## 1. Notre Dame Global Adaptation Index (ND-GAIN)

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---

### A. Key findings and context
- Moldova is among Europe’s most vulnerable countries to climate change despite contributing 0.026 percent to global CO2 emissions.
- Vulnerability drivers:
  - Heavy reliance on agriculture and a comparatively-larger rural population.
  - High dependence on energy imports ("more than three-quarters of gas and electricity is imported").
  - Limited domestic financial resources for high-quality public services.
  - Weaker disaster preparedness strategy, low adaptation in agriculture, and poorer quality of infrastructure.
- Recent crises exacerbating adaptation financing challenges: COVID-19, spillovers from Russia’s war in Ukraine, the energy and cost-of-living crises, and a drought in 2022.
- Urgency: Strengthening resilience requires significant adaptation investments; without urgent adaptation actions, climate risks will continue to pose major threats to Moldova’s economy and livelihoods.

### B. Quantitative indicators of vulnerability and impacts
- Past climate disasters cumulative costs close to 12 percent of 2019 GDP over the past three decades (regional average: 3 percent).
- On average, 3 percent of the population has been affected by past natural disasters in the past 30 years.
- Agriculture accounted for, on average, 13 percent of overall GDP over the past 20 years.
- ND-GAIN projects Moldova’s exposure to remain broadly aligned with CESEE countries and significantly above Advanced Europe; larger risks for the agricultural sector (e.g., projected change of cereal yields).

### C. Readiness and adaptive capacity gaps
- ND-GAIN composite structure:
  - Vulnerability index: Exposure, Sensitivity, and Adaptive Capacity across six sectors: health, food, ecosystem, habitat, water, and infrastructure.
  - Readiness index: Economic, Governance, and Social dimensions.
- Adaptive capacity weaknesses:
  - Comparatively weaker disaster preparedness strategies.
  - Below-average adaptation in agriculture (irrigation capacity, availability of fertilizers, automotive infrastructure) relative to Advanced Europe and EU averages.
  - Lower quality of transport and trade-related infrastructure relative to CESEE peers and Advanced Europe.
  - Weaknesses in reliable access to water and water storage infrastructure and capacity.
- Readiness shortfalls:
  - Governance indicators (political stability, control of corruption, respect of the rule of law, regulatory quality) remain below CESEE and EU averages despite improvements.
  - Social readiness lags peers on innovation, education, ICT infrastructure, and social inequality measures.
  - A less-favorable business environment may constrain private sector involvement in adaptation investment.

### D. Macroeconomic analysis framework (DIGNAD model)
- Purpose: dynamic general equilibrium model for a small open economy to quantify impacts of climate disasters and different adaptation investment scenarios.
- Main model blocks:
  - Private demand: two household types (savers with access to financial instruments; liquidity-constrained households), labor supply, remittances, government transfers, consumption of domestic and imported goods.
  - Private supply: tradable and non-tradable firms with Cobb-Douglas production; total factor productivity (TFP) depends on stock of public infrastructure (climate-resilient and standard).
  - Policy block: government financing options for standard or climate-resilient infrastructure including consumption taxes, labor taxes, net transfers, commercial debt (domestic/external), external concessional debt, grants or costless external financing.
- Fiscal policy treatment options:
  - Strict fiscal rule framework: taxes adjust automatically to close financing gaps and prevent excessive debt accumulation.
  - Non-automatic framework: taxes do not adjust automatically and debt financing is allowed.

### E. Policy implications and recommendations
- Benefits of climate-resilient infrastructure investments:
  - Substantially reduce output losses from natural disasters and mitigate scarring.
  - More cost-efficient than ex-post disaster response.
  - Support sustainable long-term growth and help achieve development objectives, potentially reducing inequality (the most vulnerable populations may disproportionately benefit).
  - Deliver greater growth benefits when complemented by reforms that improve public investment efficiency.
- Financing constraints and priorities:
  - Limited domestic financial resources imply Moldova cannot finance necessary adaptation investments domestically without endangering public debt sustainability or hindering growth potential.
  - External support—ideally on grant or concessional terms—will be critical to meet adaptation needs without jeopardizing debt sustainability.
  - The authorities’ program under the IMF’s Resilience and Sustainability Facility (RSF) can play a crucial role in mobilizing and structuring support.
- Complementary reforms to increase readiness and implementation capacity:
  - Enhance public investment efficiency.
  - Improve governance and institutional coordination for adaptation.
  - Strengthen efficiency of education expenditure and the business environment to crowd in private investment.
  - Continue structural reforms to bolster Moldova’s readiness to fully benefit from adaptation investments.

### Model: channels of impact and additional mechanisms
- Natural disasters affect GDP through three main channels:
  - Destroying the stock of public infrastructure.
  - Destroying the stock of private capital.
  - Reducing TFP.
- Distinct macro-fiscal implications:
  - Public infrastructure can only be rebuilt by the government, generating fiscal costs.
  - Private capital must be rebuilt by private investment, which faces adjustment costs.
  - TFP is exogenous and can gradually recover at an exogenously assumed pace.
- Two additional mechanisms:
  - Increased government borrowing costs via an increased risk premium on external commercial debt triggered by perceived higher default risk after a disaster.
  - Decline in the efficiency of government infrastructure investment due to limited government capacity for large-scale reconstruction.

### Climate-resilient (adaptation) infrastructure in the DIGNAD model
- Public infrastructure stock decomposed into standard infrastructure and climate-resilient (adaptation) infrastructure.
- Properties of climate-resilient infrastructure:
  - Reduces the output cost of natural disasters.
  - Higher cost relative to standard infrastructure (requires more qualified technical skills, more expensive materials, advanced technologies).
  - Lower depreciation rate (example: climate-proofed roads more likely to withstand adverse events).
  - Higher rate of return; initial returns may be high where existing stock is low.

