## _cr0548 ## Source details **Canonical URL:** [_cr0548](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0548.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0548.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0548.pdf.json) --- ### Background and political context - Parliamentary elections slated for March 6, 2005; no major change in economic policies expected before the elections. - Action Plan for enhanced cooperation with the EU within the European Neighborhood Policy finalized; endorsement expected early in 2005. - Transnistria conflict unresolved; historical shares before breakup: about 40 percent of Soviet Moldova’s GDP, 15 percent of its population, and 12.5 percent of its territory. - Unresolved conflict fosters tax evasion, smuggling, other illegal activities, and complicates solutions because Transnistria has large external debt (mainly for energy supplies from Russia). ### Recent macroeconomic performance - GDP growth and drivers: - GDP grew by 6.3 percent in 2003 and is estimated to advance by another 7 percent in 2004, largely driven by domestic consumption. - Consumption fueled by marked increase in real wages and pensions and large and rising workers’ remittances. - Fixed investment boosted by a construction boom but, at around 18 percent of GDP, remains relatively low to support long-term growth. - Net trade contributed negatively to growth despite strong export performance. - Remittances and external financing: - Officially-recorded remittances reached almost 25 percent of GDP in 2003 and continued to grow rapidly in 2004. - About two-thirds of VAT proceeds in 2004 came from imports. - Remittances strengthened the leu; actual remittances could be significantly higher than officially recorded. - Labor market and wages: - At least 25 percent of the labor force emigrated following the 1998 crisis. - Labor shortages emerged in some sectors (construction, transportation, and agriculture), pushing up wages. - Per capita gross national disposable income: $689 in 2003. - Inflation and exchange rate: - Headline CPI inflation peaked at 17 percent in October 2003 and moderated to low double-digits thereafter. - Leu rose by 9.3 percent in nominal effective terms during the first three quarters of 2004. - External competitiveness and trade: - Despite marked real exchange rate appreciation, exports grew briskly and dollar wages remain well below neighboring countries. - Exports to the EU particularly vibrant in 2003–04; textile exports increased based on import-for-export arrangements. ### Risks to sustainability and staff assessment - Key risks calling for policy adjustment: - Rising inflationary pressures from expansionary fiscal stance, fast credit growth, and strong foreign currency inflows. - Emerging capacity constraints associated with rapid demand growth and labor shortages. - Difficult business environment and lingering vulnerability to external shocks. - Heavy reliance on remittances, which could mask external financing needs and ease pressure for reforms. - Implementation constraints: - Weak ownership at highest political levels, lack of political consensus for reforms, and capacity constraints hinder implementation. - Structural reforms uneven and incomplete due to resistance from vested interests and insufficient attention to political economy constraints. ### Policy recommendations and priorities - Fiscal policy: - Tighten fiscal policy to make room for current external debt service and support central bank efforts to control inflation. - Adopt a more forward-looking perspective and greater reliance on a medium-term expenditure framework. - Monetary and exchange rate policy: - Place greater emphasis on the inflation objective; allow the exchange rate to appreciate if FX inflows continue to grow rapidly. - Move toward a more flexible exchange rate policy to absorb external shocks. - NBM under increasing political pressure to keep the leu stable. - Financial sector: - Address vulnerabilities identified by the FSAP despite positive financial soundness indicators. - Structural reforms and business environment: - Decisive shift away from state intervention, open the country to foreign investment, fight corruption, and maintain a liberal trade regime. - Program engagement: - Authorities expressed interest in a Fund program; convincing reform track record under the EGPRSP plus tighter short-term financial policies could pave way for future Fund support. ### External debt restructuring and arrears - Major agreement in May 2004 with Gazprom: buyback of promissory notes with a face value of $114.5 million for a cash payment of about $50 million, financed by the NBM. - Buyback with Hewlett Packard finalized; reschedulings agreed with the Export Credit Bank of Turkey and with Romania. - Outstanding arrears were halved in 2004. - Text Table 1 (selected figures): - Stock, end-2003: 864.4 (Millions of U.S. dollars) - Clearance of arrears through buybacks and rescheduling, 2004: 613.1 - New arrears, net, 2004: 160.8 - Stock, end-2004 (Estimate): 412.1 ### Impact of higher petroleum prices and energy dependence - Moldova depends heavily on imports for domestic primary energy—up to a 100 percent for natural gas and petroleum products. - Petroleum consumption grew 30 percent between 2000 and 2003; in 2003 petroleum products accounted for 10 percent of total imports (7.3 percent of GDP). - Staff estimates: an oil price increase of $10 per barrel would raise the trade deficit by 2.5 percent of GDP and consumer prices by 2–2.5 percent. - Using Russia’s export estimate of 6.7 million barrels per day, an oil price increase of $10 per barrel yields Russia incremental revenue of $24 billion annually; if about one-third is spent on additional imports and Moldova maintained export share, Moldova’s incremental exports could fully offset higher energy import bill. - First nine months of 2004: exports to Russia grew by 18 percent relative to the same period in 2003, in excess of the 16 percent needed to finance higher petroleum import costs. ### Monetary and financial developments - Large remittance inflows in 2003–04 created tension among objectives: lower inflation, contain leu appreciation, accumulate reserves, keep interest rates low. - NBM intervened heavily; international reserves hit a record high of $392 million at end-September 2004. - By end-October 2004 both reserve and broad money were growing at over 30 percent (y-o-y). - Since July 2004 NBM permitted required reserves for foreign exchange deposits to be met with foreign exchange. - Credit to the private sector rose from 14 to 22 percent of GDP between 2000 and Q3 2004. - Share of nonperforming loans dropped by two-thirds in the same period; share of loans under supervision edged up. - Financial soundness indicators strong, but credit growth rapid and lending rates high, signaling substantial risk premium. ### Macroeconomic outlook and scenarios - Short-term outlook: - Regional growth should remain robust and remittances unlikely to dry up in immediate future. - GDP growth projected to moderate to 5 percent in 2005 as consumption growth slows. - Authorities’ end-year inflation target (10 percent) deemed hard to reach; inflation target for 2005 is 8-10 percent. - Remittances expected to continue boosting imports and pushing up the leu; trade deficit unlikely to improve. - Downside risks: adverse weather and external shocks, including slowdown in Russia and EU. - Medium-term prospects: - Without acceleration of structural reforms and appropriate fiscal adjustment, consumption-driven expansion likely short-lived. - Staff scenarios: - Baseline scenario (unchanged policies, based on authorities’ plans): - GDP growth would decelerate to 3 percent by 2007. - Financing gaps of 0.9-2.4 percent of GDP would emerge during 2005-07, likely financed through further accumulation of external