## 1mdaea2024001-print-pdf ## Source details **Canonical URL:** [1mdaea2024001-print-pdf](https://www.imf.org/-/media/files/publications/cr/2024/english/1mdaea2024001-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1mdaea2024001-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1mdaea2024001-print-pdf.pdf.json) --- ### Executive summary — context, recent developments, and outlook - Context and political calendar: - EU agreed to open accession negotiations in December 2023; Moldova prepared its first Economic Reform Programme 2024–2026. - Presidential elections scheduled for October 20, 2024 (to be combined with a referendum on EU accession); parliamentary elections planned in 2025. - Former NBM Governor Armaşu dismissed in December; IMF staff mission visited Chişinău in March to assess commitments to strengthen NBM autonomy and governance. - Date on document: June 13, 2024. - Recent macro-financial developments: - Real GDP growth: 0.7 percent in 2023 (first estimate). - High-frequency indicators Q1:2024: industrial production +12.5 percent; aggregate retail trade +16.2 percent in February (y/y); agricultural production +11.6 percent in March (y/y). - Real exports: −11.5 percent in February (y/y); real imports growth +0.8 percent in February (y/y). - Unemployment rate: 4.9 percent in 2023Q4. - Overall fiscal deficit: 5.2 percent of GDP in 2023. - Public investment: 4 percent of GDP in 2023. - Cash buffers at end-2023: MDL 2.25 bn (0.8 percent of GDP), including a one-off MDL 1 bn repayment from Energocom recapitalization. - Current account deficit: 11.9 percent of GDP in 2023 (improved from 17.2 percent in 2022). - Headline inflation: 3.5 percent in April; core inflation: 7.8 percent in April. - NBM actions: reserve requirements reduced (MDL and FX RRs from 33 percent and 43 percent to 29 percent and 39 percent by July); base rate lowered by 0.15 ppt to 3.6 percent. - Leu appreciated by about 2 percent through early March compared to end-2023. - Gross reserves: about $5.4 billion as of mid-March (about 6 months of imports). - Financial sector soundness: - Bank aggregate capital adequacy: about 29 percent in February. - Liquidity coverage ratio: 313 percent. - Return on equity (ROE): 12.8 percent in February. - Bank credit to the economy: grew by around 7.5 percent y/y in March. - Interest rates on new MDL loans: 9.45 percent in March (peak 14.3 percent in early 2023). - Credit growth concentrated: real estate +14.5 percent y/y; retail +19.5 percent y/y; corporates +1.9 percent y/y. - Nonperforming loans (NPLs): 5.5 percent in March; agriculture NPLs 17.4 percent; industry NPLs 14.4 percent. - Outlook: - Growth projected at 2.6 percent in 2024 (down from 3.9 percent at the fourth review); expected acceleration in 2025. - Medium-term: negative output gap persists; GDP remains below pre-pandemic and pre-war trend. - Key risks: - Downside: spillovers from the war in Ukraine, renewed energy shocks, political tensions around elections, extreme weather, insufficient governance/anti-corruption progress. - Upside: faster trade-partner growth, faster EU accession progress, accelerated structural reforms. ### Authorities’ assessment and strategic priorities - Authorities concur with staff on weaker-than-expected recovery and persistent war-related and geopolitical risks (illicit flows, cyber-attacks). - Authorities favor more proactive policies to support recovery (e.g., additional public investment) and plan: - Continue supporting SMEs, adjust programs to facilitate access to bank lending. - Boost industrial production, attract FDI, reduce informality. - Design an economic growth strategy for the next 10 years. - National Development Plan for 2025–2027 aiming to build a “European country, safe and prosperous for citizens and business environment.” ### Fiscal policy — 2024 budget, midyear adjustments, and medium-term framework - Approved 2024 budget priorities: - Better-targeted social assistance; strengthened social safety nets; energy security; support for businesses; growth-enhancing reforms. - Approved 2024 budget deficit: 15,790 MDL million (4.8 percent of revised GDP). - Social assistance and EVRF: - Transition in 2024/25 heating season from in-bill to cash transfers (EVRF); consolidation of APRA into EVRF. - Pensions increased in line with inflation; Ajutorul Social Program supported. - Revenue outlook: - Likely revenue shortfall in 2024 of about MDL 803 ml compared to the approved budget. - External grant pledges of 350 MDL ml in 2024. - Contributing factors: tax incentive on undistributed income uptake reducing CIT; lower VAT due to revised imports and contained inflation. - Midyear supplementary budget (July 2024): - Staff agree to accommodate revenue shortfall while keeping overall expenditures broadly unchanged. - Modified end-December cash deficit performance criterion: new deficit 5 percent of GDP. - Expected inclusions: EVRF top up MDL 300 million (earmarked grants); Road and Regional Development Funds MDL 1 billion (mostly reallocations). - Authorities request to use full ECF/EFF disbursement for budget support (vs. prior 50-50 split). - Medium-term fiscal framework: - MTBF envisages deficit reduction to 3.1 percent of GDP by 2027. - Support from tax policy and revenue administration reforms; phase-out of tax expenditures; normalization of CIT incentives; PFM, MTBF and PIM reforms. - Additional grants and concessional financing critical; deepen domestic debt market. - Energy security risks: - Reduced reliance on energy imports from Russia via Transnistria; electricity still heavily reliant on MGRES (Transnistria) with supply agreement until end-2024. - Downside scenario estimate: increase in energy costs by some estimates, $330 million per year. - Interconnection capacity with Romania could mitigate disruption potentially over the coming two years. ### Monetary and exchange rate policies; NBM autonomy and governance - Monetary stance and tools: - NBM follows inflation-targeting regime; decisions guided by 12–24-month forecasts. - Policy rate eased from 21.5 percent (Dec 2022 start) to 3.6 percent in May 2024. - Reserve requirements relaxed: reductions of 1 ppt and 2 ppts in Nov 2023, and further 4 percentage points gradually in May 2024; MDL and FX RRs to 29 percent and 39 percent by July. - Staff advice: pause rate cuts; focus on lowering high MDL and FX RRs and absorb excess liquidity as needed. - Exchange rate and buffers: - Maintain exchange rate flexibility while preserving FX buffers. - Interventions limited: occurred on two days in 2024 and 15 days in last 12 months. - Gross foreign exchange reserves: about USD 5.4 billion by end-April 2024. - Strengthening NBM independence and governance: - IMF mission assessed NBM legal, governance, and operational frameworks in March; recommendations to strengthen autonomy, governance, transparency, accountability. - New end-November SB: package of legislative amendments to NBM law to: - Strengthen appointment/dismissal procedures and due process. - Reform governance and decision-making structures (qualifications, membership, tenure, mandate of EB and SB). - Clarify legal provisions on NBM’s accountability to Parliament. - MoU on responsibilities for asset recovery from 2014–15 bank fraud to be prepared and published by end-June. - Authorities requested IMF Central Bank Transparency Code review to be completed by end-November 2024. - Box 1 — Key findings and recommendations (assessment of NBM autonomy and governance): - Assessment highlights: weak checks and balances in appointment/dismissal; SB 7-year term longer than best practice; lack of staggered terms; dismissal provisions lack due process; governance overlaps between EB and Governor; public standing hindered by 2014–15 bank fraud legacy. - Recommendations include: strengthen checks and balances; appoint EB and SB members for fixed terms and stagger mandates; shorten SB terms to 3 or 5 years; ensure due process; fully constitute EB; transform SB into oversight board; clarify EB/Governor responsibilities; introduce assessments and periodic audits; conduct IMF Central Bank Transparency Code review. ### Financial sector policies, non-bank sector, and AML/CFT - Macroprudential stance and credit dynamics: - Counter-cyclical buffer: zero; systemic risk buffer: 1 percent. - LTV and DSTI limits introduced in 2022 (LTV 80 percent; DSTI 40 percent) have restrained credit growth. - Room for mild relaxation of borrower-based measures given low penetration of credit and banking sector strength. - Non-bank credit organizations (NBCOs) and insurance: - NBCO NPLs: 12.1 percent in 2023 (from 11.7 percent in 2022). - NBCO profitability: ROA of 6–7 percent. - NBCO funding composition: credit and loans 60 percent; equity 35 percent. - NBCO funding sources: non-residents 55 percent; other financial institutions 31 percent. - About 37 percent of NBCO loans extended in FX. - NBM supervision of NBCOs effective July 2024 with improved reporting requirements adopted. - Insurance sector (end-2023): average solvency ratio 171 percent. - Solvency II transposition: Pillar II and III legislation adoption ongoing (end-September SB); Pillar I transposition targeting adoption in 2026 (entry into force dependent on Balance Sheet Review results). - Supervision, stress testing, and resolution: - “Twin peak” supervisory framework operating with cooperation between regulators. - Strengthening systemic risk analysis and stress testing; introducing maturity ladder and LCR-based liquidity stress tests (IMF TA developed). - Improving resolution and liquidation framework; discussing forced liquidation model developed with IMF TA. - Emergency liquidity assistance (ELA): internal and external regulations updated; internal consultations to clarify government guarantees and conditions under which they could be granted in context of ELA. - Payments, inclusion, and market infrastructure: - Instant payment system launched in March 2024; over 100,000 accounts activated by mid-April. - Extension of instant payments to P2B, B2P, and P2G planned by September 2024. - Application submitted to SEPA; PSD2-based open banking planned for February 2025. - NFIS inter-agency committee planned with World Bank support (end-June 2024 SB); diagnostic phase ongoing; action plan expected by end-2024. - AML/CFT and financial integrity: - Strengthening AML/CFT critical to mitigate ML risks from corruption, embezzlement, tax evasion and cross-border illicit flows. - NBM developing risk-based AML supervision with IMF TA support. - National AML/CFT Strategy 2020–25 in place; update of National Risk Assessment and action plan planned. ### Structural reforms, governance, SOEs, judiciary, and anti-corruption - SOE reform: - State-ownership strategy adopted Dec 2022; triage of 238 central government SOEs completed (end-December 2023 SB) with five-category classification. - Strategy to include monitoring financial performance, mitigating fiscal risks, and rationalizing non-strategic/loss-making SOEs (end-September 2024 SB). - Amendments to Law on State and Municipal Enterprises (April 2023) authorize corporate governance code adoption and evaluation of Executive Board performance; Audit Committees introduced. - Judiciary and anti-corruption: - APO mandated with investigation and prosecution of high-level corruption; transfer of cases completed March–March 31, 2024 (fourth review prior action). - APO obtained 130 first-instance sentences in 2023; confiscation orders over MDL 1.7 million; recent appellate sentencing in bank fraud case ordered over MDL 5.2 billion confiscation and 15 years imprisonment in absentia for a former official. - Law to establish Anti-Corruption Court (ACC) missed end-March SB; draft prepared for second reading; SB reset for end-September 2024; law expected to be adopted in summer 2024. - Proposed legal amendments to grant APO greater staffing autonomy (hiring investigative officers) set as an end-November 2024 SB. - MoU on asset recovery responsibilities to be published by end-June 2024; Steering Committee and high-level Monitoring Committee chaired by the Prime Minister to be established. - Rule of law measures: - Integrity vetting regime and integrity assessment law (effective Aug 22, 2023) in force; reforms to Supreme Court of Justice underway. - National program of integrity and anti-corruption for 2024–2028 adopted December 2023. ### RSF, climate, energy, and sustainable finance - RSF-supported reforms and milestones: - RM1: Climate Action Law adopted; National Commission on Climate Change (NCCC) established. - RM10: Interagency steering committee on climate finance established (including NBM and Moldovan Banks Association). - RM11: Sustainable Finance Strategy (“Roadmap”) adopted and implementation starting. - RM5: Transition EVRF from in-bill to cash transfers delinked from consumption; legislation expected by September with roll-out in November. - RM4: Determine cost-recovery rates for electricity and natural gas (RM4); use CPAT; distributional impact assessment and adjustments as needed. - RM7–RM9: Include climate change impact and vulnerability assessments in project appraisal and report on climate spending and fiscal risks. - Climate and energy specifics: - LEDP 2030 in force on January 1, 2024. - Draft Integrated National Energy and Climate Plan (NECP) 2025–2030 submitted December 2023. - New Forest Code adopted March 2024; NFERP aims to increase forest area by 145,000 hectares by 2032. - CCDR initial assessment: climate-resilient green transition likely requires investments exceeding 5 percent of GDP annually over the next three decades. - Energy interconnections with Romania and ENTSO-E work ongoing; electricity interconnector capacity limited and dependence on MGRES remains high. - Energy downside estimate: potential increase in energy costs $330 million per year in a downside scenario. - Financial sector and sustainable finance: - NBM amended reserves management framework to explicitly allow investment in green bonds. - Sustainable Finance Taxonomy advanced draft to start public consultation aiming for approval by December 2025 (RM12). ### Labor force participation — Annex II (findings and policy implications) - Participation and trends: - Labor force participation rate: 45 percent in 2023. - CESEE average: 58 percent; advanced Europe average: 62 percent. - Participation rose by 7 ppts between 2010 and 2023 in Moldova (vs. 3.1 ppts in CESEE and 0.5 ppt in developed Europe). - Working-age population migrating abroad: 9 percent in 2022. - Determinants of low participation: - Informality concentrated in agriculture (about half of informal employment); shadow economy employment share ~23 percent. - Skills mismatches, outmigration, weaker business environment, barriers to women’s employment (inadequate childcare). - Gender and childcare statistics: - Labor force participation 2023: men 49.4 percent; women 41.2 percent (gap 8 ppts; gap was 6 ppts in 2010). - Employment rate age 25–49 (2022): men 60 percent; women 54.9 percent. - Employment rate of women with at least one child (25–49): 37 percent; women without children: 65.9 percent. - Lack of statutory childcare for children up to 2 years; National Programme for Childcare Services for children under 3 (2023–2026) adopted but state not required to finance services. - Policy recommendations and fiscal implications: - Reforms: boost education efficiency; raise education levels; address skill mismatches; reduce informality; strengthen institutions and business environment; enhance childcare policies (maternity, paternity, parental leave; ECCE). - Investment needed to close gaps in children-related care services: up to 1.9 percent of GDP annually over a decade (ILO Care Policy Investment Simulator). - Potential impacts of care investments: increase total employment by as much as 10 percent; reduce gender employment gap from 8 percent to about 3 percent; reduce gender gap in monthly wages by about 1.4 percentage points. - Aggregate return on investment: estimated about US$ 5.8 for every dollar invested over a decade. ### Program modalities, conditionality, and technical memorandum highlights - Program status: - ECF/EFF performance broadly on track; some delays on structural reforms. - RSF on track; all reform measures for current review completed. - Quantitative and structural conditionality: - Modification requested for end-2024 ceiling on cash deficit: MDL 803 million (reflecting revised forecast). - New proposed SBs (five): submission of NBM law amendments (end-November 2024); APO autonomy amendments (end-November 2024); tax audit review report (end-January 2025); tax audit modernization plan (end-April 2025); present fiscal accounts in GFSM2014 (end-April 2025). - Missed SB on adoption of anti-corruption adjudication infrastructure law reset for end-September 2024. - Program financing and risks: - ECF/EFF fully financed for next 12 months with good prospects for remainder; EU and World Bank disbursements likely in 2024Q2. - Fund exposure peaks at 6.5 percent of GDP in 2024. - Total debt service to the Fund peaks at 5.9 percent of total exports in 2025. - Public debt sustainable; overall risk of debt distress moderate; risk of external debt distress low. - TMU key elements and reporting: - Program exchange rate of the MDL to US$ set at 17.6627/US$ (official rate as of September 30, 2021). - Stock of NIR of the NBM: US$ 3708.57 million as of September 30, 2021. - Cash deficit definition and adjusters specified; adjusters include shortfalls in programmed external grants (up to US$363 million in 2024 and US$29 million in 2025). - Extensive fiscal, monetary, balance of payments, debt, and other reporting requirements with specified frequencies and submission lags. *Source: IMF, Executive Summary and selected chapters (1mdaea2024001-print-pdf), June 13, 2024.* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - Moldova’s economic recovery from multiple shocks is proceeding, albeit at a slower pace than expected. - Progress towards EU accession continues; the EU agreed to open accession negotiations in December 2023 and Moldova prepared its first Economic Reform Programme 2024–2026. - Presidential elections are scheduled for October 20, to be combined with a referendum on EU accession; parliamentary elections are planned in 2025. - The abrupt dismissal of former NBM Governor Armaşu in December raised concerns about due process and central bank independence; an IMF staff team visited Chişinău in March to assess commitments and identify actions to strengthen NBM autonomy and governance. - Date on document: June 13, 2024. ### Recent developments — growth, labor, and high-frequency indicators - Real GDP growth: - Growth was 0.7 percent in 2023 (first estimate), below staff’s 2 percent forecast at the time of the fourth review. - High-frequency indicators point to a rebound in Q1:2024: industrial production grew by 12.5 percent, aggregate retail trade grew by 16.2 percent in February (y/y), and agricultural production grew by 11.6 percent in March (y/y). - Real exports contracted by 11.5 percent in February (y/y); real imports growth turned positive at 0.8 percent (y/y) in February after negative growth since April 2023. - Labor market: - Unemployment rate increased to 4.9 percent in 2023Q4. - Public finances and buffers: - The overall fiscal deficit reached 5.2 percent of GDP in 2023, in line with estimates at the fourth review and below the originally budgeted 6 percent. - Public investment closed 2023 at 4 percent of GDP. - Cash buffers at end-2023: MDL 2.25 bn (0.8 percent of GDP), reflecting strong external support and a one-off MDL 1 bn repayment from recapitalization of Energocom. - External financing in 2024 experienced modest delays; authorities frontloaded domestic securities issuance. - External sector: - The current account deficit was 11.9 percent of GDP in 2023, improved from 17.2 percent of GDP in 2022. - Trade credits and currency and deposits have supported the financial account; direct investment declined from 2022. - Inflation and monetary conditions: - Headline inflation: 3.5 percent in April (reaching the lower bound of the NBM’s target corridor of 5±1.5 percent). - Core inflation: 7.8 percent in April, up from 5 percent in November 2023. - NBM policy actions: lowered reserve requirements in two consecutive reductions of 2 ppts each, bringing MDL and FX RRs from 33 percent and 43 percent to 29 percent and 39 percent by July; lowered the base rate by 0.15 ppt to 3.6 percent. - Leu appreciated by about 2 percent through early March compared to end-2023. - Gross reserves: about $5.4 billion as of mid-March, about 6 months of imports. - Financial sector soundness: - Bank aggregate capital adequacy: about 29 percent in February. - Liquidity coverage ratio: 313 percent. - Return on equity (ROE): 12.8 percent in February. - Bank credit to the economy: grew by around 7.5 percent y/y in March. - Interest rates on new MDL loans: declined from a peak of 14.3 percent in early 2023 to 9.45 percent in March. - Credit growth concentrated in real estate (+14.5 percent y/y) and retail (+19.5 percent y/y); credit to corporates +1.9 percent y/y. - Nonperforming loans (NPLs): 5.5 percent in March, concentrated in agriculture (17.4 percent) and industry (14.4 percent). ### Outlook and risks - Growth projections: - Growth is projected at 2.6 percent in 2024 (down from 3.9 percent at the fourth review), mainly due to downward growth revisions in key trade partners and a more gradual domestic demand rebound. - Growth is expected to accelerate in 2025 as domestic demand strengthens. - Relatively robust medium-term growth is projected as war impacts dissipate, trade partners recover, and reform progress for EU accession and ECF/EFF and RSF accelerates; however, a negative output gap is expected to persist in the medium-term with GDP remaining well below the pre-pandemic and pre-war trend. - Key downside risks (Annex I): - Continued uncertainty and spillovers from the war in Ukraine (including exchange rate, Transnistria, refugees). - Possible renewed energy shocks that would worsen fiscal and external balances and strain households. - Political tensions linked to upcoming elections that could jeopardize or reverse reform momentum, lead to spending overruns, and weigh on external support. - Vulnerability to extreme weather, given agriculture’s significant share in the economy. - Insufficient progress on anti-corruption and governance reforms undermining the business environment and growth. - Upside risks: - Faster-than-expected growth in trade partners, faster progress toward EU accession, and acceleration of structural reforms. ### Policy priorities and recommendations - Fiscal policy: - Continue prioritizing better-targeted social assistance, energy security, support for businesses, and growth-enhancing investments. - A supplementary 2024 budget is expected to reflect weaker revenues, with overall spending broadly unchanged. - Medium-term fiscal policies should balance development needs with gradual consolidation. - Monetary and financial policies: - Monetary policy should remain data-driven and forward-looking given the uncertain environment. - Maintain a strong supervisory and regulatory framework and strengthen AML/CFT frameworks. - Following dismissal of the former NBM governor, new agreed actions will strengthen NBM autonomy and governance to ensure sound monetary and financial policies. - Structural and governance reforms: - Renewed reform momentum on governance and anti-corruption, the SOE sector, and the labor market to foster trust in public institutions, improve the business environment, reduce fiscal risks, and support EU convergence. - Climate and investment: - Pursue robust reforms, growth-focused and climate-supportive investments, and improved access to diversified energy sources. ### Program performance: ECF/EFF and RSF status - ECF/EFF: - Performance under the ECF/EFF remains broadly on track, although with some delays on structural reforms. - The end-December structural benchmark (SB) on presentation to Parliament of amendments to strengthen NBM independence and governance was not met (but was completed as a prior action for the review). - The end-March 2024 SB on adoption of an anti-corruption adjudication infrastructure law was not met and is being reset for end-September. - Policy commitments added: further strengthen central bank independence, governance, transparency and accountability; strengthen and modernize tax audits; enhance independence of the Anti-Corruption Prosecutors office; upgrade fiscal accounts to the GFSM2014. - Staff agrees with authorities’ request for modification of the ceiling on the cash deficit of the general government at end-December 2024 to reflect lower-than-budgeted revenue projections from weaker growth and external outlook. - RSF: - The RSF is on track; all reform measures for completion of this review were completed. - Work is ongoing to prepare measures for the next review. *Source: IMF, Executive Summary (1mdaea2024001-print-pdf), June 13, 2024.* ### 13. The authorities concurred with staff’s assessment of the outlook and risks. They ### 13. The authorities concurred with staff’s assessment of the outlook and risks. They ### Authorities’ assessment and strategic priorities - Authorities concurred with staff’s assessment that the recovery has been weaker than expected and that risks related to the war and geopolitics (illicit flows, cyber-attacks) persist. - Uncertainty is impeding investment. - Authorities consider that policies should be more proactive to support the recovery given the weaker-than-previously-projected outlook and the uncertain environment (e.g., via additional public investment). - Planned measures and priorities: - Continue supporting SMEs, including by adjusting the existing program to facilitate access to bank lending through increased coverage. - Boost industrial production, further attract FDI, and reduce informality. - Stronger medium-term growth is needed to catch up with EU income levels. - Designing an economic growth strategy for the next 10 years. - Approved the National Development Plan for the years 2025–2027 aiming at building a ‘European country, safe and prosperous for citizens and business environment’. ### Program performance (ECF/EFF and RSF) - Overall: Program performance under the ECF/EFF appears broadly on track, although with some delays on structural reforms (MEFP Table 1). - End-December 2023 quantitative performance criteria (QPCs): - All QPCs, continuous PCs, indicative targets and the inflation consultation clause were met. - End-March 2024 indicative targets (ITs): - All ITs were met, except for the IT on general government wage bill, which was missed by a small amount, but expected to be compatible with the approved annual budget allocation. - The Ministry of Finance (MoF) is preparing a proposal that will align functions with central government salaries, benefit technical level staff, and compress reference values. - Structural conditionality: - End-December SBs to strengthen tax administration reforms and on SOE triage were met (MEFP Table 2). - End-December SB on presentation to Parliament of amendments to strengthen NBM independence and governance was not met due to delays; reset as a prior action for completion of this review and completed on June 3. - End-March SB on adoption of an anti-corruption adjudication infrastructure law was not met; draft law prepared for second reading in parliament; SB reset for end-September 2024. - RSF performance: - All three reform measures (RMs) for this review completed (Table 11): - RM1: Government adopted the Climate Action Law and established the National Commission on Climate Change (NCCC) under the Office of the Prime Minister, via a supporting decree clarifying responsibilities and procedures. - RM10: An interagency steering committee on climate finance was established, including various government agencies and the Moldovan Banks Association. - RM11: The Sustainable Finance Strategy (“Roadmap”) was adopted and its implementation is starting. ### Policy discussion — overarching message - Robust reforms, growth-focused and climate-resilient investments, and improved access to diversified energy sources are essential for sustainable development and convergence with EU income levels. - The ECF/EFF supports policies aimed at ensuring macroeconomic and financial stability, strengthening governance and building strong institutions. - The RSF bolsters resilience against climate shocks through increased climate investments, energy sector reforms, improved financial sector readiness, and promoting sustainable finance. ### A. Fiscal Policy — approved 2024 budget and near-term adjustments - Approved 2024 budget priorities: - Better-targeted social assistance, strengthened social safety nets, sustain energy security, support businesses, focus on growth-enhancing reforms. - Approved 2024 budget deficit: - 15,790 MDL million (4.8 percent of revised GDP), representing consolidation from the 5.2 percent executed in 2023. - Social assistance reforms: - Transition in the 2024/25 heating season from in-bill to cash transfers delinked from current energy consumption (EVRF), in line with RSF commitments (RM5). - Consolidation of the heating assistance allowance (APRA) into the EVRF. - Pensions increased in line with inflation; support continued through allocations for the Ajutorul Social Program. - Revenue outlook and adjustments: - Tax revenues expected to be lower than in the approved 2024 budget, partially offset by new external grants. - Likely revenue shortfall of about MDL 803 ml in 2024 compared to the approved budget. - External grant pledges of 350 MDL ml in 2024. - Factors affecting collections: more companies claimed the tax incentive on undistributed income reducing CIT; lower VAT reflecting downward revision to imports and contained inflation. - Policy measures to mobilize revenue: - Broadening the VAT base and aligning customs and tax procedures with EU rules. - Implementation of an automated tax-filing compliance program (introduced for VAT and excises), end-December 2023 SB. - Excises on tobacco and alcohol will continue gradually increasing until 2025 to align with EU directives. - Tax incentive on undistributed income has a sunset clause that expires in 2025. - Modernizing the tax system and harmonizing the Tax Code with the EU acquis, including budgetary and tax incidence impact evaluations of preferential tax treatments with IMF TA support. - Midyear supplementary budget: - Authorities will prepare a midyear supplementary budget in July. - Staff agreed to accommodate the expected revenue shortfall but advised keeping overall expenditures broadly unchanged compared to the approved budget. - New deficit: 5 percent of GDP (modified end-December cash deficit performance criterion). - Supplementary expected inclusions: - EVRF top up of MDL 300 million, financed from earmarked grants. - Pro-growth infrastructure projects with high execution rates; higher spending for the Road and Regional Development Funds (MDL 1 billion) met mostly through reallocations from under-execution in current expenditures and contingencies. - Supplementary will reflect authorities’ request to use the full ECF/EFF disbursement for budget support (vs. a 50-50 split agreed previously) to ease financing constraints and support fiscal adjustment while continuing to support growth. - MoF will start preparation of fiscal accounts in line with GFSM2014 (new SB, end-December 2024) to address classification challenges in the wage bill, contingencies, and inventories. - Medium-term fiscal framework: - MTBF envisages deficit reduction to 3.1 percent of GDP by 2027. - Consolidation supported by: - Additional reforms in tax policy and revenue administration (MoF’s preparation of cost-benefit analyses to phase out tax expenditures, end-December 2024 SB). - Normalization of the CIT tax incentives for SMEs on undistributed dividends. - Modernizing tax audit processes (new SBs). - Improving budget execution with PFM, MTBF and PIM reforms. - Spending efficiency gains via improved targeting and integration of social programs. - Additional grants and concessional financing remain critical while aiming to deepen the domestic debt market. - Energy security risks and estimates: - Progress made in reducing reliance on energy imports from Russia through Transnistria, particularly gas, due to interconnection capacity with Romania. - Electricity sector still relies heavily on one supplier, MGRES in Transnistria; agreement reached with MGRES in October 2023 to ensure supply until end-2024. - Potential expiry of a Russia/Ukraine gas transit agreement at end-year may affect supply to Transnistria and make electricity more expensive. - Downside scenario estimate: increase in energy costs by some estimates, $330 million per year. - Budget has buffers, but additional international support would be needed if costs rise. - Interconnection capacity with the Romanian market could mitigate disruption once set up, potentially over the coming two years according to the authorities. - Uncertainty remains regarding an audit of debts to Gazprom. - Authorities plan to prepare an action plan for the upcoming heating season with preventive and mitigating measures. - EVRF expected to continue protecting the most vulnerable via cash transfers. ### B. Monetary and Exchange Rate Policies - Monetary policy stance and recommendations: - NBM’s forward-looking and data-driven monetary policy, consistent with its inflation-targeting regime, has been effective in anchoring inflation