequency reviews proposed for remainder of 2022 — end-June, end-September, and end-December; semi-annual reviews thereafter.
- For the ad hoc augmentation, assessed items include continuous performance criterion, structural conditionality, prior action, and the inflation consultation clause.
- Performance at end-March was mixed:
  - Cash deficit ceiling and floor on development spending met.
  - Floor on NIR missed due to higher energy import costs and FX interventions.
  - Floor on social spending missed due to lower-than-expected take-up of pandemic-related programs.
  - Continuous PC on external payment arrears met (no external payment arrears accumulated to date).
- Structural benchmarks:
  - Three end-March SBs met: solvency assessment for insurance companies; guidelines for SOEs to submit standardized quarterly financial statements for 2019–2021 by end-April; report on execution of investment projects by extrabudgetary funds.
  - One SB (strengthening the law on the prosecution service) not met by end-March and completed with slight delay in April.
  - New SBs: end-June 2023 targeted review of BRRL; end-December 2022 appointment of new head of APO per strengthened law.

### Inflation consultation clause and breach
- Inflation consultation mechanism:
  - Quarterly inflation targets measured as headline CPI with inner and outer bands around a center point; deviations trigger consultations with IMF staff or Executive Board.
  - Staff proposes widening the outer limits of the consultation band by 1 percentage point to account for uncertainties.
- Breach in March 2022:
  - Inflation at 22.2 percent YoY in March 2022 exceeded the outer band of the 5 percent ±2 percentage points ICC.
  - Causes: high global and domestic food prices (food price inflation grew by 27 percent yoy in March; vegetables +65 percent yoy), substantial energy tariff adjustments, and MDL depreciation.
  - Monetary response: policy rate increased by three consecutive 200 bps moves in January, February, and March to reach 12.5 percent by mid-April; reserve requirements raised; sizeable FX sales equivalent to 10 percent of FX reserves.
  - Outlook: inflation expected to persist into Q3 2022 and projected to return to target by second half of 2023 (with recalibration the expectation that inflation falls within the consultation band in April).

### Risk Assessment Matrix — summary of major conjunctural and structural risks
- Conjunctural risks (relative likelihood / impact / policy responses highlighted):
  - Russia’s invasion escalation — Relative Likelihood: High; Time Horizon: Short term; Impact: High. Policy: limit expenditures, protect social spending, tighten monetary policy, allow exchange rate pass-through, deploy NBM crisis toolkit, build contingency plans.
  - Covid-19 variant outbreaks — Relative Likelihood: Medium; Time Horizon: Short to Medium Term; Impact: High. Policy: growth-friendly fiscal policy, strengthen financial supervision, maintain flexible exchange rate.
  - Social discontent and political instability — Relative Likelihood: High; Time Horizon: Short to Medium Term; Impact: Medium. Policy: strengthen social spending, clear communication, strengthen rule of law, avoid policy reversals.
  - Rising and volatile food and energy prices — Relative Likelihood: High; Time Horizon: Short term; Impact: High. Policy: adjust tariffs, targeted fiscal support, rationing measures, seek alternate suppliers.
  - Feedback loops from corporate/non-bank sector exposures — Relative Likelihood: Medium; Time Horizon: Short term; Impact: High. Policy: strengthen monitoring, collateral enforcement, resolve insolvent non-banks.
- Structural risks:
  - Geopolitical tensions and de-globalization — Relative Likelihood: High; Time Horizon: Short to Medium Term; Impact: High. Policy: diversify economy, invest in infrastructure and skills, rebuild buffers.
  - Governance weaknesses and corruption — Relative Likelihood: High; Time Horizon: Short to Medium Term; Impact: High. Policy: safeguard reforms, protect social spending, strengthen anti-corruption and rule of law.
  - Natural disasters/climate change — Relative Likelihood: Medium; Time Horizon: Short to Medium Term; Impact: High. Policy: diversify economy, use monetary policy for second-round effects, invest in agricultural resilience.
  - Global information infrastructure failure — Relative Likelihood: Medium; Time Horizon: Short to Medium Term; Impact: High. Policy: strengthen cyber risk management and backups.

### Program outlook, staff appraisal, and policy recommendations
- Staff appraisal:
  - Moldova hit hard by war spillovers: trade disruptions, surging energy prices, weaker current account, hampered growth, and higher inflation.
  - Authorities’ response aligned with program: FX interventions to limit volatility, transparent energy subsidies with sunset clause, targeted support scheme development, and strong progress on structural benchmarks.
  - Financial sector resilient despite temporary liquidity pressures.
- Policy recommendations and priorities (enumerated):
  - Steadfast implementation of reforms to anchor confidence and growth.
  - Target energy subsidies transparently, time-bound and better targeted.
  - Maintain fiscal discipline while protecting high-priority social spending.
  - Strengthen revenue mobilization: publish comprehensive tax expenditure analysis and operationalize integrated taxpayer register.
  - Improve public investment management and fiscal transparency.
  - Strengthen NBM institutional autonomy and expand macroprudential toolkit (LTV, DSTI limits; consider LCR in FX).
  - Enhance anti-corruption measures and rule of law reforms (appoint APO head, narrow mandates, amend plea bargaining rules).
  - Preserve debt sustainability by relying on concessional financing and monitoring contingent liabilities (including SOEs).

_Italic: 1mdaea2022004 — EXECUTIVE SUMMARY (IMF staff report excerpts and associated program documentation)._

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- The economy rebounded strongly from the pandemic recession in 2021 while prudent macroeconomic management maintained robust buffers.  
- The war in Ukraine and international sanctions imposed on Russia and Belarus have resulted in significant spillovers to Moldova, with implications yet to fully play out.  
- At the outbreak of hostilities, FX market pressures triggered significant foreign currency interventions and bank deposit withdrawals, while dollarization has intensified.  
- Moldova has received the highest per capita inflow of Ukrainian refugees (17 percent of the total population), of which about 100,000 refugees (4 percent of the total population) remain in Moldova.  
- Driven by rising food and energy prices, inflation accelerated further above the target band.

### Recent economic developments
- Real GDP contracted by over 8 percent in 2020 and expanded by 13.9 percent in 2021.  
- The recovery was supported by a record agricultural harvest and strong private consumption growth.  
- Inflation: end-year 2021 inflation stood at 13.9 percent (yoy), and rose to 22.2 percent in March 2022.  
- Current account: the current account deficit worsened to 11.7 percent of GDP in 2021 from about 8 percent of GDP in 2020.  
- Public debt: public debt reached 32.5 percent of GDP in 2021, slightly lower than 33.7 percent of GDP in 2020.  
- Gross FX reserves: US$3.9 billion (about 174 percent of the Fund’s composite reserve adequacy metric) as of end-2021.  
- Banking sector: banks entered the crisis with strong capital and liquidity positions, both standing above regulatory requirements, and broadly balanced net open positions in foreign currencies.

### Channels of transmission of the war (summary of Box 1)
- Trade disruptions:
  - Russia, Ukraine, and Belarus represent about 24 percent and 15 percent of total imports and exports of goods and services, respectively.
  - Disruptions and sanctions are pressuring the current account and trade-related revenues (which represent more than a third of total government revenue).
  - Moldova is facing difficulties exporting agricultural products (e.g., apples and grains) for which Russia was the main importer.
- Energy price increase:
  - Cost of energy imports is expected to increase to US$1.8 billion (13.1 percent of GDP—the highest level since 2008), accounting for 25 percent of total goods imports in 2022.
  - All natural gas imports originate from Russia; main electricity supplier is based in Transnistria and operates with Russian natural gas, posing energy security risks.
  - Petroleum product supply is not reliant on Russia, but they account for the largest share of energy imports in value terms.
- Confidence:
  - Confidence effects are putting pressure on FX reserves, bank liquidity, and the government’s borrowing capacity, and are expected to weigh on private consumption and investment.
- Refugees:
  - About 100,000 refugees (4 percent of the total population) remain in Moldova.
  - Humanitarian support costs are currently estimated at around 0.4 percent of GDP.
- Remittances:
  - Remittances are over 15 percent of GDP; Russia accounts for close to 20 percent of remittances while the EU accounts for a half.

### Outlook and risks
- Baseline projection:
  - Real GDP growth: projected 0.3 percent in 2022, and 2 percent in 2023 (compared to pre-conflict forecasts of 4.5 percent and 5.5 percent for 2021 and 2022, respectively, in the program request staff report).
  - Real economy scarring: real GDP is estimated to stand at about 7 percent below pre-conflict forecast in 2026.
  - Inflation: average annual inflation is expected to reach 23.5 percent in 2022; inflation is likely to peak in the summer before easing towards the end of 2022 and in 2023, and is projected to remain well above the NBM’s target band until end-2023.
  - Fiscal: budget deficit projected to widen to 7.2 percent of GDP in 2022; public debt expected to increase to 38.4 percent of GDP amid increased concessional borrowing. Public debt is envisaged to decline to about 41 percent of GDP in 2027 after peaking at 43 percent of GDP in 2024 (DSA). Debt is assessed to be sustainable in the medium term but the overall risk of debt distress has been reclassified to moderate due to high sensitivity to adverse growth shocks.
  - External: current account deficit projected to widen to 13 percent of GDP in 2022 (relative to the 10 percent deficit expected pre-conflict); medium-term current account expected to narrow to 8.5 percent of GDP.
- Key risks (tilted to the downside and exceptionally large):
  - A sharper-than-anticipated increase in energy prices or disruptions in energy supplies.
  - Worsening of confidence effects that lead to an acceleration of MDL depreciation and system-wide liquidity pressures.
  - Further tightening of government financing constraints resulting in lower rollover rates.
  - Social risks: popular unrest over rising utility tariffs, worsening living standards, and deepening political divisions.

### Policy discussions and reform priorities
- Immediate challenge: navigate multiple shocks from the war in Ukraine.  
- Fiscal response:
  - Authorities approved a supplementary budget to address urgent spending needs related to continued influx of refugees, rising energy costs, and high inflation.  
  - Humanitarian support for refugees currently estimated at around 0.4 percent of GDP.  
- Structural reforms:
  - Progress with an ambitious structural reform agenda is crucial to enhance revenue mobilization, spending efficiency and transparency, and further strengthen the resilience of the financial sector.
  - Addressing significant governance weaknesses and institutional vulnerabilities remains critical.
  - Implementation of anti-corruption measures is progressing apace, and the authorities’ reform commitments have been further strengthened.
- Monetary and financial policies:
  - The report documents FX interventions and liquidity developments; banks remain above regulatory capital and liquidity requirements.
  - A comprehensive review of policies under the program will be undertaken at the time of the next review.

### The authorities’ requests and program status
- Authorities are requesting an ad-hoc review under the ECF/EFF arrangements and an augmentation and rephasing of access:
  - Augmentation: SDR 194.26 million (112.6 percent of quota), of which SDR 64.79 million under the ECF and SDR 129.47 million under the EFF.
  - Increasing total access under the blended 40-month ECF/EFF arrangements approved in December 2021 to SDR 594.26 million (344.5 percent of quota).
  - Immediate disbursement equivalent to SDR 108.15 million (62.70 percent of quota), of which SDR 64.75 million under the ECF and SDR 43.40 million under the EFF.
- Justification for ad-hoc review:
  - Pressing war-induced balance of payments financing needs—arising from the spike in energy prices, trade disruptions, adverse confidence effects, the inflow of refugees and the indirect impact of sanctions—cannot await the next scheduled review in June.
- Program status:
  - The program is on track and maintains goals of addressing protracted balance of payment problems and strengthening governance and institutional frameworks through an ambitious set of structural reforms.
  - Authorities’ commitment to the governance-focused reform agenda under the program remains strong, and reform commitments have been further strengthened.
  - Risks to the program are high but mitigated by the authorities’ strong program ownership.

*Source: 1mdaea2022004 - EXECUTIVE SUMMARY*

### 9.      Risks around the baseline are exceptionally large and tilted to the downside (Annex I).

### 9.      Risks around the baseline are exceptionally large and tilted to the downside (Annex I)

### Risks to the baseline
- A sharper-than-anticipated increase in energy prices or disruptions in energy supply are key risks.
- Based on recent peak futures prices, import costs could be several hundred million dollars higher than in the baseline this year, worsening the current account and hitting public and private balance sheets.
- Moldova’s energy security is at risk of an interruption or reduction in natural gas or electricity deliveries; a broader supply shock could trigger significant challenges to identify alternative sources.
- Given that Ukraine is an important food exporter to Moldova, food security risks are amplified.
- Increasing uncertainties and confidence effects related to the war in Ukraine could lead to:
  - an acceleration of MDL depreciation and system-wide deposit runs;
  - further tightening of government financing constraints due to lower rollover rates.
- Escalation of the war in Ukraine closer to the Moldovan border could:
  - exacerbate the refugee wave;
  - trigger serious confidence shocks.
- Moldova’s fragile social fabric could be tested by popular unrest over rising utility tariffs, worsening living standards, or deepening political divisions.
- Materialization of these risks would generate a further adverse layer of shocks via indirect spillovers, adding to direct shocks from the war.

### Authorities’ views and program implementation (summary)
- The authorities broadly shared staff’s view of the macroeconomic outlook, stressing Moldova’s high exposure to spillovers from the war in Ukraine due to geographic location, trade and financial linkages, and energy import dependence.
- Authorities see risks as substantial and largely tied to the future evolution of the conflict and global energy prices.
- Authorities have set up a first deep layer of contingency plans for extreme events (¶16, ¶21, ¶25 and Box 2), continuing to be enhanced with staff support.

Program implementation updates:
- The program is on track, with good progress on near-term structural commitments and strong program ownership.
- For the ad hoc augmentation, only the continuous performance criterion, structural conditionality, prior action, and the inflation consultation clause are being assessed.
- Performance against end-March indicative targets was mixed, largely due to shocks related to the war in Ukraine:
  - The cash deficit ceiling and floor on development spending were met.
  - The floor on the NIR was missed due to higher-than-expected energy import costs and FX interventions to mitigate war-induced exchange rate volatility.
  - The floor on social spending was missed largely on account of a lower-than-expected take-up of pandemic-related support programs.
- Authorities confirmed that, to date, no external payment arrears have accumulated; staff assesses the continuous performance criterion (PC) on external payment arrears is met.
- Inflation exceeded the outer consultation band in March 2022, triggering a consultation with the IMF Executive Board (Annex II, Attachment II).
- The prior action on adoption of a supplementary budget consistent with program objectives is on track of being met (¶16).
- Three end-March structural benchmarks (SBs) met:
  - Solvency assessment for insurance companies to support migration to Solvency II completed.
  - Guidelines issued requesting all central government SOEs to submit standardized quarterly financial statements for 2019–2021 by end-April.
  - Report published on execution of investment projects undertaken by extrabudgetary funds in the previous fiscal year.
- One SB (strengthening the law on the prosecution service) was not met by end-March and was completed with slight delay in April.
- Several end-June SBs and other program commitments are advancing, including:
  - Testing the integrated taxpayers’ register.
  - Comprehensive tax expenditure analysis progressing.
  - Draft legislative amendments to strengthen NBM institutional autonomy being discussed.
  - NBM and National Commission for Financial Markets jointly developing draft regulations to introduce prudential limits on debt-service-to-income and loan-to-value ratios.