### DIGNAD production and fiscal framework (key parameters preserved exactly)
- Selected calibration parameters:
  - Public infrastructure investment to GDP ratio 4.0%
  - Public adaptation infrastructure investment to GDP ratio 0.0%
  - Consumption tax rate (VAT) 20.0%
  - Labor income tax rate 12.0%
  - Public domestic debt to GDP ratio 9.6%
  - Public concessional debt to GDP ratio 26.0%
  - Public external commercial debt to GDP ratio 0.0%
  - Private external debt to GDP ratio 50.6%
  - Real interest rate on public domestic debt 4.0%
  - Real interest rate on public external commercial debt 6.0%
  - Grants to GDP ratio 0.5%
  - Natural resources revenues to GDP ratio 0.0%
  - Remittances to GDP ratio 14.1%
  - Imports to GDP ratio 58.9%
  - Trend per capita growth rate in absence of natural disasters 6.0%
  - Value added in NT-sector 60.0%
  - Efficiency of public infrastructure investment 65.0%
  - Ability of adaptation capital to withstand natural disaster 30.0
  - Cost ratio adaptation vs standard investment 25.0%
  - Initial return standard on infrastructure investment 25.0%
  - Initial return on adaptation infrastructure investment 35.0%
  - Depreciation rate of public capital (standard infrastructure) 7.5%
  - Depreciation rate of public capital (adaptation) 3.0%
  - Division of fiscal adjustment parameter - Transfers 20.0%
  - Division of fiscal adjustment parameter - Consumption tax 40.0%
  - Division of fiscal adjustment parameter - Labor income tax 40.0%
  - Public debt adj. between commercial external and domestic 50.0%

### Baseline calibration and simulation design
- Simulation horizon: 20-year horizon.
- Government may increase infrastructure investment during first 5 years.
- A natural disaster hits in Year 6; reconstruction starts immediately and lasts 5 years.
- Natural disaster channels: the three main channels plus reduced efficiency of government infrastructure investment.
- Assumption: no impact on risk premium on government commercial external debt (Moldova has not incurred new commercial debt on international markets in at least the past 5 years).

### Investment scenarios analyzed
- Unchanged policies scenario: No additional public infrastructure investment beyond baseline.
- Standard investment scenario: Additional 2 percent of GDP invested in public standard infrastructure annually.
- Adaptation investment scenario: Additional 2 percent of GDP invested in public climate-resilient infrastructure annually.

### Fiscal constraint in baseline scenarios
- Government faces a tight budgetary constraint and a strict fiscal rule that does not allow debt financing.
- No new external grants or concessional loans are available beyond baseline assumptions.
- New spending financed through tax increases or expenditure rationalization (savings from lower public transfers).

### Key simulation results (Pre-disaster, Shock, Post-disaster)
- Pre-disaster:
  - New infrastructure boosts GDP growth by about 1 ppt above the baseline during the investment phase in both investment scenarios.
  - Private investment and consumption contract due to tax increases and cuts in public transfers.
- Shock (Year 6 disaster):
  - Under unchanged policy and standard investment scenarios, GDP contracts by about 6 percent (similar to the drought in 2009 in Moldova).
  - Under the adaptation investment scenario, GDP contracts by about 2 precent, implying resilient infrastructure could absorb about two-thirds of the disaster impact on economic activity.
  - Public debt-to-GDP ratio increases from 35.5 percent to about 38 percent of GDP under unchanged or standard scenarios.
  - Public debt-to-GDP ratio increases to about 36 percent of GDP under the adaptation investment scenario.
  - Given the strict fiscal rule, the debt-to-GDP increase is driven exclusively by the denominator effect (change in nominal GDP).
- Post-disaster:
  - Unchanged and standard scenarios:
    - GDP growth remains about 2.5 to 3 ppts below the steady state 5 years after the disaster.
    - In the longer term, GDP growth stands at 1 to 1.5 percent below the steady state more than a decade after the shock.
    - Long-term debt-to-GDP ratio is slightly above the steady state by about 1 ppt.
  - Adaptation scenario:
    - Faster recovery due to limited destruction of capital stock and smaller contractions in investment and consumption.
    - GDP returns to the steady state level within 10 years after the disaster.
    - Debt-to-GDP ratio converges back to close to 35.5 percent of GDP by the end of the forecast horizon.

### Quantifying adaptation investment needs (estimates preserved exactly)
- Sectoral approach (World Bank, 2016): total adaptation cost of about 2 percent of GDP per year over the next 10–15 years.
- Frontier analysis approach: about 2.5 percent of GDP per year in adaptation needed over the next 20 years for CESEE countries.
- Moldova’s 2020 Nationally Determined Contribution: adaptation investment needs 2.5 percent of GDP per year over the next 10–15 years.
- For simulations in the paper, the lower bound of 2 percent of GDP per year is used.

### Alternative financing options and assumptions
- Additional financing assumptions for simulations:
  - Additional 0.5 percent of GDP of grant financing annually (bringing baseline grant financing to 1 percent of GDP).
  - Increased access to concessional loans by 1 percent of GDP annually.
  - This leaves a financing gap of about 0.5 percent of GDP annually to fully finance climate-resilient infrastructure.
- Two options to close the financing gap:
  - Increase public commercial debt.
  - Mobilize additional tax revenues and/or generate savings from current transfers.
- Public Investment Efficiency (PIE) scenarios:
  - Considered improvement in PIE by 15 ppts to 80 percent.
  - PIE measures the share of budgeted funds effectively used for allocated expenditure items.

### Financing Option 1: Increased public commercial debt to close the gap
- Scenario comparisons:
  - Scenario 1: finance exclusively by increasing commercial debt.
  - Scenario 2: additional grants and concessional borrowing available (grant +0.5 ppt; concessional +1 ppt).
  - Scenario 3: scenario 2 plus PIE improvement by 15 ppts.
- Results:
  - All-commercial-debt scenario: public debt would peak at about 50 percent of GDP (from about 35.5 percent) and remain broadly at that level 10 years after the shock.
  - Adaptation investment boosts growth by about 1 ppt above pre-disaster baseline and limits disaster impact by about two-thirds.
  - With additional grants and concessional borrowing, growth impact is larger by about 0.2 ppt by end of investment cycle and over the post-shock period.
  - Debt-to-GDP ratio under mixed financing reaches a maximum of 45 percent, then declines to 43 percent by end of forecast horizon.
  - Improving PIE raises growth by about 0.3 ppt by the end of the investment phase and supports post-shock recovery by about 0.3 ppts annually.