arrears. - Alternative scenario (bolder structural reforms and tighter fiscal stance): - Primary expenditure growth constrained to 14 percent (versus 16.3 percent in baseline). - Constraint would allow 4.2 percent real expenditure growth in 2005. - Measures would allow Moldova to fully service current external debt obligations, though arrears issue would remain unresolved. - Medium-term fiscal stance could be relaxed with mobilization of external financing to reduce government’s debt to NBM, clear external arrears partially, or boost priority spending. ### Fiscal stance, policy trade-offs, and reform priorities - Fiscal developments: - Fiscal stance loosened considerably in 2004. - Primary expenditure estimated to have exceeded original budget projections by 2.5 percent of GDP. - Staff expects general government deficit to have reached 1.1 percent of GDP in 2004 (versus 0.4 percent in original budget). - 2005 state budget (approved November 2004) and decision to raise pensions by a minimum of 25 percent point to a general government deficit of 2.5 percent of GDP in 2005. - Fiscal outlook table (percent of GDP): - 2005: Revenue 33.8; Expenditure 36.3; Overall balance -2.5 - 2006: Revenue 32.7; Expenditure 34.8; Overall balance -2.0 - 2007: Revenue 32.3; Expenditure 34.4; Overall balance -2.1 - Staff arguments for fiscal tightening: - Without fresh financing, expansionary stance implies continuing buildup of arrears. - Complicates NBM’s efforts to control inflation. - Emerging primary deficits pose risks under low growth and higher interest rates. - Risk of lower-than-projected privatization receipts and budget grants. - Revenue and tax policy: - Staff recommended more gradual tax cuts and measures to broaden the taxable base—eliminate VAT exemptions and domestic zero-rating, simplify VAT administration. - Recently introduced exemptions for VAT and profit taxes for new domestic investment viewed as a step in the wrong direction (though they level treatment with foreign investors). - Projected revenue increases in 2005: Social Fund 28 percent and Health Fund 24 percent; wage bill growth projected at 18 percent may render projections optimistic. - Heavy reliance on VAT: estimated at 37 percent of total tax revenue in 2004. ### Expenditure plans for 2005 and Social Fund sustainability - 2005 expenditure plans entail significant increase in consolidated primary spending toward social sector, agriculture, transportation, and communications. - November 2004 pension hike negative for Social Fund sustainability: - In 2004 hike financed by savings in other social benefits and drawdown in bank balances. - From 2005 authorities may have to tap the reserve fund. - Authorities recognize need for Social Fund reform, including broadening contribution base and lowering rates. - Staff stressed future benefit changes must factor emigration impact on contribution base and be accompanied by contribution adjustments. ### Wage policy, civil service reform, and public administration - Consolidated government wage bill projected to increase by 44 percent in 2004–07 due to alignment of wage scales. - Staff emphasized linking wage policy with civil service reform. - Authorities intend to implement civil service reform as envisaged in the EGPRSP. ### Fiscal transparency and Health Fund - Improvements: integration of income from special funds and donor-financed projects into the budget; 2005 plans based on 2005–07 medium-term expenditure framework. - Health Fund launched in 2004; performance needs close monitoring given uncertainty about contributions from non-salaried subscribers. ### Financial sector vulnerabilities and supervision - FSAP highlighted weaknesses: increasing government influence, opaque ownership structures, governance issues from lack of strategic investors. - Concerns: - Administrative interference, dominant state role in one of largest banks, preferential treatment of state-owned insurance company, and government’s large debt to NBM. - Opaque ownership complicates supervision. - Recommendations: - Encourage business climate improvements to attract foreign investors. - Warn about adverse impact of credit boom. - NBM should adhere to international practice and transfer profits to the government only once a year, following annual audit. ### Structural policies, business environment, and anti-corruption - Structural reforms moving slowly; government intervention widespread, corporate governance weak, corruption pervasive. - Progress: - Completion of EGPRSP; simplification of licensing and business registration; new laws on microfinance and investment; review of audit, accounting, and leasing laws; renewed anti-corruption attempts; progress on fiscal reform. - Concerns: - Privatization stalled; price controls and export restrictions distort incentives. - Policy priorities: - Strengthen EGPRSP implementation to improve investor confidence. - Channel remittances into investment by improving business environment and stemming emigration. - Tighten fiscal policy temporarily to close financing gaps and enable resumption of debt servicing. ### External sector: debt, remittances, and trade regime - External public debt service a near-term challenge despite recent agreements and leu appreciation reducing the external debt burden. - Authorities seek external financing and a Fund-supported program to allow possible Paris Club rescheduling and unlock donor assistance. - Debt indicators improving although short-term liquidity problems likely. - Remittances dependence: - Balance of payments heavily dependent on remittances; large-scale emigration generates at least 25-30 percent of GDP in workers’ remittances. - Trade regime: - Formally fairly liberal: weighted average tariff 4.6 percent and no quantitative restrictions, but de facto restrictions widespread. - Staff objected to selective restrictions, including requirement that certain agricultural products be exported only through the Commodity Exchange. ### Technical assistance - Intense IMF technical assistance in past year incorporated in financial and monetary statistics, payments system, fiscal transparency, and budget coverage. - FSAP-related projects in pipeline, including TA on foreign exchange regulations and monitoring, and sequencing of possible capital account liberalization. - Strong interest from technical counterparts in Fund expertise. ### Staff appraisal — main conclusions and policy recommendations - Macroeconomic performance satisfactory and short-run outlook positive, but recovery rests on vulnerable foundations: - Rapid growth owes much to remittances; structural reforms stalled; difficult business climate holds back investment. - Required policy directions: - Radical shift away from interventionist policies to support private sector development and foreign investment. - Push structural reform agenda and steadfastly implement EGPRSP policies. - Tackle corruption as a major stumbling block. - Fiscal policy: - Short run: support NBM efforts to control inflation. - Medium term: secure sustainable public finances via tighter short-run fiscal stance, improved tax administration, broadened tax base (including removing exemptions), and forward-looking budgetary planning. - Monetary policy: - Emphasize inflation objective; tighten stance to counteract rising inflationary pressures from expansionary fiscal stance, rapid credit growth, and strong FX inflows. - Continue sterilization and allow exchange rate to appreciate if inflows grow rapidly; adopt more flexible exchange rate policy. - Trade and competitiveness: - Remove impediments to trade and accelerate structural reforms; exports concentrated in few commodities and markets. - Financial sector: - Reduce government role and administrative interference, increase competition, and monitor risks from opaque ownership and the credit boom. - External debt: - Recent negotiations improved debt profile; resumption of Paris Club interest payments important; outstanding arrears need credible policy changes before creditors commit to debt relief. - Statistical capacity: - Official statistics timely and generally adequate, though shortcomings remain in price and national accounts statistics; authorities encouraged to build on progress with Fund TA. ### Data quality and statistical issues - Overall: Official statistics "generally adequate for surveillance and program monitoring" but shortcomings remain in national accounts and price statistics; lack of updated census hampers analysis. - National accounts: - Prepared per 1993 SNA; estimates exclude Transnistria. - Needs: compiling annual and quarterly GDP in constant prices; benchmarking; estimating consumption of fixed capital per international standards. - Price statistics: - Price collection limited geographically; missing price data not imputed by standard procedure; CPI basket weights derived primarily from Household Budget Survey and need improvement. - Labor market: - No unemployment data following ILO methodology; wage data exclude fringe benefits. - Fiscal statistics: - Outstanding recommendations from 1999 GFS mission: improve consolidation, reclassify financing data, report monthly fiscal data to STA. - Balance of payments: - Issues include under-reporting of imports/exports, services data, measurement of private capital inflows, and treatment of Transnistria transactions. - Monetary statistics: - Improved after TA; remaining shortcomings on definitions, treatment of nonoperating banks, valuation, and institutional coverage. ### Debt sustainability, sensitivity analysis, and stress tests - Total external debt: - End-2004 estimated about $1,635 million (compared to $1,752 million at end-2003). - External debt as percent of GDP: 63 percent at end-2004 (90 percent at end-2003 reported elsewhere in text). - NPV of debt-to-exports ratio fell to 102 percent at end-2004 (from 138 percent at end-2003). - Public and publicly-guaranteed (PPG) debt at end-2004 about $930 million or 36½ percent of GDP (compared to about 50 percent at end-2003). - Public domestic debt increased by 1 percentage point to about 11½ percent of GDP in 2004, mainly due to large loan from NBM to finance Gazprom buyback; government plans to start repaying that loan in 2005. - Staff view: Moldova faces more of a liquidity problem than structural debt sustainability problem; baseline projects improving debt indicators through 2012. - Selected projections (external debt, percent of GDP): - 2001: 105.6; 2002: 101.2; 2003: 89.5; 2004: 63.3; 2005: 58.4; 2012: 48.5. - NPV of external debt (percent of exports), 2004–2012: - 2004: 138.1; 2005: 101.6; 2006: 87.5; 2007: 82.7; 2008: 80.3; 2009: 76.8; 2010: 72.5; 2011: 67.7; 2012: 63.1. - Debt service-to-exports ratio (percent), 2001–2012: - 2001: 25.1; 2002: 28.2; 2003: 21.2; 2004: 21.3; 2005: 17.2; 2012: 12.2. - Sensitivity and stress tests presented (examples): - A1. "Real GDP growth and primary balance are at historical averages" - A2. "Primary balance is unchanged from 2004" - A3. "Permanently lower GDP growth 1/" (footnote: assumes real GDP growth is baseline minus one standard deviation divided by square root of 20) - B4. "One time 30 percent real depreciation in 2005" - B5. "10 percent of GDP increase in other debt-creating flows in 2005" - Policy implications from debt analysis: - Renewed IFI involvement, concessional loans and grants, and further rescheduling would ease financing gaps. - Maintain fiscal discipline, continue arrears reduction, normalize creditor relations, and pursue structural reforms to reduce vulnerabilities. ### Quantitative highlights and historical indicators (selected, 2000–05) - Real growth rate: 2.1 (2000); 6.1 (2001); 7.8 (2002); 6.3 (2003); 7.0 (2004); 5.0 (2005). - Nominal GDP (MDL million): 16,020 (2000); 27,297 (2003); 31,836 (2004); 36,779 (2005). - Nominal GDP ($ million): 1,289 (2000); 1,957 (2003); 2,582 (2004); 2,861 (2005). - CPI Inflation (average): 31.3 (2000); 11.7 (2003); 12.3 (2004); 10.0 (2005). - Foreign saving (percent of GDP): 8.2 (2000); 6.8 (2003); 6.7 (2004); 6.3 (2005). - Gross investment (percent of GDP): 15.4 (2000); 17.1 (2003); 18.0 (2004); 17.4 (2005). - Current account balance (percent of GDP): -8.2 (2000); -6.8 (2003); -6.7 (2004); -6.3 (2005). - Gross official reserves (millions of U.S. dollars): 226.0 (2000); 302.3 (2003); 421.3 (2004); 504.7 (2005). - Broad money (M3) growth (annual percent change): 36.0 (2002); 30.7 (2003); 25.8 (2004); 32.9 (2005). - Credit to the economy (percent change, annual): 34.3 (2002); 45.4 (2003); 31.9 (2004); 21.9 (2005). - Financial sector indicators (selected): - Number of banks: 16 (2004 end-Sep). - Total assets of banking system (percent of GDP): 39 (2004 end-Sep). - Nonperforming loans as share of total loans: 7 (2004 end-Sep). ### Medium-term projections (baseline and alternative, selected) - Baseline (real growth rate): 6.3 (2003); 7.0 (2004); 5.0 (2005); 4.0 (2006); 3.0 (2007–2009). - Baseline inflation (average): 11.7 (2003); 12.3 (2004); 10.0 (2005); 8.1 (2006); 5.9 (2007); 5.0 (2008–2009). - Baseline financing gap (flow, percent of GDP): 0.0 (2003); 0.1 (2004); 0.9 (2005); 2.2 (2006); 2.4 (2007). - Alternative scenario (selected): - Real growth rate: 6.0 (2006–2008); 5.0 (2009). - Primary balance (cash, percent of GDP): 0.4 (2006); 1.8 (2007); 1.6 (2008); 1.4 (2009). - Overall balance (cash, percent of GDP): -1.6 (2006); 0.2 (2007); 0.3 (2008); 0.4 (2009). - Financing gap (flow, percent of GDP): 0.0 in 2006–09. - Total public debt stock/GDP, percent (alternative): 40.0 (2006); 36.7 (2007); 33.7 (2008); 30.7 (2009). ### IMF relations, program history, and technical assistance (selected) - Membership Status: Joined August 12, 1992; Article VIII. - Quota: 123.20 (SDR million) = 100.00 percent of Quota. - Fund holdings of currency: 176.85 (SDR million) = 143.54 percent of Quota. - Outstanding purchases and loans: Extended arrangements 53.65 (SDR million) = 43.54 percent of Quota; PRGF arrangements 27.72 (SDR million) = 22.50 percent of Quota. - PRGF: approved 12/21/2000 — 12/20/2003; Amount approved 110.88 (SDR million); Amount drawn 27.72 (SDR million). - EFF: 05/20/1996 — 05/19/2000; Amount approved 135.00 (SDR million); Amount drawn 87.50 (SDR million). - Program outcomes: EFF expired May 19, 2000 without completion of last review; PRGF expired December 2003 with only one review completed and left ¾ of available funds undisbursed. - Technical assistance 1999–2004: extensive missions across MAE, STA, FAD, LEG, MFD in monetary operations, GFS, tax and customs administration, payments system, banking legislation, national accounts, price statistics, AML, LTU and VAT modernization, and foreign exchange regulation. *Italic: Executive Summary and selected sections from IMF Country Report _cr0548 (provided PDF content).