expectations. - Consensus forecasts suggest medium-term inflation expectations remain within the NBM’s target band. - With core inflation expected to decline and a negative output gap expected to persist, the NBM’s current policy stance is appropriate (¶7). - Staff advised to pause rate cuts and focus on lowering high MDL and FX reserve requirements (RRs), absorbing any excess liquidity as needed through CDs or open-market operations. - Staff emphasized ensuring monetary policy decisions are not driven by financial considerations related to sterilization costs. - The May decision to lower RR is welcome. - Staff will continue to discuss gradual normalization of RRs to better align them with the monetary policy stance and reach a long-term level to better support credit intermediation. - Continued financial market deepening and further capital account liberalization—supported by IMF TA—will help strengthen transmission. - Exchange rate flexibility and FX buffers: - Maintaining ER flexibility while preserving sufficient FX buffers is critical to cope with new or longer-lasting shocks. - If risks materialize and FX pressures re-emerge, FX interventions should be limited to preventing disorderly adjustments and curbing excess volatility, with NBM discretion under a rules-based framework. - Interventions have been infrequent recently: interventions on only two days in 2024 and only 15 days in the last 12 months. - Strengthening NBM independence: - Continued efforts to strengthen NBM independence are critical for monetary policy credibility and macro-financial stability. - Following the December dismissal of the former NBM Governor, an IMF team conducted an assessment in March of the NBM’s legal, governance, and operational frameworks and provided recommendations to strengthen autonomy, governance, transparency, and accountability (Box 1). - A package of legislative amendments to strengthen the NBM law, in consultation with staff and in line with the March mission findings, is set as a new end-November SB. Amendments will focus on: - Strengthening appointment/dismissal procedures and due process provisions. - Reforming governance and decision-making structures of the NBM, especially qualifications, membership, tenure and mandate of the EB and SB. - Clarifying legal provisions on NBM’s accountability to Parliament. - An MoU will be prepared and published delineating responsibilities among institutions involved in asset recovery from the 2014–15 bank fraud by end-June. - Authorities requested an IMF Central Bank Transparency Code review to be completed by end-November 2024, with follow-up actions to be incorporated into the program at subsequent reviews. ### Box 1 — Key findings and recommendations from the assessment of NBM autonomy and governance - Personal and institutional autonomy — assessment: - (i) Appointment and dismissal procedures of members of NBM decision-making bodies lack checks and balances and should be strengthened; - (ii) The 7-year term of Supervisory Board (SB) members is longer than best practices; - (iii) Members of the Executive Board (EB) and SB with expired mandates holding office until appointment of replacements hampers personal autonomy; - (iv) Staggered terms of appointment for members of NBM decision-making bodies—important for continuity and knowledge transfer—are lacking; - (v) Criteria for dismissal of EB and SB members, although in line with EU practices, are general and leave room for interpretation and possibly abuse; - (vi) Dismissal provisions lack due-process guarantees; - (vii) Lack of understanding among relevant state agencies about responsibilities regarding the recovery of assets from the 2014–15 bank fraud. - Personal and institutional autonomy — recommendations: - (i) More checks and balances for appointment/dismissal of members of decision-making bodies; - (ii) Appoint EB and SB members for a fixed term, ensuring stepping down when terms end; - (iii) Shorten to 3 or 5 years term of SB members; - (iv) Ensure staggered mandates of EB and SB members; - (v) Clarify dismissal criteria in the NBM law; - (vi) Ensure due process in dismissal procedures; - (vii) Prepare an MoU to clarify responsibilities among agencies involved in asset recovery from the 2014–15 fraud. - Governance — assessment: - (i) SB structure (dominated by EB members), remuneration/profile/qualifications, absence of a “secretary’s department”, and lack of annual SB self-assessment and EB performance assessment inhibit effective governance; - (ii) Overlaps in executive management responsibilities between the EB and Governor create uncertainty and potential for conflict; EB is only partially constituted. - Governance — recommendations: - (i) Fully constitute EB; - (ii) Transform SB into a strong oversight board; - (iii) Clarify EB/Governor responsibilities; - (iv) Strengthen internal governance by reviewing SB’s and EB’s charters, organigram, and strategy; establish full-fledged secretariat; - (v) Introduce assessments of decision-making bodies to strengthen performance and collegiality; - (vi) Perform periodic audits of governance by NBM Internal Audit Department to provide assurances of governance improvement. - Transparency and accountability — assessment: - (i) NBM public standing is hindered by legacy of the 2014–15 banking fraud; - (ii) Lack of understanding of NBM’s accountability, including to Parliament. - Transparency and accountability — recommendations: - (i) Undertake an IMF Central Bank Transparency Code review; - (ii) Clarify legal provisions on NBM’s accountability to Parliament; strengthen public communications. ### C. Financial Sector Policies - Macroprudential policy stance: - Policies remain appropriate, with scope for some relaxation in borrower-based measures. - Counter-cyclical buffer rate maintained at zero. - Systemic risk buffer maintained at one percent. - In October, authorities released the systemic risk buffer for household exposure due to improvement in credit quality indicators and rapid fall of inflation. - Borrower-based measures and credit dynamics: - LTV and DSTI limits introduced in 2022 have been effective in restraining credit growth and shifting loans towards less risky segments. - With bank credit growth below its long-term trend, lower interest rates have brought DSTI ratios to lower levels. - Low penetration of credit and the strength of the banking sector suggest room for mild relaxation of borrower-based measures. *Source: IMF country report excerpt (chapter/section provided).* ### 26. Non-bank credit organizations (NBCOs) continue to grow, and reforms aimed at ### 1mdaea2024001-print-pdf - 26. Non-bank credit organizations (NBCOs) continue to grow, and reforms aimed at ### Financial sector developments: NBCOs and insurance - NBCO nonperforming loans (NPLs) increased marginally in 2023 to 12.1 percent, from 11.7 percent in 2022. - NBCO profitability: ROA of 6–7 percent. - NBCO funding composition: credit and loans 60 percent, equity 35 percent. - NBCO funding sources: non-residents 55 percent, other financial institutions 31 percent. - About 37 percent of NBCO loans are extended in FX, limiting net open FX position. - Supervisory change: NBM now supervises NBCOs and has adopted improved reporting requirements, effective July 2024. - Insurance sector (end-2023): liquid and profitable with an average solvency ratio of 171 percent. - Solvency II implementation: preparation and adoption of Pillar II and Pillar III legislation ongoing (end-September SB). NBM preparing a Balance Sheet Review for Pillar I readiness and transposition legislation targeting adoption in 2026 (entry into force dependent on Balance Sheet Review results). ### Supervision, stress testing, and resolution - New “twin peak” supervisory framework is operating with good cooperation between the two regulators. - NCFM is reviewing the regulatory framework on consumer financial protection. - Ongoing resilience measures: - Strengthening framework for systemic risk analysis and stress testing. - Introducing maturity ladder and LCR-based liquidity stress tests (developed with IMF TA). - Regular stress tests for both the Deposit Guarantee Fund (DGF) and banks continue. - Improving resolution and liquidation framework; discussing a new forced liquidation model developed with IMF TA. - Emergency liquidity assistance (ELA): internal and external regulations updated; authorities agreed to start internal consultations to clarify types of government guarantees and conditions under which they could be granted in the context of ELA—following IMF TA recommendations. ### Financial inclusion and payments - Instant payment system launched in March; over 100,000 accounts activated by mid-April. - Planned extension of instant payments to person-to-business, business-to-person, and person-to-government transactions by September. - Amendments to the law on payment system providers (PSPs) corrected loopholes to ensure licensing and adequate supervision of EU-licensed and national PSPs. - Application submitted to the Single Euro Payments Area (SEPA). - Work to set up an inter-agency committee to develop, implement, and monitor a National Financial Inclusion Strategy (NFIS) with World Bank support (end-June 2024 SB). Diagnostic phase ongoing; action plan expected to be finalized by end-2024. ### Market structure and capital markets policy - Authorities agreed not to relax current supervisory and regulatory thresholds (e.g., for NBM authorization to buy bank shares or minimum disclosure) at this time; staff advised against relaxation due to increased risks. - Contextual risks: unresolved legacies from the 2014–15 banking fraud, high domestic financial criminality risks, insufficient UBO registries, corruption risks in the judiciary, and heightened geopolitical risks. - NCFM drafting a national strategy for capital markets development with USAID and EBRD support, aiming for completion by end-2024. ### AML/CFT and financial integrity - Strengthening AML/CFT remains critical to protect financial sector integrity from illicit flows. - Need to mitigate ML risks from proceeds of crime, including cross-border flows related to corruption, embezzlement, and tax evasion, by improving AML effectiveness and information exchange. - NBM efforts to develop risk-based AML supervision are supported by IMF TA and should continue. ### Structural policies and governance - Anti-Corruption Prosecutor’s Office (APO): - APO achieving first results in investigating high-level corruption; bolstered investigative jurisdiction in force. - Authorities increased APO’s budget and staffing and plan to allocate new premises by end-June 2024. - APO staffing autonomy not enhanced; recommendation: grant APO powers to hire its own investigative officers and participate in transfer of prosecutors to APO (new SB). - Judiciary reforms and Anti-Corruption Court (ACC): - Law to establish ACC (including strengthened judge selection process per IMF TA) was not approved by end-March 2024 (missed SB); draft now prepared for second reading and expected to be approved this summer (SB reset for end-September). - State-Owned Enterprises (SOEs): - Triage of all 238 SOEs at the central government level completed (end-December 2023 SB) with classification into five categories. - Authorities working on a strategy including: (i) framework for monitoring financial performance and mitigating fiscal risks; (ii) rationalization of number of SOEs in non-strategic or loss-making sectors (end-September 2024 SB). ECF/EFF program will support implementation. - Labor market and participation: - Labor force participation remains significantly lower than advanced and emerging European peers due to informality, outmigration, skill mismatches, and barriers to women’s employment. - Recommended reforms: boost efficiency of education expenditure, raise average education levels and outcomes, address skill mismatches, reduce informality, strengthen institutions and business environment, and enhance childcare policies. - Aggregate return on investment for closing the gender employment gap estimated at about US$5.8 for every dollar invested (Annex II). ### Energy security and climate-related reforms - Energy diversification efforts: - Interconnections built with Romania for gas and electricity; gas from LNG terminals in Greece flowing from Romania to Moldova through trans-Balkan pipeline; gas stored in Ukraine used last winter. - Work on new electricity interconnections with Romania and ENTSO-E ongoing; interconnector capacity remains limited and dependence on electricity from MGRES in Transnistria remains high. - Renewable energy generation is growing from a low level. - RSF and climate measures: - RSF supporting macro-critical climate and energy measures to strengthen balance of payments stability and catalyze financing for adaptation and mitigation. - RMs implemented in current review: - Adoption of the Climate Action Law and establishment of the National Commission on Climate Change (NCCC) to enable low carbon development and climate change resilience and to guide coordination across sectors. - Establishment of an interagency steering committee on climate finance (chaired by an NBM representative) to promote Sustainable Finance Roadmap implementation and develop a taxonomy of environmentally sustainable economic activities (RM12 to be addressed in Eighth Review). - Development, adoption, and start of implementation of the Sustainable Finance Strategy (“Roadmap”) enacted as RM11 with four pillars: awareness and capacity building; sustainable finance flows (including taxonomy RM12); ESG integration and risk management; transparency and market discipline. - Preparations for RMs in the 6th ECF/EFF Review (2nd RSF review): - Disaster-risk Management (DRM): Ministry of Environment working on Moldova’s DRM Program (RM2) to set up full DRM cycle; recommended strategic leadership by Prime Minister’s Office and possible institutional placement within NCCC. - Energy Sector Policies: - RM4: cost-recovery rates to reflect infrastructure needs identified in the Energy Strategy; use Climate Policy Assessment Tool (CPAT); work likely finalized slightly later than indicative due date. - RM5: preserve energy price signals and remove untargeted in-tariff subsidies; replace with targeted, progressive cash-transfers delinked from current energy consumption; legislation expected adopted by September to roll out new EVRF support in November. - Fiscal Management (RM7): MoF preparing inclusion of climate change impact and vulnerability assessments in project appraisal and selection methodologies per C-PIMA recommendations; government decision expected in June. ### Program modalities, risks, and conditionality - Program financing and outlook: - ECF/EFF program fully financed for the next 12 months with good prospects for remainder. - EU and World Bank disbursements (initially planned for 2024Q1) are likely to occur in 2024Q2. - Additional grant financing from World Bank and bilateral support for Energy Vulnerability Reduction Fund from Sweden and Italy through UNDP, plus bilateral concessional loans, support program catalytic role. - Use of full ECF/EFF disbursements for budget support (rather than a 50-50 split) plus RSF disbursements reduces reliance on more expensive budget financing. - Risks and debt service: - Risks to ECF/EFF and RSF are moderate. - Fund exposure peaks at 6.5 percent of GDP in 2024. - Total debt service to the Fund peaks at 5.9 percent of total exports in 2025. - Moldova has a strong repayment record; public debt considered sustainable. Risk of external debt distress remains low; overall risk of debt distress is moderate. - Capacity-to-repay risks stem from volatile geo-political environment and possibility of policy reversals; mitigants include authorities’ program ownership and development partners’ support. - Prior actions and conditionality: - Missed end-December 2023 SB on strengthening NBM’s independence was reset as a prior action for this review and completed on June 3. - Proposals for new and modified ECF/EFF conditionality (MEFP tables 1 and 2): - Quantitative targets: new quarterly ITs and PCs proposed for end-March and end-June 2025. - Modification requested for end-2024 ceiling on the cash deficit of the general government: MDL 803 million, reflecting revised forecast and lower-than-projected revenues. - Inflation consultation band targets: new targets proposed for end-March and end-June 2025. - Structural benchmarks (five new SBs proposed): 1. Submission to Parliament of legislative amendments to strengthen the NBM law (end-November 2024). 2. Adopting legal amendments to grant APO autonomy in hiring of staff (end-November 2024). 3. Preparing a report summarizing findings of a review of legislative framework and practices of tax audits (end-January 2025). 