### Financing Option 2: Mobilizing tax revenue and expenditure savings
- Scenario comparisons analogous to Financing Option 1 but closing the gap via tax increases and expenditure rationalization.
- Results:
  - Growth and resilience impacts are of comparable magnitude to the debt-financing case.
  - Scenarios with additional grants and concessional debt financing yield larger growth outcomes than fully tax/expenditure-financed scenarios.
  - Tax increases (income and consumption) depress private investment and consumption, weakening growth impact of public investment.
  - Improving PIE has similar positive effects as in the debt-financing case.
  - Debt-to-GDP implications:
    - Debt-to-GDP ratio peaks at about 40 percent following the shock and declines gradually to 37 percent by end of forecast horizon.
    - This option preserves public debt sustainability while delivering similar growth and climate-resilience impacts.

### Trade-offs and implications for donors
- Closing adaptation gaps involves trade-offs among bolstering climate-resilient infrastructure stock, supporting economic activity, and maintaining debt sustainability.
- Given Moldova’s constrained fiscal space, limited access to commercial domestic and external debt, and limited financial resources, donor support is particularly important.
- Donor policy implication: financial assistance ex ante (before a disaster) to support resilient investments may be more reasonable and efficient than financing reconstruction ex post.
- Donor analysis approach: assume donors finance all reconstruction efforts following a disaster; calculate net present value of future reconstruction costs and compare to cost of ex-ante investment in climate-resilient infrastructure.

### Donors’ net savings from ex ante support for adaptation
- Findings (Table 3 summary):
  - Donors’ savings would amount to about 17 percent of total ex post reconstruction costs if they were to support adaptation investments ex ante (based on a disaster impact of similar magnitude to Moldova’s past climate shocks).
  - If future natural disasters are 50 percent larger than historical shocks, donors’ net savings would be equivalent to about 27 percent of reconstruction costs.
  - Discounted Net Savings of International Donors (in percent of reconstruction cost):
    - Average Impact 17.6
    - Average Impact + 30% 24.3
    - Average Impact +50% 27.3
    - Average Impact +100% 32.2

### Conclusions on vulnerability and benefits of adaptation investments (¶27–29)
- Moldova is one of the countries most affected by climate change in Europe, having borne the largest toll in Europe over the past three decades.
- Country-specific sensitivity factors:
  - Heavier reliance on agriculture.
  - A comparatively-larger rural population.
  - High dependence on energy imports and limited diversification of energy supply sources.
  - Limited financial resources for high-quality public services, with diversion of spending in times of external shocks.
- Challenges magnifying climate impacts:
  - Weaker disaster preparedness strategy.
  - Low adaptation in the agriculture sector.
  - Poorer quality of infrastructure.
  - Less reliable access to water and water storage infrastructure and capacity.
- Scale and impacts of adaptation investments:
  - Accumulation of adaptation infrastructure equivalent to 2 percent of GDP per year over 5 years can reduce GDP losses from about 6 percent to 2 percent following a disaster.
  - Such investments support sustainable long-term growth, can reduce inequality, and support Moldova’s Sustainable Development Goals.
  - Increasing Public Investment Efficiency (PIE) further boosts GDP growth.
- Role of reforms and external support:
  - Under the ongoing ECF/EFF program, Moldova has made progress in governance reforms, including fiscal governance.
  - Implementation of the PIMA and C-PIMA recommendations will help improve PIE.
  - External support is critical: without donors’ support, authorities cannot finance needed climate-resilient investment without endangering public debt sustainability or weakening growth potential.
- Implementation constraints and policy priorities:
  - Moldova is relatively less well prepared for effective implementation due to governance challenges, gaps in innovation, education, and ICT infrastructure, and a less favorable business environment (per ND-GAIN).
  - Policy priorities: strengthen governance (supported by ECF/EFF and EU accession process), boost efficiency of education expenditure, promote ICT sector, stimulate favorable business environment to crowd in private investments, and financial sector reforms under the RSF to foster private sector participation.

### Corruption, economic growth, and implications for convergence (selected findings)
- Regression estimate: a reduction of perceptions of corruption (increase of the Corruption Index from the International Country Risk Guide (ICRG) by one unit) may raise per capita GDP growth by about 0.6 percent.
- Convergence scenarios (ICRG-based):
  - If Moldova is unable to lower corruption, per capita GDP will remain at about 30 percent of the EU average in 2040.
  - If corruption is lowered to the average of EU countries (increase of the ICRG index by 1.3 points), per capita GDP will reach 35 percent of the EU average in 2040.
  - If Moldova reduces corruption to the level of the best performing, highest ICRG level in the EU (increase of the ICRG index by 3 points), per capita GDP will reach 45 percent of the EU average by 2040, with accelerated convergence thereafter.
- Regional best practices in criminal justice reforms:
  - Specialized anti-corruption law enforcement authorities with operational independence and strong mandates (examples cited) have broad autonomy over staffing and budget, clear mandates to investigate high-level corruption, and investigative powers (e.g., surveillance and wiretapping).
  - Success depends on robust prosecution and adjudication leading to convictions and asset recovery; leadership perceived as rule-of-law oriented and impartial is important.
  - Moldova ranks lower than Romania and Poland on rule of law indicators; weaknesses in adjudication capacity and trust in general jurisdiction courts have led some countries to consider specialized anti-corruption courts.

### Civil society, international experts, and AML/anti-corruption progress (selected implementation findings)
- Civil society and international experts have contributed to credibility and sustainability of anti-corruption reforms; investigative journalists and media supported agencies by identifying officials not declaring assets.
- Anti-corruption framework progress highlights:
  - Strengthened selection process for APO head with participation of international experts and civil society — Implemented (March 2020 Structural Benchmark; December 2022 Structural Benchmark).
  - Transfer of the disciplinary function from the PGO to the SCP — Implemented (legal revision in June 2023).
  - Measures to limit abuse in criminal justice — Prior action, third ECF/EFF review.
  - Prioritization of investigations of high-level corruption — In progress; notable casework since January 2023:
    - NAC and APO submitted to court over 140 corruption cases involving high-level officials.
    - APO obtained 130 sentences in the first instance court, including confiscation orders for over MDL 1.7 million.
    - APO prosecutors obtained an appellate adjudication sentencing in absentia a former high-level official to 15 years imprisonment and ordering over MDL 5.2 billion confiscation.
- Illicit enrichment:
  - Constitutional Court interpretation (November 2022) confirmed that evidence of a crime that generated illicit wealth is not required to charge illicit enrichment.
- Judicial adjudication metrics:
  - Courts in 2020: average 324 days to reach a final decision (39 percent faster than Council of Europe median of 529 days).
  - Corruption cases: average 3.5 years to reach a final decision (four times slower than national average for all criminal cases and 2.4 times slower than Council of Europe median).
  - Completion rate for corruption cases in 2022: 30 percent; completion rate for all criminal cases: 50 percent.
- Anti-corruption court initiative:
  - President submitted a draft law in July 2023; authorities adjusting draft per Venice Commission opinion with adoption expected in early 2024.
  - Key design requirements: reinforced selection process for anti-corruption judges (involving experts with international experience), objective and uniform selection criteria, jurisdiction limited to cases investigated/prosecuted by APO, and safeguards for staffing, budgetary and operational autonomy.