### Fiscal and energy policies — background and policies
- Fiscal buffers as of end-2021:
  - General government budget deficit narrowed to 2.6 percent of GDP (compared to approved 5.1 percent of GDP under the program).
  - Authorities ended the year with MDL 11.9 billion (4.9 percent of GDP) in cash buffers.
  - As of April 8, MDL 4.3 billion (1.6 percent of GDP) of freely usable funds remain in the central government’s single treasury account.
- The 2022 budget (approved before the war) included higher allocations for crisis priorities at a cost of 1.4 percent of GDP and increased capital budget allocations by 0.4 percent of GDP relative to the previous year.
- Heightened uncertainty in the financial sector dampened demand for government debt:
  - Around 35 percent of the domestic debt stock has a maturity of less than one year.
  - Placement of 3-month to 1-year securities since the beginning of March stands at around 70 percent of amounts offered.
  - Given continued uncertainty, net issuance in 2022 is assumed to be zero, with domestic financing only rolling over existing debt.

Policy responses and fiscal measures:
- Authorities aim to design anti-crisis measures embedding structural reform principles, including monitoring and publishing budgetary costs of the refugee crisis and implementing transparent, targeted, and time-bound energy subsidies (MEFP ¶26).
- Under-execution relative to the end-March indicative target on social spending highlights need for improvements to the social safety net.
- Authorities adopted a supplementary budget to respond to the shock from the war in Ukraine, consistent with a deficit of 7.2 percent of GDP (relative to 6 percent in the previously approved budget) and addressing priority spending needs agreed with staff (prior action, MEFP ¶8).

Supplementary budget details:
- Revenues:
  - Revenues expected to be 1  percent of GDP higher relative to the previously approved budget.
  - High inflation boosts revenues by 0.7 percent of GDP; higher external grants add 0.3 percent of GDP.
  - Consumption-based taxes comprise around 45 percent of revenues.
- Expenditures:
  - Expenditures increased by 2.5 percent of GDP relative to the previously approved budget.
  - Fiscal cost to support households and businesses amid surge in energy prices and higher energy costs for public entities: 1. 2 percent of GDP (in addition to 0.7 percent of GDP in the original budget).
  - Budgeted for humanitarian needs of refugees: 0.4 percent of GDP (assuming six months’ duration and some external support).
  - Indexation of wages, pensions, social protection payments, and departmental budgets will create additional fiscal costs of about 0.9 percent of GDP.
- Contingencies (MEFP ¶8):
  - Flexible emergency funds replenished (0.3 percent of GDP).
  - Around 40 percent of revenues in 2021 were trade-related, posing downside risks to revenue projections.
  - Authorities signaled preparedness to cut non-priority expenditures if risks outstrip emergency funds.

Outlook and structural reform commitment:
- Uncertain financing could delay development priorities in 2023; absent firm additional external financing, available financing would dictate a sharp 2.1 percent of GDP contraction of the deficit in 2023.
- Authorities committed to calibrating policy to minimize impact on the most vulnerable and to a planned better-targeted natural gas subsidy scheme.
- Authorities remain committed to fiscal structural reform agenda (MEFP, ¶10–¶12), including:
  - Publication of a comprehensive assessment of tax expenditures.
  - Operationalizing an integrated taxpayer register.
  - Implementing reforms to PIM framework legislation.
  - Agriculture and health spending reviews; functional reviews of government departments.
  - Reforming the Ajutor Social minimum income scheme.
  - Continued work on a new Poverty Reduction Strategy.
  - Strengthening oversight over the SOE sector and fiscal risk monitoring.

Box 2 — Policy response to spike in international energy prices (key points)
- Natural gas tariffs increased by 300 percent:
  - Tariff increased from around 5 lei per m3 to 11 lei in November 2021, then to 15 lei in January 2022.
  - A subsidized tariff applied to households’ initial 150 m3 of natural gas consumption per month between November 2021 and March 2022.
  - The reduced rate covered 70 percent of household consumption; household consumption accounts for about half of total consumption.
- Electricity tariffs increased by around 40 percent in April to reflect higher cost of domestic production.
- Government budgeted a total of 1.9 percent of GDP in 2022 to shield economy from rising energy costs:
  - Subsidy for household natural gas consumption over January–March: 0.6 percent of GDP.
  - Increased budgetary allocations to public institutions to cover annual energy costs: 0.6 percent of GDP.
  - Smaller amounts cover support for businesses and compensation to electricity provider for a one-month delay (in March) in increasing electricity tariffs.
- Petroleum product price increases have been passed through to consumer prices with no implications for public expenditures.
- Continuous monitoring of energy tariffs needed; import prices for natural gas expected to increase further in Q2 2022 relative to Q1, keeping monthly import bill for natural gas as high as 0.4 percent of GDP over the summer.
- At current tariff level, high risk that economic costs of Moldovagaz would not be covered, requiring a natural gas tariff increase in June or July.
- An open tender for electricity provision will decide future import prices; if markedly higher, a further electricity tariff increase would likely be necessary.
- A more targeted household natural gas subsidy scheme is planned for next winter (November), cutting monthly cost by 50 percent to 0.1 percent of GDP by explicitly targeting low-income households.
- A soon-to-be-finalized loan with the EBRD of over EUR 300 million will allow buying and storing one winter month worth of natural gas consumption in Romania.
- Recent emergency synchronization of the Moldovan Power System with the ENTSO-E Continental Europe is an important step towards improving security of electricity supply.
- Authorities have contingency plans for a severe adverse price or quantity shock, including possible rationing; further gas tariff changes might be needed if import prices increase significantly.

### Monetary and exchange rate policies
- The NBM has increased the policy rate and intervened heavily amid inflation and FX pressures.
- Inflation stands well above both the NBM’s target band—by about 16 ppt at end-March—and the program’s consultation band in March (¶10).
- The lei has depreciated by 3 percent since the onset of hostilities, with FX interventions by the NBM amounting to about 10 percent of its stock of reserves.
- In the first three months of the year the NBM:
  - raised the policy rate by a cumulative 600 basis points to 12.5 percent;
  - increased reserve requirements for MDL deposits by 2 percentage points.

*IMF Staff Report excerpt (Republic of Moldova).*

### 21.      Further policy interventions will be needed, but the NBM will have to navigate difficult

### Further policy interventions will be needed, but the NBM will have to navigate difficult trade-offs

### Near-term macroeconomic and monetary policy assessment
- Skyrocketing energy prices and further increases in food inflation, in combination with depreciation pressures, are expected to worsen the near-term inflation outlook.
- FX interventions:
  - Appropriate as an immediate crisis response but should be limited to preventing a disorderly adjustment of the exchange rate and curbing excess volatility.
  - Authorities concur on carefully calibrated FX interventions (FXIs) to avoid disorderly market conditions.
  - Partially (rather than fully) sterilizing FXIs and moving away from a full-allotment strategy would help absorb excess liquidity, strengthen monetary transmission, and further safeguard FX reserves.
- Monetary policy stance and tools:
  - Monetary policy decisions should continue to be data dependent; a cautiously calibrated tightening, in a data dependent manner, is warranted to anchor expectations.
  - NBM is carefully monitoring signs of accelerating second round effects.
  - NBM should remain pro-active and continue tightening if warranted to contain spiraling inflationary pressures.
  - To alleviate constraints on FX reserves and limit unintended effects of policy rate increases, staff noted NBM could consider:
    - applying an asymmetric interest band on standing facilities;
    - reviewing the reserve requirement strategy.
  - NBM reiterated readiness to activate contingency plans, should severe downside risks materialize (MEFP ¶14).
- Communication:
  - Staff underscored that clear communication about policy responses is crucial to help maintain market confidence amidst ongoing uncertainty.
- Trade-offs highlighted:
  - Need to balance further policy tightening against objectives of maintaining banking system liquidity and supporting economic growth, while relying further on exchange rate depreciation and preserving sufficient FX buffers.

### Financial sector—background and vulnerabilities
- Liquidity pressures and buffers:
  - Deposit withdrawals in FX and MDL drained liquid assets; trough reached by end-March with a close to 8 percent decline in total deposits (relative to mid-February banking system stocks).
  - Retail deposits led the liquidity drag; corporates mainly switched to FX.
  - System-wide LCR decreased to 282 percent at end-February 2022 from over 390 percent at end-2021, remaining well above the regulatory level of 80.
  - Reverse stress tests by the NBM indicate banks can withstand significant deposit withdrawals.
  - Banks do not hold significant open currency positions.
  - NBM response: added MDL through standing facilities and FX swaps, carried out FX interventions, and ensured continued supply of FX banknotes despite closure of the airspace.
  - Largest risks: resumption of deposit runs and excessive use of FXI reducing FX reserves.
- Capitalization and asset quality:
  - Aggregate capital adequacy ratio about 26 percent at end-2021.
  - System-wide NPLs decreased to about 6 percent of total loans by end-2021 from about 8 percent at end-2019.
  - Sectoral heterogeneity: higher NPLs among energy and agricultural sector loans.
    - Energy and agricultural sectors account for 2 and 13 percent of the system-wide credit portfolio, respectively.
  - Risks: shocks to energy and agricultural sectors, high FX exposures, or direct exposures to Russia, Ukraine and Belarus could erode capital buffers for some banks.
  - If needed, potential capital and liquidity support by foreign parent banks is available for most domestic banks.
  - Other downside risks: interconnectedness risks from international banks with large exposures to Russia and Ukraine; sudden stop of external funding and spillovers from the non-bank sector; withdrawal of correspondent banking relationships.
- Non-bank sector vulnerabilities:
  - Non-bank credit organization (NBCO) loans account for about 15 percent of total financial sector assets.
  - NBCOs reported no net open currency positions but have a large share of FX lending (about 30 percent at the end of 2021Q3), exposing them indirectly to exchange rate credit risk.
  - NBCOs’ funding from non-residents poses maturity and liquidity risks if funding stops.
  - Insurance sector: undergoing Solvency II gap assessment; in aggregate remains solvent.

### Financial sector policies and planned reforms
- Structural benchmarks and legal frameworks:
  - NBM Law will be amended to enhance NBM’s institutional autonomy and provide an explicit legal mandate for financial stability by end-June 2022.
  - Update of macro-solvency stress testing framework and financial resolution tools as part of the Financial Sector Stability Review (with technical assistance).
  - New SB for end-June 2023: targeted review of the Bank Recovery and Resolution Law (BRRL) and relevant secondary legislation.
  - Legislative actions expected to improve the ELA framework by enhancing rules for collateral eligibility, risk controls, and internal procedures.
- Macroprudential toolkit and supervisory measures:
  - Planned introduction of LTV and DSTI limits to strengthen the macroprudential toolkit and foster responsible lending across banks and non-banks.
  - Per approved regulation, the LCR will increase to 100 percent in 2023; authorities are considering a LCR in FX.
  - Guidance issued on limiting dividend payouts to conserve banks’ capital positions; staff recommend maintaining this until the shock is weathered.

### Rule of law and anti-corruption—background and policy actions
- Background:
  - Pervasive and entrenched corruption has eroded trust in public institutions and weakened the rule of law.
  - Corruption enforcement historically focused on low-level acts; judicial actors are viewed as among the most corrupt and susceptible to undue influence.
- Policy measures and timetable:
  - Reform priorities: enhance independence and accountability of anti-corruption and judicial bodies; reduce avenues for political influence; instill trust in justice; hold corrupt actors accountable.
  - March: extraordinary vetting of judges and prosecutors began, starting with candidates to the Superior Council of Prosecutors (SCP) and the Supreme Council of Magistrates (SCM).
  - April: legislation passed improving selection process for heads of specialized prosecution bodies, including the Anti-Corruption Prosecutor (APO) (end-March 2022 SB).
  - Authorities committed to initiating selection for head of the APO with creation of a special pre-selection committee and fill the vacant position pursuant to the new procedure by end-December 2022 (new end-December 2022 SB).
  - Commitments to amend criminal law framework to add clear criteria and procedures for plea bargaining and to prohibit reduction of imprisonment terms in corruption cases below statutory minimum (end-December 2022 SB).
  - Commitment to narrow focus of key anti-corruption bodies to high-level corruption (end-December 2022 SB).

### Program modalities, financing, and conditionality
- Balance of payments and financing needs:
  - Under agreed policies, balance of payments need estimated at a combined US$1.4 billion over 2022–24, some US$0.6 billion greater than at approval of the current arrangement.
    - Additional fiscal needs about US$0.4 billion.
  - Additional fiscal financing needs: estimated at MDL 6 billion in 2022.
    - Under currently identified financing sources, additional fiscal financing needs in 2023 estimated at MDL 1 billion; a more optimal fiscal envelope would increase this by another MDL 3-4 billion.
- IMF augmentation and disbursement:
  - Staff supports augmentation of SDR 194.26 million (112.6 percent of quota), increasing total access under the ECF/EFF to SDR 594.26 million (344.5 percent of quota).
  - Full ECF augmentation to be available in a single disbursement in May 2022 to address pressing balance of payments difficulties.
  - Immediate disbursement equivalent to SDR 108.15 million (62.70 percent of quota), of which SDR 64.75 million under the ECF and SDR 43.40 million under the EFF.
  - All 2022–23 tranches will be used for direct budget support; remaining tranches split equally between the NBM and the MOF.
  - Augmentation preserves blending ratio of ECF/EFF resources of 1:2.
- Review schedule and performance criteria:
  - Higher-frequency review schedule for remainder of 2022: end-June, end-September, and end-December proposed as test dates for first, second, and third reviews, respectively; semi-annual reviews to resume thereafter.
  - QPCs recalibrated to new test dates and revised macroeconomic projections.
  - Inflation consultation clause modified:
    - (i) anchor monetary framework more closely to the inflation forecast and evolving outlook (center point modification);
    - (ii) account for significant uncertainties in near-term inflation outlook (outer band modification).
    - Staff proposes widening the outer limits of the consultation band by 1 percentage point.
    - Note: Without adding any risk factors, the simple forecast-error based confidence interval for inflation is about ±2 percentage point.
- Updated conditionality:
  - Two new structural benchmarks proposed:
    - end-June 2023: targeted review of the BRRL and relevant secondary legislation;
    - end-December 2022: appointment of new head of the APO in accordance with the strengthened Law on Prosecution Service.
- Financing prospects:
  - Program remains fully financed in 2022-23 with firm commitments covering next 12 months and good prospects thereafter.
  - External financing need in 2022 expected to be fully covered by disbursements from the ECF/EFF, the World Bank, the European Commission, the Agence Française de Développement, and the Government of Poland.
  - Similar sources expected to finance external financing gap in 2023–24; program expected to catalyze additional donor financing.

### Risks, staff appraisal, and program outlook
- Risks:
  - Risks to the program are substantial but mitigated by strong ownership and contingency planning.
  - Fund exposure will peak at 7 percent of GDP in 2024 before declining.
  - Total debt service to the Fund will peak at 2.3 percent of total exports in 2023.
  - Risk of debt distress assessed as moderate (DSA); capacity to repay considered adequate conditional on successful program implementation and absent major additional shocks.
  - Key downside risks: longer-than-expected impact from the war in Ukraine, climate-related shock, volatile political environment and policy reversals, sudden stop of external funding, and other major shocks.
- Staff appraisal highlights:
  - Moldova’s economy is being hit hard by spillovers from the war in Ukraine: trade disruptions, surging energy prices, weakened current account, hampered growth, and higher inflation.
  - Authorities’ crisis response has been swift and aligned with program principles: FX interventions focused on limiting volatility, transparent energy subsidies with sunset clause respected, and development of a targeted support scheme for the most vulnerable ahead of next winter heating season.
  - Financial sector remained resilient despite temporary liquidity pressures; strong progress on structural benchmarks under the program.
  - Supplementary 2022 budget addresses urgent spending priorities while maintaining debt sustainability as a key program anchor; targeting of energy subsidies to be further improved.
  - Despite the difficult environment, program is on track with good progress on key reform commitments, including fiscal governance, financial sector oversight, oversight of state-owned enterprises, and anti-corruption legislation (the latter with slight delay).
  - NBM preparing draft legislative amendments to strengthen institutional autonomy and, jointly with the NCFM, developing draft regulations to boost macroprudential toolkit and foster responsible lending.