4. Developing a plan for modernization of tax audits in line with the report findings (end-April 2025). 5. Presenting fiscal accounts in line with GFSM2014 (end-April 2025). - Missed SB on adoption of law establishing anti-corruption adjudication infrastructure proposed to be reset as SB for end-September 2024. *Source: IMF staff.* ### 44. The Moldovan economy is recovering from spillovers from multiple shocks, although ### 44. The Moldovan economy is recovering from spillovers from multiple shocks, although ### Macroeconomic outlook and inflation - Growth was sluggish in 2023 and is expected to pick up slowly in 2024, driven by weaker-than-expected domestic demand and a slower recovery of main trading partners. - Credit growth is recovering—from low levels—and the accommodative monetary policy stance will support domestic demand. - Inflation remains within NBM's target band. - FX reserves stand at comfortable levels. - The rebound in key trade partners was modest; FX inflows, important to support consumption, remain depressed. - The trade balance was a key driver of growth in 2023. - The leu appreciated by about 2 percent compared to end-2023. ### Fiscal policy and public spending - Fiscal policies remain focused on protecting the most vulnerable and supporting the economy, with gradual consolidation to build buffers and preserve debt sustainability. - The anticipated revenue shortfall compared to the approved budget justifies an accommodation in the overall deficit. - The authorities intend to increase infrastructure spending; staff welcomes this, noting improvements in spending execution. - Staff encouraged maintaining a gradual consolidation path given the expected decline in external grants over the medium term. - The deficit was 5 percent in 2023. ### Monetary policy and financial sector - Staff welcomes the NBM’s decision to start reducing reserve requirements, which should stimulate private sector lending. - Given an uncertain inflation trajectory, staff advise against further lowering the base rate for now. - Financial sector reforms should continue, with the new supervisory model fully operational. - Ongoing IMF TA work includes strengthening the ELA and liquidation and resolution frameworks, improving financial inclusion, and enhancing the regulatory framework for consumer protection. - Staff supports authorities’ ambitions to develop the capital market and welcomes the commitment to maintain current prudential requirements on share ownership in the banking sector unchanged. ### Governance, anti-corruption, and climate/energy measures - Staff welcomes progress and new commitments to strengthen NBM governance and autonomy; a prior action in this area has been implemented and an MoU on asset recovery is under preparation. - Staff and authorities worked on diagnostics and recommendations to strengthen autonomy, governance, transparency, and accountability; staff look forward to development and implementation of actions. - Staff look forward to approval of legislation on a new Anti-Corruption Court; the law is expected to be adopted this summer with a credible selection process for judges and focused jurisdiction. - Under the RSF, staff commends adoption of the Climate Law, the Sustainable Finance Roadmap, and establishment of the interagency steering committee on climate finance. - Progress in moving in-bill energy support to cash transfers, delinked from consumption, is welcomed; careful communications are needed given sensitivity. - Authorities should step up preparations to determine energy cost-recovery rates and ensure a more strategic, comprehensive approach to coordinating climate action under the newly-established NCCC. ### Program reviews and conditionality - Staff supports completion of the fifth reviews under the ECF/EFF and the first review under the RSF. - Staff supports (i) the modification of a QPC, and (ii) the resetting of 1 and adding of 5 new SBs. - Policies outlined in the attached Letter of Intent are assessed as adequate to achieve the program's goals. ### Risk assessment (selected high-impact risks and policy responses) - Intensification of regional conflict(s) — Relative Likelihood: High; Time Horizon: Short to Medium Term; Impact if Realized: High. - Potential impacts: disruptions in trade, remittances, FDI and financial flows; refugee inflows; leu depreciation; deposit runs; tightening of financing constraints. - Policy responses: seek additional financing from external partners/donor support; secure alternative energy sources; implement measures to ration energy demand; advance structural reforms; protect high-priority social spending; monitor fiscal and financial risks; limit expenditures to available fiscal cash buffers and external financing. - Commodity price volatility — Relative Likelihood: High; Time Horizon: Short term; Impact if Realized: High. - Potential impacts: volatile energy prices, higher cost of energy imports, possible temporary rationing. - Policy responses: adjust local energy tariffs; seek additional donor support; allocate budget resources to shield vulnerable groups; implement energy demand rationing; extend support to energy regulator; draw down stored gas; closely monitor inflation. - Europe slowdown / Abrupt global slowdown — Relative Likelihood: Medium; Time Horizon: Short to Medium Term; Impact if Realized: High. - Potential impacts: slower growth for Moldova, weaker fiscal position, limited external financing. - Policy responses: secure alternative energy sources; ration demand; seek external support; advance structural reforms; protect high-priority social spending; monitor fiscal and financial risks. - Monetary policy miscalibration — Relative Likelihood: Medium; Time Horizon: Short to Medium Term; Impact if Realized: High. - Potential impacts: renewed inflation, de-anchoring of expectations, weakened central bank credibility. - Policy responses: closely monitor inflation; carefully calibrate decisions under high uncertainty; clear communication to anchor expectations; strengthen NBM independence. - Country-specific risks — Governance weaknesses/corruption — Relative Likelihood: High; Time Horizon: Short to Medium Term; Impact if Realized: High. - Potential impacts: reform fatigue, jeopardized donor funding, lower potential growth due to emigration and low productivity. - Policy responses: continue policy reforms; resist populist pressures; protect and better target social spending; maintain growth-friendly fiscal policy; strengthen anticorruption efforts and rule of law; implement active labor market policies; maintain flexible exchange rate. *Source: 1mdaea2024001-print-pdf - 44. The Moldovan economy is recovering from spillovers from multiple shocks, although* ### Annex II. Strengthening Moldova’s Labor Force Participation ### Annex II. Strengthening Moldova’s Labor Force Participation ### Labor force participation: levels and trends - Labor force participation rate in Moldova: 45 percent in 2023. - Comparative averages: 58 percent in the CESEE and 62 percent in advanced Europe. - Recent change: labor force participation in Moldova rose by 7 ppts between 2010 and 2023, compared to 3.1 ppts in the CESEE and 0.5 ppt in developed Europe. - Working-age population migrating abroad: reached 9 percent in 2022; this proportion nearly doubled after 2014. - Anecdotal trend: an increasing share of the working-age population works at least part time in neighboring countries (Romania) while residing in Moldova and remaining outside the domestic labor market. ### Determinants of low participation - Informality: - High prevalence of informality attracts a significant share of labor into informal employment, reducing formal labor participation. - The agriculture sector accounts for the largest share of informal employment (estimated at about half), mostly concentrated in rural areas. - Outmigration: - Increased outmigration in recent years has been a drag on labor participation; the 9 percent migration share in 2022 likely continued to affect 2023. - Skills and education: - Skills mismatches between labor supply and demand, and weak efficiency of education investment and education outcomes, contribute to low participation. - Business environment and institutions: - A less favorable business environment, weaker institutions (e.g., compliance with the rule of law and control of corruption) contribute to reduced participation and higher outmigration. - Barriers to women’s employment: - Inadequate childcare options and cultural considerations constrain women's labor market participation. ### Gender gaps and childcare constraints - Aggregate gender participation and employment: - Labor force participation: 49.4 percent for men in 2023 and 41.2 percent for women in 2023 (gap of 8 ppts; gap was 6 ppts in 2010). - Employment rate for age 25–49 (2022): 60 percent for men and 54.9 percent for women in Moldova. - Employment rate of women with at least one child (age 25–49): 37 percent, compared to 65.9 percent for women without children. - Urban-rural difference for women with children: 39 percent in urban areas versus 35 percent in rural areas. - Comparative statement: The employment rate of women with children is about 90 percent lower on average in Moldova compared to the rest of Europe. - Note: In Moldova, the employment rate of women without children is above that of men—partly due to men representing a larger share of migrants or part-time cross-border workers and higher female educational attainment. - Childcare policy gap and paid leave: - Moldova lacks a statutory childcare service system for children aged up to 2 years. - A recent law on Alternative Care and a National Programme for Childcare Services for children under 3 years old, 2023–2026, aim to improve availability, but access remains limited and costly because the state is not required to finance such services. - The ILO’s childcare policy gap (difference between the starting age of universal and free ECCE/primary education and the duration of paid leave) is one of the highest in Moldova compared to European peers. - The gender gap in childcare-related paid leave (restrictions to paid paternity leave) is also high in Moldova compared to peer averages. - Cultural factors: A 2015 survey showed about 90 percent of men and 81.5 percent of women in Moldova consider that the most important occupation for a woman is to care for the household. ### Policy recommendations and expected impacts - Structural reforms recommended: - Boost efficiency of education expenditures. - Increase average education levels and outcomes and address skill mismatches. - Reduce informality. - Strengthen institutions and the business environment to reduce outmigration. - Enhance childcare policies (maternity, paternity and parental leave, early childhood care and education, long-term care, breastfeeding breaks). - Fiscal and investment implications (ILO Care Policy Investment Simulator estimates): - Required additional investment to close gaps in key children-related care services: up to 1.9 percent of GDP annually in Moldova over a decade. - Potential impacts: - Increase total employment by as much as 10 percent. - Reduce the current gender employment gap to about 3 percent from 8 percent. - Reduce the gender gap in monthly wages by about 1.4 percentage points. - Aggregate return on investment: estimated to be about US$ 5.8 for every dollar invested over a decade. - Timing and sequencing: - Policies to close the gender gap in employment would have an immediate positive impact on labor force participation and household incomes, and large long-term benefits for economic growth, while requiring additional investment. *Source: Annex II. Strengthening Moldova’s Labor Force Participation (prepared by Armand Fouejieu and Yiran Zha).* ### 6. Also, faster-than-expected progress towards EU accession will support medium-to- ### 1mdaea2024001-print-pdf - 6. Also, faster-than-expected progress towards EU accession will support medium-to- ### EU accession and reform priorities - European Council decided in December 2023 to open accession negotiations with Moldova, following recommendations of the European Commission presented in the Enlargement Report. - In 2024 a screening process started for all chapters of the acquis to identify key reform priorities and benchmarks; the European Commission will take decisions during 2024 on opening negotiations for specific chapters. - Public Finance Management (part of Public Administration Reform) is one of three key reform pillars; public procurement and financial control are expected to be opened first for negotiations. - In January 2024 the Government submitted its first Economic Reforms Program for 2024–2026 for participation in the EU’s economic policy coordination procedures. - Policy guidance for Moldova, reflecting priority economic reform needs, was approved during the Economic and Financial Committee. ### II. Program developments — implementation status and benchmarks - Program implementation broadly on track with some delays on structural reforms. - Quantitative performance criteria (QPCs) and indicative targets (ITs) for end-December 2023 were met except: - Missed IT on targeted social spending due to savings from the Energy Vulnerability Reduction Fund (EVRF) from a milder winter and more favorable energy prices. - Structural benchmarks (SBs): - Met three end-December 2023 SBs: - Completed triage of SOEs at the central government level. - Implemented automated tax filing compliance program for VAT and excises. - Extended tax expenditure analysis to include excises, customs duties and real estate tax (well ahead of end-December deadline). - Missed SB on presentation to Parliament of amendments to strengthen NBM independence and governance; amendments submitted to Parliament on June 3, 2024 (prior action). - Met all end-March 2024 ITs except the IT on the general government wage bill due to a slight overspend (expected to be compatible with the annual budget allocation). - Missed end-March SB on adoption of an anti-corruption adjudication infrastructure law; SB reset for end-September 2024. - Reform Support Facility (RSF) — all three reform measures planned for first review met: - RM1: approval of the Law on Climate Action and establishment of the National Committee for Climate Change (NCCC). - RM11: development of the Sustainable Finance Strategy. - RM10: establishment of the interagency committee on climate finance. ### Escrow account for legacy external debt - On March 31, 2023 an escrow account was created at the NBM and outstanding amounts deposited to service external debt owed to official creditors that cannot be paid due to factors outside Moldova’s control, as specified in the Technical Memorandum of Understanding (TMU). - These obligations stem from old commercial debt contracted in 2001; current amount outstanding is around USD 14.6 million from a USD 91 million total. - Conditions for the escrow account: - No third party (including the Treasury or the Ministry of Finance) has access to the funds deposited. - Funds can only be used to service the related debt, according to the repayment schedule and in line with international sanctions. - Funds can only be transferred back to the Ministry of Finance if there is legal evidence of an agreement to service the debt through other instruments or if funds need to be transferred to another account with the same purpose. ### III. Policy framework — Fiscal policy stance and short-term measures - 2024 budget priorities: - Support growth-enhancing reforms while providing moderate consolidation in line with the IMF’s macro-framework. - Prioritize better-targeted social assistance, strengthen social safety nets, enhance energy security, support private sector development, and promote infrastructure investment. - Social protection measures: - Indexed pensions with inflation and certain social benefits by 6 percent. - Improve program design and impact of social programs including Ajutorul Social Program. - EVRF consolidated with APRA assistance; will transition from in-bill to cash transfers delinked from current energy consumption. - Revenue measures: - Enhance revenue mobilization by advancing tax administration reforms, including automated tax-filing compliance program (end-December 2023 SB, met). - Apply a general anti-avoidance rule provision that entered into force on January 1st to counter abusive tax practices. - Risk management: - Risks around the baseline are high, particularly with existing security threats and an uncertain energy outlook; contingency plans and policies are being updated with the IMF. - If risks materialize, Moldova will seek additional financial support from partners in the form of grants and concessional loans. - Midyear supplementary budget: - Preparing a midyear supplementary budget within the agreed general