### AML findings and recommendations
- AML regime not sufficiently used to support anti-corruption or shield economy from illicit flows.
- Banking sector deficiencies: recurring weaknesses in identifying beneficial owners and politically exposed persons (PEPs); reliance on self-reported customer information.
- Implemented measures:
  - NBM introduced thematic inspections as part of AML/CFT supervision; sanctions on banks for failures to identify/report suspicious transactions.
  - Office for Prevention and Combating of Money Laundering approved new Guidelines on identification and monitoring of PEP activity and risk indicators.
- Beneficial ownership deficiencies:
  - Public register exists (maintained by the Public Services Agency (PSA)), but PSA lacks sanctioning powers; sanctioning powers currently lie with the Ministry of Internal Affairs.
  - GD recommended granting PSA sanctioning powers — Not implemented.
- Further AML recommendations:
  - Strengthen capacity of law enforcement to use financial intelligence and conduct financial investigations.
  - Intensify prosecution of corruption-related money laundering.
  - NBM to develop toolkit for risk-based supervision and leverage targeted on-site inspections.
  - NBM should impose effective, proportionate, and dissuasive sanctions for AML/CFT non-compliance.
  - Authorities should grant PSA sanctioning powers for beneficial ownership non-compliance or establish an effective cooperation mechanism between PSA and the Ministry of Internal Affairs.

### Building institutional capacity and next steps for APO and adjudication
- APO capacity needs:
  - Grant APO required equipment, premises, and staffing (prosecutors, investigative officers, counsels, and experts).
  - October 2023 law granted APO powers to apply wiretapping; allocate equipment and staff promptly.
  - Strengthen APO’s authority over human resources to lead selection and transfers, reduce reliance on seconded investigative officers, and ensure continuous staffing.
  - Safeguards to protect APO from pressures (prevent transfers of prosecutors or limits to its mandate).
- Institutional completion:
  - Establish a specialized adjudication infrastructure (anti-corruption court) with jurisdiction limited to APO-investigated/prosecuted cases to ensure timely adjudication.
- Overall assessment:
  - Strengthening of anti-corruption and AML frameworks has progressed since the GD, but further progress remains necessary.
  - Continued reforms can contribute to boosting growth, fostering competition and investment, and accelerating income convergence towards the EU.

*Source: Excerpt from IMF chapter on Moldova (DIGNAD model simulations and analysis).*

### 1. Notre Dame Global Adaptation Index (ND-GAIN) ____________________________________ 6

### 1. Notre Dame Global Adaptation Index (ND-GAIN)

### A. Key findings and context
- Moldova is among Europe’s most vulnerable countries to climate change despite contributing 0.026 percent to global CO2 emissions.
- Moldova’s vulnerability arises from:
  - A heavy reliance on agriculture and a comparatively-larger rural population.
  - High dependence on energy imports ("more than three-quarters of gas and electricity is imported").
  - Limited domestic financial resources for high-quality public services.
  - Weaker disaster preparedness strategy, low adaptation in agriculture, and poorer quality of infrastructure.
- Recent crises have exacerbated financing challenges for adaptation: COVID-19, spillovers from Russia’s war in Ukraine, the energy and cost-of-living crises, and a drought in 2022.
- Strengthening resilience will require significant adaptation investments; without urgent adaptation actions, climate risks will continue to pose major threats to Moldova’s economy and livelihoods.

### B. Quantitative indicators of vulnerability and impacts
- Past climate disasters in Moldova have had cumulative costs close to 12 percent of 2019 GDP over the past three decades, compared to an average of 3 percent in the region.
- On average, 3 percent of the population has been affected by past natural disasters in the past 30 years.
- Agriculture accounted for, on average, 13 percent of overall GDP over the past 20 years, contributing to sensitivity to climate shocks.
- ND-GAIN projects Moldova’s exposure to climate change to remain broadly aligned with the rest of CESEE countries (while significantly above Advanced Europe), with larger risks for the agricultural sector (e.g., projected change of cereal yields).

### C. Readiness and adaptive capacity gaps
- ND-GAIN composite structure:
  - Vulnerability index composed of Exposure, Sensitivity, and Adaptive Capacity across six sectors: health, food, ecosystem, habitat, water, and infrastructure.
  - Readiness index composed of Economic, Governance, and Social dimensions.
- Moldova’s adaptive capacity weaknesses highlighted by ND-GAIN:
  - Comparatively weaker disaster preparedness strategies.
  - Below-average adaptation in agriculture (irrigation capacity, availability of fertilizers, automotive infrastructure) relative to Advanced Europe and EU averages.
  - Lower quality of transport and trade-related infrastructure relative to CESEE peers and Advanced Europe.
  - Weaknesses in reliable access to water and water storage infrastructure and capacity.
- Readiness shortfalls:
  - Governance indicators (political stability, control of corruption, respect of the rule of law, regulatory quality) remain below CESEE and EU averages despite improvements.
  - Social readiness lags peers on innovation, education, ICT infrastructure, and social inequality measures.
  - A less-favorable business environment may constrain private sector involvement in adaptation investment.