*Source: IMF staff report excerpts (MEFP references as in source).*

### 38.      Meanwhile, the program’s focus on addressing significant governance weaknesses and

### 1mdaea2022004 - 38.      Meanwhile, the program’s focus on addressing significant governance weaknesses and

### Governance weaknesses, institutional reforms, and expected medium-term gains
- Structural reforms to strengthen governance frameworks and institutions can yield large medium-term gains.
- Strengthening the rule of law, addressing wide-spread corruption, and fully embracing the independence of key institutions are key priorities.
- The authorities and staff continue to agree that reforms under the program—appropriately sequenced and resolutely implemented—can:
  - improve the business environment,
  - foster competition and innovation,
  - unlock private investment,
  - curb brain drain,
  - accelerate human capital accumulation, and
  - increase productivity.

### Contingency planning and policy readiness
- Given exceptionally high uncertainty, the authorities have appropriately developed robust contingency plans.
- The 2022 budget incorporates emergency contingency funds which can be deployed should renewed spending pressures arise.
- The NBM stands ready to deploy its full toolkit to maintain financial stability if renewed or worsening pressures arise.
- On energy policy, the authorities are committed to passing on further price shocks to tariffs with additional fiscal support contingent on room in the budget.
- The authorities have also prepared plans in case volume reductions are needed in a severe adverse scenario.

*Source: 1mdaea2022004*

### 40.      Staff supports    the completion of the ad hoc review, inflation consultation,

### 1mdaea2022004 - 40.      Staff supports    the completion of the ad hoc review, inflation consultation,

### Program support, augmentation, and conditionality
- Staff supports completion of the ad hoc review, the inflation consultation, modification of performance criteria, and augmentation and rephasing of access under the current ECF/EFF arrangements.
- Fund approval is warranted for an augmentation of SDR 194.26 million (112.6 percent of quota) and the immediate disbursement equivalent to SDR 108.15 million (62.70 percent of quota).
- Staff supports the new proposed SBs, and a recalibration of the end-June, end-September, and end-December ITs and QPCs.
- The continuous PC on external payment arrears is being met at this time.
- A comprehensive review of policies under the program will be undertaken at the time of the next review.
- Rationale cited: Moldova’s pressing balance of payments financing needs, vulnerability to ongoing spillovers from the war in Ukraine, and the authorities’ demonstrated commitment to program objectives.
- Assessment: While risks to the program are substantial, the augmented arrangements would protect the Moldovan economy in the face of regional turmoil, catalyze external financing and give further impetus to crucial reforms which will foster inclusive medium-term growth.

### Real sector developments and projections
- Post-pandemic rebound described as strong, supported by important foreign currency inflows that helped sustain demand.
- Economic activity is expected to stagnate in 2022 on account of a deterioration of the trade balance, lower investment, negative net exports, and a slowdown in consumption growth.
- Regional trading partners adversely affected by the conflict.
- Real wage growth turned negative in late 2021 due to the sharp increase in inflation.
- Selected projections and indicators (from Table 1, 2020–2027; key series and exact values preserved):
  - Real GDP growth (2020–2027): 4.7 4.3 3.7 -8.3 13.9 0.3 2.0 5.8 5.4 5.0 5.0
  - Demand (2020–2027): 5.9 6.0 3.7 -6.1 15.3 2.1 2.8 5.2 4.8 4.5 4.1
  - Consumption (2020–2027): 4.7 3.3 2.9 -5.9 13.2 3.7 2.8 4.3 4.5 4.4 4.4
  - Gross fixed capital formation (2020–2027): 8.0 14.5 11.9 -2.1 1.7 -6.0 6.3 11.4 9.4 8.4 8.6
  - Net Exports of goods and services (2020–2027): -11.1 -13.0 -3.8 2.7 -21.1 -8.5 -5.3 -3.3 -2.9 -2.7 -0.5
  - Nominal GDP (billions of Moldovan lei, 2020–2027): 178.9 192.5 210.4 199.7 241.9 273.5 295.7 330.0 366.9 406.4 450.2
  - Nominal GDP (billions of U.S. dollars, 2020–2027): 9.7 11.5 12.0 11.5 13.7 13.8 13.8 14.4 15.6 16.8 18.0
  - Consumer price index (average, 2020–2027): 6.5 3.6 4.8 3.8 5.1 23.5 6.7 5.0 5.0 5.0 5.0
  - Consumer price index (end of period, 2020–2027): 7.3 0.9 7.5 0.4 13.9 16.5 5.0 5.0 5.0 5.0 5.0

### Monetary developments and exchange rate
- Headline inflation spiked since the beginning of the year mainly on account of a sharp increase in food and energy prices.
- The base rate was increased by a cumulative 600 bps since January 2021, in response to inflation and exchange rate pressures.
- Credit conditions have tightened; liquidity in the economy has been under pressure.
- The exchange rate depreciated by 3 percent, and reserves declined by about 10 percent since the beginning of the war.
- Monetary aggregates and banking sector (selected exact values, Table 4):
  - Reserve money (2017–2022): 36,997 43,557 46,851 55,639 57,548 58,689
  - Broad money (M3, 2017–2022): 77,110 83,159 89,951 107,625 119,760 119,655
  - Credit to the economy (2017–2022): 38,101 39,656 44,207 48,744 58,996 55,199
  - Gross international reserves (millions of U.S. dollars, 2017–2022): 2,803 2,995 3,060 3,784 3,902 3,353

### Fiscal sector developments and projections
- Revenues are showing signs of decline at a time when favorable external support is due to be lower.
- Spending pressures have mounted driven by multiple crises’ demands on current spending.
- The deficit is expected to hit a 10-year high; the overall risk of debt distress was reclassified as moderate.
- Selected fiscal projections and exact values (Table 3a, 2020–2027; amounts in millions of Moldovan lei):
  - Revenues and Grants (2020–2027): 53,379 57,996 62,949 62,655 77,373 83,993 94,038 105,887 119,860 134,271 148,595
  - Expenditure and Net Lending (2020–2027): 54,524 59,609 65,972 73,275 83,714 103,774 109,057 122,079 134,617 148,706 163,252
  - Overall Balance (incl. one-off items, 2020–2027): -1,145 -1,613 -3,023 -10,620 -6,341 -19,781 -15,019 -16,192 -14,758 -14,434 -14,657
  - Primary balance (excl. one-off items, 2020–2027): 807 -293 -1,595 -9,469 -4,849 -17,507 -13,254 -13,531 -12,026 -11,102 -10,586
  - Public and publicly guaranteed debt (millions of Moldovan lei, 2020–2027): 58,049 57,550 57,989 67,387 78,575 105,052 120,765 141,727 157,137 169,952 182,607
  - Public and publicly guaranteed debt (percent of GDP, 2020–2027): 32.5 29.9 27.6 33.7 32.5 38.4 40.8 43.0 42.8 41.8 40.6

### External sector, balance of payments, and reserves
- The REER has recently increased owing to a growing inflation differential with trading partners.
- Current account and trade outlook:
  - Current account balance (millions of U.S. dollars, 2019–2027): -555 -1,212 -1,112 -906 -1,595 -1,792 -1,644 -1,532 -1,508 -1,525 -1,536
  - Current account balance (percent of GDP, 2019–2027): -5.7 -10.6 -9.3 -7.9 -11.7 -13.0 -12.0 -10.6 -9.7 -9.1 -8.5
  - Merchandise trade balance (millions of U.S. dollars, 2019–2027): -2,559 -3,294 -3,312 -3,094 -4,190 -4,592 -4,610 -4,714 -4,879 -5,051 -5,277
  - Exports of goods and services (millions of U.S. dollars, 2019–2027): 1,866 1,975 2,118 1,944 2,562 2,562 2,742 2,961 3,207 3,479 3,845
  - Imports of goods and services (millions of U.S. dollars, 2019–2027): 4,425 5,269 5,430 5,039 6,753 7,154 7,351 7,675 8,086 8,530 9,121
- Financial account in 2021 accumulated inflows that more than covered the current account deficit, with favorable reserve adequacy metrics and net IIP showing signs of recovery after declining in the past few years.
- Gross official reserves (millions of U.S. dollars, 2019–2027): 2,803 2,995 3,060 3,784 3,902 3,300 3,338 3,826 3,973 4,071 4,189
- Remittances and compensation of employees (net, 2019–2027): 1,494 1,669 1,729 1,669 1,791 1,976 2,078 2,202 2,288 2,352 2,474

### External financing needs and identified sources
- External financing requirements and identified sources (Table 6, selected exact figures):
  - Gross Financing Requirement (2016–2026; selected years): 528 795 1545 1511 1296 194 322 032 103 207 720 762 131
  - Identified program financing (from Official Financing, Table 6): 177 150 659 418 222 437 017 099 00
  - Memorandum on exceptional official financing items include: European Commission, World Bank, Other official bilateral donors as identified sources (exact contributions listed in tables).

### Fund obligations, outstanding credit, and proposed disbursement schedule
- Fund obligations and outstanding credit (Table 8, selected exact figures):
  - Outstanding Fund Credit Based on Existing and Prospective Credit (Millions of SDRs, selected years): 346.7 368.5 494.8 595.1 719.7 707.3 662.8 602.4 515.6 401.6 290.8 185.2 99.8
  - Total Obligations Based on Existing and Prospective Credit (Millions of SDRs, selected years): 55.6 37.7 18.3 48.8 86.5 67.4 54.0 69.4 94.4 119.7 115.3 109.3 88.1
  - Total Obligations in Millions of U.S. dollars (selected years): 76.8 52.2 25.5 68.1 121.1 94.7 75.9 97.4 132.6 168.1 162.0 153.5 123.7
- Proposed augmented schedule of reviews and disbursements (Table 9; amounts and percent of quota preserved exactly):
  - December 20, 2021: Amount of Disbursement/Purchase 57,150,000; Percent of Quota 33.13% (ECF 19,050,000; EFF 38,100,000; 11.04% and 22.09% respectively). Condition: Board approval of the Arrangement.
  - May 11, 2022: Amount 108,150,000; Percent of Quota 62.70% (ECF 64,750,000; EFF 43,400,000; 37.54% and 25.16% respectively). Conditions: Board completion of ad hoc review, augmentation of access, the inflation consultation clause; and based on observance of continuous performance criteria, and prior action.
  - July 14, 2022: Amount 20,650,000; Percent of Quota 11.97% (ECF 9,525,000; EFF 11,125,000; 5.52% and 6.45% respectively). Conditions: Observance of end-June 2022 performance criteria, continuous performance criteria, and completion of first review.
  - October 14, 2022: Amount 20,650,000; Percent of Quota 11.97% (ECF 9,525,000; EFF 11,125,000; 5.52% and 6.45% respectively). Conditions: Observance of end-September 2022 performance criteria, continuous performance criteria, and completion of second review.
  - January 24, 2023: Amount 70,950,000; Percent of Quota 41.13% (ECF 19,050,000; EFF 51,900,000; 11.04% and 30.09% respectively). Conditions: Observance of end-December 2022 performance criteria, continuous performance criteria, and completion of third review.
  - July 24, 2023: Amount 70,950,000; Percent of Quota 41.13% (ECF 19,050,000; EFF 51,900,000; 11.04% and 30.09% respectively). Conditions: Observance of end-June 2023 performance criteria, continuous performance criteria, and completion of fourth review.
  - January 24, 2024: Amount 100,600,000; Percent of Quota 58.32% (ECF 19,050,000; EFF 81,550,000; 11.04% and 47.28% respectively). Conditions: Observance of end-December 2023 performance criteria, continuous performance criteria, and completion of fifth review.
  - July 24, 2024: Amount 100,600,000; Percent of Quota 58.32% (ECF 19,050,000; EFF 81,550,000; 11.04% and 47.28% respectively). Conditions: Observance of end-June 2024 performance criteria, continuous performance criteria, and completion of sixth review.
  - January 24, 2025: Amount 44,562,500; Percent of Quota 25.83% (ECF 19,037,500; EFF 25,525,000; 11.04% and 14.80% respectively). Conditions: Observance of end-December 2024 performance criteria, continuous performance criteria, and completion of seventh review.
  - Total proposed augmentations and disbursements: Total 594,262,500; ECF 198,087,500; EFF 396,175,000; Total percent of Quota 344.50%; ECF percent of Quota 114.83%; EFF percent of Quota 229.67%.
  - Note: Moldova's quota is SDR 172,500,000.

*Source: IMF staff estimates and projections as presented in the document.*

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### Conjunctural Risks
- Russia’s invasion of Ukraine leads to escalation of sanctions and other disruptions.
  - Relative Likelihood: High
  - Time Horizon: Short term
  - Impact if Realized: High
  - Key adverse developments described:
    - Sanctions on Russia are broadened to include oil, gas, and food sectors.
    - Russia is disconnected almost completely from the global financial system and large parts of the trading system.
    - Russian countersanctions and secondary sanctions on countries and companies that continue business with Russia lead to even higher commodity prices, refugee migration, tighter financial conditions, and other adverse spillovers.
    - Limited domestic financing; heightened uncertainty could dampen demand for government debt, raising the possibility of binding domestic borrowing constraints and lower rollover rates.
    - Acceleration of deposit withdrawals; panic-driven steady deposit withdrawals could intensify, degrading confidence and triggering capital flight.
    - Accelerated refugee inflows; increased cost to accommodate refugees and potential social tensions given the small size of the country and already fragile social fabric.
    - Increased inflation pressures domestically, due to higher commodity prices and worsening supply-demand imbalances, may pose difficult policy trade-offs.
  - Policy Response:
    - Limit expenditures to the extent that available fiscal cash buffers and external financing allow.
    - Ensure that the high-priority social spending is protected.
    - Tighten monetary policy through further increases in the policy rate.
    - Allow greater pass-through to the exchange rate.
    - If a crisis is imminent, the NBM will deploy its crisis toolkit as warranted.
    - Build contingency plans ready to be activated quickly (e.g. budget allocations that can be easily reoriented).
    - Ensure appropriate infrastructure in place to facilitate the transit of those refugees transiting through Moldova.
    - Closely monitor inflation.
    - Further tighten monetary policy to address second-round effects (if warranted).