government total expenditure in the 2024 budget to reallocate spending informed by budget execution and available external financing. - Will favor infrastructure investment (Road Fund and Regional Development Fund), the EVRF, while maintaining contingency buffers. - Supplementary budget deficit will only increase by the projected tax revenue shortfall (MDL 803 ml). - Medium-term fiscal policy targets: - Reduce general government deficit from 5 to 3.1 percent of GDP in 2024–27. - Anchor total public debt to GDP ratio below 45 percent. - Underpinned by reforms to mobilize domestic revenues, improve tax administration, and promote sustainable development-focused spending. ### Reforms to strengthen revenue mobilization - Planned actions (in consultation with IMF staff): - Conduct a comprehensive tax policy diagnostic of the Moldova Tax Code with IMF technical assistance to identify weaknesses and move towards a more progressive tax system. - Identify tax expenditure provisions for phasing out based on the completed tax expenditure reviews analysis (end-December 2023 SB, met); prepare a proposal identifying tax expenditures to be phased based on cost-benefit analysis (end-December 2024 SB). - Continue strengthening revenue administration (State Tax Service, STS) including TADAT recommendations by: - Building a comprehensive compliance risks management process and governance framework in the STS. - Investigating and referring tax crimes for prosecution through protocols, legislative gaps addressing, and training/technical assistance. - Enhancing voluntary tax compliance. - Launching automatic exchange of information with the OECD's Global Forum on Transparency and Exchange of Information for Tax Purposes by November 2024. - Enhancing automated tax filing compliance program to include taxes other than VAT and excises. - Preparing a report summarizing findings of a review of the legislative framework and practices of tax audit (new end-January 2025 SB), to serve as basis for a plan to modernize the tax audit function (new end-April 2025 SB). - Continue actions towards reduction of global greenhouse gas (GHG) emissions: - Road fuel excises adjusted annually by nominal GDP growth with a view to converge towards minimum EU levels by 2025. - After the energy crisis subsides, revise and improve the taxation system in line with national, regional and international commitments on GHG emissions following thorough social and economic assessments. - Advance customs reforms: - Revisions to the custom code approved by Parliament in August 2021 became effective on January 1st, 2024, aligning customs regulations with international best practices and closer to EU directives. - Relevant regulations entered into force to support implementation; will update legislation to facilitate implementation of WHO Protocol to Eliminate Illicit Trade in Tobacco Products. - Leverage AML/CFT for tax compliance: - Focus on tax compliance as a predicate offence for AML in line with the National Risk Assessment. - Use AML/CFT tools (screening of cross-border financial flows, reporting of suspicious transactions) to detect and enforce tax offences and abusive profit shifting. - Improve exchange of information between authorities and development/dissemination of financial intelligence; strengthen cooperation among tax authority, Financial Intelligence Unit, NBM and law enforcement with focus on cross-border tax offences. ### Reforms to improve budget quality and fiscal transparency - Institutionalize spending reviews: - Completed spending review for education; finalizing health sector spending review. - Implement recommendations for education: consolidate network of universities, absorb smaller higher education institutions, merge research institutes with universities, merge some vocational educational institutions, and direct efficiency gains to improve educational process. - Work with UN partners to conduct additional social sector spending reviews and monitor implementation of recommendations. - Improve MTBF credibility: - Prepare fiscal accounts in GFSM2014-compliant format; aim to present fiscal accounts 2024 in GFSM2014 format (new end-April SB 2025) with IMF technical assistance. - Prepare MTBF for 2025–28, plan to adopt by July 2024. - Establish binding (for first budget year) and indicative (for following two years) multiyear expenditure limits. - Implement Public Finance Management (PFM) Strategy (2023–30): - Strategy based on PEFA 2022 findings; aims to improve budgeting processes and increase public finances' efficiency, performance, and transparency to facilitate EU accession. - Three core policy documents prepared to operationalize strategy: - Action plan for 2023–2025 approved December 2023. - Public Procurement Development Program 2023–2026 approved August 2023. - Program on Public Internal Financial Control Development 2024–2027 approved March 2024. - Approved Concept Document on PFM integrated IT system in May 2023 to modernize budgetary processes and improve control and transparency. - Strengthen public procurement: - Roll out new e-procurement system to cover all public procurements to support transparency and cost-efficiency. - Public Procurement National Program for 2023–2026 approved to harmonize national regulatory framework with the Acquis Communautaire, finalize secondary regulatory framework, develop capacity of procurement specialists, and promote centralized and sustainable public procurement. - Enhance disclosure and management of fiscal risks: - Published fiscal risk statement as addendum to budget documents starting 2018; expanded in 2020 to include key PPPs, large SOEs, and government guarantees including Prima Casa housing support program. - With EU technical assistance applying new methodology to assess fiscal risks from SOEs, including energy sector. - Plan to expand coverage of Fiscal Risk Statement to include climate hazard risks. - Continue improving coverage, monitoring, inter-agency coordination and reporting quality of contingent liabilities. - Strengthen debt and cash management: - Issued a 10-year domestic bond in September 2023 to deepen the debt market. - Plans to strengthen operational capacity, cash management practices, primary dealer system, develop and operationalize new platform for retail investors by summer 2024, and support external investors’ ability to access domestic government debt market. - Borrowing strategy will prioritize grants and donor financing on concessional terms. - Tackle the shadow economy: - Share of employment in Moldova’s shadow economy estimated at around 23 percent, concentrated in agriculture (about 61 percent of the total shadow economy), construction (about 22 percent), and HoReCa (about 7 percent). - Estimated losses in tax revenue about 5–7 percent of GDP, including due to envelope wages (about 30 percent of the corporate wage bill). - ILO functional review of the state labor inspectorate identified weak legal framework, absence of deterrent sanctions, and weak capacity. - Aim to reform the state labor inspectorate to improve governance, build capacity for risk analysis, align mandate with ILO conventions (including unannounced visits and dissuasive sanctions) to bring informal workers into the social safety net and create fiscal space. ### Reforms to make expenditures efficient, sustainable, and growth-friendly - Public investment management (PIM): - Strengthening PIM framework guided by 2019 PIMA recommendations and 2023 C-PIMA, taking climate and environmental implications into account (reform area RM7-9, section F). - From 2024 apply Regulation 684 for all new eligible public investment projects considered for funding under the MTBF and State budget. - Developing a registry for investment projects approved for implementation by State budget, externally funded projects and developmental funds, and make supporting documentation public. - Strengthen unitary pay system in the budgetary sector: - Prepare technical proposal for comprehensive medium-term salary structure reform (with IMF TA) to contain wage bill pressures, reduce number of reference values, and illustrate fiscal implications of scenarios. - Aim to synchronize with MTBF process to improve wage-compression ratio and address staffing needs; future salary increases to follow well-defined criteria aligning titles and functions. - Ensure pension system sustainability: - Pension system challenges: narrow contribution base, ageing population, falling replacement ratios. - From January 2024 started review of certain beneficiary groups; effective July 1st retirement age for women extended by six months to reach age 61. - In consultation with the World Bank, intend to broaden contribution base. - Over the medium-term review old-age and disability pensions and continue raising retirement age every six months for women until reaching age 63 and men age 65. - Enhance social assistance programs: - In consultation with the World Bank initiated reform of Ajutorul Social to strengthen support to most vulnerable, improve targeting, and streamline eligibility. - Plan to shift resources from categorical to means-tested payments, make remote application operational, simplify proxy test, clarify qualification criteria, and improve interoperability of information systems. - Continue monitoring war impacts on living standards with UN partners and adjust assistance to ensure coverage of the most vulnerable, especially families with children. - Improve EVRF design: - EVRF launched for 2022–23 heating season and consolidated with APRA for 2023–24; improved targeting increased energy vulnerability categories and thresholds, compensating main household heating energy source. - For 2023–24 heating season more than 770,000 households benefited (65 percent of Moldovan households). - For 2024–2025 winter season aim to replace in-bill support with cash transfers and ensure compensation system does not incentivize energy consumption. - Strengthen gender equality efforts: - Labor force participation: women 55 percent vs men 62 percent. - Wages for women average 13.7 percent lower than for men due to education, age, and working-time differences. - Introduced flexible work arrangements, promoted legislation and regulation of alternative childcare services and expanded childcare services. - Will work to improve access to childcare to facilitate faster reintegration of women into workforce post-maternity leave and collaborate with UN agencies to incorporate gender equality into PFM reforms with guidance for line ministries on tracking and reporting gender-sensitive information. *Republic of Moldova — IMF staff report excerpt* ### 16. The NBM stands ready to adjust its monetary policy stance consistent with its inflation ### 16. The NBM stands ready to adjust its monetary policy stance consistent with its inflation targeting framework ### Monetary policy stance and tools - Objectives and framework: - Decisions guided by 12–24-month inflation forecasts with objective of keeping inflation within the tolerance band. - Conditional on inflation remaining within target band, monetary policy will be supportive of economic recovery. - Policy rates and reserve requirements: - The NBM started an easing cycle in December 2022, gradually reducing the policy rate from 21.5 percent to 3.6 percent in May 2024. - Reserve requirements were relaxed in domestic currency and FX by 1 ppt and 2 ppts, respectively, in November 2023, and then by 4 percentage points gradually in May 2024. - Future policy rate decisions will be carefully calibrated, frequent assessment of the inflation outlook, and analysis of the balance of risks. - The NBM will continue reviewing other policy tools and gradually normalize reserve requirements to further support private sector credit. - Inflation developments: - Headline inflation peaked in October 2022, then declined sharply, stabilizing within the NBM target band since October 2023. - Core inflation has surprised on the upside, partly due to transitory impact of higher taxation on prices of some items, offset by lower regulated prices. - Foreign exchange policy and reserves: - Moldovan leu depreciated against the US dollar by around 2 percent since end December 2023 and is roughly flat against the euro. - Gross foreign exchange reserves increased to about USD 5.4 billion by end-April 2024. - The NBM stands ready to allow necessary exchange rate adjustment, will manage reserves conservatively, and limit interventions to counteracting excessive exchange rate volatility, following a rule-based approach and actively communicating its intervention strategy. - Contingency measures: - The NBM stands ready to undertake necessary contingency measures if severe downside risks materialize and endanger macroeconomic and financial stability; such measures would be used in combination with a broader macroeconomic adjustment package, in consultation with IMF staff. ### Financial sector: resilience and risks - Banking sector soundness indicators: - Aggregate capital adequacy at 29 percent as of end-February 2024. - Nonperforming loans declined to 5.5 percent of total loans. - Liquidity coverage ratio at 313 percent, exceeding the prescribed 100 percent limit. - Total deposits about 30 percent above the pre-war level. - Share of FX in total deposits marginally declined to 36 percent. - Return on equity and return on assets were 16.2 percent and 2.8 percent at end-December. - Risks: - Geopolitical and macroeconomic risks remain high and could translate into weaker profitability and deposit outflows. - Recent decline in profitability linked to monetary policy normalization reducing net interest margins. ### Credit conditions and macroprudential settings - Household and corporate credit: - Banks’ lending to households recovering after contraction in 2022/23; household lending growth accelerated since Q3 2023. - Slow credit growth to businesses due to weak demand and slow pass-through of lower policy rates. - Responsible lending and buffers: - Loan-to-value (LTV) threshold of 80 percent and debt service-to-income (DSTI) threshold of 40 percent introduced; initial calibration under evaluation. - Counter-cyclical buffer rate maintained at zero. - Systemic risk buffer maintained at one percent; systemic risk buffer for household exposure released in October last year. - FSAP request: - Renewed request for a Financial Sector Assessment Program (FSAP) as soon as possible. ### Institutional autonomy, governance, and transparency of the NBM - Legislative and governance reforms (submitted to Parliament and planned): - Prior actions submitted include: (i) granting the NBM operational autonomy over its assets; (ii) adjusting administrative procedures code to eliminate inappropriate deadlines for NBM supervision; (iii) adding an explicit mandate for financial stability and macroprudential policy of the NBM. - In line with March 2024 IMF mission recommendations, a set of amendments to the NBM law will be presented to Parliament (new end-November 2024 SBs) focusing on: - Strengthening procedures related to changes in members of decision-making bodies, including procedural safeguards and checks and balances. - Fine-tuning governance and decision-making structures, including qualifications, membership, tenure, staggering and mandate of executive and supervisory board members. - Clarifying legal provisions on NBM’s accountability to Parliament and strengthening public communications. - Requested a Central Bank Transparency Review of the NBM to be conducted by the IMF and concluded in the Fall 2024; key findings and follow-up actions to be discussed at next reviews. - Memorandum of understanding on responsibilities in asset recovery from the 2014/15 bank fraud to be agreed by end-June 2024 (see ¶35). ### Crisis management, resolution, and legal proceedings - Preservation of reforms and enforcement: - Commitment to maintain tight regulatory standards and enforce removal of shareholders not fulfilling fitness and probity criteria. - Determination to pursue independent and comprehensive investigation, prosecution, and judicial process regarding bank fraud perpetrators. - Recognition of financial stability risks from legal proceedings against banks as legal entities. - Crisis management arrangements: - Strengthening crisis management by complementing NCFS discussions with consideration at the Supreme Security Council. - Prepared contingency plans to: (i) ensure provisions and capital charges applied to banks due to pending legal decisions are in line with IFRS and NBM regulations; (ii) require credible and time-bound capital restoration plans where capital falls below prudential limits; (iii) implement resolution actions identified by competent authorities in line with the BRRL. - Commitment to take decisive steps and make good faith efforts towards