### D. Macroeconomic analysis framework (DIGNAD model)
- Purpose: dynamic general equilibrium model for a small open economy to quantify impacts of climate disasters and different adaptation investment scenarios.
- Main model blocks:
  - Private demand: two household types (savers with access to financial instruments; liquidity-constrained households), labor supply, remittances, government transfers, consumption of domestic and imported goods.
  - Private supply: tradable and non-tradable firms with Cobb-Douglas production; total factor productivity (TFP) depends on stock of public infrastructure (climate-resilient and standard).
  - Policy block: government financing options for standard or climate-resilient infrastructure including consumption taxes, labor taxes, net transfers, commercial debt (domestic/external), external concessional debt, grants or costless external financing.
- Fiscal policy treatment options in model:
  - Strict fiscal rule framework: taxes adjust automatically to close financing gaps and prevent excessive debt accumulation.
  - Non-automatic framework: taxes do not adjust automatically and debt financing is allowed.

### E. Policy implications and recommendations
- Climate-resilient infrastructure investments can:
  - Substantially reduce output losses from natural disasters and mitigate scarring.
  - Be more cost-efficient than ex-post disaster response.
  - Support sustainable long-term growth and help achieve development objectives, potentially reducing inequality (the most vulnerable populations may disproportionately benefit).
  - Deliver greater growth benefits when complemented by reforms that improve public investment efficiency.
- Financing constraints and priorities:
  - Limited domestic financial resources imply Moldova cannot finance necessary adaptation investments domestically without endangering public debt sustainability or hindering growth potential.
  - External support—ideally on grant or concessional terms—will be critical to meet adaptation needs without jeopardizing debt sustainability.
  - The authorities’ program under the IMF’s Resilience and Sustainability Facility (RSF) can play a crucial role in mobilizing and structuring support.
- Complementary reforms to increase readiness and implementation capacity:
  - Enhance public investment efficiency.
  - Improve governance and institutional coordination for adaptation.
  - Strengthen efficiency of education expenditure and the business environment to crowd in private investment.
  - Continue structural reforms to bolster Moldova’s readiness to fully benefit from adaptation investments.

_Italic: Source: IMF staff report section “Notre Dame Global Adaptation Index (ND-GAIN)”._

### 10.      Natural disasters are assumed to affect GDP through three main channels: (1)

### 10.      Natural disasters are assumed to affect GDP through three main channels: (1)

### Model: channels of impact and additional mechanisms
- Natural disasters affect GDP through three main channels:
  - Destroying the stock of public infrastructure.
  - Destroying the stock of private capital.
  - Reducing TFP.
- Distinct macro-fiscal implications:
  - Public infrastructure can only be rebuilt by the government, generating fiscal costs financed as described in the model.
  - Private capital must be rebuilt by private investment, which faces adjustment costs.
  - TFP is exogenous and can gradually recover to its pre-disaster level at an exogenously assumed pace.
- Two additional mechanisms:
  - Increased government borrowing costs via an increased risk premium on external commercial debt triggered by perceived higher default risk after a disaster.
  - Decline in the efficiency of government infrastructure investment due to limited government capacity for large-scale reconstruction.

### Climate-resilient (adaptation) infrastructure in the DIGNAD model
- Public infrastructure stock is decomposed into:
  - Standard infrastructure.
  - Climate-resilient (adaptation) infrastructure.
- Properties of climate-resilient infrastructure:
  - Reduces the output cost of natural disasters.
  - Higher cost relative to standard infrastructure (e.g., requires more qualified technical skills, more expensive materials, advanced technologies).
  - Lower depreciation rate (example given: climate-proofed roads more likely to withstand adverse events).
  - Higher rate of return; initial returns of adaptation infrastructure may be high where existing stock is low.

### DIGNAD production and fiscal framework (Box 2 summary)
- Production function: Cobb-Douglas with labor, public capital, private capital, and TFP. (Formula presented in source.)
- φ captures the rate of return of public capital.
- Fiscal reaction and budget constraint link debt trajectory to financing options, revenues, and expenditures, including public investment (g_i I) and public consumption/transfers (t G).
- Financing instruments: external commercial (X), external concessional (Z), domestic debt (D); interest rates: Xr, Zr, Dr; grants (Λ) and other revenues (R) included.
- In absence of enough financing, taxes and transfers are adjusted to close financing gaps.

### Baseline calibration and simulation design
- Simulation horizon: 20-year horizon.
- Government may increase infrastructure investment during first 5 years.
- A natural disaster hits in Year 6; reconstruction starts immediately and lasts 5 years.
- Natural disaster channels: the three main channels plus reduced efficiency of government infrastructure investment.
- Assumption: no impact on risk premium on government commercial external debt (Moldova has not incurred new commercial debt on international markets in at least the past 5 years).
- Key calibration parameters (excerpt, values preserved exactly):
  - Public infrastructure investment to GDP ratio 4.0%
  - Public adaptation infrastructure investment to GDP ratio 0.0%
  - Consumption tax rate (VAT) 20.0%
  - Labor income tax rate 12.0%
  - Public domestic debt to GDP ratio 9.6%
  - Public concessional debt to GDP ratio 26.0%
  - Public external commercial debt to GDP ratio 0.0%
  - Private external debt to GDP ratio 50.6%
  - Real interest rate on public domestic debt 4.0%
  - Real interest rate on public external commercial debt 6.0%
  - Grants to GDP ratio 0.5%
  - Natural resources revenues to GDP ratio 0.0%
  - Remittances to GDP ratio 14.1%
  - Imports to GDP ratio 58.9%
  - Trend per capita growth rate in absence of natural disasters 6.0%
  - Value added in NT-sector 60.0%
  - Efficiency of public infrastructure investment 65.0%
  - Ability of adaptation capital to withstand natural disaster 30.0
  - Cost ratio adaptation vs standard investment 25.0%
  - Initial return standard on infrastructure investment 25.0%
  - Initial return on adaptation infrastructure investment 35.0%
  - Depreciation rate of public capital (standard infrastructure) 7.5%
  - Depreciation rate of public capital (adaptation) 3.0%
  - Division of fiscal adjustment parameter - Transfers 20.0%
  - Division of fiscal adjustment parameter - Consumption tax 40.0%
  - Division of fiscal adjustment parameter - Labor income tax 40.0%
  - Public debt adj. between commercial external and domestic 50.0%

### Investment scenarios analyzed
- Unchanged policies scenario:
  - No additional public infrastructure investment beyond baseline.
- Standard investment scenario:
  - Additional 2 percent of GDP invested in public standard infrastructure annually.
- Adaptation investment scenario:
  - Additional 2 percent of GDP invested in public climate-resilient infrastructure annually.