- Outbreaks of lethal and highly contagious Covid-19 variants.
  - Relative Likelihood: Medium
  - Time Horizon: Short to Medium Term
  - Impact if Realized: High
  - Key adverse developments described:
    - Rapidly increasing hospitalizations and deaths, due to low vaccination rates or vaccine-resistant variants, force more social distancing and/or new lockdowns.
    - Extended supply chain disruptions and reassessment of growth prospects, triggering capital outflows, financial tightening, currency depreciations, and debt distress.
    - Higher fiscal costs to (i) contain virus fallout and strengthen the health care system; (ii) support businesses facing distress (e.g. losses, curtailed activity); and (iii) protect affected households via social transfers (layoffs/unemployment benefits).
    - The government may decide to adopt export restrictions/controls.
    - Mounting financing pressures due to potential loss of donor support.
    - Increased inflation pressures domestically, due to higher commodity prices and worsening supply-demand imbalances, may pose difficult policy trade-offs.
  - Policy Response:
    - Continue growth-friendly fiscal policy, strengthen efficiency of public spending, and reprioritize outlays.
    - Address structural bottlenecks through continued reforms to improve competitiveness and reduce trade costs.
    - Continue sound monitoring/supervision of the financial system to promptly address any signs of market distress.
    - Refrain from resorting to any protectionist measures.
    - Maintain a flexible exchange rate regime.
    - Closely monitor inflation.
    - Further tighten monetary policy to address second-round effects.

- Widespread social discontent and political instability.
  - Relative Likelihood: High
  - Time Horizon: Short to Medium Term
  - Impact if Realized: Medium
  - Key adverse developments described:
    - Social unrest fueled by increasing prices and shortages of essentials, rising inequality, inadequate healthcare, financial and social scars from the prolonged pandemic, and heavier household debt burdens amid rising interest rates.
    - Capital outflows, higher unemployment, and slower economic growth.
    - Economic activity and supply disruptions are likely from elevated social tensions and heightened insecurity.
    - Loss of confidence in the government’s ability to facilitate a strong recovery may fuel political instability and aggravate economic uncertainty.
    - Risk of policy reversals by the government to appease rising protest demands, and/or mitigate heightened instability.
  - Policy Response:
    - Strengthen budget outlays, especially those geared towards social spending in support of distraught households, and in support of businesses and economic recovery.
    - Communicate the government’s policy deliverables clearly to the general population and to economic agents, to ascertain the credibility of its intentions and provide certainty, clarity, and assurances to market participants on the path of adjustment and recovery.
    - Enhance rule of law and strengthen anti-corruption measures, including those aimed at increasing transparency and accountability in public spending.
    - Avoid policy reversals.

- Rising and volatile food and energy prices.
  - Relative Likelihood: High
  - Time Horizon: Short term
  - Impact if Realized: High
  - Key adverse developments described:
    - Commodity prices are volatile and trend up amid supply constraints, war in Ukraine, export restrictions, and currency depreciations, causing short-run disruptions in the green transition, bouts of price and real sector volatility, food insecurity, social unrest, and acute food and energy crises.
    - Volatile energy prices and/or interruptions in energy supply raise the cost of energy imports; disruption of gas supply deliveries to Moldova would force replacement from the spot market at a much higher cost; alternative electricity supplies could become capacity constrained and/or significantly more expensive, possibly necessitating temporary rationing.
    - Deterioration in food security; higher food prices and/or supply disruptions would hurt vulnerable consumers and could weigh on domestic demand via reduced purchasing power and aggravate domestic social tensions.
  - Policy Response:
    - Adjust local energy tariffs.
    - Allocate additional budget resources to targeted measures that shield most vulnerable segments of the population through transparent processes.
    - Implement measures to ration demand.
    - Extend support to the energy regulator to ensure energy sector security.
    - Closely monitor inflation.
    - Seek alternative foreign suppliers.
    - Allocate funds to increase domestic grains reserve.
    - Target fiscal support to segments of the population hit hardest by rising food prices.
    - Increase investments in agricultural productivity and agricultural infrastructure.

- Feedback loops from corporate balance sheets and spillovers from non-banks to banks, resulting from shocks to the energy and agricultural sectors as well as exposures to Russia, Ukraine and Belarus.
  - Relative Likelihood: Medium
  - Time Horizon: Short term
  - Impact if Realized: High
  - Key adverse developments described:
    - Significant worsening of debtor balance sheets, concentrated in the energy and agricultural sectors, would lead to rising NPLs.
    - Spillovers from the non-bank sector could further exacerbate stress in financial institutions.
  - Policy Response:
    - Follow standard procedures in place, including collateral enforcement and capital and provisioning buffers to absorb losses.
    - Strengthen monitoring of non-banks and stand ready to take necessary preventive regulatory measures should risks increase.
    - Implement policies to resolve insolvent non-bank entities.

### Structural Risks
- Geopolitical tensions and de-globalization.
  - Relative Likelihood: High
  - Time Horizon: Short to Medium Term
  - Impact if Realized: High
  - Key adverse developments described:
    - Intensified geopolitical tensions, security risks, conflicts, and wars cause economic and political disruptions, fragmentation of the international monetary system, production reshoring, a decline in global trade, and lower investor confidence.
    - Tensions in major regional trade partners and donors could disrupt Moldova’s growth trajectory through trade, remittances, and financial flows, aggravate domestic and external financing constraints, and undermine energy security.
    - Associated changes in global trade, remittances, and capital flow patterns could affect Moldova’s economy and the balance of payments.
  - Policy Response:
    - Diversify the economy and improve competitiveness via structural reforms.
    - Improve effectiveness of donor-financed projects.
    - Invest in new infrastructure, technology, and labor skills.
    - Rebuild fiscal and financial buffers.
    - Maintain flexible exchange rate regime.

- Global information infrastructure failure.
  - Relative Likelihood: Medium
  - Time Horizon: Short to Medium Term
  - Impact if Realized: High
  - Key adverse developments described:
    - Disruption in global information systems (from an unintended error, natural disaster, or knock-on effects of widespread energy shortages) and/or cyber-attacks on critical infrastructure and institutions trigger financial instability or widespread disruptions in socio-economic activities and remote work arrangements.
    - Potential paralysis to financial services provided by bank and non-bank financial institutions can depress economic activity and induce hefty costs and financial losses, fuel sudden stops in government, household, and cross border operations, and raise fears of financial contagion and of identity theft.
  - Policy Response:
    - Review and strengthen national cyber security risk management and mitigation policies, such as safety of personal, banking and sensitive official information sources, records, and data systems.
    - Invest in continuous, automatic backups on secured servers.

- Governance weaknesses and corruption vulnerabilities could contribute to domestic populism and reform fatigue, which could jeopardize reform momentum and undermine donor funding.
  - Relative Likelihood: High
  - Time Horizon: Short to Medium Term
  - Impact if Realized: High
  - Key adverse developments described:
    - Lower potential growth on account of continued emigration, crumbling infrastructure, and low productivity.
  - Policy Response:
    - Continue policy reforms and safeguard progress to date.
    - Resist populist demands.
    - Protect social spending on poor, improve targeting.
    - Continue growth-friendly fiscal policy.
    - Maintain flexible exchange rate regime.
    - Implement active labor market policies to encourage labor market participation.
    - Strengthen anticorruption efforts and rule of law to instill public confidence in government and public bodies.

- Natural disasters related to climate change.
  - Relative Likelihood: Medium
  - Time Horizon: Short to Medium Term
  - Impact if Realized: High
  - Key adverse developments described:
    - Higher frequency of natural disasters cause severe economic damage and accelerate emigration.
    - Adverse weather conditions would directly affect economic and labor conditions in the large agricultural sector, put pressures on domestic food prices, and reduce export flows.
    - Severe events in large economies reduce global GDP, cause further supply chain disruptions and inflationary pressures, and prompt a recalculation of risk and growth prospects.
    - Lower potential growth.
  - Policy Response:
    - Diversify the economy and improve competitiveness via structural reforms.
    - Use monetary policy to address second round effects of commodity prices shocks.

*Annex I. Risk Assessment Matrix (extract).*

### 2.      The escalation of shocks generates significant financing needs and challenges social

### 2.      The escalation of shocks generates significant financing needs and challenges social 

### Financing needs and external support
- Projected balance-of-payment (BOP) financing requirement of US$1.7 billion in 2022–24—largely on account of worsening current account balance due to lower growth in our trading partners triggered by the war and associated sanctions hurting exports of goods and services—to be financed with an ECF-EFF augmentation and external assistance.
- Use FX reserves to tame excessive exchange rate volatility and secure external financing to bolster external buffers.
- Planned external financing and support (as described):
  - IMF: increasing total access under the ECF/EFF by SDR 194.26 million to SDR 594.26 million.
  - World Bank: US$290 million.
  - European Union: EUR million in grants and loans. 
  - Agence Française de Développement: EUR 65 million.
  - EBRD: EUR 300 million credit line earmarked for gas purchases from the spot market to help mitigate energy security risks.

### Moldova’s starting position and buffers
- Growth:
  - Economy posted 13.9 percent growth in 2021, notwithstanding a lingering pandemic and energy crisis.
  - Rebound driven mainly by robust private consumption, supported by strong remittances and robust growth in wages and consumer credit.
- Inflation:
  - CPI inflation increased steadily to 13.9 percent in December 2021, driven by surging energy, commodity, and food prices on global markets, and accelerating core inflation due to recovery in domestic demand.
- Fiscal position:
  - General government deficit narrowed to 2.6 percent of GDP in 2021 compared to the approved 6.0 percent of GDP under the program.
  - Revenue and grants overperformed reflecting the solid economic recovery and sizeable external support, including from the IMF and the EU.
  - Government cash buffers increased to about 4.9 percent of GDP while public debt reached 33.8 percent of GDP.
- External:
  - Current account deficit widened to 11.7 percent of GDP in 2021.
  - Gross foreign exchange reserves closed the year at US$3.9 billion (5.5 months of prospective imports of goods and services).
- Monetary and financial policies:
  - Since July 2021, the National Bank of Moldova (NBM) shifted to a tightening cycle and hiked the base rate by 600 basis points.
  - Interest corridor narrowed by 1 percentage point to incentivize savings.
  - Temporary pandemic-related loan forbearance measures and NCFM guidance for non-bank financial institutions were implemented early in the pandemic and have been fully phased out as of today.

### Near-term outlook and risks
- Growth and inflation projections for 2022:
  - Economy expected to stagnate in 2022, with growth projected at 0.3 percent in 2022 compared to the pre-war forecast of 4.5 percent.
  - Inflation projected to average 22 percent in 2022.
- Fiscal and external outlook for 2022:
  - General government deficit expected to reach 7.2 percent of GDP in 2022 compared to 6 percent of GDP envisaged in the approved budget.
  - Current account deficit expected to widen to 13 percent of GDP.
  - FX reserves projected to drop to US$3.3 billion or 4.5 months of prospective imports.
- Adverse risks:
  - Sharper-than-anticipated increase in energy prices or disruptions in energy supply could impair public and private balance sheets.
  - Uncertainty around electricity contract renewal or limited progress in the audit for Moldovagaz could disrupt supplies and exert sizeable fiscal costs.
  - Escalation of the war in Ukraine could hurt confidence, exert pressure on the Moldovan lei, undermine domestic securities markets, and culminate into system-wide deposit runs.
- Policy response emphasis:
  - Steadfast implementation of reforms is the first line of defense.
  - Additional resources from the IMF, other multilateral and bilateral partners, and donors should help anchor confidence.

### Commitment to program and recent structural reforms
- Continuous engagement with the Fund since program approval in December.
- All end-March structural benchmarks implemented.
- Specific completed actions:
  - Solvency assessment for insurance companies to support migration to Solvency II framework.
  - Guidelines requiring all central government SOEs to submit standardized quarterly financial statements for 2019–2021 by end-April.
  - Draft report on execution of investment projects undertaken by extrabudgetary funds in 2021.
  - Strengthened the law on prosecution in consultation with the IMF and other stakeholders.

### Fiscal policy stance and measures
- Objective: respond to shocks (war in Ukraine, energy insecurity, high inflation, and pandemic) while pursuing development goals.
- Approved 2022 budget allocations (original approved budget):
  - Support for gas supplies and compensation for households: 0.7 percent of GDP.
  - Unemployment schemes and agricultural subsidies: 0.4 percent of GDP.
  - Health sector: 0.3 percent of GDP.
  - Capital budget allocation: 3.7 percent of GDP.
- Supplementary budget actions (aligned with IMF staff macroeconomic framework):
  - Target general budget deficit of 7.2 percent of GDP subject to financing availability (prior action).
  - Additional support to secure energy supplies and cushion households and businesses: 1.2 percent of GDP.
  - Humanitarian needs, including shelter, medicine, food, and additional wage costs: 0.4 percent of GDP.
  - Replenished flexible emergency funds in the budget by 0.3 percent of GDP.
  - Deficit to be financed by development partners (EU’s macro-financial assistance and grants, World Bank development policy financing, the IMF, bilateral donors) and domestic sources.
- Contingency planning:
  - Preparing contingency measures in consultation with IMF staff.
  - If further shocks materialize, will reprioritize spending within the budget and reduce capital expenditures to support priority spending needs.

### Fiscal sustainability and medium-term targets
- Nominal depreciation and response to the triple shocks will increase public debt towards 45 percent of GDP, the level anchoring the program.
- Targeted deficit of 5.1 percent of GDP in 2023, subject to financing availability and potential easing if additional financing becomes available.
- Medium-term budget framework target: general government deficits of about 3½-4½ percent of GDP in 2024–26.
- Development-focused spending priorities: capital spending on roads, energy diversification, and water; investments in health and education; supporting SME growth and job creation.
- Supporting measures: reforms to mobilize domestic revenues, enhance spending efficiency, domestic market development, and strengthen fiscal governance and transparency.

### Reforms to strengthen revenue mobilization
- Publish comprehensive tax expenditure analysis of VAT and income taxes (end-June 2022 structural benchmark).
  - Draft report inventorying tax expenditures and establishing a baseline tax system prepared with IMF technical assistance.
  - Institutionalize tax expenditure reviews as part of annual state budget planning starting in 2022.
- Strengthen tax administration (in line with IMF TA):
  - Operationalize the integrated taxpayer register (end-June 2022 structural benchmark).
  - Strengthen STS capacity to investigate and refer tax crimes for prosecution by signing relevant protocols, addressing gaps in legislation, and organizing training and TA from the IMF.
  - Launch automatic exchange of information with the OECD's Global Forum on Transparency and Exchange of Information for Tax Purposes by September 1, 2023.
  - Introduce a General Anti-Avoidance Rule provision in the tax code.
- Phase out favorable treatment of carbon emissions:
  - Road fuel excises adjusted annually by nominal GDP growth with a view to converge towards minimum EU levels by 2025.
  - Review energy sector taxation regime after pandemic and energy crises subside.
- Advance customs reforms:
  - New customs code approved in August 2021 to align regulations with international best practices and EU directives effective January 1, 2023.
  - Amendments to reduce legal threshold for smuggling as a criminal offence, raise administrative fines, and define smuggling offense base to include duties, taxes, and other fees.
  - Intend to ratify the WHO Protocol to Eliminate Illicit Trade in Tobacco Products during the program.
- Leverage AML/CFT regime to strengthen tax compliance:
  - Use AML/CFT tools to identify beneficial owners, improve exchange of information, and strengthen cooperation between tax authority, financial intelligence unit, and law enforcement.