* ### Executive Summary ...................................................................................................... ### _cr0548 - Executive Summary ### Background and political context - Parliamentary elections slated for March 6, 2005; no major change in economic policies expected before the elections. - An Action Plan for enhanced cooperation with the EU within the European Neighborhood Policy has been finalized; endorsement expected early in 2005. - The long-standing conflict in Transnistria remains unresolved and aggravates political risks and hampers growth prospects (Box 1): - Before the breakup, Transnistria accounted for about 40 percent of Soviet Moldova’s GDP, 15 percent of its population, and 12.5 percent of its territory. - The unresolved conflict fosters opportunities for tax evasion, smuggling, and other illegal activities and complicates any solution because Transnistria has large external debt (mainly for energy supplies from Russia). ### Recent macroeconomic performance - GDP growth and drivers: - GDP grew by 6.3 percent in 2003 and is estimated to advance by another 7 percent in 2004, largely driven by domestic consumption. - Consumption was fueled by a marked increase in real wages and pensions and large and rising workers’ remittances. - Fixed investment was boosted by a construction boom but, at around 18 percent of GDP, remains relatively low to support long-term growth. - Net trade contributed negatively to growth despite strong export performance. - Remittances and external financing: - Officially-recorded remittances reached almost 25 percent of GDP in 2003 and continued to grow rapidly in 2004. - Remittances have helped finance growing imports, boosted VAT collection (about two-thirds of VAT proceeds in 2004 came from imports), and provided a safety net, but also contributed to strengthening the leu. - Actual remittance figures could be significantly higher than officially recorded. - Labor market and wages: - At least 25 percent of the labor force emigrated following the 1998 crisis. - Labor shortages have emerged in some sectors (construction, transportation, and agriculture), pushing up wages (Figure 3). - Moldova’s per capita gross national disposable income was $689 in 2003. - Inflation and exchange rate: - Headline CPI inflation peaked at 17 percent in October 2003 and has moderated to low double-digits. - The appreciating leu has helped attenuate the impact of higher oil prices. - During the first three quarters of 2004, the leu rose by 9.3 percent in nominal effective terms. - External competitiveness and trade: - Despite a marked real exchange rate appreciation, external competitiveness appears favorable: exports have grown briskly and dollar wages are well below those in neighboring countries. - Exports to the EU were particularly vibrant in 2003–04, reflecting the euro’s strength, frontloading of export contracts ahead of enlargement, and a sharp increase in textile exports based on import-for-export arrangements. ### Risks to sustainability and staff assessment - Key risks identified by staff that call for policy adjustment: - Rising inflationary pressures driven by an expansionary fiscal stance, fast credit growth, and strong foreign currency inflows. - Emerging capacity constraints associated with rapid demand growth and labor shortages. - A difficult business environment and lingering vulnerability to external shocks. - Heavy reliance on remittances, which has eased pressure for reforms and could mask external financing needs. - Implementation constraints: - Implementation of Fund advice has been marred by weak ownership at the highest political levels, lack of political consensus for reforms, and capacity constraints (Box 2). - Structural reforms advocated by the Fund and other IFIs have been uneven and incomplete, reflecting resistance from vested interests and insufficient attention to political economy constraints. ### Policy recommendations and priorities - Fiscal policy: - Fiscal policy should be tightened to help make room for current external debt service and support the central bank’s efforts to control inflation. - To ensure fiscal sustainability, fiscal policy would benefit from a more forward-looking perspective and greater reliance on a medium-term expenditure framework. - Monetary and exchange rate policy: - Monetary policy should place greater emphasis on the inflation objective, allowing the exchange rate to appreciate if foreign exchange inflows continue to grow rapidly. - Going forward, a more flexible exchange rate policy would serve Moldova well in absorbing possible external shocks. - The central bank appears to be under increasing political pressure to keep the leu stable. - Financial sector: - Financial soundness indicators are positive, but financial sector vulnerabilities identified by the FSAP need to be addressed. - Structural reforms and business environment: - Without an acceleration in structural reforms leading to a clear improvement in the business environment, economic recovery is likely to be short-lived. - The reform agenda should include a decisive shift away from state intervention in economic activity, a more determined effort to open the country to foreign investment and to fight corruption, while maintaining a liberal trade regime. - Program engagement: - The authorities have reiterated their interest in a Fund program. - A convincing track record of reform implementation in the context of the EGPRSP, coupled with tighter short-term financial policies, could pave the way for future Fund financial support. ### Summary of salient quantitative indicators (as reported) - GDP growth: 6.3 percent in 2003; estimated 7 percent in 2004. - Remittances: almost 25 percent of GDP in 2003. - Fixed investment: around 18 percent of GDP. - Per capita gross national disposable income: $689 in 2003. - Emigration: at least 25 percent of the labor force. - Peak headline CPI inflation: 17 percent in October 2003; thereafter moderated to low double-digits. - Leu nominal effective appreciation: 9.3 percent during the first three quarters of 2004. *Executive Summary (IMF Country Report _cr0548).* ### 8. Recent external debt restructuring agreements helped improve the medium-term debt ### 8. Recent external debt restructuring agreements helped improve the medium-term debt ### External debt restructuring and arrears - Major agreement in May 2004 with Gazprom: buyback of promissory notes with a face value of $114.5 million for a cash payment of about $50 million, financed by the NBM. - Together with the leu appreciation vis-à-vis the dollar, this resulted in a marked decline in the external debt/GDP ratio. - Authorities also finalized a buyback with Hewlett Packard and agreed reschedulings with the Export Credit Bank of Turkey and with Romania. - Consequently, outstanding arrears were halved in 2004. - Text Table 1 (as presented): - Stock, end-2003 864.4 (Millions of U.S. dollars; Percent of GDP 1/; 1/ 2003 GDP.) - Clearance of arrears through buybacks and rescheduling, 2004 613.1 - New arrears, net, 2004 160.8 - Stock, end-2004 2/ 412.1 (2/ Estimate.) - Sources for arrears numbers: Moldovan authorities; and staff calculations. ### Impact of higher petroleum prices and energy dependence (Box 3) - Moldova depends heavily on imports for domestic primary energy needs—up to a 100 percent in the case of natural gas and petroleum products. - Petroleum consumption grew 30 percent between 2000 and 2003; in 2003 petroleum products accounted for 10 percent of Moldova’s total imports (7.3 percent of GDP). - Staff estimates: an oil price increase of $10 per barrel would raise Moldova’s trade deficit by 2.5 percent of GDP and consumer prices by 2–2.5 percent. - Using an estimate of 6.7 million barrels per day for Russia’s petroleum exports, Russia’s incremental revenue from an oil price increase of $10 per barrel would be $24 billion annually. - If about one-third of this were spent on additional imports—and Moldova succeeded in maintaining its export share—Moldova’s incremental exports would offset fully the higher energy import bill. - Data for the first nine months of 2004: exports to Russia grew by 18 percent relative to the same period in 2003, in excess of the 16 percent needed to finance higher petroleum import costs. ### Monetary and financial developments - Large inflows of remittances in 2003-04 created tensions among monetary policy objectives: bringing down inflation, containing leu appreciation, accumulating international reserves, and keeping interest rates low. - With inflation moderating in 2004, the NBM intervened heavily; international reserves hit a record high of $392 million at end-September. - By end-October 2004 both reserve and broad money were growing at over 30 percent (y-o-y). - Following