### Fiscal constraint in baseline scenarios
- Government faces a tight budgetary constraint and a strict fiscal rule that does not allow debt financing.
- No new external grants or concessional loans are available beyond baseline assumptions.
- New spending financed through tax increases or expenditure rationalization (savings from lower public transfers).

### Key simulation results (Pre-disaster, Shock, Post-disaster)
- Pre-disaster:
  - New infrastructure boosts GDP growth by about 1 ppt above the baseline during the investment phase in both investment scenarios.
  - Private investment and consumption contract due to tax increases and cuts in public transfers.
- Shock (Year 6 disaster):
  - Under unchanged policy and standard investment scenarios, GDP contracts by about 6 percent (similar to the drought in 2009 in Moldova).
  - Under the adaptation investment scenario, GDP contracts by about 2 precent, implying resilient infrastructure could absorb about two-thirds of the disaster impact on economic activity.
  - Public debt-to-GDP ratio increases from 35.5 percent to about 38 percent of GDP under unchanged or standard scenarios.
  - Public debt-to-GDP ratio increases to about 36 percent of GDP under the adaptation investment scenario.
  - Given the strict fiscal rule, the debt-to-GDP increase is driven exclusively by the denominator effect (change in nominal GDP).
- Post-disaster:
  - Unchanged and standard scenarios: medium-term scarring is significant:
    - GDP growth remains about 2.5 to 3 ppts below the steady state 5 years after the disaster.
    - In the longer term, GDP growth stands at 1 to 1.5 percent below the steady state more than a decade after the shock.
    - Long-term debt-to-GDP ratio is slightly above the steady state by about 1 ppt.
  - Adaptation scenario:
    - Faster recovery due to limited destruction of capital stock and smaller contractions in investment and consumption.
    - GDP returns to the steady state level within 10 years after the disaster.
    - Debt-to-GDP ratio converges back to close to 35.5 percent of GDP by the end of the forecast horizon.

### Quantifying adaptation investment needs (Box 3 summary)
- Two approaches used to estimate adaptation investment needs:
  - Sectoral approach (World Bank, 2016): suggests total adaptation cost of about 2 percent of GDP per year over the next 10–15 years.
  - Frontier analysis approach: estimates about 2.5 percent of GDP per year in adaptation will be needed over the next 20 years to close adaptation gaps for CESEE countries.
- Moldova’s 2020 Nationally Determined Contribution estimates adaptation investment needs to be 2.5 percent of GDP per year over the next 10–15 years.
- For simulations in the paper, the lower bound of 2 percent of GDP per year is used.

### Alternative financing options and assumptions
- Additional financing assumptions for simulations:
  - Additional 0.5 percent of GDP of grant financing annually (bringing baseline grant financing to 1 percent of GDP).
  - Increased access to concessional loans by 1 percent of GDP annually.
  - This leaves a financing gap of about 0.5 percent of GDP annually to fully finance climate-resilient infrastructure.
- Two options to close the financing gap:
  - Increase public commercial debt.
  - Mobilize additional tax revenues and/or generate savings from current transfers.
- Public Investment Efficiency (PIE) scenarios:
  - Considered improvement in PIE by 15 ppts to 80 percent.
  - PIE measures the share of budgeted funds effectively used for allocated expenditure items.

### Financing Option 1: Increased public commercial debt to close the gap
- Scenario comparisons:
  - Scenario 1: finance exclusively by increasing commercial debt.
  - Scenario 2: additional grants and concessional borrowing available (grant +0.5 ppt; concessional +1 ppt).
  - Scenario 3: scenario 2 plus PIE improvement by 15 ppts.
- Results:
  - All-commercial-debt scenario: public debt would peak at about 50 percent of GDP (from about 35.5 percent) and remain broadly at that level 10 years after the shock.
  - Adaptation investment boosts growth by about 1 ppt above pre-disaster baseline and limits disaster impact by about two-thirds.
  - With additional grants and concessional borrowing, growth impact is larger by about 0.2 ppt by end of investment cycle and over the post-shock period.
  - Debt-to-GDP ratio under mixed financing reaches a maximum of 45 percent, then declines to 43 percent by end of forecast horizon.
  - Improving PIE raises growth by about 0.3 ppt by the end of the investment phase and supports post-shock recovery by about 0.3 ppts annually over the forecast horizon.

### Financing Option 2: Mobilizing tax revenue and expenditure savings
- Scenario comparisons analogous to Financing Option 1 but closing the gap via tax increases and expenditure rationalization.
- Results:
  - Growth and resilience impacts are of comparable magnitude to the debt-financing case.
  - Scenarios with additional grants and concessional debt financing yield larger growth outcomes than fully tax/expenditure-financed scenarios.
  - Tax increases (income and consumption) depress private investment and consumption, weakening growth impact of public investment.
  - Improving PIE has similar positive effects as in the debt-financing case.
  - Debt-to-GDP implications:
    - Debt-to-GDP ratio peaks at about 40 percent following the shock and declines gradually to 37 percent by end of forecast horizon.
    - This option preserves public debt sustainability while delivering similar growth and climate-resilience impacts.

### Trade-offs and implications for donors
- Closing adaptation gaps involves trade-offs among:
  - Bolstering climate-resilient infrastructure stock.
  - Supporting economic activity.
  - Maintaining debt sustainability.
- Given Moldova’s constrained fiscal space, limited access to commercial domestic and external debt, and limited financial resources, donor support is particularly important:
  - Financial assistance ex ante (before a disaster) to support resilient investments may be more reasonable and efficient than financing reconstruction ex post.
- Analysis approach for donor trade-off:
  - Assume donors finance all reconstruction efforts following a disaster.
  - Calculate net present value of future reconstruction costs under that assumption and compare it to the cost of ex-ante investment in climate-resilient infrastructure.