resolving the Victoriabank legacy to help boost credit and attract foreign investment. ### Strengthening supervision, resolution, and safety nets - Legislative and regulatory updates: - Targeted review of the BRRL and secondary legislation prepared to identify shortcomings and introduce more flexibility to the MREL requirement, access to the resolution fund, and DGF participation (end-June 2023 SB, met); plan to adopt by Fall 2024. - Advanced comprehensive review of the bank liquidation framework and prepared amendments to strengthen liquidation procedures, including introducing a forced liquidation procedure. - Financial safety nets and stress testing: - Introduced a financial stability dashboard to monitor liquidity pressure monthly. - Plan to introduce LCR and maturity ladder liquidity stress tests (for the 2025 financial stability report). - Continue enhancing DGF’s capability to pay out insured deposits, including regular stress tests for the DGF and banks. - Strengthening resolution preparedness: clarifying Bridge Bank Tool and Bail-in tool framework, preparing operational plans, enhancing inter-agency cooperation. - Updated internal and external regulations for Emergency Liquidity Assistance (ELA) in line with best practices. - Will start discussions on amending laws to clarify types of government guarantees and conditions under which they could be granted in the context of ELA (following IMF technical assistance). ### Sustainable finance and climate-related financial risk - Strategic commitments and actions: - Develop a sustainable finance framework based on international and EU practices, aligned with Moldova specifics and RSF reforms to be completed by end-2025 (section F). - NBM and stakeholders (NCFM, financial sector, climate experts, development partners) started work on sustainable finance reforms. - NBM building regulatory and supervision capacity to monitor, assess, report, and manage financial, environmental, and climate-related risks; participating in workshops and SBFN Working Groups. - Incorporate Sustainable Finance Taxonomy and other guidance into regulatory framework for financial sector participants. - Reserves management framework amended to explicitly allow investment in green bonds. ### Non-bank sector oversight, insurance, and capital markets - Non-bank supervision transfer and reporting: - Regulatory and supervisory responsibilities for NBCO, savings and lending associations, credit history bureaus, insurance companies, and insurance intermediaries transferred to the NBM effective July 1, 2023. - Upgraded reporting requirements for NBCOs adopted in January and effective as of July 2024. - Insurance regulation and Solvency II: - NBM to prepare remaining secondary legislation for Pillar II and III of Solvency II and adopt by September (end-September 2024 SB). - Preparing Balance Sheets Review specification to assess readiness of insurers for Pillar I of Solvency II following EU Twinning Project. - Preparing legislation for transposing Pillar I with goal to adopt in 2026, with entry into force date to consider Balance Sheets Review results. - Capital markets and CSD: - Consolidate supervision of capital markets by transferring CSD capital market–related supervisory competencies from the NBM to the NCFM. - Intra-agency working group set up to establish CSD supervision, ownership, and governance under new regulatory framework. - Legislation amending Single Central Securities Depository Law approved by Government and adopted by Parliament in September 2023. - Continue aligning CSD Law to EU acquis and strengthen supervision of corporate securities depositories and investment firms. - Financial consumer protection: - NCFM entrusted with financial consumer protection mandate for all financial services from July 2, 2023 (banking services from January 1, 2024). - Concept note developed to define objectives and responsibilities between NBM and NCFM. - Legislation amendments approved by Parliament on June 30, 2023; NCFM approved new organizational chart and is reviewing regulatory framework aligned to EU acquis. - Adequate funding ensured for NCFM to perform new mandate. - Capital markets strategy: - NCFM drafting national strategy for capital markets development with USAID support; aim to complete by end-2024. - Following regulatory framework for voluntary pension funds, NCFM approved decision to establish first pension company eligible for operating a voluntary pension fund and licensing process underway. ### Financial market infrastructure, payments, and inclusion - Instant payments and account activation: - Instant payment scheme launched in March 2024, with over 100, 000 users accounts activated by mid-April. - Plan to extend instant payments to person-to-business, business-to-person, and person-to-government transactions by September 2024. - Open banking and SEPA: - Preparing PSD2-based open banking system to be launched in February 2025, including necessary legislation updates. - Submitted application to join the Single Euro Payments Area (SEPA) in February this year. - Legal and digital identity reforms: - Revised amendments to law 114/2012 to ensure licensing, supervision, and fair competition between EU-licensed and national payment service providers. - Updated primary legal framework for online identity verification system (e-KYC procedure) effective July 1, 2023. - Financial inclusion strategy: - NBM fintech division engaging private sector to develop products leveraging instant payments for consumers and SMMEs. - Committed to set up inter-agency committee to develop, implement, and monitor a National Financial Inclusion Strategy (NFIS) with WB support (end-June 2024 SB). - Diagnostic phase ongoing; expect to formalize governance structure and action plan by end-2024. ### AML/CFT and illicit finance prevention - Enforcement and interdiction: - Decisive actions taken to identify and prevent cross-border illicit finance, resulting in dismantling illegal financing schemes and seizing large amounts of cash and wired funds. - Will intensify efforts to detect, investigate and prosecute ML. - Risk-based supervision and tools: - With IMF capacity development support, enhanced data collection and developing AML/CFT institutional and sectoral risk assessments for banks. - Developing guidance for business ML risk assessments for the foreign exchange sector and conducting outreach on suspicious transactions reporting, PEPs, and beneficial ownership identification. - Committed to targeted supervisory activities focusing on cross-border ML/TF risks. - Cross-border payments monitoring and strategy: - Developing a national mechanism for monitoring cross-border payments, building on NBM's transaction screening toolkit, to address illicit financial flow risks and improve coordination among NBM, SPCS B (Office for Prevention and Fight against Money Laundering) and STS. - Adopted a National AML/CFT Strategy for 2020–25 and will update National Risk Assessment, develop accompanying action plan, and publish results. *Source: 1mdaea2024001-print-pdf - 16. The NBM stands ready to adjust its monetary policy stance consistent with its inflation targeting framework.* ### 28. Reforming the SOE sector remains a priority to improve efficiency and contain fiscal ### Reforming the SOE sector remains a priority to improve efficiency and contain fiscal risks ### State-owned enterprise (SOE) reform: strategy, triage, and governance - Adopted a state-ownership strategy—for all SOEs operating at the central government level—in December 2022 to identify public enterprises to undergo reorganization, privatization, or liquidation, and to strengthen governance. The rationales include: (i) supporting national economic interests; (ii) maintaining critical infrastructure; (iii) producing strategic goods and services; and (iv) providing basic social services. - Completed a triage of SOEs owned by the central government, in line with the approved state-ownership strategy (end-December 2023 SB), following an adopted methodology that classifies all SOEs into five categories: (i) remain under state management, (ii) privatized in the short-term, (iii) privatized after certain reforms, (iv) restructured into public institutions, and (v) liquidated. The approved triage will be published on the government’s website. - Addressing legal impediments related to the delineation of public and private assets to enable implementation of the SOE ownership strategy. - Will develop a strategy for SOEs at central government level that includes: - (i) a framework for monitoring financial performance and mitigating related fiscal risks; - (ii) a plan to rationalize the number of SOEs that are in non-strategic sectors or are loss-making (end-September 2024 SB). - Intend to propose a privatization strategy for small and large enterprises and set economic benchmarks to identify opportune conditions for launching de-nationalization efforts. - Adopted amendments to the Law on State and Municipal Enterprises in April 2023 (with World Bank support) authorizing owners to: - (i) ensure adoption by SOEs of a corporate governance code according to the model approved by the Government; - (ii) evaluate performance of SOE Executive Board members. - Other legal changes: - Introduced Audit Committees for Public Interest Entities as executive bodies of SOEs and allowed inclusion of independent members in SOE Boards. - Adopted regulations on the selective process of Supervisory Board members of SOEs and their remuneration (April 2023). ### Safeguarding energy security: preparations, supply diversification, and efficiency measures - General approach: - Initiated preparations for the 2024–25 Heating Season and plan to approve it by July 2024. - Plan will consider scenarios based on natural gas availability and electricity deliverables and identify preventive measures to reduce and mitigate the impact of gas curtailment. - Taken measures to reduce energy consumption and improve energy efficiency, and engaged economic agents and households to save energy during peak hours. - Voucher program for low-income households to purchase efficient appliances to reduce electricity demand. Natural Gas - With the EUR 300 million EBRD credit line and usage of fiscal buffers, accumulated sufficient gas reserves for the last winter season. - Amendment of the Loan agreement with the EBRD secured a new tranche (no. 3) of EUR 165 million in October 2023, supplemented with EUR 34 million grant from the Norwegian Government under the NANSEN program. - Following market stabilization and sufficient reserves/liquidity built by Energocom, the company repurchased in September–November 2023 MDL 1 billion of its own shares (based on the Commission for Emergency Situations Decision from September 2023). In 2024 additional repurchases worth MDL1.3 billion is expected. - Unbundling of transmission system operators (TSO) started in September 2023. LLC “Vestmoldtransgaz” designated as operator of the natural gas transmission system; preliminary certified by ANRE in February 2024 according to the ISO model. ANRE shall adopt the decision regarding final certification by end-August 2024, taking into account the opinion of Energy Community Secretariat. - As a member of the EU’s energy platform, leveraged regional cooperation to diversify gas imports and address infrastructure bottlenecks. Implemented customs regulations to operationalize virtual reverse pipeline flows; during 2023 significant amount of gas transported through this regime, mostly via the Trans-Balkan pipeline. - Adjusted regulatory framework to ensure closer and faster alignment of domestic tariffs with imported prices. Electricity - Secured electricity purchases with MGRES (producer owned by Inter-RAO and located in Transnistrian region) through end-2024 at a beneficial price. - Diversified electricity supply by concluding several bilateral contracts with producers and suppliers from Romania and Ukraine. - Registration of state-owned JSC “Energocom” on the OPCOM electricity market in Romania secured instruments for purchases from the spot market and other sources; interconnection capacity with Romania remains constrained until additional transmission lines come online. - Unbundling of electricity transmission system operators (TSO) has been implemented and certification of the electricity transmission system operator was approved. - Amendments to electricity-related laws, in line with EU regulations on wholesale market integrity and transparency, were approved by Parliament in December 2023. - Appointed Operatorul Pietei de Energie M (OPEM) as electricity market operator to establish an electricity market to enhance market efficiency, boost liquidity and investor confidence. ### Rule of Law and anti-corruption: judicial reform, institutional strengthening, and asset recovery - Overall priorities: - Continue implementation of judicial reform, improve governance, and address high-level corruption to strengthen institutions combating high-level corruption, root out dishonest officials, and prepare the ground for strong rule of law. - Short-term goals include cleansing the judiciary and promoting accountability of high-level judges and prosecutors. - Reviewed anti-corruption strategy and adopted in December 2023 a new national program of integrity and anti-corruption for 2024–2028. Judiciary and prosecution - Strategy on Ensuring Judicial Independence and Integrity for 2022–2025 guides modernization in line with international recommendations. - March 2022 legislation governs integrity vetting (pre-vetting) of candidates for the SCM and SCP and their respective colleges (established in consultation with the Venice Commission). - Initiated competition for members of SCM’s Board for the Selection and Appointment of Judges in September 2023 (two out of twelve candidates interviewed and vetted). - Adopted an integrity assessment (full vetting) law entered into force on August 22, 2023, prioritizing vetting of high-level judges and prosecutors. - Adopted amendments to remodel the Supreme Court of Justice (SCJ) as a cassation court; provided for an extraordinary integrity assessment of future judges of the SCJ (ongoing). Anti-Corruption Prosecution Office (APO) and institutional reforms - Revised institutional anti-corruption framework in July 2023: APO mandated with investigation and prosecution of high-level corruption; NAC responsible for low and mid-level corruption. - Amended the Criminal Procedure Code to ensure APO’s investigative jurisdiction covers: - (i) all types of corruption-related offences listed in the UN Convention against Corruption as well as false asset declarations; and - (ii) all high-level officials defined in Article 123(3) with some exceptions of lower-level officials. - The law entered into force on March 1 and transfer of ongoing criminal cases in line with revised jurisdiction was completed on March 31, 2024 (fourth review prior action). - Adopted legal amendments in November 2023 granting investigative officers seconded to APO powers for special investigative techniques (wiretapping and surveillance). - Assessed APO’s capacity needs (equipment, premises, staffing) informing budget allocation for APO in the national budget for 2024, providing APO with an independent budget using its separate budgetary code (end-June 2023 SB, met). - Adopted a new organizational structure for APO, granting 54 new staff positions and committed to increase staffing autonomy. - Plan to adopt legal amendments (after legal assessment) in line with constitutional provisions and the ECHR (November 2024 SB) to grant APO the right to: - (i) hire its own investigative officers along with the current secondment procedure; and - (ii) participate in the competition and interview process for transfer or promotion of prosecutors to APO for appointment by the SCP. - Will grant APO separate functional premises by end-June 2024. Anti-corruption court (ACC) - President’s Administration initiated establishment of an anti-corruption court, submitting a draft law to Parliament in July 2023; work ongoing with public consultations and consultations with the European Commission (DG JUST). - Law on establishment of anti-corruption adjudication infrastructure now expected to be adopted in summer 2024 (in consultation with IMF staff and in line with the Venice Commission opinion). - ACC jurisdiction will focus on: - (i) cases investigated and/or prosecuted by APO; - (ii) a limited number of non-APO cases based on articles 324–335 and 181–1 of the Penal Code as committed by high-level officials defined in article 123 (3) or in large proportions defined in article 126 (1); - (iii) cases of substantial unjustified wealth and related confiscation by NIA (missed end-March 2024 structural benchmark, reset for end-September). - Will seek external