Fund advice, since July 2004 the NBM has been gradually implementing a system where required reserves for foreign exchange deposits can be met with foreign exchange. - Credit to the private sector rose from 14 to 22 percent of GDP between 2000 and the third quarter of 2004. - The share of nonperforming loans dropped by two-thirds in the same period, although the share of loans under supervision edged up. - Financial soundness indicators are strong, but credit continues to grow rapidly and lending rates have remained high, signaling a substantial risk premium on private sector credit. ### Macroeconomic outlook and scenarios - Short-term outlook: regional growth should remain robust and remittances are unlikely to dry up in the immediate future. - GDP growth is projected to moderate to 5 percent in 2005, as consumption growth slows down. - The authorities’ end-year inflation target (10 percent) was deemed hard to reach; their inflation target for 2005 is 8-10 percent. - On current trends, remittances should continue to boost imports and push up the leu; the trade deficit is unlikely to improve. - Downside risks include adverse weather conditions and external shocks, including a slowdown in Russia and in the EU. - Medium-term prospects subject to greater uncertainty; staff view: without acceleration of structural reforms and an appropriate fiscal adjustment, the current consumption-driven expansion is likely to be short-lived. - Staff prepared two scenarios to illustrate medium-term options: - Baseline scenario: assumes unchanged policies and is based on the authorities’ fiscal and monetary plans. - Under the baseline, GDP growth would decelerate to 3 percent by 2007. - Financing gaps of 0.9-2.4 percent of GDP would emerge during 2005-07, likely financed through further accumulation of external arrears. - Alternative scenario: assumes bolder structural reforms and a tighter fiscal stance, with monetary policy targeting the same inflation path. - To close fiscal financing gaps, primary expenditure growth should be constrained to 14 percent (versus the 16.3 percent increase in the baseline). - This constraint would still make room for 4.2 percent real expenditure growth in 2005. - These measures would allow Moldova to fully service its current external debt obligations, but would still leave the arrears issue unresolved. - Medium-term fiscal stance could be relaxed with mobilization of external financing; additional resources could reduce the government's debt to the NBM, partially clear external arrears, or boost priority spending. ### Fiscal stance, policy trade-offs, and reform priorities - Fiscal developments and projections: - The fiscal stance was loosened considerably in 2004. - Primary expenditure is estimated to have exceeded original budget projections by 2.5 percent of GDP, largely due to overruns at local government level and higher Social Fund spending. - Budget revision in October 2004; staff expects the general government deficit to have reached 1.1 percent of GDP in 2004 (versus a deficit of 0.4 percent of GDP in the original budget). - 2005 state budget (approved November 2004) and a decision to raise pensions by a minimum of 25 percent point to a general government deficit of 2.5 percent of GDP in 2005. - Text Table 3: Moldova: Fiscal Outlook for 2005–07 (In percent of GDP) - 2005 2006 2007 - Revenue 33.8 32.7 32.3 - Expenditure 36.3 34.8 34.4 - Overall balance -2.5 -2.0 -2.1 - Sources: Moldovan authorities; and staff projections. - Staff arguments for fiscal tightening: - Without fresh financing, the expansionary stance implies continuing buildup of debt payment arrears. - It complicates the NBM’s efforts to control inflation. - Emerging primary deficits signal potential risks in a scenario with low growth and higher interest rates. - Risk of lower-than-projected privatization receipts and budget grants from foreign donors. - A tighter fiscal stance would allow the government to resume debt payments to the NBM. - Revenue and tax policy risks: - Revenue performance depends on continuation of economic growth and success in expanding the taxable base. - Staff recommended a more gradual approach to tax cuts and measures to broaden the tax base—eliminating VAT exemptions and domestic zero-rating, and simplifying VAT administration. - Recently introduced exemptions for VAT and profit taxes for new domestic investment were viewed as a step in the wrong direction (although they level treatment with foreign investors). - Projected revenue increases: Social Fund 28 percent and Health Fund 24 percent in 2005; projection may be optimistic given wage bill growth projected at 18 percent. - Heavy reliance on VAT: estimated at 37 percent of total tax revenue in 2004, implying high sensitivity to changes in consumer spending and imports. ### Structural reforms and business environment - Structural reforms continue to move slowly: government intervention remains widespread, political and corporate governance are weak, and corruption is pervasive. - The business environment is among the most difficult in the region, with high transaction costs holding back private sector-led growth. - Progress noted: - Completion of the EGPRSP. - Efforts to simplify licensing and business registration. - Adoption of new laws on microfinance and on investment (unifying treatment of foreign and domestic investors). - Review of laws on audit, accounting, and leasing. - Renewed attempt to curb corruption. - Progress on fiscal reform. - Areas of concern: - Privatization has stalled, with several enterprises removed from the privatization program. - Price controls and export restrictions continue to distort incentives; higher rates of effective protection apply to selected sectors. - Policy priorities emphasized: - Strengthen implementation of EGPRSP measures to improve investor confidence. - Channel remittances into investment by improving the business environment and stemming emigration. - Tighten fiscal policy temporarily to close financing gaps and enable resumption of debt servicing to domestic and external creditors. *Source: Moldovan authorities; and staff calculations.* ### 21. Expenditure plans for 2005 entail a significant increase in consolidated primary ### _cr0548 - 21. Expenditure plans for 2005 entail a significant increase in consolidated primary ### Expenditure plans and Social Fund sustainability - Expenditure plans for 2005 entail a significant increase in consolidated primary spending to direct more resources to the social sector, agriculture, transportation, and communications. - The November 2004 pension hike will have a negative impact on Social Fund sustainability. - In 2004 the hike was financed by savings in other social benefit payments and a drawdown in bank balances. - Starting from 2005 the authorities may have to tap the reserve fund. - Authorities recognize the need for Social Fund reform, including broadening the contribution base and lowering rates. - Staff cautioned that future changes in benefits should factor in the potential impact of emigration on the contribution base and should be accompanied by adjustments in contributions to ensure the Social Fund’s long-term viability. - Corporate and personal income tax rates were reduced in 2004; further cuts are envisaged for 2005-07. ### Fiscal management, medium-term framework, and risks - Key medium-term fiscal challenges: effective expenditure management, realistic revenue projections, and a more efficient tax administration. - Recommendations and observations: - Align the overall size and composition of public spending more closely to development needs through better prioritization and improved public service delivery. - Review the role and optimal size of government; current government size is relatively high for Moldova’s level of income (Figure 9). - The medium-term expenditure