*Source: Excerpt from IMF chapter on Moldova (DIGNAD model simulations and analysis).*

### 26.      Donors’ net savings from supporting adaptation investments   are large. The results

### 26. Donors’ net savings from supporting adaptation investments are large. The results

### Donors’ net savings from ex ante support for adaptation
- Findings from Table 3: donors’ savings would amount to about 17 percent of total ex post reconstruction costs if they were to support adaptation investments ex ante (based on a disaster impact of similar magnitude to Moldova’s past climate shocks).  
- Larger future disasters raise donor savings: if future natural disasters are 50 percent larger than historical shocks, donors’ net savings would be equivalent to about 27 percent of reconstruction costs.  
- Table 3. Moldova: Discounted Net Savings of International Donors (in percent of reconstruction cost)
  - Average Impact 17.6
  - Average Impact + 30% 24.3
  - Average Impact +50% 27.3
  - Average Impact +100% 32.2

### Conclusions on Moldova’s climate vulnerability and benefits of adaptation investments (¶27–29)
- Moldova is one of the countries most affected by the impact of climate change in Europe, having borne the largest toll in Europe over the past three decades. Country-specific characteristics increasing sensitivity include:
  - heavier reliance on agriculture,
  - a comparatively-larger rural population,
  - high dependence on energy imports and limited diversification of energy supply sources,
  - limited financial resources for high-quality public services, with diversion of spending in times of external shocks.
- Challenges magnifying climate impacts include:
  - weaker disaster preparedness strategy,
  - low adaptation in the agriculture sector,
  - poorer quality of infrastructure,
  - less reliable access to water and water storage infrastructure and capacity.
- Benefits and scale of adaptation investments:
  - Adaptation infrastructure from additional public investments can significantly reduce output losses from natural disasters and mitigate scarring.
  - Example quantification: an accumulation of adaptation infrastructure equivalent to 2 percent of GDP per year over 5 years can reduce GDP losses from about 6 percent to 2 percent following a disaster.
  - Such investments support sustainable long-term growth, which can reduce inequality and support Moldova’s Sustainable Development Goals.
  - Increasing Public Investment Efficiency (PIE) would further boost GDP growth.
- Role of reforms and external support:
  - Under the ongoing ECF/EFF program, Moldova has made progress in governance reforms, including fiscal governance.
  - Implementation of the PIMA and C-PIMA recommendations will help improve PIE.
  - External support is critical: in the absence of donors’ support, Moldovan authorities cannot finance the most needed climate-resilient investment without endangering public debt sustainability or weakening growth potential. Donors’ ex ante support (to build resilience) yields large savings relative to reconstruction costs ex post.
- Implementation constraints:
  - Moldova appears relatively less well prepared for effective implementation of adaptation actions compared to other European countries due to governance challenges, gaps in innovation, education, and ICT infrastructure, and a comparatively less favorable business environment (as shown by the ND-GAIN index).
  - Policy priorities to improve readiness and mobilize private finance include strengthening governance (supported by ECF/EFF and EU accession process), boosting efficiency of education expenditure to support innovation, promoting the ICT sector, stimulating a favorable business environment to crowd in private investments for climate actions, and reforms in the financial sector under the RSF to foster private sector participation.

### Corruption, economic growth, and implications for convergence (selected findings)
- Relationship between corruption and growth:
  - Regression estimates indicate that a reduction of perceptions of corruption, represented by an increase of the Corruption Index from the International Country Risk Guide (ICRG) by one unit, may raise per capita GDP growth by about 0.6 percent.
- Convergence scenarios (ICRG-based):
  - If Moldova is unable to lower corruption, per capita GDP will remain at about 30 percent of the EU average in 2040.
  - If corruption is lowered to the average of EU countries (equivalent to an increase of the ICRG index by 1.3 points), per capita GDP will reach 35 percent of the EU average in 2040.
  - If Moldova reduces corruption to the level of the best performing, highest ICRG level in the EU (equivalent to an increase of the ICRG index by 3 points), per capita GDP will reach 45 percent of the EU average by 2040, with accelerated convergence thereafter.
- Regional best practices in criminal justice reforms:
  - Specialized anti-corruption law enforcement authorities with operational independence and strong mandates (examples: Romania’s DNA in 2002, Poland’s CBA in 2006, Ukraine’s NABU in 2015) have broad autonomy over staffing and budget, clear mandates to investigate high-level corruption, and investigative powers (e.g., surveillance and wiretapping).
  - Success depends on robust prosecution and adjudication leading to convictions and asset recovery; leadership perceived as rule-of-law oriented and impartial is important.
  - Moldova ranks lower than Romania and Poland on rule of law indicators; weaknesses in adjudication capacity and trust in general jurisdiction courts have led some countries to consider specialized anti-corruption courts.

*Source: IMF staff analysis (sections 26–29 and selected parts of the Corruption and Economic Growth in Moldova paper) from the provided content unit.*

### 9.      Involvement of civil society and experts with international experience has contributed

### 9. Involvement of civil society and experts with international experience has contributed to the credibility and sustainability of anti-corruption reforms

### Civil society, international experts, and media involvement
- Civil society has been actively engaged in the design of new anti-corruption agencies in the region, promoting credibility and support for the institutions.
- Experience of anti-corruption experts from academia, think-tanks and other NGOs has been leveraged.
- Involvement of experts with international experience was instrumental at the early stages of the reforms given the limited domestic track record of successful prosecution of top-level corruption.
- Examples:
  - Romania: anti-corruption reforms leveraged EU conditions.
  - Ukraine: experts with international experience were a key part of the selection process for top prosecutors, judges, and investigators.
- Investigative journalists and media have supported anti-corruption agencies by identifying officials not declaring assets or exhibiting other indications of illicit enrichment.