donor-partner financing and technical support for operationalization; mindful of caseload risks and potential overburdening. Enforcement and asset recovery - In 2023, NAC and APO submitted to court over 140 corruption cases involving: one former President, one former Prime Minister, two former ministers, one deputy minister, eight former and current members of Parliament, former director of NAC, 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. - Recent appellate adjudication in a Bank Fraud case: sentencing in absentia of a former high-level official to 15 years imprisonment and ordering over MDL 5.2 billion confiscation. - Developing a database of seized assets at the Criminal Assets Recovery Agency to improve transparency of confiscated asset management and enforcement measures. - Priorities include intensified scrutiny of high-level officials’ sources of wealth (including assets held abroad), leveraging asset declaration regime and the illicit enrichment offence. - Working on amendments to the legal framework for asset recovery to address gaps, streamline processes and deadlines; aim to send these amendments to parliament this summer. - Committed to progress on asset recovery from the 2014 banking fraud via criminal justice efforts and cooperation with foreign counterparts, including joint investigative teams and task forces. - Adopted a new national program for criminal asset recovery 2022–2027 and progressing on associated action plan. - Will prepare and publish a MoU describing responsibilities among institutions involved in asset recovery and establishing a Steering Committee and a high-level Monitoring Committee chaired by the Prime Minister (publish by end-June 2024). ### Building climate resilience and emissions commitments - Committed to reducing national GHG emissions by 70 percent (88 percent conditional) in 2030 compared to 1990. - Developed National Climate Change Adaptation and Low Emission Development Programs up to 2030, implemented through Action Plans. - Reforms are consistent with EU accession obligations and aim to enhance energy security and sustainable development. - Will work to enhance climate resilience of key sectors, including infrastructure and agriculture. *REPUBLIC OF MOLDOVA — INTERNATIONAL MONETARY FUND* ### 37. Our RSF-supported program is helping us to deepen and accelerate climate related ### 37. Our RSF-supported program is helping us to deepen and accelerate climate related reform efforts. ### Reform Area 1: Adaptation and Mitigation Policy, and Disaster Risk Management - Objective: Strengthen the legal and institutional framework for managing climate change to enhance cross-sectoral coordination and accelerate implementation. - Achievements and measures: - Adopted the Law on Climate Action enabling low carbon development and climate change resilience, and established a National Commission on Climate Change (NCCC) under the Office of the Prime Minister, with tasks, responsibilities and procedures defined in the supporting government decree (RM1). - For the second review: develop a Disaster Risk Management (DRM) program including a single comprehensive strategy that (i) covers the full spectrum of the Sendai framework (disaster prevention and mitigation, preparedness, response, rehabilitation and recovery), and (ii) defines an institutional framework with clearly assigned roles and responsibilities at the national and subnational level, including assigning the role for DRM coordination and strategic planning under the Office of the Prime Minister, e.g. to the NCCC (RM2). - By the fourth review: develop and disseminate natural disaster risk and vulnerability maps, including information on how and where climate hazards might affect areas and regions, to assess risks and vulnerabilities of the population, infrastructure assets, sectors, and the economy/businesses; maps will be made available online and updated regularly (RM3). ### Reform Area 2: Energy Sector Policies - Objective: Comprehensive energy reforms to ensure energy efficiency and security while promoting energy transition; design and implement mechanisms to support energy efficient refurbishment of public and private buildings through the budget. - Institutional changes: - Former Energy Efficiency Agency reorganized into the National Centre for Sustainable Energy (NCSE). - Residential Energy Efficiency Fund established as a division of the NCSE. - Renewable energy and market preparation: - Target: reach the NDC target of 27 percent of renewable energy by 2030 (from the current 24 percent). - MoE published Indicative timetable for planned tendering procedures for large eligible producer status for 2024–2025: allocated capacity is Wind—105 MW; Solar—60 MW. - Energy vulnerability and appliance program: - EU-funded "Rabla for Household Appliances" programme, implemented by UNDP Moldova, total budget of around $5.8 million, provided voucher-based financial support for LED light bulbs and up to 80% of the cost of a refrigerator, electric cooker or washing machine. - To date, more than 5700 vouchers have been used for a major appliance and more than 29000 for LED bulbs. - Ministry of Energy launched a public consultation on a draft government decision to approve the new "Rabla for Household Appliances" programme. - Reform milestones and reform measures: - By the second review: - Determine the cost-recovery rate for provision of electricity and natural gas (fully reflecting operational and capital costs including for future investments and reforms identified in the Energy Strategy), (i) identifying any discrepancy between tariff and so defined cost recovery, considering tax expenditures, (ii) undertake a distributional impact assessment, and (iii) close any gap by adjusting the tariff or by compensating the operating company transparently from the budget (RM4). Seek support from development partners. - From the 2024-25 heating season onwards, coordinate with the World Bank and other development partners to (i) assign the administration of payment provision from energy providers to the Ministry of Labor and Social Protection, and (ii) delink the provision of support under the EVRF from current energy consumption by providing targeted cash transfers to beneficiaries (RM5). - By the third review: - Based on results from an ongoing pilot project (supported by the UNDP) collecting information through smart meters, conduct a review for tariff differentiation options (e.g., day-night tariff) as a tool for managing demand fluctuations to facilitate balancing and renewable energy onboarding; summarize results and recommendations in a report (RM6). ### Reform Area 3: Enabling Climate-Smart Infrastructure Investment and Fiscal Management - Objective: Promote green, resilient infrastructure investment and integrate climate implications and climate vulnerability into public investment design and selection; improve transparency on public resource allocation to climate priorities and on climate-related fiscal risks. - Reform milestones and reform measures: - By the second review: include climate change impact and vulnerability assessment in project appraisal (and project selection) methodologies by amending Regulation 684, in line with C-PIMA recommendations (RM7). - By the third review: - Review and provide a written opinion of climate implications and climate vulnerabilities of projects and of the project portfolio included in the budget submission (RM8); this review of individual projects and the project portfolio will be part of project appraisal and budget processes. - Report on: (i) climate spending allocations at the budget stage, (ii) climate related spending execution, and (iii) include climate risks assessment in the Fiscal Risks Statement, including fiscal risk from natural disasters to public and SOE infrastructure (RM9). ### Reform Area 4: Sustainable Climate Finance Mobilization and Financial Sector Resilience - Objective: Mobilize sustainable finance, enhance financial sector resilience, strengthen institutional capacity and collaboration, and develop guidance and regulation for financial sector participants to identify, quantify, monitor, and manage climate-related risks. - Institutional actions and milestones: - For the first review: - Established an interagency steering committee (including the NBM, Ministry of Finance (MoF), Ministry of Economic Development and Digitalization (MOEDD), Ministry of Environment (MOE), NCFM, and Moldovan Banks Association) on sustainable and environmentally responsible finance (RM10). - Developed, adopted, and started implementing a Sustainable Finance Strategy ("Roadmap") and Action Plan for Moldova’s financial sector (RM11). - By the fourth review: - Develop an advanced draft of the Sustainable Finance Taxonomy and start the public consultation process to approve the taxonomy by December 2025 (RM12). ### G. Economic Statistics - Objective: Improve production and dissemination of economic statistics; align legal framework for statistical production with relevant EU standards; enable access to personal data from administrative and private sources for statistical purposes. - Actions and timelines: - Prepare and report fiscal accounts in line with GFSM2014 (new April 2025 SB) to increase fiscal transparency and address misclassification of spending including the wage bill, contingencies, and inventories. - Adopted the Strategy on the Development of the National Statistical System (NSS) for 2023-2030, and the NSS Development Program for the years 2023-2026. - Strengthen operational capacity of the National Bureau of Statistics (NBS) by: (i) allocating adequate human and financial resources; (ii) building new capacities and capabilities; and (iii) augmenting the mandate of the NBS for the effective use of administrative and alternative data sources. ### H. Program Monitoring - Monitoring arrangements: - The ECF/EFF and RSF-supported programs will be monitored through semi-annual reviews. - The QPCs, inflation consultation clause (ICC), and ITs have been extended to include targets through June 2025. - A prior action related to the independence of the NBM has been proposed for the completion of this review. - The QPCs, ICC, and ITs are set out in Table 1; the prior action and SBs are in Table 2; RSF reviews are based on evaluation of implementation of the RMs set out in Table 3. ### Attachment II. Technical Memorandum of Understanding (TMU) — Key elements - Quantitative program targets and variables: - Performance criteria: floor on net international reserves (NIR) of NBM; ceiling on the cash deficit of the general government; ceiling on accumulation of external payment arrears of the general government (continuous). - Indicative targets: ceiling on the general government wage bill; floor on targeted social assistance spending; floor on developmental spending. - Consultation clause on the 12-month rate of inflation. - 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$ (official rate as of September 30, 2021). - Gold holdings valued at US$1,801.50 per troy ounce (average price during January–September 2021). - Program Exchange Rates (as of September 30, 2021) included: - U.S. dollar / Euro 1.1579 - U.S. dollar / Swiss franc 0.9365 - U.S. dollar / Pounds sterling 1.3435 - U.S. dollar / Japanese yen 111.9100 - U.S. dollar / Australian dollar 0.7206 - U.S. dollar / Canadian dollar 1.2741 - U.S. dollar / Chinese renminbi 6.4634 - U.S. dollar / Russian ruble 72.6642 - U.S. dollar / SDR 0.7098 - Definitions and measurements: - General government: central government and local governments; central government includes state budget (including foreign-financed projects), state social insurance budget, and health insurance budget. - NIR of the NBM: gross reserves in convertible currencies minus reserve liabilities in convertible currencies. - Gross reserves include monetary gold, holdings of SDRs, reserve position in the Fund, and holdings of foreign exchange in convertible currencies readily available for intervention or in securities issued by sovereigns, IFIs and agencies with minimum credit rating AA- and deposits in counterparts with minimum rating A-; excluded are capital subscriptions to foreign financial institutions, long-term non-financial assets, funds disbursed for on-lending/project implementation, assets in non-convertible currencies, NBM’s claims on resident banks and nonbanks, and foreign assets pledged as collateral or encumbered, including claims arising from derivative transactions. - Reserve liabilities include use of Fund credit by the NBM, convertible currency liabilities of the NBM to nonresidents with an original maturity up to and including one year, and convertible currency liabilities of the NBM to residents (excluding the general government and mandatory FX reserves of domestic banks in the NBM). Liabilities from use of Fund credit exclude liabilities from SDR allocation. - Program data points: - Stock of NIR of the NBM amounted to US$ 3708.57 million as of September 30, 2021. - Stock of the net domestic credit of the banking system amounted to MDL 8479.3 billion as of September 30, 2021. - Cash deficit of the general government: - Defined as the sum of net credit of the banking system to the general government (per TMU definition), the general government’s net placement of securities outside the banking system, other net credit from the domestic non-banking sector to the general government, the general government’s receipt of disbursements from external debt for direct budgetary support and for project financing minus amortization paid, and privatization proceeds stemming from sale of general government assets. - 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. *Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1mdaea2024001-print-pdf.pdf* ### 10. Government securities in the form of coupon-bearing instruments sold at face value will ### 1mdaea2024001-print-pdf - 10. Government securities in the form of coupon-bearing instruments sold at face value will ### Treatment of government securities and fiscal recording - Government securities that are coupon-bearing and sold at face value: - Treated as financing items in the fiscal accounts, in the amount actually received from buyers. - On redemption date, the sales value (face value) is recorded as amortization. - Coupon payments are recorded as domestic interest payments. ### Definition and forms of debt (TMU / program purposes) - Debt definition (for the TMU and program purposes) follows paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements (Executive Board Decision No. 15688-(14/107)): - Debt includes contracted or guaranteed and non-guaranteed commitments for which value has not been received. - For program purposes, “debt” means a current (not contingent) liability created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, requiring the obligor to make one or more payments in assets (including currency) or services at future dates to discharge principal and/or interest. - Primary forms of debt: I. Loans: advances of money including deposits, bonds, debentures, commercial loans, buyers’ credits; also temporary exchange of assets equivalent to fully collateralized loans (e.g., repurchase agreements and official swap arrangements). II. Suppliers’ credits: contracts allowing deferral of payment after delivery of goods or services. III. Lease agreements: debt equals the present value (at inception) of all expected lease payments for the agreement period, excluding payments for operation, repair, and maintenance. ### Guarantees, on‑lending, and contingent liabilities - Guarantee definition (for program): - Any explicit legal obligation of the general government or the NBM or any agency acting on behalf of the general government to service debt in the event of nonpayment (payments in cash or in kind), or any implicit legal or contractual obligation to finance partially or in full any shortfall incurred by the debtor. - Policy consequences: - On-lending from external creditors to SOEs is treated as a public guarantee and is monitored explicitly from above-the-deficit line. - On-lending from external creditors to the private sector through commercial banks—when collateralized and credit risks are explicitly borne by commercial banks—is treated as contingent liabilities. ### External payments arrears (program definition and exceptions) - External payments arrears consist of all overdue debt service obligations (principal or interest, taking into account contractual grace periods) for debt contracted, guaranteed, or assumed by the central government, the NBM, or any agency acting on behalf of the central government. - The ceiling on accumulation of external payments arrears applies continuously throughout the arrangement period. - Exceptions: - Arrears arising from external debt