framework should avoid relying on continued fiscal revenue gains of the size experienced recently. - A comprehensive reform of tax administration should be a cornerstone to strengthen revenue performance. - The lack of contingency revenue and expenditure measures poses further risks to the fiscal outlook. ### Wage policy, civil service reform, and public administration - Authorities’ medium-term spending plans reflect high social demand and unsustainably low wages in education and health care. - Consolidated government wage bill is projected to increase by 44 percent in 2004–07, largely due to alignment of wage scales within the government sector. - Staff emphasized the need to consider wage policy in conjunction with civil service reform. - Authorities acknowledged the public administration is not sufficiently adapted to market-economy requirements and confirmed intention to implement civil service reform as envisaged in the EGPRSP. ### Fiscal transparency and Health Fund - Notable improvements in fiscal planning and budget elaboration: - Integration of income from special funds and donor-financed projects into the budget (in line with ROSC recommendations). - 2005 expenditure plans were based on the 2005–07 medium-term expenditure framework. - Launch of the Health Fund in 2004 offers a basis for greater financial accountability in health care management. - Performance needs close monitoring given high uncertainty about the amount of contributions from non-salaried subscribers. ### Monetary and exchange rate policy - Staff reiterated that monetary policy should assign priority to fighting inflation and advised tightening monetary policy to stem inflationary pressures and bring inflation down to single digits in the medium term. - NBM actions and tools: - NBM stepped up sterilization efforts in recent months. - NBM certificates will be used as a new liquidity management tool in 2005. - Staff welcomed more intense use of monetary policy instruments and argued for willingness to allow the leu to appreciate further in the face of strong demand. - Reserve accumulation: - Some precautionary accumulation of reserves from current low levels of about 2 months of imports would be appropriate as long as it did not jeopardize the inflation objective. - Political and operational constraints: - NBM appears under increasing political pressure to keep the leu stable; following intensified government criticism in early November the leu/dollar exchange rate stabilized remarkably (Figure 10), raising questions about de facto independence. - Staff urged NBM to restrict interventions to smoothing short-term exchange rate fluctuations and advocated a more flexible exchange rate policy capable of absorbing external shocks. - Fiscal support to monetary policy: - Staff advised authorities to work out a plan to gradually reduce the government’s debt to the NBM, currently about 8½ of GDP. - 2005 budget envisages some repayments, contingent on (uncertain) privatization revenues. ### Financial sector vulnerabilities and supervision - FSAP highlighted weaknesses: increasing government influence, opaque ownership structures, governance issues from lack of strategic investors. - Concerns and recommendations: - Administrative interference in the financial sector, including dominant state role in one of the largest banks, preferential treatment of the state-owned insurance company, and the government’s large debt to the NBM. - Opaque ownership structures of financial institutions and corporations create risks and complicate banking supervision. - Encourage improvements to the business climate to attract foreign investors. - Warned about potential adverse impact of the recent credit boom. - Encouraged NBM to adhere to international practice and transfer profits to the government only once a year, following its annual audit. ### Structural policies and business environment - Staff argued a fundamental policy shift is required to re-launch economic reform, urging alignment with the EGPRSP and acceleration of its implementation. - Priority structural measures: - Simplify government regulations, remove opportunities for administrative discretion, and eliminate restrictions to free trade. - Refrain from granting tax holidays and exemptions to priority sectors. - Improve the business environment to strengthen ties with the EU and attract investment. - Anti-corruption efforts: - Recently approved anti-corruption strategy is a step in the right direction but effective implementation and monitoring are crucial. - Staff underscored importance of establishing clear functional and institutional separation between objectives of fighting corruption and fighting “economic crime”; authorities disagreed, viewing corruption as intimately tied to economic crime. ### External sector: debt, remittances, and trade regime - External public debt service will remain a near-term challenge despite recent agreements and leu appreciation reducing the external debt burden. - Authorities seek external financing and a Fund-supported program to allow possible Paris Club rescheduling and help unlock donor assistance. - Staff urged fiscal adjustment to create room for servicing current debt obligations and structural reforms to remove obstacles to private-sector-led growth. - Debt sustainability and liquidity: - Debt indicators show continuing improvement although liquidity problems will likely arise in the short term (Appendix V). - Remittances dependence: - Balance of payments heavily dependent on continued inflows of remittances; should these dry up, immediate impact on the exchange rate and balance of payments could be significant. - Large-scale labor emigration generates at least 25-30 percent of GDP in workers’ remittances. - Trade regime: - Formally fairly liberal with a low weighted average tariff (4.6 percent) and no quantitative restrictions, but de facto restrictions are widespread. - Staff objected to selective restrictions on exports and imports, including regulation requiring certain agricultural products be exported only through the Commodity Exchange. - Staff cautioned against protection of special interests and stressed benefits of a stable, transparent, and uniform tariff regime; authorities did not acknowledge informal trade restrictions. ### Technical assistance - Moldova benefited from intense IMF technical assistance over the past year. - Fund advice incorporated in financial and monetary statistics, the payments system, fiscal transparency, and budget coverage. - Several FSAP-related projects are in the pipeline, including technical assistance on foreign exchange regulations and monitoring, and sequencing of possible capital account liberalization. - Strong interest from staff’s technical counterparts in Fund expertise and advice. ### Staff appraisal — main conclusions and policy recommendations - Recent macroeconomic performance satisfactory and short-run outlook positive, but recovery rests on vulnerable foundations: - Rapid growth owes much to large and rising workers’ remittances; structural reforms have stalled; difficult business climate holds back investment. - Key challenges and required policy directions: - Radical shift away from interventionist policies to create an environment supportive of private sector development and foreign investment. - Push structural reform agenda forward; steadfast implementation of EGPRSP policies is essential. - Tackle corruption as a major stumbling block to structural reform. - Fiscal policy: - In the short run, fiscal policy should buttress NBM efforts to control inflation. - In the medium term, secure sustainable public finances through a tighter short-run fiscal stance, improvements in tax administration, measures to broaden the tax base (including removing exemptions), and more forward-looking budgetary planning. - Monetary policy: - Place