### Reforms to improve budget quality and fiscal transparency
- Institutionalize spending reviews:
  - Completed education sector review in 2018; finalizing agriculture sector review; launched health sector review.
  - Implement relevant recommendations from completed spending reviews.
- Strengthen fiscal responsibility framework and budget transparency:
  - Review framework in place since 2018 to reduce procyclicality, limit escape clauses, and strengthen oversight.
  - Regularly monitor and publish on the Ministry of Finance webpage information about budgetary allocations on refugee-related spending.
- Strengthen public procurement:
  - November 2020 secondary legislation amended to require provision and publication of beneficial owner information for tenders.
  - Published pandemic-related spending report for 2020, including beneficial owner entities contracting with government.
  - Publish beneficial ownership information of all entities contracting with public authorities on the Public Procurement Agency website.
  - Roll out a new e-procurement system to cover all public procurements by January 1, 2023.
  - Approve a Public Procurement Development Program roadmap for the next four years.
- Enhance disclosure and management of fiscal risks:
  - Published fiscal risk statement as addendum to budget documents starting 2018; expanded coverage in 2020 to include key PPPs, large SOEs, and government guarantees under the Prima Casa housing support program.
  - Continue to improve coverage, monitoring, inter-agency coordination, and reporting quality of contingent liabilities.
- Strengthen debt and cash management:
  - Review legal foundation underlying debt management, strengthen operational capacity, develop primary dealer system, and develop a new platform for retail investors.

### Reforms to make expenditures efficient, sustainable, and growth-friendly
- Public investment management (PIM):
  - Strengthen planning, allocation, and implementation stages of the PIM cycle guided by the 2019 PIMA report recommendations.
  - Published five reports on execution of investment projects undertaken by developmental funds in the previous fiscal year (end-March 2022 structural benchmark) and require annual updates.
  - Amend legislation and regulations to expand PIM coverage to include state budget projects, externally funded projects, and development funds (end-September 2022 structural benchmark).
- Unitary pay system:
  - Undertake analysis to improve wage-compression ratio, strengthen budgetary process, and address staffing needs.
  - Launched a fully operational comprehensive IT-based staff registry pilot in December 2021 covering Ministry of Finance and STS; expand to Customs Service, Financial Inspectorate, and Public Procurement Agency.
  - Expand coverage of IT-based staff registry to all central government employees (end-June 2022 structural benchmark).
- Pension system sustainability:
  - Corrected policy slippage on retirement ages by repealing legislation that reduced retirement ages.
  - Modified indexation formula to ensure viable replacement ratios.
  - Raised minimum pension by 68 percent to MDL 2,000 in October 2021.
  - In April 2022, raised pension components below the average monthly salary by 14 percent, and topped up all pensions by a fixed amount computed as half of real GDP growth applied to the amount of average pension.
  - In consultation with the World Bank, intend to continue broadening the contribution base.
- Social assistance reforms:
  - Outlays on social assistance remain low (about 1 percent of GDP); poverty remains high (around 15 percent).
  - Only 40 percent of payments are means-tested.
  - Initiated reform of the Ajutorul Social program with World Bank support to increase allocations and improve targeting, shift resources from categorical to means-tested payments, increase coefficients for most vulnerable, and make remote application operational.
  - Commit to updating Poverty Reduction and Strategy Paper (PRSP) by end-December 2022.
- Disaster and climate risk mitigation:
  - In cooperation with the World Bank, explore measures for agricultural resilience including sustainable practices, access to irrigation, drought-resistant crop varieties, anti-hail protection, and innovative insurance schemes.
- Gender equality:
  - Implement family-friendly policies to provide better childcare services and facilitate earlier return to work for parents.
  - Work with U.N. agencies and other stakeholders to analyze measures to enhance parental leave and childcare policies and to remove gender-biased distortions.

_Italic: Republic of Moldova — International Monetary Fund excerpt._

### 13.      Inflation exceeded the outer band of the inflation consultation clause in March 2022,

### 13.      Inflation exceeded the outer band of the inflation consultation clause in March 2022

### Inflation outlook and drivers
- Inflation exceeded the outer band of the inflation consultation clause in March 2022, triggering a consultation with the IMF Executive Board.
- Acceleration in inflation driven predominantly by supply-side pressures developed in early-2022, including escalating international food and energy prices and substantial adjustments in domestic energy tariffs.
- Spillovers from the war in Ukraine put pressure on the lei, which depreciated since the intensification of the conflict, with significant pass-through to domestic prices of imported goods.
- Despite significant tightening of monetary and liquidity conditions, the NBM and IMF staff share the view that high inflation is likely to persist into the third quarter of the 2022 before easing gradually.
- With recalibration and modification of the inflation consultation band:
  - Inflation is expected to fall within the consultation band in April.
  - Inflation is projected to return to the target by the second half of 2023.

### Monetary and liquidity policy response
- Policy rate:
  - On January 13, February 15, and March 15, we increased the policy rate by 2 percentage points each time to 12.5 percent to combat the accelerating and persistent inflation which reached 18.5 percent in February.
  - The NBM stands ready to continue tightening monetary policy stance in a data-dependent manner to address second round effects from rising commodity prices and anchor expectations.
- Reserve requirements:
  - Raised the reserve requirement ratio for MDL and non-convertible currencies by 2 percentage points to 28 percent in January.
  - Maintained required reserves for foreign currency at 30 percent.
  - The NBM stands ready to continue to adjust reserve requirements for MDL, if needed.
- Foreign exchange intervention:
  - NBM undertook sizeable foreign exchange sales equivalent to 10 percent of FX reserves to limit excessive exchange rate volatility.
  - Policy stance: allow necessary exchange rate adjustment, manage reserves conservatively, limit interventions to counteracting excessive exchange rate volatility, and actively communicate intervention strategy to the market.
- Contingency measures:
  - NBM stands ready to undertake necessary contingency measures, in consultation with IMF staff, to be used in combination with a broader macroeconomic adjustment package if severe downside risks materialize and endanger macroeconomic and financial stability.

### Financial sector stability and liquidity
- Deposit and portfolio movements since war onset (February through end-March):
  - Individuals withdrew close to 10 percent of their bank deposits in FX and MDL.
  - Corporates mostly switched their portfolio to FX.
- System-wide liquidity and resilience:
  - Liquidity coverage ratio remains above the prescribed level at 80 percent by end-March.
  - According to recent NBM stress tests, banks can withstand significant withdrawals of liabilities.
  - Capital adequacy ratio of 26 percent at end-March; banks remain well capitalized to withstand significant loan losses.
  - Nonperforming loans at 6.7 percent, assessed as manageable but vulnerable to worsening debtor balance sheets from war-related shocks.
- Contingency and supervisory actions:
  - Commit to upgrade and activate the ELA framework and undertake other contingency measures to address liquidity risk.
  - Issue and maintain guidance on limiting dividend payouts until the shock is weathered to conserve banks’ capital positions.

### Institutional autonomy, governance, and supervisory strengthening
- Commitment to strengthen institutional autonomy and governance of the NBM and fully implement safeguards recommendations.
- Draft amendments shared with IMF staff to strengthen provisions for (end-June 2022 structural benchmark):
  - Procedures and criteria for the appointment, resignation, and dismissal of the Governor and Deputy Governors and members of the Supervisory Board.
  - Prohibiting influence from public and private parties.
  - Clarifying managerial responsibilities for the governor and the executive board.
- Preserve recent banking sector reforms and actions to remove shareholders not fulfilling fitness and probity criteria, reinforce finality of supervisory decisions, and pursue independent investigations and prosecutions of fraud perpetrators.
- Strengthen crisis management arrangements:
  - Discuss financial stability and fiscal risks at the National Committee for Financial Stability (NCFS) and the Supreme Security Council.
  - Prepare and regularly update comprehensive contingency plans to:
    - Ensure provisions and capital charges applied to banks due to pending legal decisions are in line with IFRS and NBM regulations.
    - Require credible and time-bound capital restoration plans where capital falls below prudential limits alongside other supervisory corrective actions.
    - If necessary, implement resolution actions identified by competent authorities in line with the Bank Recovery and Resolution Law (BRRL).

### Supervisory framework, macroprudential tools, and structural benchmarks
- Targeted reviews and legislative amendments planned for 2023 and by end-June 2022:
  - 2023: targeted review of the BRRL and relevant secondary legislation (end-June 2023 structural benchmark) to identify shortcomings, introduce more flexibility to the MREL requirement, the conditions of access to the resolution fund, and the participation of the DGF in financing resolution measures.
  - Conduct a comprehensive review of the bank liquidation framework to strengthen liquidation procedures.
  - Allocate more staff to the Financial Stability department to enhance monitoring of systemic risks.
  - Close gaps in the macroprudential framework by:
    - Amending the NBM Law to provide an explicit legal mandate for financial stability by end-June 2022.
    - Strengthening NBM’s macroprudential toolkit to introduce caps on loan-to-value (LTV) and debt-service-to-income (DSTI) ratios for financial institutions by end-June 2022.
  - Update the macro-solvency stress testing framework.
  - By end-June 2022, amend the NBM Act, the Law on Bank Activity, and other relevant legislation to ensure NBM supervisory work is not curtailed by inappropriate deadlines or impediments introduced by the 2019 Administrative Code.
- Bolster financial safety nets:
  - Enhance the DGF’s capability to pay out insured deposits, including conducting stress tests for both the DGF and banks.
  - Strengthen resolution preparedness for implementation of the Bridge Bank Tool and Bail-in tool, including operational plans and bolstered inter-agency cooperation.
  - Approve secondary ELA regulations to enhance rules for collateral eligibility, risk controls, and internal procedures (end-June 2022 structural benchmark).

### Non-bank sector, insurance, and capital markets
- Oversight of non-bank sector:
  - Draft amendments prepared to Law 192/1998 (previously draft Law 186) to strengthen provisions safeguarding MCFM’s autonomy; plan to adopt them shortly.
  - Prior commitment to transfer regulatory and supervisory responsibilities for non-bank credit organizations, savings and lending associations, and insurance companies to the NBM effective July 1, 2023.
  - Enhance intra-authority coordination and prepare a comprehensive action plan covering legal framework clarification, capacity building, business continuity, regulatory changes, and communication.
- Nonbank credit organizations (NBCO):
  - NBCO loans have edged up recently, accounting for 15 percent of financial sector assets.
  - Large share of FX lending at about 30 percent of total loans exposes NBCOs indirectly to exchange rate credit risk and funding from non-residents to maturity and liquidity risks.
  - Strengthened law on non-bank credit institutions to include due diligence on debtors’ repayment capacity and collateralization levels.
  - Approve legislation on LTV and DSTI ratios for NBCOs by end-June 2022.
- Insurance companies:
  - Finalized comprehensive solvency assessment by a reputable auditing firm for all insurers issuing green cards (end-March 2022 structural benchmark).
  - April 2022: adopted a new law on insurance and reinsurance activity to transpose Pilar II and Pilar III of the solvency II framework.
  - Plan to conduct a gap analysis for all insurers to evaluate readiness for subsequent implementation of Pilar I.
  - Law on Motor Third Party Liability Insurance approved by parliament in the first reading at end-March.
  - Committed to implement resolution steps for insolvent insurers to safeguard assets.
- Capital markets:
  - Plan to consolidate supervision of capital markets by transferring supervisory competencies of the Central Securities Depository (CSD) from the NBM to the NCFM.
  - Will set up an intra-agency coordination committee to prescribe process for supervision, ownership, and governance of the CSD under the new regulatory framework.

### Financial inclusion and AML/CFT
- National Financial Inclusion Strategy (NFIS):
  - Develop an inter-agency committee mandated to develop, implement, and monitor an NFIS.
  - Target strategies focusing on development of inclusive financial products and leveraging digital services for consumers and SMEs.
  - Augment existing laws to strengthen consumer protection (disclosures and define consumer rights) and bolster enforcement by providing agencies with appropriate resources and improved coordination.
- AML/CFT:
  - Continue strengthening the AML/CFT regime, addressing vulnerabilities identified in the 2019 MONEYVAL assessment.
  - Conduct outreach to financial sector on risk-based approach, suspicious transactions reporting, politically exposed persons, and identification of beneficial owners.
  - Strengthen capacity of regulatory authorities and improve coordination among regulatory authorities, law enforcement, and private sector.
  - Adopted a National AML/CFT Strategy for 2020–25; will update National Risk Assessment, develop accompanying action plan, and publish results.

### State-owned enterprises and energy sector reforms
- SOE reforms and fiscal risk monitoring:
  - Public Property Agency requested in February all SOEs at central government level to submit quarterly financial statements (end-March 2022 structural benchmark); these will be regularly shared with the Ministry of Finance.
  - Undertake comprehensive assessment of financial position of all central government SOEs to identify corrupt practices and legacy contracts contributing to fiscal costs.
  - Identified 169 economically active SOEs out of 268; will work to improve data reporting and adjust legal/regulatory framework.
  - Government will develop and adopt a state-ownership strategy for all central government SOEs to identify entities for reorganization, privatization, or liquidation and plans to strengthen governance (end-September 2022 structural benchmark).
  - Plans to expand fiscal and financial monitoring of SOEs to the local government level.
- Energy sector response and measures:
  - Tariff adjustments will be critical to respond to possible further import price increases; additional fiscal support subject to availability of budget resources.
  - Natural gas:
    - Import prices—partly indexed to spot natural gas prices—have increased sharply.
    - Increased domestic gas prices in January to reflect the imported price.
    - Provided direct support to residential consumers up to 150m3 and up to 500m3 for non-residential clients in a transparent way.
    - Plan to build a new framework to protect the most vulnerable before the next winter season by October 2022.
    - Focus on improvements in energy efficiency.
    - In agreement with the Energy Community Secretariat, ANRE will issue final certification for the unbundled gas Transmission System Operator (TSO) by August 2023.
    - Updated contingency plan and policy options for scenarios of soaring energy prices and/or significant supply disruptions.
  - Electricity:
    - Provided direct compensation to the Central Electricity Supplier to mitigate impact of rising prices.
    - Ongoing complex negotiations with key electricity provider; war has led to supply and price uncertainties complicating contract extension discussions.
    - Exploring alternative electricity supplies from Ukraine or Romania, but capacity might be constrained and prices would be very high.
    - Completed legislative and regulatory frameworks towards full unbundling of the electricity sector.
    - 2020 Wholesale Electricity Market Rules entered pilot phase on January 1, 2022; testing window extended to April 30, 2022, due to the emergency situation.
    - Recent trial synchronization of the Moldovan Power System with the ENTSO-E Continental Europe noted as an important step towards improving security of electricity supply.

### Rule of law, anti-corruption, and judicial reforms
- Priority to strengthen rule of law and address corruption to lay foundation for strong rule of law in Moldova.
- Immediate goals:
  - Cleanse the system and develop a rigorous framework to preserve independence and accountability of judicial actors.
  - Ensure due process to hold corrupt actors and government officials accountable.
- Strategy on Judicial Independence and Integrity adopted by Parliament in early-December 2021; reforms to be carried out in line with constitutional principles and internationally recognized norms and standards.
- Judicial independence and transparency measures:
  - Continue modernization of judicial system in line with international recommendations.
  - Continue reforms to recruitment, appointment, evaluation, promotion, and disciplining of judges.
  - March 2022: passed legislation governing an extraordinary assessment of the judicial sector based on a transparent process formulated in consultation with relevant international bodies and have commenced this process.
  - Increase transparency and accessibility of judicial information by curtailing closed hearings, removing closed-door policy of the Superior Council of Magistrates (SCM) decision-making, and ensuring SCM decisions are accompanied by reasoned explanations.
  - Recent constitutional amendments enable reforms to the SCM in line with Venice Commission recommendations, including removal of ex officio members.
  - Transforming the Supreme Court of Justice (SCJ) into a court of cassation to improve quality of case law remains a top priority.
  - Continue reforms to optimize and consolidate the court system, address inefficiencies, improve court management, and strengthen dispute resolution systems.