being renegotiated with external creditors, including Paris Club creditors, where a creditor has agreed that no payment needs to be made pending negotiations. - Outstanding amounts on a debt owed to the Russian Federation stemming from old commercial debt contracted in 2001 and held in an escrow account at the NBM. - For the performance criterion, nonpayment of external debt service to Russia will not give rise to arrears when the Central Government and the NBM cannot pay or settle based on contractual terms solely due to factors outside the debtor’s control (e.g., transfer of funds rejected owing to intermediary financial institutions’ compliance policies, sanctions or inability to identify the counterparty), provided that debt service payments have been paid in full into an escrow account held by a third party by the contractual due date, taking into account any contractual grace period. - Funds in such escrow accounts will be used only to satisfy the related external debt obligations; use or withdrawal for other purposes would constitute a breach of the performance criterion (PC). ### Definitions of fiscal aggregates and spending categories - General government wage bill: - Defined as the sum of budget spending on wages and salaries of public sector employees—according to economic budgetary classification—including but not limited to employer pension contributions and other social security contributions, and other remunerations (such as bonus payments). - Aligned with current spending reported in line “Wages” of the general government budget according to the program classification of the annual budget except for salaries of SOEs and health care providers compensated from the Health Insurance Fund (FAOAM) itself. - For calculation, the following accounts from the Treasury system in the Ministry of Finance will be used: category 210000 personnel expenditure (central government, local government, and special funds). - Targeted social assistance spending (general government): - Defined as the sum of support for unemployment (9012/00322, 9012/0052, 9008/00519, and 9019/0052), the Ajutor Social (social assistance program 9015/00320), the Energy Vulnerability Reduction Fund (9019/00529), heating allowance during the cold season and government’s energy poverty policy (9015/00322) from the central government budget. - Developmental spending (general government): - Defined as the 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). ### Inflation Consultation Mechanism - Monetary conditionality includes quarterly inflation targets measured as year-on-year CPI inflation published by the Moldovan National Bureau of Statistics, set within tolerance bands: - Inner band: ±1.5 percentage point around the central point. - Outer band: inner band plus an additional ±1.5 percentage point. - Consultation triggers: - If observed year-on-year CPI inflation falls outside the inner band at the end of a quarter, the NBM will consult with IMF staff on reasons and proposed policy response. - If it falls outside the outer band at the end of a quarter, the authorities will consult with the IMF Executive Board on reasons and proposed policy response before further purchases could be requested under the ECF/EFF. - Consultations focus on: - (i) Broad-based assessment of the stance of monetary policy and whether the Fund-supported program is still on track. - (ii) Reasons for program deviations, compensating factors, and proposed remedial actions if necessary. ### Adjusters and programmed external financing flows - Adjusters in the TMU apply for assessing compliance with quantitative targets starting from end-June 2022. - Adjustments to the ceiling on the cash deficit of the general government: - Increased by the amount paid in cash for maintaining financial sector stability or by the face value of government securities issued for the same purpose. - Increased by the amount of any shortfall between actually disbursed and programmed budget support from external donors, including MFA (grants) from the European Commission. - Adjustment to the floor on NIR of the NBM: - Lowered by any shortfall in official external grants and loans up to the equivalent of US$363 million and US$29 million in 2024 and 2025, respectively, valued at the program exchange rates. - Programmed external financing flows (cumulative from the beginning of the calendar year) used to adjust targets are specified in the program tables. ### Reporting requirements and data submission (Table 1 highlights) - Fiscal data (MoF): - General budget operations: Monthly, within three weeks of the end of each month. - General government wage bill and detailed breakdown of salaries of all SOEs and JSCs, by company: Monthly, within three weeks of the end of each month; annually (2019, 2020 and 2021) and quarterly starting Q1 2022. - Number of budgetary sector positions and employees: Monthly, within four weeks. - Social expenditure (pensions, unemployment support, Ajutor Social, heating allowance, health expenditures from Health Insurance Fund): Monthly, within three weeks. - Public and publicly guaranteed domestic debt, by instrument and creditor; debt stock outstanding for all SOEs and JSCs, by company: Monthly, within three weeks; quarterly for SOEs, within six weeks. - Domestic arrears and arrears outstanding for SOEs and JSCs: Monthly, within three weeks; annual and quarterly schedules as indicated for historical years and from Q1 2022. - Onlending to SOEs by type and by external creditors (including disbursements and repayments): Monthly, within three weeks. - Monetary and central bank data (NBM): - Monetary survey of the NBM: Weekly, within one week. - Monetary survey for the whole banking system: Weekly, within two weeks. - Net claims on general government (NBM and commercial banks): Weekly, within two weeks. - Financial position of commercial banks (balance sheets, income statement, regulation indicators, capital, liquidity, credits and deposits): Monthly, within four weeks. - Foreign exchange operations and cash flows of NBM: Monthly, within two weeks. - 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. - Monthly daily-data summary covering FX market liquidity conditions, banks' ability to maintain open FX positions, MDL exchange rate volatility, spread between buy/sell MDL-USD rates, exchange rates quoted by foreign exchange offices, daily change in net open currency position, interbank market volatility: Daily data to be provided once every month, within 10 days of the end of each month. - Balance of Payments (NBM): Current, capital, and financial account data — one quarter after the end of the previous quarter. - Transfers of individuals from abroad through banking system: Monthly, within six weeks. - Public debt data (MoF): New external loans contracted or guaranteed by the general government: Monthly, within three weeks. - Total public and publicly guaranteed outstanding debt stock, debt service due, and debt service paid by creditor (per new Debt Template): Quarterly, within six weeks. - Disbursements of grants and loans by recipient sector: State—Monthly within three weeks; Local/SOEs—Quarterly within three weeks. - Other data (NBS unless stated): - Overall CPI: Monthly, within two weeks. - National accounts by sector of production: Quarterly, within three months. - Export and import data: Monthly, within two months. - Detailed financial performance of all state-owned enterprises and joint stock companies (central government level): Annual, within two months (unaudited) and no later than 6 months (audited). ### World Bank RSF assessment update—selected findings on climate vulnerability and adaptation - Recent extreme weather and vulnerabilities: - Moldova experienced heavy snows and winds from Storm Bettina in November 2023 with three deaths and disruptions to power and transport; a major blizzard in early January 2024; and a record high temperature in March 2024 with the village of Sîngerei reaching 29.7°C. - Heatwave extended into April and threatens agriculture, which has been impacted by droughts in recent decades, most recently in 2020 and 2022. - As much as 80 percent of Moldova’s poor population live in rural areas and the majority derive income and food from agriculture, making climate-induced extreme weather events a risk for increasing poverty and food insecurity. - Government adaptation and resilience measures: - National Climate Change Adaptation Program until 2030 and its Action Plan adopted in August 2023; Ministry of Environment, supported by UNDP, leads implementation. - Program targets integration of adaptation into sectoral policies and sets objectives to increase climate resilience of six priority sectors: agriculture, health, transportation, energy, water, and forestry. - Moldova became a member of the EU’s Civil Protection Mechanism as of January 1, 2024, providing access to resources and equipment for disaster response. - Law on Climate Actions establishes key mechanisms for implementing adaptation and resilience measures set out in the National Adaptation Program. - New Forest Code (approved by Parliament in March 2024) introduces dual classification of forests (“special protection forests” and “production forests”) and strengthens management and oversight; expected to reduce risks of flooding, drought, erosion, and fire. - Implementation challenges and financing gap: - Institutional assessment for the forthcoming CCDR found implementation of adaptation measures is limited by lack of budget alignment and capacity constraints. - Existing funds fall short of meeting post-disaster expenses, leaving an estimated annual shortfall of US$146 million. *Source: 1mdaea2024001-print-pdf (IMF).* ### 3. Moldova has adopted a climate framework law, which makes its climate targets ### 3. Moldova has adopted a climate framework law, which makes its climate targets ### Climate framework law and institutional arrangements - The Law on Climate Actions, approved by Parliament in April 2024: - anchors Moldova’s Nationally Determined Contribution (NDC) commitments; - sets a long-term goal of climate neutrality by 2050; - makes climate targets binding and provides the legal and institutional basis for implementation. - Law provisions and mechanisms: - establishes the principle for pricing carbon emissions and provides the legal basis to develop mechanisms for emissions monitoring, reporting, and verification (MRV), needed to support adoption of an emissions trading system (ETS) or a carbon tax; - provides a basis for implementation and evaluation of policies and measures for GHG emission reduction; - establishes mechanisms for more efficient participation of stakeholders in planning, implementation, and evaluation of climate policies and measures. - Coordination and oversight: - creates the National Commission on Climate Change (NCCC) responsible for coordination, promotion, and oversight of climate change related activities necessary to achieve the targets of the United Nations Framework Convention on Climate Change and the Paris Agreement. ### Energy transition and EU acquis alignment - Policy frameworks and planning: - The Low Emission Development Program (LEDP) 2030 came into force on January 1, 2024 and systematizes policies and sectoral action plans aimed at achieving the GHG reduction targets specified in the updated NDC considering commitments set forth in the EU-Moldova Association Agreement. - The draft Integrated National Energy and Climate Plan (NECP) 2025–2030, submitted to the Energy Community Secretariat in December 2023, provides a roadmap for achieving Moldova’s short-term decarbonization objectives with a perspective to 2050 and incorporates previously separate plans, including the National Renewable Energy Action Plan and the National Energy Efficiency Action Plan. - The Energy Community Secretariat published an evaluation of the draft NECP on April 3, 2024, concluding the draft is aligned with the Governance Regulation requirements while providing comments and recommendations. - Sector reforms and market measures: - Steps taken to enhance governance and competition in the energy sector include unbundling of the gas sector and aligning the legal and regulatory framework with the Energy Community acquis (governance and performance of national authorities, compliance with energy markets regulation, market rules and market integrity and transparency, energy security and compliance with energy decarbonization incentives). - These reforms aim to pave the way for investment in renewable energy and transmission. ### Forestry, land use, and afforestation plans - New Forest Code (adopted March 2024): - aligned with EU standards and global practices; - introduces a dual classification system for forests, clarifies management responsibilities, defines ownership rights, and enhances oversight mechanisms; - streamlines procedures for allocating forest fund lands, regulates forest product management, and strengthens enforcement against forestry violations. - future reforms may focus on restructuring forest institutions, including Moldsilva and its affiliates. - Afforestation target and program: - The National Forest Extension and Rehabilitation Program for 2023–32 (NFERP) aims to increase the forest area by 145,000 hectares by 2032. - Role in climate neutrality: - Moldova’s NECP foresees a significant role for forest and broader land use carbon sinks to meet mid-century climate neutrality. ### Other challenges and opportunities - Institutional capacity and preparedness: - The main challenges identified in the November 2023 assessment letter remain, notably the need to strengthen institutional capacity to support the climate transition amid long-term structural constraints and continued social, political and economic risks compounded by recent external shocks. - The European Commission’s 2023 report assesses Moldova as having “some to moderate level” of preparedness on energy, but being in the “early stage” of preparedness on climate and environment. - Key barriers noted include “limited administrative capacity, fragmented sectoral policies and absence of a whole-of-government oversight on implementation of climate policies and commitments, and insufficient monitoring and checks of greenhouse gas emissions, including the reliability of data across the country.” - Financing needs and opportunities: - An initial assessment from the CCDR indicates that the climate-resilient green transition will require substantial investments, likely exceeding 5 percent of GDP annually over the next three decades. - The process of EU integration provides opportunities to adopt standards, policies, and institutional mechanisms to support decarbonization and climate resilience and acts as a catalyst to unlock a wider range of financing options for resilient and net zero development. ### World Bank and development partner engagements - Ongoing World Bank engagements: - The CCDR (Climate Change Development Report), at a draft stage, assesses how Moldova can meet development objectives in the context of climate change and the global energy transition; consultations are ongoing and the report is expected to be published before COP29. - The Moldova Supporting Growth and Resilience Development Policy Operation (DPO) supports policy and regulatory reforms including the Law on Climate Actions, the new Forest Code, the Energy Performance of Buildings Law, and amendments to the Renewable Energy Law. - Investment and technical projects: - Projects and programs include the Second District Heating Efficiency Improvement Project (DHEIP-2), Power System Development Project (PSDP), and the upcoming Sustainable Transition to Energy Efficiency in Moldova (STEEM) program. - Programmatic Advisory Services and Analytics (ASA) for Moldova Energy Sector aims to accelerate the energy transition and increase electricity sector resilience. - The planned Strengthening Moldova's Disaster Risk Management and Resilience Project seeks to enhance institutional capacities in disaster risk reduction and climate change adaptation, finance risk-reducing investments, and improve response and financial preparedness of the country. ### Key statistics and timelines (preserved from source) - LEDP 2030 came into force on January 1, 2024. - Draft Integrated National Energy and Climate Plan (NECP) 2025–2030 submitted in December 2023. - New Forest Code adopted in March 2024. - National Forest Extension and Rehabilitation Program for 2023–32 (NFERP) aims to increase forest area by 145,000 hectares by 2032. - CCDR initial assessment: climate-resilient green transition likely requires investments exceeding 5 percent of GDP annually over the next three decades. *Source: IMF country report excerpt (chapter text provided).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1mdaea2024001-print-pdf.pdf_