### Progress in the Anti-Corruption Framework
- GD findings:
  - Anti-corruption legal and institutional infrastructure largely in place but lacked effectiveness and needed insulation from undue influence.
  - Sanctioning appeared lenient: wide application of fines and reduced and suspended sentencing; criminal enforcement focused on petty corruption rather than high-level corruption.
  - Pervasiveness of corruption in law enforcement and the judiciary created vulnerabilities across public agencies.
- Priority recommendations identified by the GD ranged from short-term measures to strengthen enforcement and integrity in the prosecution service to longer-term adjustments to target high-level corruption.
- Implemented measures and status highlights:
  - Strengthened selection process for APO head with participation of international experts and civil society, and allowing non-prosecutors to apply — Implemented (part of ECF/EFF program, March 2020 Structural Benchmark; December 2022 Structural Benchmark).
  - Transfer of the disciplinary function from the PGO to the SCP — Implemented (legal revision in June 2023 transferring the Inspection of Prosecutors to the Supreme Council of Prosecutors).
  - Measures to limit abuse in criminal justice: enhanced simplified proceedings provisions with clear criteria and procedures and prohibition of reduction of terms of imprisonment in corruption cases below statutory minima — Prior action, third ECF/EFF review.
  - Prioritization of investigations of high-level corruption — In progress; notable casework since January 2023:
    - NAC and APO submitted to court over 140 corruption cases involving one former President, one former Prime Minister, one former minister, four former and current members of Parliament, three prosecutors, one judge, one former governor of the NBM and other high-level officials.
    - APO obtained 130 sentences in the first instance court, including confiscation orders for over MDL 1.7 million.
    - APO prosecutors obtained an appellate adjudication sentencing in absentia a former high-level official to 15 years imprisonment and ordering over MDL 5.2 billion confiscation.
- Illicit enrichment:
  - GD recommended intensifying investigations of embezzlement by public officials, illicit enrichment, and declaring false information — continuous relevance.
  - Constitutional Court interpretation (November 2022) confirmed that evidence of a crime that generated illicit wealth is not required to charge illicit enrichment, clarifying burden of proof and potentially instrumental in intensifying prosecution of illicit enrichment.
- Judicial adjudication timelines and completion rates:
  - Courts in 2020 took, on average, 324 days to reach a final decision on a case (39 percent faster than the Council of Europe median of 529 days).
  - Corruption cases took, on average, 3.5 years to reach a final decision (four times slower than the national average for all criminal cases and 2.4 times slower than the Council of Europe median).
  - Completion rate for corruption cases in 2022 was 30 percent of cases examined adjudicated, materially lower than the completion rate for all criminal cases at 50 percent.
- Anti-corruption court initiative:
  - President submitted a draft law to Parliament in July 2023 to establish an anti-corruption court; authorities are adjusting the draft taking into account a Venice Commission opinion with adoption expected in early 2024.
  - Key design requirements emphasized: reinforced selection process for anti-corruption judges (involving experts with international experience), objective and uniform selection criteria specific to anti-corruption judges, jurisdiction limited to cases investigated/prosecuted by APO, and comprehensive safeguards for staffing, budgetary and operational autonomy.

### Anti-Money Laundering (AML)
- GD findings:
  - Moldova’s AML regime was not sufficiently used to support anti-corruption efforts or shield the economy from illicit flows.
  - Banks exhibited recurring deficiencies in preventive measures, particularly in identifying beneficial owners and politically exposed persons (PEPs); reliance on self-reported customer information for PEP identification was noted.
  - Recommendation: conduct cross-sectoral thematic inspections of banks based on external audits.
- Implemented measures and status highlights:
  - NBM introduced thematic inspections as part of AML/CFT supervision, focusing on identification of beneficial owners and application of customer due diligence measures for PEPs; inspections were triggered by external audit findings.
  - During on-site inspections the NBM reviewed implementation of action plans developed from external audit results.
  - NBM identified failures to identify and report suspicious transactions in banks, resulting in sanctions on banks, including written warnings and fines.
  - Office for Prevention and Combating of Money Laundering approved new Guidelines on identification and monitoring of PEP activity and risk indicators for PEPs; Guidelines include a list of types of officials that hold prominent public positions for PEP identification.
- Beneficial ownership deficiencies and recommendations:
  - Public register of beneficial owners exists, maintained by the Public Services Agency (PSA), but PSA lacks sanctioning powers for submission of false or incomplete information or failure to report changes; such sanctioning powers currently lie with the Ministry of Internal Affairs.
  - GD recommended granting PSA sanctioning powers for non-compliance with registration requirements regarding beneficial ownership — Not implemented.
- Further AML recommendations (from the GD and assessment):
  - Strengthen capacity of law enforcement to use financial intelligence and conduct financial investigations to identify and trace proceeds of corruption.
  - Intensify efforts to prosecute corruption-related money laundering consistent with substantial risks.
  - NBM should develop a toolkit for risk-based supervision and leverage risk-based targeted and thematic on-site inspections focusing on vulnerabilities to laundering proceeds of corruption.
  - NBM should impose effective, proportionate, and dissuasive sanctions for AML/CFT non-compliance; current sanctioning may be hindered by NBM’s cumbersome internal sanction approval processes.
  - Authorities should grant PSA sanctioning powers for beneficial ownership non-compliance or establish an effective cooperation mechanism between PSA and the Ministry of Internal Affairs.

### Building institutional capacity and next steps
- APO capacity needs:
  - Following strengthening of APO’s mandate to cover all high-level officials and corruption-related offences, APO should be granted required equipment, premises, and staffing (prosecutors, investigative officers, counsels, and experts).
  - October 2023 law granted APO powers to apply wiretapping; this should be accompanied by prompt allocation of required equipment and staff.
  - Strengthening APO’s authority over human resources is recommended so APO can lead in identifying prosecutorial candidates, forming panels for selection interviews, and have decisive input in selection and transfer of prosecutors to APO.
  - Reduce reliance on seconded investigative officers; ensure continuous staffing to maintain investigation continuity.
  - Safeguards needed to protect APO from pressures, including preventing transfers of prosecutors or introduction of limits to its mandate over high-level corruption cases.
- Institutional completion:
  - Establishing a specialized adjudication infrastructure (anti-corruption court) is recommended to ensure timely and specialized adjudication of corruption cases; court jurisdiction should be limited to APO-investigated/prosecuted cases to avoid overburdening.
- Overall assessment and expected benefits:
  - Analysis shows strengthening of anti-corruption and AML frameworks since the GD, but further progress remains necessary in both areas.
  - Perseverance of reform efforts is critical and has potential to contribute to boosting growth, fostering competition and investment, and accelerating income convergence towards the EU.

*Source: Republic of Moldova — IMF Country Governance Diagnostic and assessment on anti-corruption and AML progress (excerpts).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1mdaea2023005.pdf_