*Source: 1mdaea2022004 - 13.      Inflation exceeded the outer band of the inflation consultation clause in March 2022*

### 29.      We are committed to enhancing the capacity and integrity of our prosecution service.

### 29.      We are committed to enhancing the capacity and integrity of our prosecution service.

### Prosecution service reforms and governance
- Recent amendments relate to the extraordinary assessment of the Prosecutor General.
- Will develop specific criteria and procedures for such evaluations with necessary safeguards and in consultation with international partners.
- Reforms needed to improve evaluation and discipline of prosecutors, including:
  - Streamlining disciplinary proceedings.
  - Removing the inspectorate of prosecutors from under the office of the Prosecutor General.
- Ultimate objective: strengthen the independence, accountability, and capacity of the Superior Council of Prosecutors (SCP) as the prosecutorial governance body.

### Anti-corruption legal framework and sentencing
- September 2020 amendment to the Criminal Code: main corruption offences classified as serious offences.
  - Consequence: extended statute of limitations and application of protection measures for witnesses and other participants in criminal procedures possible for these offences.
- Comprehensive process underway, in consultation with Fund staff, to amend the Criminal and Criminal Procedure Codes to:
  - Add clear criteria and procedures for the application of plea bargaining and other sentence reduction or mitigation provisions.
  - Prohibit the reduction of a term of imprisonment in corruption cases below the statutory minimum.
  - Structural benchmark timeframe: end-December 2022.

### Integrity, capacity, and independence of anti-corruption institutions
- April 2022 amendments to the Law on the Prosecution Service (end-March 2022 structural benchmark) to improve selection of the head of the Anti-Corruption Prosecution Office (APO):
  - (i) Allow legal professionals without prosecutorial experience to apply for the position of head of the APO.
  - (ii) Establish a commission comprised of members with impeccable reputation and high professional and moral qualities to vet candidates using objective criteria stipulated by law.
- Law requires that at least half of the commission’s members be respected experts with recognized ethical standards and experience in anticorruption prosecution, including relevant experience in other countries; commission to include representatives of civil society with appropriate experience or record of advocacy in corruption cases.
- Commitments and benchmarks:
  - Expeditiously initiate selection process for head of the APO in accordance with amended Law on Prosecution Service.
  - Establish a special pre-selection committee including experts with international experience and appoint an individual with necessary professional skills and irreproachable reputation to head the APO by the end of 2022 (end-December 2022 structural benchmark).
  - Amend legislation to narrow mandates of the APO and NAC to high-level corruption involving investigation or prosecution of (i) public officials of high office and (ii) corruption “in large proportions” or “resulting in serious consequences”, as defined by the Moldova Criminal Code (end-December 2022 structural benchmark).
- Intensify scrutiny of high-level officials’ sources of wealth, including assets held abroad, leveraging the asset declaration regime and the illicit enrichment offence.

### Asset recovery and coordination
- Commitment to achieve progress on asset recovery from the 2014 banking fraud through criminal justice efforts and cooperation with foreign counterparts, including establishment of joint investigative teams.
- Will bolster coordination among all domestic stakeholders under the leadership of the State Security Council.

### Economic statistics improvements
- Recognized constraints on the National Bureau of Statistics (NBS) operational capacity, including:
  - (i) limited human and financial resources;
  - (ii) inadequacy of the ICT system;
  - (iii) gaps in legislative framework regarding access to personal data from administrative and private sources for statistical purposes;
  - (iv) poor inter-institution coordination within the National Statistical System (NSS).
- Commitments:
  - Develop a new multi-year strategic planning document for further development of the NSS to improve production and dissemination of official statistics.
  - Develop legal framework for statistical production in line with relevant EU standards to enable access to personal data from administrative and private sources for statistical purposes.
  - Strengthen coordination within the NSS and allocate adequate resources to improve data collection and processing.

### Program monitoring and benchmarks
- For 2022, proposed monitoring includes reviews, prior actions, quantitative and performance criteria, indicative targets, structural benchmarks, and an inflation consultation clause for end-June, end-September, and end-December.
- Quantitative performance criteria, inflation consultation clause, and indicative targets specified in Table 1 and the Technical Memorandum of Understanding (TMU) attached to the Letter of Intent dated April 26, 2022.
- Selected numeric program targets and indicators as reported:
  - Ceiling on the cash deficit of the general government: 1,705; 1,206; 9,845; 14,521; 19,781; 3,155; 6,715 (as listed in Table 1).
  - Floor on net international reserves of the NBM (stock, millions of U.S. dollars): 3,447; 3,260; 2,761; 2,515; 2,692; 2,806; 2,946 (as listed in Table 1).
  - Ceiling on the general government wage bill: 4,900; 4,778; 11,102; 16,505; 21,485; 5,485; 12,020 (as listed in Table 1).
  - Floor on targeted social spending undertaken by the general government: 835; 620; 905; 1,055; 1,546; 980; 1,217 (as listed in Table 1).
  - Floor on developmental spending undertaken by the general government: 5,976; 7,192; 12,617; 19,390; 28,958; 6,093; 13,290 (as listed in Table 1).
  - Inflation Consultation Bands (in percent) — Outer Band (upper limit): 7.03 32.5 29.5 19.5 12.4 8.0; Inner Band (upper limit): 6.5 31.0 28.0 18.0 10.9 6.5; Center point: 5.0 22.2 19.5 26.5 16.5 9.4 5.0; Inner Band (lower limit): 3.5 28.0 25.0 15.0 7.9 3.5; Outer Band (lower limit): 3.0 26.5 23.5 13.5 6.4 2.0 (as listed in Table 1).
- Prior actions and structural benchmarks table highlights (selected):
  - Structural benchmark (Anti-Corruption and Rule of Law) to amend Law on Prosecution Service to allow non-prosecutorial legal professionals to apply for APO head and establish vetting commission: end-March 2022 — Status: Not met. Implemented in April.
  - Structural benchmark to amend legislation to narrow APO and NAC mandates: end-December 2022.
  - Structural benchmark to amend Criminal and Criminal Procedure Codes to add plea bargaining criteria and prohibit reducing imprisonment below statutory minimum in corruption cases: end-December 2022.
  - Structural benchmark to establish pre-selection committee and appoint head of APO: end-December 2022 — New structural benchmark.
  - Fiscal governance and other structural benchmarks detailed in Table 2 (timelines ranging from end-March 2022 to end-June 2023).

### Inflation breach in March 2022 — causes, policy response, and outlook
- Context:
  - In March 2022, inflation at 22.2 percent YoY exceeded the upper bound of the 5 percent ±2 percentage points Inflation Consultation Clause (ICC) outer band under the 2021 ECF/EFF arrangement.
- Reasons for breach:
  - High global and domestic food prices:
    - Food price inflation accelerated sharply in 4Q2021 and continued into 1Q2022.
    - In March, food prices in Moldova grew by 27 percent yoy.
    - Prices of vegetables increased by 65 percent yoy.
    - Prices of basic goods increased by more than 20 percent yoy.
    - About a third of Moldova’s food imports come from Russia and Ukraine.
  - Substantial adjustments in energy prices:
    - Natural gas tariff increased in November 2021 and again in January 2022 following steep increases in international natural gas prices and a new import contract with Gazprom agreed in 4Q2021.
    - Regulated prices spiked in November and continued to rise through 1Q2022, affecting central heating, transport, and other services.
  - Stronger private consumption as economic recovery continued:
    - Private consumption recovered strongly in 2021; main sources of financing were salaries and loans, complemented by remittances.
- Cost-push effects and core inflation:
  - Cost pressures have pushed up core inflation since mid-2021, accelerating since November 2021.
  - Rising raw material prices affected clothing and furniture subcomponents; interruptions in imports from Ukraine, Belarus, and Russia since February 2022 also contributed.
  - Significant increases in prices for construction materials in late 2021 continued into 2022.
- Policy response:
  - From July 2021, shifted to a tightening cycle and began to hike the base rate:
    - Policy rate increased by a cumulative 285 basis points between July and December 2021 (from 2.65 percent to 6.5 percent).
  - Since the beginning of 2022, monetary policy tightened further:
    - Base rate increased by a cumulative 600 basis points as of March 2022 (three consecutive 200 basis points increases in January, February, and March).
    - As of mid-April 2022, the central bank policy rate stands at 12.5 percent.
    - Raised reserve requirements for MDL deposits by 2 percentage points.
    - Conducted significant FX interventions in February and March to mitigate depreciation pressures triggered by spillovers from the war in Ukraine and sanctions against Russia and Belarus.
- Outlook:
  - The letter explains the breach, discusses the policy response, and the outlook for inflation as of April 26, 2022 (details on the inflation outlook continue beyond the provided excerpt).

*Source: 1mdaea2022004 - 29.      We are committed to enhancing the capacity and integrity of our prosecution service.*

### 5.      High inflation is expected to persist in the near term. Driven by further increases in food

### 5.      High inflation is expected to persist in the near term. Driven by further increases in food

### Inflation outlook and projection
- Driven by further increases in food and energy prices, depreciation pressures, as well as tariff adjustments (including in electricity, transport, and gas), a persistent upward trend of inflation is projected, with the peak to be reached in the third quarter of this year.
- Forecasts:
  - Inflation to stand at about 26 percent in April and to increase further in May.
  - Inflation projected to fall close to the NBM’s target band only by end-2023.

### Monetary policy stance and instruments
- Authorities are carefully monitoring inflationary pressures and risks and stand ready to apply monetary instruments to bring inflation back to the target range.
- Policy actions stated:
  - Continue adjusting monetary policy stance with the goal to bring inflation back to the target.
  - Continue implementing data-driven policy decisions and increase the policy rate in the coming months, if needed.
  - Use other instruments at disposal (including reserve requirements and FX interventions) to reinforce policy response, should it be deemed necessary.

### Challenges, risks, and policy trade-offs
- Key challenges:
  - Volatile commodity prices and uncertainty resulting from the war in Ukraine complicate monetary policy formulation.
  - Monitoring of signs of accelerating second round effects of rising food and energy prices, which may be substantial and longer lasting if spillovers from the conflict in Ukraine further exacerbate.
  - Unprecedented uncertainties blur assessment of inflationary risks, complicating monetary policy decisions.
- Trade-offs highlighted:
  - Tightening monetary policy to respond to inflationary pressures versus containing financial stability risks, maintaining banking system liquidity, and supporting a slowing economic activity.
  - FX interventions appropriate as immediate crisis response but should be limited to preventing a disorderly adjustment of the exchange rate and curbing excess volatility.
  - Noting risks of significant FX pass-through from depreciation to inflation, plan to rely further on exchange rate adjustments as a shock absorber and aim to preserve sufficient FX buffers.

### Attachment III — Technical Memorandum of Understanding (TMU): Purpose and scope
- The TMU defines variables subject to quantitative targets (prior actions, performance criteria and indicative benchmarks) in the MEFP and methods to assess program performance.

### A. Quantitative program targets
- Performance criteria are set with respect to:
  - the floor on the net international reserves (NIR) of NBM;
  - the ceiling on the cash deficit of the general government;
  - the ceiling on accumulation of external payment arrears of the general government (continuous).
- Indicative targets are set on:
  - the ceiling on the general government wage bill;
  - the floor on targeted social assistance spending undertaken by the general government;
  - the floor on developmental spending undertaken by the general government.
- The program will include a consultation clause on the 12-month rate of inflation.

### B. Program assumptions and valuation
- 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 17.6627/US$ (the official rate as of September 30, 2021).
- Gold holdings valued at US$1,801.50 per troy ounce, the average price during January-September 2021.
- Assets and liabilities denominated in SDRs and other foreign currencies converted into U.S. dollars at respective exchange rates of September 30, 2021.

### Program exchange rates (as of September 30, 2021)
- U.S. dollar / Euro 1.1579
- U.S. dollar / Swiss franc 0.9365
- U.S. dollar / Pounds sterling 1.3435
- U.S. dollar / Japanese yen 111.9100
- U.S. dollar / Australian dollar 0.7206
- U.S. dollar / Canadian dollar 1.2741
- U.S. dollar / Chinese renminbi 6.4634
- U.S. dollar / Russian ruble 72.6642
- U.S. dollar / SDR 0.7098

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

### D. Program definitions (selected)
- NIR of the NBM defined as gross reserves in convertible currencies minus reserve liabilities in convertible currencies.
- Gross reserves include 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 agencies (minimum credit rating AA-) and deposits in counterparts with minimum rating A-.
- 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 encumbered, including claims in foreign exchange arising from derivatives.
- Reserve liabilities defined as use of Fund credit by the NBM, convertible currency liabilities of the NBM to nonresidents with original maturity up to and including one year, and convertible currency liabilities of the NBM to residents, excluding to the general government and mandatory FX reserves of domestic banks in the NBM.
- For program monitoring, stock of reserve assets and reserve liabilities of the NBM shall be valued at program exchange rate.

### Key program stocks and measurements (as of September 30, 2021)
- Stock of NIR of the NBM amounted to US$ 3708.75 million.
- Stock of net domestic credit of the banking system (measured from below the line) amounted to MDL 8479.3 billion.

### Cash deficit of the general government (definition)
- 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,
  - privatization proceeds from sale of general government assets.
- The deficit is cumulative from the beginning of a calendar year and monitored from the financing side at the current exchange rate established by the NBM at the date of transaction.

### Treatment of government securities and debt
- Government coupon-bearing securities sold at face value treated as financing items in fiscal accounts in the amount actually received; on redemption date, sales value (face value) recorded as amortization; coupon payments recorded as domestic interest payments.
- Definition of “debt” follows paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements and includes contracted or guaranteed and non-guaranteed commitments for which value has not been received.
- Debt forms include:
  - Loans (advances, deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements).
  - Suppliers’ credits (deferral of payment after delivery).
  - Lease agreements (debt equals present value at inception of lease payments expected for the period, excluding operation, repair, and maintenance payments).

### Guarantees and treatment of on-lending
- Guarantee of a debt arises from explicit legal obligations of the general government or NBM to service debt in event of nonpayment, or from implicit legal/contractual obligations to finance shortfalls.
- On-lending from external creditors to SOEs treated as public guarantee and monitored explicitly above-the-deficit line.
- On-lending from external creditors to the private sector through commercial banks—collateralized with credit risks explicitly borne by commercial banks—treated as contingent liabilities.

### External payments arrears (definition and ceiling)
- External payments arrears consist of all overdue debt service obligations (payments of 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 accumulation of external payments arrears applies on a continuous basis throughout the arrangement period.
- Exception: does not apply to external payments arrears arising from external debt being renegotiated with external creditors, including Paris Club creditors, where creditor has agreed no payment needs to be made pending negotiations.

### Fiscal and social spending definitions
- General government wage bill: sum of budget spending on wages and salaries of public sector employees according to economic budgetary classification, including employer pension contributions and other social security contributions, and other remunerations (such as bonus payments). Excludes salaries of SOEs and health care providers compensated from the Health Insurance Fund (FAOAM) itself.
- Targeted social assistance spending: sum of support for unemployment (9012/00322, 9012/0052, 9008/00519, and 9019/0052), the Ajutor Social (social assistance program 9015/00320), heating allowance during the cold season and the government’s energy poverty policy (9015/00322) from the central government budget.
- Developmental spending: sum of total capital spending envelope in the annual budget (including foreign-financed projects) and current spending in the areas of health and education (COFOG Functions 07 and 09).

### E. Inflation consultation mechanism
- Quarterly inflation targets measured as headline CPI published by the Moldovan National Bureau of Statistics set within tolerance bands.
- Bands:
  - Inner band: specified as ±1.5 percentage point around the central point.
  - Outer band: inner band plus an additional ±1.5 percentage point.
- Deviations from the bands trigger consultations:
  - If observed year-on-year CPI inflation falls outside inner bands for end of each quarter, the NBM will consult with IMF staff on reasons for deviation and proposed policy response.
  - If observed year-on-year CPI inflation falls outside outer bands for end of each quarter, the 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 (selected values shown)
- Center point (quarterly sequence): 29.5, 26.5, 16.5, 9.4, 5.0
- Inner Band (upper limit): 31.0, 28.0, 18.0, 10.9, 6.5
- Inner Band (lower limit): 28.0, 25.0, 15.0, 7.9, 3.5
- Outer Band (upper limit): 32.5, 29.5, 19.5, 12.4, 8.0
- Outer Band (lower limit): 26.5, 23.5, 13.5, 6.4, 2.0
- These band values correspond to reporting windows in 2022 and 2023 (June, September, December, March, June).

### F. Adjusters (effective from end-June 2022)
- Ceiling on the cash deficit of the general government will be increased by the amount paid in cash for the purposes of maintaining financial sector stability or by the face value of government securities issued for the same purpose.
- Ceiling on the 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.
- Floor on NIR of the NBM will be lowered by any shortfall in official external grants and loans up to the equivalent of US$79.6 million and US$290.5 million respectively, in 2022, valued at program exchange rates.

*Source: International Monetary Fund — Republic of Moldova (Technical Memorandum of Understanding and program text).*

### 23.      Macroeconomic data necessary for assessing compliance with performance criteria and

### 23.      Macroeconomic data necessary for assessing compliance with performance criteria and indicative targets

### Data reporting requirements (overview)
- 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 Table 1. The authorities will transmit promptly to Fund staff any data revisions.

### Programmed external financing flows and program targets
- Programmed external financing flows to adjust the floor on the NIR target (US$ million):
  - 185
  - 278
  - 370
  - 43
  - 85
- Programmed external financing flows to adjust the ceiling on the cash deficit (MDL million):
  - 3,663
  - 5,494
  - 7,325
  - 915
  - 1,830
- Note: 1/ Excluding IMF financing. 2/ Indicative targets for March.

### Data items, providers, and reporting periodicity (selected items from Table 1)
- Fiscal data (to be provided by the MoF)
  - General budget operations for revenues, expenditure, and financing (economic and functional classifications): Monthly, within three weeks of the end of each month
  - General government wage bill at the level of budgets (state budget, local budgets, Social Insurance Fund and Health Insurance Fund) and functional groups: Monthly, within three weeks of the end of each month
  - Detailed breakdown of salaries of all SOEs and JSCs, by company: Annually (2019, 2020 and 2021), and quarterly starting Q1 2022
  - Number of budgetary sector positions and employees at the level of budgets and functional groups: Monthly, within four weeks of the end of each month
  - Social expenditure including pensions, unemployment support, Ajutor Social, heating allowance for the cold season, and health expenditures from the Health Insurance Fund: Monthly, within three weeks of the end of each month
  - Public and publicly guaranteed domestic debt, by instrument and creditor (central government domestic debt; local government domestic debt): Monthly, within three weeks of the end of each month
  - Debt stock outstanding for all SOEs and JSCs, by company (to be provided by the PPA): Quarterly, within six weeks of the end of each quarter; Annually (2019, 2020 and 2021), and quarterly starting Q1 2022
  - Domestic arrears, by creditor: Monthly, within three weeks of the end of each month
  - Arrears outstanding for all SOEs and JSCs, by company (to be provided by the PPA): Annually (2019, 2020 and 2021), and quarterly starting Q1 2022
  - Onlending to SOEs by type of onlending projects and by external creditors (including loan disbursements and repayments): Monthly, within three weeks of the end of each month
  - Breakdown of borrowing by SOEs and JSCs between external project loans on-lent directly from the budget and other borrowing from commercial banks: Monthly, within three weeks of the end of each month

- Monetary data (to be provided by the NBM)
  - Monetary survey of the NBM: Weekly, within one week of the end of each week
  - Monetary survey for the whole banking system: Weekly, within two weeks of the end of each week
  - Net claims on general government (NBM and commercial banks): Weekly, within two weeks of the end of each week
  - Financial position of commercial banks, including balance sheets, income statement, banking regulation indicators, capital, liquidity, data on credits and deposits (NBM): Monthly, within four weeks of the end of each month
  - Foreign exchange operations (NBM data): Monthly, within two weeks of the end of each month
  - Foreign exchange cash flows of NBM: Monthly, within two weeks of the end of each month
  - Foreign exchange market data (volume of trades, interventions, exchange rates): Daily, within 12 hours of the end of each day
  - NBM’s sterilization operations: Weekly, within one week of the end of each week
  - Daily data to be provided once every month, within 10 days of the end of each month, covering:
    - liquidity conditions in the foreign exchange market and banks' ability to maintain open foreign exchange positions
    - volatility of the MDL exchange rate against foreign currencies
    - gap between the rates of purchasing and selling MDL against the US dollar in the domestic foreign exchange market
    - change in the exchange rates of MDL against the US dollar quoted by foreign exchange offices
    - daily change in net opened currency position in all currencies, in total by banking system
    - interbank market volatility

- Balance of Payments (to be provided by the NBM)
  - Current, capital, and financial account data: One quarter after the end of the previous quarter
  - Transfers of individuals from abroad through the banking system: Monthly, within six weeks of the end of each month

- External debt data (to be provided by MoF and NBM)
  - Information on all new external loans contracted by the general government or guaranteed by the government: Monthly, within three weeks of the end of each month
  - Total public and publicly guaranteed outstanding debt stock, outstanding debt service due, and debt service paid, by creditor (in line with the new Debt Template titled “Decomposition of Public Debt and Debt Service by Creditor”): Quarterly, within six 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

- Other data (to be provided by NBS, unless otherwise stated)
  - 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
  - Detailed financial performance of all state-owned enterprises and joint stock companies operating at the central government level, in line with the agreed input template (from the Public Property Agency): Annual, within two months following the end of each year (unaudited), and no later than 6 months following the end of each year (audited)

### Debt sustainability assessment (joint IMF-World Bank DSA findings)
- Risk ratings:
  - Risk of external debt distress: Low
  - Overall risk of debt distress: Moderate
  - Granularity in the risk rating: Not applicable
  - Application of judgment: No
- Key findings:
  - Moldova’s risk of external debt distress remains low but overall risk of debt distress has been reclassified to moderate, down from low risk in the December 2021 DSA.
  - The present value (PV) of public debt-to-GDP ratio remains below the indicative threshold under the baseline scenario but exhibits a sustained breach of the threshold under a real GDP growth shock scenario.
  - All the external debt indicators remain below the relevant indicative thresholds under the baseline and shock scenarios.
  - Overall, public debt is considered sustainable with current debt carrying capacity assessed as strong.
  - The assessment reflects a baseline which assumes authorities remain committed to prudent fiscal policy under the ECF/EFF program.
  - In the long term, the financing mix is expected to shift from concessional to commercial borrowing by 2032.
  - Private sector external debt remains relatively high compared to peers and could pose significant risks to external debt sustainability.
  - Public debt trajectory remains vulnerable to risks, particularly from shocks to real GDP growth.
- Policy priorities to contain vulnerabilities:
  - Broaden growth drivers.
  - Improve governance.
  - Enhance effectiveness of public spending.
  - Strengthen management of fiscal risks, including risks stemming from state-owned enterprises.

### Public debt coverage
- Public debt includes obligations of the public sector (central government, local authorities, and public entities), external and domestic obligations of the central government, arrears to suppliers and guaranteed debt.
- Domestic debt includes debt of state and municipal enterprises, companies with full or majority public ownership, and local public authorities with maturity of a year and above, as stipulated in Law No. 419 (2006) on Public Sector Debt, State Guarantees and State On-lending.
- Debt contracted by the central government and central bank owed to the IMF is covered.
- Debt coverage is on the residency basis.
- Notes on SOE and contingent liabilities:
  - SOE debt is primarily driven by externally financed project loans on-lent by the central government to SOEs.
  - Debt of SOEs with maturity longer than a year accounts for about 2 percent of GDP as of 2021.
  - Contingent liabilities shock from SOE debt is set at the default value of 2 percent of GDP.
  - A contingent liability shock of 12 percent of GDP is meant to capture risks from PPPs and SOEs partially owned by the state.
  - Includes SDR allocation in 2021 (about US$236 million).

### Background on debt (selected historical and 2021 data)
- Public debt trajectory:
  - Public debt declined in 2021 to 32.5 percent of GDP, from almost 34 percent of GDP in 2020.
  - Public and publicly guaranteed (PPG) debt reached about 40 percent of GDP in 2015, up from about 27 percent of GDP in 2010.
  - 2016–19: downward trend returning towards 2010 levels.
  - 2020: COVID pandemic-induced borrowing pushed up public debt.
  - 2021: rebound in economic activity and receding COVID tailwinds reduced government spending and borrowing, contributing to decline to 32.5 percent of GDP.
- Composition and characteristics:
  - About two-third of PPG external debt is from multilateral institutions.
  - About a third of PPG domestic marketable debt are long-term debt securities (government securities with maturity longer than one year).
  - Other domestic marketable debt is mainly short-term and held by the banking system.
  - Stock of domestic arrears to suppliers amounting to about MDL 30 million (0.01 percent of GDP) by end-2021 is included in domestic debt.
- External debt:
  - Moldova’s gross total external debt declined by about 10 percentage points of GDP in 2021 from about 74 percent of GDP in 2020.
  - In 2021, PPG external debt declined by 2.2 percentage points of GDP from 2020.
  - Gross total external debt in Moldova was 63.6 percent of GDP in 2021.
  - Private external debt has been above 40 percent of GDP since 2010 and remains relatively elevated compared to peers.
  - About half of private debt are liabilities to direct investors (foreign-owned companies borrowing from parent companies abroad).
  - Short-term debt of the non-bank sector is high, about one-third of non-bank debt, consisting of trade credits, arrears, and other debt liabilities.
  - Foreign assets of the non-bank sector are about 35 percent of gross nonbank external liabilities.
  - Despite high private external debt, overall risk of total external debt distress is assessed as low because PPG external debt is held mainly by multilateral and bilateral donors and is mostly medium and long term and on concessional terms.

### Macroeconomic outlook (main assumptions and projections)
- Macroeconomic assumptions are consistent with the proposed augmentation of the ECF/EFF-supported program in the Policy Note. Main changes relative to December 2021 DSA include a downward revision to the 2020 GDP contraction and a significant recovery in 2021.
- Real GDP:
  - 2021 real GDP growth jumped to almost 14 percent, reflecting a stronger-than-expected recovery from the pandemic.
  - 2022 real growth expected to decline to 0.3 percent, owing to the war in Ukraine and sanctions against Russia and Belarus.
  - Medium-term growth expected to strengthen to an average of about 5 percent, driven by broad-based program-induced reforms and additional fiscal support directed to critical human and infrastructure needs (development spending ringfenced by a “floor” in the IMF-supported program).
- Inflation:
  - Inflation accelerated to 22.2 percent (y/y) in March.
  - For 2022, average inflation is projected to rise to 23.5 percent (y/y), before receding towards the inflation target at end-2023 and over the medium-term.
  - Inflation drivers: rising food prices, adjustments in energy tariffs, pent-up demand, MDL depreciation, pass-through from exchange rate, and tariff adjustments in the gas market.
  - Inflation outlook is subject to significant downside risks.
- Fiscal:
  - The fiscal position improved in 2021, with the deficit falling to 2.6 percent of GDP.

*Prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA); May 2, 2022.*

### 5.3 percent in the previous year due to spending under-execution and buoyant revenues, including

### 1mdaea2022004 - 5.3 percent in the previous year due to spending under-execution and buoyant revenues, including 

### Fiscal outlook and medium-term projections
- General government deficit expected to increase to 7.2 percent of GDP in 2022 due to the energy crisis and spillovers of the war in Ukraine.
- Revenues projected at 30.7 percent of GDP in 2022 vis a vis 32 percent in 2021 and 31.4 percent in 2020.
- Additional spending allocations of 2.5 percent of GDP required in 2022 to cushion escalating energy prices, support households against high inflation, and provide urgent humanitarian support to refugees.
- Total public debt envisaged to peak at 43 percent of GDP in 2024 before declining to 40.6 percent in 2027.
- Output gap remains negative in the medium-term following a sharp decline in GDP of 8.3 percent in 2020.

### Policy measures to support fiscal consolidation and debt sustainability
- Strengthen tax administration and improve tax compliance.
- Streamline tax exemptions.
- Improve efficiency of capital spending by strengthening public investment management.
- Strengthen the unified public wage system and improve control over the wage bill.
- Rationalize current expenditure.
- Program expectation: improvements in revenue and spending efficiency and supporting governance reforms under the ECF/EFF arrangement to support fiscal consolidation and improve debt sustainability.

### External sector and reserves
- Current account deficit worsened to 11.7 percent of GDP in 2021, from about 8 percent of GDP in 2020.
- Current account deficit expected to worsen to 13 percent of GDP in 2022 and narrow to 8.5 percent of GDP by 2027.
- Gross international reserves at end-December 2021: US$3.9 billion, up from US$3.78 billion in 2020; comprising about 173 percent of the Fund’s composite reserve adequacy metric.
- Reserves expected to decline in 2022, then trend upward from 2023 ensuring reserves adequacy.
- MDL strengthened in 2020–21 but is expected to weaken in 2022.

### External borrowing, financing needs, and grant financing
- DSA assumes: all contracted but undisbursed concessional loans fully disbursed over the medium-term.
- Grant element of new borrowing around 40 percent in the medium-term.
- Short-term external financing need estimated at about US$578 million in 2022.
- Short-term external financing sources in 2022:
  - World Bank Development Policy Operation (DPO): US$150 million.
  - European Commission: US$121 million.
  - Other development partners’ disbursements: about US$100 million.
  - Augmented ECF/EFF disbursement: about US$208 million (SDR 149.45 million, of which SDR 99.90 million under the EFF and SDR 49.55 million under the ECF).
- New SDR allocation channeled for budget support: about US$236 million (SDR 165.3 million).
- Remaining external financing gap of US$819 million in 2023–25 to be financed mainly by:
  - IMF disbursements under ECF/EFF: around US$550 million.
  - EU funds via macro-financial assistance: about US$129 million.
  - World Bank DPO: US$140 million.
- Commercial borrowing projected to rise over the longer term, with commercial financing reaching about 65 percent of total public sector borrowing by 2042.

### Public debt dynamics and assumptions
- Public debt-to-GDP expected to increase in 2022–27 with increased domestic and external borrowing.
- In 2022, external debt envisaged to rise by about 6 percentage points of GDP.
- Domestic borrowing assumed net zero in 2022 (rolling over existing debt).
- Modest net financing of MDL 5 billion assumed in 2023.
- Weighted average interest rate on short-term debt assumed:
  - Around 13 percent in 2022.
  - Falling to 6 percent in 2023.
  - Declining to 4.5 percent over the medium-term.
- PV of PPG external debt projected at 16 percent of GDP in 2022, decreasing to 8.9 percent by 2032.
- PV of total PPG debt-to-GDP ratio projected to increase to 31.6 percent of GDP in 2022 (from 26.9 percent of GDP in 2020) and stabilize below 35 percent of GDP over the medium-term, remaining below the 70 percent benchmark.

### Growth, investment, and program objectives
- Growth expectations: rebound in 2023 to 2 percent and hover at an average of 5 percent in the medium-term.
- ECF/EFF-supported program aims to augment public investment and implement growth-enhancing structural reforms (including SOE reforms and business environment improvements) to crowd-in domestic and foreign private investment.
- Public investment and reforms expected to support higher projected growth trajectory over the medium term.

### Debt carrying capacity, stress tests, and vulnerabilities
- Composite Indicator (CI) for Moldova: 3.14, corresponding to a strong debt-carrying capacity.
- All PPG external debt indicators remain below policy-relevant thresholds under baseline and alternative scenarios.
- Standardized stress test indicates a breach of public debt thresholds beyond 2028 under some scenarios.
- Contingent liability stress test calibrated to 12 percent of GDP (reflecting domestic banking crisis event in 2016 that resulted in recapitalization of about 8.3 percent of GDP).
- Private external debt-to-GDP ratio expected at about 45 percent of GDP in 2022, declining to 43 percent by 2027 and about 35 percent by 2032.
- Risks: sensitivity to real GDP growth shock (PV of total PPG debt-to-GDP ratio breaches threshold starting 2028 under that shock); contingent liabilities from SOEs and PPPs; potential rollover risks from large private external debt.
- Moldova’s risk of external debt distress remains low; overall risk of debt distress reclassified to moderate (down from low in previous DSA).

### Policy recommendations and risk mitigation
- Maintain fiscal discipline and fiscal risk management.
- Rely on concessional financing consistent with the ECF/EFF-supported program in the near and medium-term.
- Strengthen public investment management to finance priority projects with high growth and social returns.
- Monitor contingent liability risks—including from SOEs—carefully.
- Advance structural reforms to increase growth potential and reduce vulnerability to shocks.
- Develop the domestic debt market and broaden the secondary dealer system to lengthen domestic debt maturities, deepen the secondary government securities market, and reduce PPG domestic debt roll-over and interest rate risks.
- Strengthen debt and cash management to enable a broader range of longer maturity debt instruments.

*Republic of Moldova — IMF staff calculations and DSA (March 2022).*

### 14. The authorities broadly agreed with the staff's assessment of Moldova's public debt

### 14. The authorities broadly agreed with the staff's assessment of Moldova's public debt

### Authorities' assessment and policy stance
- The authorities "broadly agreed" with the staff's assessment of Moldova's public debt situation and recommendations on debt management policy.
- They "broadly concurred" with the staff’s assessment of debt composition, projections, risk ratings and distress level.
- They recognize that maintaining fiscal discipline and managing fiscal risks is critical to ensure fiscal and debt sustainability.
- The authorities reaffirmed commitment to the objectives of the ECF–EFF program and sound policies in the context of the 2022 shock environment, including the Russian invasion of Ukraine.

### Debt management progress and technical needs
- Progress reported on debt management and development of the domestic debt market.
- Authorities highlighted the need for further improvement in:
  - debt statistics, and
  - debt management frameworks.
- Authorities requested to make full use of IMF technical assistance and training resources to support those improvements.

### Stress tests, scenarios, and risk diagnostics
- Staff-produced stress-test outputs and figures cover 2022–2032 for:
  - Indicators of Public Guaranteed External Debt under alternative scenarios (Figure 1).
  - Indicators of Public Debt under alternative scenarios (Figure 2).
  - Drivers of Debt Dynamics – Baseline Scenario (Figure 3).
  - Realism Tools, fiscal adjustment and possible growth paths (Figure 4).
- The most extreme stress test is defined as "the test that yields the highest ratio in or before 2032." The treatment of one-off breaches and presentation rules are stated in the figures' notes.
- Default assumption in external DSA: "All the additional financing needs generated by the shocks under the stress tests are assumed to be covered by PPG external MLT debt in the external DSA."
- The public DSA allows for domestic financing to cover additional financing needs generated by shocks under the stress tests.

### Key figures and projections (selected exact values from tables and text)
- External debt (nominal):
  - 2021: 63.6 (percent of GDP)
  - 2022: 68.7
  - 2023: 73.6
  - 2024: 75.3
  - 2025: 72.6
  - 2026: 67.9
  - 2027: 64.0
  - 2032: 46.7
  - 2042: 36.4
- Of which: public and publicly guaranteed (PPG) external debt:
  - 2021: 18.7
  - 2022: 23.7
  - 2023: 26.2
  - 2024: 27.5
  - 2025: 25.4
  - 2026: 23.3
  - 2027: 21.4
  - 2032: 11.6
  - 2042: 10.4
- Change in external debt (annual):
  - 2021: -9.9
  - 2022: 5.1
  - 2023: 4.9
  - 2024: 1.8
  - 2025: -2.8
  - 2026: -4.6
  - 2027: -3.9
  - 2032: -2.8
  - 2042: -0.7
- Identified net debt-creating flows (selected):
  - 2022: 12.3
  - 2023: 9.2
  - 2024: 5.0
  - 2025: 4.3
  - 2026: 3.9
  - 2027: 3.6
  - 2032: 1.9
  - 2042: -0.2
- Non-interest current account deficit (percent of GDP):
  - 2021: 11.1
  - 2022: 12.4
  - 2023: 11.1
  - 2024: 9.5
  - 2025: 8.8
  - 2026: 8.2
  - 2027: 7.4
  - 2032: 6.0
  - 2042: 3.2
- Residual (including exceptional financing), examples:
  - 2021: -8.3
  - 2022: -7.2
  - 2023: -4.3
  - 2024: -3.2
  - 2025: -7.1
  - 2026: -8.5
  - 2027: -7.4
  - 2032: -4.7
  - 2042: -0.5
- Sustainability indicators (selected):
  - PV of PPG external debt-to-GDP ratio:
    - 2021: 13.1
    - 2022: 16.0
    - 2023: 17.9
    - 2024: 18.0
    - 2025: 16.9
    - 2026: 15.7
    - 2027: 14.3
    - 2032: 8.9
    - 2042: 10.0
  - PV of PPG external debt-to-exports ratio:
    - 2021: 42.7
    - 2022: 50.4
    - 2023: 52.4
    - 2024: 50.4
    - 2025: 46.6
    - 2026: 42.6
    - 2027: 37.7
    - 2032: 30.5
    - 2042: 58.3
  - PPG debt service-to-exports ratio:
    - 2021: 5.4
    - 2022: 3.4
    - 2023: 3.6
    - 2024: 4.4
    - 2025: 3.9
    - 2026: 3.6
    - 2027: 4.2
    - 2032: 5.0
    - 2042: 13.2
  - PPG debt service-to-revenue ratio:
    - 2021: 5.3
    - 2022: 3.6
    - 2023: 4.0
    - 2024: 5.0
    - 2025: 4.4
    - 2026: 4.1
    - 2027: 4.9
    - 2032: 4.4
    - 2042: 6.8
- Gross external financing need (Million of U.S. dollars):
  - 2021: 4674.6
  - 2022: 4892.9
  - 2023: 5013.8
  - 2024: 5199.2
  - 2025: 5547.7
  - 2026: 5995.4
  - 2027: 6165.1
  - 2032: 7424.5
  - 2042: 11902.5
- Key macroeconomic assumptions (selected):
  - Real GDP growth (in percent):
    - 2021: 13.9
    - 2022: 0.3
    - 2023: 2.0
    - 2024: 5.8
    - 2025: 5.4
    - 2026: 5.0
    - 2027: 5.0
    - 2032: 5.0
    - 2042: 3.6
  - GDP deflator in US dollar terms (change in percent):
    - 2021: 4.1
    - 2022: 0.7
    - 2023: -2.4
    - 2024: -0.9
    - 2025: 2.6
    - 2026: 2.5
    - 2027: 2.3
    - 2032: 1.9
    - 2042: 1.9
  - Effective interest rate (percent):
    - 2021: 0.9
    - 2022: 1.0
    - 2023: 1.3
    - 2024: 1.6
    - 2025: 1.2
    - 2026: 1.3
    - 2027: 1.7
    - 2032: 1.1
    - 2042: 1.8
  - Growth of exports of G&S (US dollar terms, in percent):
    - 2021: 30.3
    - 2022: 4.3
    - 2023: 7.5
    - 2024: 9.5
    - 2025: 9.5
    - 2026: 9.5
    - 2027: 10.6
    - 2032: 1.5
    - 2042: 1.5
  - Growth of imports of G&S (US dollar terms, in percent):
    - 2021: 33.6
    - 2022: 7.3
    - 2023: 3.7
    - 2024: 5.6
    - 2025: 6.4
    - 2026: 6.5
    - 2027: 7.7
    - 2032: 1.5
    - 2042: 1.5
- Government revenues (excluding grants, percent of GDP):
  - 2021: 31.0
  - 2022: 29.6
  - 2023: 31.0
  - 2024: 31.6
  - 2025: 32.2
  - 2026: 32.6
  - 2027: 32.5
  - 2032: 33.1
  - 2042: 33.1
- Aid flows (Million of US dollars):
  - 2021: 272.2
  - 2022: 397.7
  - 2023: 329.4
  - 2024: 235.5
  - 2025: 220.2
  - 2026: 225.9
  - 2027: 234.8
  - 2032: 91.2
  - 2042: 107.8
- Nominal GDP (Million of US dollars):
  - 2021: 13,672
  - 2022: 13,811
  - 2023: 13,752
  - 2024: 14,412
  - 2025: 15,590
  - 2026: 16,779
  - 2027: 18,020
  - 2032: 25,319
  - 2042: 49,988

### Policy recommendations and actions implied by the authorities
- Maintain fiscal discipline to ensure fiscal and debt sustainability.
- Actively manage fiscal risks arising from the crisis environment (including shocks from the war in Ukraine, energy and food price pressures, and refugee influx).
- Continue to develop domestic debt markets and strengthen debt management frameworks.
- Improve debt statistics and reporting quality.
- Make full use of IMF technical assistance and training to strengthen debt management and statistics.

*Source: Statement by Luc Dresse, Alternate Executive Director for the Republic of Moldova and Stijn Verhelst, Advisor to Executive Director (May 11, 2022); IMF staff estimates, tables and figures from the Moldova DSA chapter.*

### 2021. The general government deficit narrowed to 2.6 percent of GDP in 2021, while public debt remained

### 1mdaea2022004 - 2021. The general government deficit narrowed to 2.6 percent of GDP in 2021, while public debt remained

### Economic outlook and impact of the crisis
- 2021: general government deficit narrowed to 2.6 percent of GDP; public debt remained low.
- Near-term prospects significantly weakened due to the Russian invasion of Ukraine:
  - 2022 growth projected at 0.3 percent compared to the pre-war forecast of 4.5 percent.
  - Inflation reached 22.2 percent YoY in March 2022 and "will accelerate further above the central bank’s target band."
  - High inflation projected to persist into the third quarter of 2022, easing gradually thereafter.
- Deterioration observed in external and fiscal accounts and erosion of reserve buffers.
- Adverse risks highlighted:
  - Sharper-than-anticipated increase in energy prices or disruptions in energy supply could impair public and private balance sheets and cause additional inflationary pressure.
  - Escalation of the war in Ukraine could hurt confidence, exert pressure on the Moldovan lei, undermine domestic securities markets, and could culminate in system-wide deposit runs.

### Fiscal response and financing needs
- Authorities requested additional assistance from IMF, other multilateral and bilateral partners and donors to anchor confidence and support higher spending needs ahead of 2023.
- Authorities agreed to set up reviews for end-June, end-September and end-December 2022 for frequent monitoring of the IMF program.
- Supplementary budget (prior action) approved in response to the crisis:
  - Brings the general budget deficit to 7.2 percent of GDP subject to financing availability.
- Authorities’ commitments:
  - Preserve debt sustainability as a key anchor of the program.
  - Transparent budgeting, prioritization of the spending review, and strengthening of fiscal responsibility.
  - Continue social assistance to protect the most vulnerable and work to put in place a new modernized social assistance program with better-targeted support.

### Monetary policy and financial sector measures
- National Bank of Moldova (NBM) actions:
  - After three consecutive 200 basis point increases since the beginning of the year, the base rate reached 12.5 percent in April 2022.
  - In early May 2022, the base rate was increased further to 15.5 percentage points.
  - Reserve requirement ratio adjusted upwards; as a result of an increase in early May 2022:
    - Reserve requirement will stand at 30 percent for Moldovan lei and non-convertible foreign currency assets.
    - Reserve requirement will stand at 33 percent for foreign currency.
  - Sizable interventions on the FX markets were made to limit excessive exchange rate volatility.
  - NBM stands ready to continue tightening and has developed a contingency package to be used with a broader macroeconomic adjustment package in close consultation with IMF staff.

### Structural reforms, governance, and program implementation
- Authorities emphasize continued commitment to the program and reform strategy despite the challenging environment; program supported by broad political backing.
- Program implementation and performance:
  - Close engagement with the Fund since program approval in December 2021.
  - Mixed performance against indicative targets mainly attributable to the impact of the war in Ukraine.
  - Inflation above the outer consultation band in March 2022 triggered a consultation with the IMF Executive Board.
- Structural benchmarks and reform progress:
  - All end-March structural benchmarks implemented.
  - Completed solvency assessment for insurance companies to support migration to the Solvency II framework.
  - Issued guidelines to all central government State-Owned Enterprises (SOEs) to submit standardized quarterly financial statements for 2019–2021 by end-April.
  - Prepared draft report on execution of investment projects undertaken by extrabudgetary funds in 2021.
  - Strengthened the law on prosecution service (with slight delay due to additional consultations).
  - Advancing end-June structural benchmarks, including developing an integrated taxpayers’ register, performing a detailed tax expenditure analysis, enhancing the NBM autonomy, and improving macroprudential tools to address borrowing risks.
  - Commit to implementing two new structural benchmarks: review of bank recovery and resolution legislation and appointment of the new head of the Anti-Corruption Prosecution Office (leveraging the amended law on prosecution service).

### Financial stability, SOE reform, and rule of law
- Financial stability measures:
  - Authorities will undertake measures incorporating FSSR recommendations to bolster financial crisis management and macroprudential frameworks, improve oversight of the non-bank sector, strengthen the regulatory framework for capital markets, develop a comprehensive national financial inclusion strategy, and protect the financial sector from illicit financial flows.
- State-Owned Enterprise reform:
  - Priority to improve SOEs’ efficiency and contain fiscal risks.
  - Develop a state-ownership strategy to identify public enterprises for reorganization, privatization, or liquidation and plans to strengthen SOE governance.
- Rule of law and anti-corruption:
  - Continue to modernize the judicial system in line with recommendations by international bodies.
  - Commit to enhancing capacity and integrity of the prosecution service and tackling entrenched corruption.

### Contingency planning and commitment to program objectives
- Authorities maintain that policies and measures in the Memorandum of Economic and Financial Policies are appropriate to achieve program objectives.
- Combined with additional financing from IMF and other partners, these measures aim to address current challenges.
- Authorities authorize IMF to publish the Letter of Intent, the Memorandum of Economic and Financial Policies, including attachments, and the staff report.
- Authorities stand ready to take measures, as appropriate and in consultation with IMF staff, and have designed contingency measures if severe downside risks materialize.
- Authorities express gratitude for IMF support and look forward to close cooperation, including technical assistance.

*Source: 1mdaea2022004.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1mdaea2022004.pdf_