greater emphasis on the inflation objective; tighten stance to counteract rising inflationary pressures given expansionary fiscal stance, rapid credit growth, and strong foreign currency inflows. - Continue sterilization efforts and allow the exchange rate to appreciate if inflows continue to grow rapidly; adopt a more flexible exchange rate policy to absorb external shocks. - Trade and competitiveness: - Remove impediments to trade and accelerate structural reforms to improve long-term competitiveness; exports remain concentrated in a few commodities and markets. - Financial sector: - Reduce government role and administrative interference, increase competition, and intensively monitor sectoral risks arising from opaque ownership structures and the credit boom. - External debt: - Recent negotiations successful in improving the debt profile; resumption of Paris Club interest payments is important, but outstanding arrears still need to be tackled and external creditors will seek credible policy changes before committing to debt relief. - Statistical capacity: - Official statistics are timely and generally adequate, though shortcomings remain in price and national accounts statistics; authorities encouraged to build on progress with Fund technical assistance. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 46. Staff recommends that the next Article IV consultation be held within the regular ### _cr0548 - 46. Staff recommends that the next Article IV consultation be held within the regular ### Article IV recommendation - Staff recommends that the next Article IV consultation be held within the regular 12-month cycle. ### Real sector and inflation (selected historical indicators, 2000–05) - Real growth rate: 2.1 (2000); 6.1 (2001); 7.8 (2002); 6.3 (2003); 7.0 (2004); 5.0 (2005) - Nominal GDP (MDL million): 16,020 (2000); 19,052 (2001); 22,556 (2002); 27,297 (2003); 31,836 (2004); 36,779 (2005) - Nominal GDP ($ million): 1,289 (2000); 1,480 (2001); 1,662 (2002); 1,957 (2003); 2,582 (2004); 2,861 (2005) - CPI Inflation (average): 31.3 (2000); 9.8 (2001); 5.3 (2002); 11.7 (2003); 12.3 (2004); 10.0 (2005) - CPI Inflation (end of period, y-o-y): 18.5 (2000); 6.4 (2001); 4.4 (2002); 15.7 (2003); 11.0 (2004); 9.5 (2005) ### Saving–investment and external balances (2000–05) - Foreign saving (percent of GDP): 8.2 (2000); 2.5 (2001); 4.4 (2002); 6.8 (2003); 6.7 (2004); 6.3 (2005) - National saving (percent of GDP): 7.2 (2000); 14.2 (2001); 11.9 (2002); 10.3 (2003); 11.3 (2004); 11.1 (2005) - Private saving: 5.7 (2000); 12.4 (2001); 9.9 (2002); 7.1 (2003); 10.5 (2004); 11.5 (2005) - Public saving: 1.5 (2000); 1.9 (2001); 2.0 (2002); 3.2 (2003); 0.8 (2004); -0.4 (2005) - Gross investment (percent of GDP): 15.4 (2000); 16.7 (2001); 16.3 (2002); 17.1 (2003); 18.0 (2004); 17.4 (2005) - Current account balance (millions of U.S. dollars): -105.7 (2000); -37.4 (2001); -73.9 (2002); -132.4 (2003); -172.2 (2004); -180.6 (2005) - Current account balance (percent of GDP): -8.2 (2000); -2.5 (2001); -4.4 (2002); -6.8 (2003); -6.7 (2004); -6.3 (2005) - Gross official reserves (millions of U.S. dollars): 226.0 (2000); 228.5 (2001); 268.8 (2002); 302.3 (2003); 421.3 (2004); 504.7 (2005) - Gross official reserves (months of imports): 2.5 (2000); 2.1 (2001); 1.9 (2002); 1.7 (2003); 2.0 (2004); 2.3 (2005) - Exchange rate (MDL/$) end of period: 12.4 (2000); 13.1 (2001); 13.8 (2002); 13.2 (2003) ### Balance of payments highlights (2000–05, U.S. dollars) - Exports of goods: 476.8 (2000); 567.3 (2001); 659.8 (2002); 806.0 (2003); 1,036.9 (2004); 1,182.1 (2005) - Imports of goods: -770.3 (2000); -880.1 (2001); -1,038.0 (2002); -1,428.5 (2003); -1,786.0 (2004); -2,029.6 (2005) - Merchandise trade balance: -293.6 (2000); -312.8 (2001); -378.2 (2002); -622.5 (2003); -749.0 (2004); -847.5 (2005) - Current transfers (net): 200.6 (2000); 220.1 (2001); 236.2 (2002); 304.2 (2003); 352.6 (2004); 411.4 (2005) - Remittances, net (memorandum): 96.3 (2000); 202.0 (2001); 288.6 (2002); 445.2 (2003); 556.5 (2004) ### Fiscal indicators and public finances (general government, 2000–05) - Primary balance (cash, percent of GDP): 2.9 (2000); 4.1 (2001); 0.4 (2002); 2.8 (2003); 0.8 (2004); -0.4 (2005) - Overall balance (cash, percent of GDP): -3.5 (2000); -0.1 (2001); -1.8 (2002); 0.7 (2003); -1.1 (2004); -2.5 (2005) - Revenues and grants (millions of lei): 4,965 (2000); 5,556 (2001); 6,668 (2002); 9,383 (2003); 11,078 (2004); 12,433 (2005) - Revenues (millions of lei): 4,815 (2000); 5,394 (2001); 6,537 (2002); 8,328 (2003); 9,843 (2004); 11,291 (2005) - Tax revenues (millions of lei): 4,009 (2000); 4,645 (2001); 5,827 (2002); 7,597 (2003); 9,200 (2004); 10,609 (2005) - VAT (millions of lei): 1,343 (2000); 1,498 (2001); 2,034 (2002); 2,792 (2003); 3,410 (2004); 3,789 (2005) - Expenditures and net lending (cash, millions of lei): 5,530 (2000); 5,605 (2001); 7,114 (2002); 9,201 (2003); 11,435 (2004); 13,338 (2005) - Interest payments (millions of lei): 1,021 (2000); 797 (2001); 486 (2002); 580 (2003); 607 (2004); 740 (2005) - Stock of general government debt (percent of GDP): 84.5 (2000); 72.4 (2001); 65.8 (2002); 57.2 (2003); 44.0 (2004); 41.2 (2005) - External debt (percent of GDP): 69.2 (2000); 56.3 (2001); 51.6 (2002); 45.4 (2003); 31.4 (2004); 30.3 (2005) ### Monetary and financial indicators (2002–05) - Broad money (M3) growth (annual percent change): 36.0 (2002); 30.7 (2003); 25.8 (2004); 24.6 (2004 Q4 estimate); 32.9 (2005); 29.2 (2005 proj) - Reserve money (annual percent change): 31.1 (2002); 16.6 (2003); 23.2 (2004); 28.2 (2004 Q4 est); 34.9 (2005); 35.2 (2005 proj); 36.5 (2005 proj) - Credit to the economy (percent change, annual): 34.3 (2002); 45.4 (2003); 31.9 (2004); 28.9 (2004 Q4 est); 21.9 (2005); 18.5 (2005 proj); 20.6 (2005 proj) - Broad Money (M3) levels (millions of lei): 6,512 (2002); 8,509 (2003); 8,659 (2004); 9,099 (2004 Q4 est); 10,385 (2005); 11,311 (2005 proj); 14,609 (2005 proj) - Velocity (GDP/end-period M3; ratio): 4.6 (2000); 4.0 (2001); 3.4 (2002); 3.2 (2003); 2.8 (2004); 2.5 (2005) ### Financial sector structure and indicators (1998–2004 highlights) - Number of banks: 23 (1998); 20 (1999); 20 (2000); 19 (2001); 16 (2002); 16 (2003); 16 (2004 end-Sep) - Total assets of the banking system (percent of GDP): 29 (1998); 26 (1999); 29 (2000); 31 (2001); 36 (2002); 38 (2003); 39 (2004 end-Sep) - Credit to nongovernment sector (percent of GDP): 19 (1998); 13 (1999); 14 (2000); 16 (2001); 19 (2002); 22 (2003) - Share in total assets of banks with foreign ownership exceeding 50 percent: 22 (1998); 34 (1999); 40 (2000); 35 (2001); 37 (2002); 35 (2003); 35 (2004) - Nonperforming loans as a share of total loans: 32 (1998); 29 (1999); 21 (2000); 10 (2001); 8 (2002); 6 (2003); 7 (2004 end-Sep) ### Medium-term projections (2003–09) Baseline scenario (percent change or percent of GDP as indicated) - Real growth rate: 6.3 (2003); 7.0 (2004); 5.0 (2005); 4.0 (2006); 3.0 (2007); 3.0 (2008); 3.0 (2009) - Inflation (average): 11.7 (2003); 12.3 (2004); 10.0 (2005); 8.1 (2006); 5.9 (2007); 5.0 (2008); 5.0 (2009) - Nominal GDP (millions of lei): 27,297 (2003); 31,836 (2004); 36,779 (2005); 41,358 (2006); 45,115 (2007); 48,792 (2008); 52,769 (2009) - Government primary expenditure (percent of GDP): 31.6 (2003); 34.0 (2004); 34.3 (2005); 33.1 (2006); 32.9 (2007); 32.5 (2008); 32.1 (2009) - Primary balance (cash, percent of GDP): 2.8 (2003); 0.8 (2004); -0.4 (2005); -0.3 (2006); -0.6 (2007); -0.6 (2008); -0.6 (2009) - Overall balance (cash, percent of GDP): 0.7 (2003); -1.1 (2004); -2.5 (2005); -2.0 (2006); -2.1 (2007); -2.0 (2008); -1.9 (2009) - Financing gap (flow, percent of GDP): 0.0 (2003); 0.1 (2004); 0.9 (2005); 2.2 (2006); 2.4 (2007); 2.4 (2008); 2.3 (2009) - Current account balance (percent of GDP): -6.8 (2003); -6.7 (2004); -6.3 (2005); -6.1 (2006); -5.6 (2007); -4.7 (2008); -4.3 (2009) - Total public debt stock/GDP, percent (excluding IMF loans and publicly-guaranteed debt serviced by borrowers): 57.2 (2003); 44.0 (2004); 41.2 (2005); 40.7 (2006); 40.9 (2007); 40.2 (2008); 39.5 (2009) Alternative scenario (selected projections) - Real growth rate: 6.0 (2006); 6.0 (2007); 6.0 (2008); 5.0 (2009) - Inflation (average): 10.0 (2006); 8.1 (2007); 5.9 (2008); 5.0 (2009) - Nominal GDP (millions of lei): 37,129 (2006); 42,555 (2007); 47,773 (2008); 52,669 (2009) - Primary balance (cash, percent of GDP): 0.4 (2006); 1.8 (2007); 1.6 (2008); 1.4 (2009) - Overall balance (cash, percent of GDP): -1.6 (2006); 0.2 (2007); 0.3 (2008); 0.4 (2009) - Financing gap (flow, percent of GDP): 0.0 (2006); 0.0 (2007); 0.0 (2008); 0.0 (2009) - Current account balance (percent of GDP): -6.3 (2006); -6.2 (2007); -5.8 (2008); -5.5 (2009) - Total public debt stock/GDP, percent: 40.0 (2006); 36.7 (2007); 33.7 (2008); 30.7 (2009) ### Millennium Development Goals (localized EGPRSP targets and baseline) - Population with income below $2.15 (PPP) a day (%): 64.5 (2000); 39.8 (2002); 23 (2010); 18 (2015) - Net enrollment ratio in gymnasium education (%): 87.0 (2000); 87.9 (2002); 93.8 (2010); 100.0 (2015) - Under-five mortality rate (per 1,000): 23.3 (2000); 18.3 (2002); 11.9 (2010); 8.4 (2015) - Maternal mortality ratio (per 100,000 births): 27.1 (2000); 28.0 (2002); 21.0 (2010); 13.3 (2015) - Population with sustainable access to an improved water source (%): 37.8 (2000); 38.5 (2002); 57.0 (2010); 68.5 (2015) - Population with access to improved sanitation (%): 73.3 (2010); 90.0 (2015) ### Moldova—Fund relations (as of November 30, 2004) and institutional notes - Membership Status: Joined August 12, 1992; Article VIII - Quota: 123.20 (SDR million) = 100.00 percent of Quota - Fund holdings of currency: 176.85 (SDR million) = 143.54 percent of Quota - Outstanding purchases and loans: Extended arrangements 53.65 (SDR million) = 43.54 percent of Quota; PRGF arrangements 27.72 (SDR million) = 22.50 percent of Quota - Latest financial arrangements (type, approval date, expiration date, amount approved, amount drawn): - PRGF: 12/21/2000 — 12/20/2003; Amount approved 110.88 (SDR million); Amount drawn 27.72 (SDR million) - EFF: 05/20/1996 — 05/19/2000; Amount approved 135.00 (SDR million); Amount drawn 87.50 (SDR million) - Stand-by: 03/22/1995 — 03/21/1996; Amount approved 58.50 (SDR million); Amount drawn 32.40 (SDR million) - Projected obligations to Fund (SDR million): Principal forthcoming 14.58 (2004); 16.42 (2005); 14.53 (2006); 13.88 (2007); (charges/interest and totals also presented) - Safeguards assessment: Full safeguards assessment completed June 12, 2002; identified inadequacies; priority measures recommended and all priority measures identified have been implemented. - Exchange arrangement: Reclassified to managed floating with no pre-announced path on June 30, 2002; leu traded at MDL 12.46=$1 on December 31, 2004. - Article IV Consultation cycle: Moldova is on a 12-month consultation cycle; the last Article IV consultation was concluded on January 26, 2004 (Country Reports No. 04/39, and No. 04/40). - FSAP participation: Received FSAP mission in May 2004; FSSA to be presented to the Board at the time of the 2004 Article IV discussions. *Source: IMF staff report content (tables and appendices as provided).* ### 2000. While the fourth review was completed (www.imf.org), the program expired on ### _cr0548 - 2000. While the fourth review was completed (www.imf.org), the program expired on ### IMF-supported programs, reviews, and disbursements - The EFF arrangement: five purchases totaling SDR 87.5 million (equivalent to 97 percent of old quota). - A PRGF arrangement was approved on December 21, 2000 in the amount of SDR 110.88 million (equivalent to 90 percent of quota). - PRGF disbursements: - SDR 9.24 million on December 29, 2000 - SDR 9.24 million on February 23, 2001 - SDR 9.24 million on July 26, 2002 - Program outcomes: - The EFF program expired on May 19, 2000 without completion of the scheduled last review because parliament rejected twice an important program condition. - The PRGF arrangement expired in December 2003 with only one review completed. - The PRGF program left ¾ of the available funds undisbursed. ### Resident Representative and Resident Advisors - Resident Representative: - Mr. Ruggiero has been the Resident Representative since mid-2002. - Resident Advisors and postings: - FAD resident advisor Mr. Agarwal completed a posting to support the development of the treasury in June 1998; peripatetic return visits were conducted through 1999. - Mr. and Mrs. Faulk were assigned as resident advisors on banking supervision at the NBM during 1998; they paid various follow-up visits as external experts in 1999. - FAD resident tax administration advisor Mr. Vandenberghe was extended in July 1999 for a third six month period to support development of a large taxpayer unit; his contract ended in mid-2000. ### Short-term assistance missions and advisers - Mr. Antao conducted regular visits to assist the ministry of finance on macroeconomic analysis since mid-1997. - Mr. Richards paid regular visits as a regional balance of payments statistics advisor to Moldova, Armenia, and Georgia from April 1996 to July 1998. - Mr. Van Sluys and Dr. Peeraer visited Chişinău on several occasions in 1998/99 to assist in supervision of commercial banks’ foreign exchange activities. - Mr. Thompson has been advising the NBM on accounting issues since 1999 and visited Moldova regularly during the past three and a half years, including for preparation of the NBM international audits. - Mr. Ponomarenko visited Moldova several times in 2002–04 to assist the Department of Statistics and Sociology (DSS) in national accounts. - Mr. Astin has been visiting Moldova regularly to help the DSS reform the methodology for the CPI and PPI. ### Technical assistance provided by the Fund, 1999–2004 (summary of missions listed) - MAE — Monetary and foreign exchange operations; and banking, accounting, and auditing issues. Timing: April/May 1999. Counterpart: NBM. - STA — Government financial statistics. Timing: August 1999. Counterpart: MoF. - FAD — Tax administration. Timing: May 2000. Counterpart: MoF. - FAD — Customs administration. Timing: June 2000. Counterpart: MoF. - MAE — Monetary policy management; payment system; foreign exchange operations; and banking supervision. Timing: September 2000. Counterpart: NBM. - LEG — Banking legislation. Timing: October 2000. Counterpart: NBM. - LEG — Free economic zone legislation. Timing: Jan./Feb. 2001. Counterpart: MoE. - FAD — Expenditure policy. Timing: May 2001. Counterpart: MoF. - LEG — Bankruptcy law. Timing: June 2001. Counterpart: MoE. - LEG — Banking legislation. Timing: June 2001. Counterpart: NBM. - MAE — TA assessment/evaluation. Timing: October 2001. Counterpart: NBM. - MAE — Payments system; liquidity projection and monetary policy framework; central bank accounting and internal audit; and bank supervision. Timing: May 2002. Counterpart: NBM. - MFD — Payments system. Missions: 2003 and 2004. Counterpart: NBM. - STA — National accounts. Timing: March 2002, Dec. 2002, March 2003, Apr. 2004. Counterpart: DSS. - STA — Price statistics. Timing: Nov. 2003, Sept 2004. Counterpart: DSS. - STA — Money and Banking Statistics. Timing: April, 2004. Counterpart: NBM. - MFD — Anti Money Laundering. Timing: April, 2004. Counterpart: MDA Gov., NBM. - FAD — Modernization of the LTU and VAT. Timing: May, 2004. Counterpart: MoF. - MFD — Foreign Exchange Regulation and Banking Supervision. Timing: December 2004. Counterpart: NBM. - Note: MoF: Ministry of Finance; NBM: National Bank of Moldova; MoE: Ministry of Economy. ### IMF–World Bank relations and roles (as of November 30, 2004) - Partnership focus: - Poverty reduction is viewed as the major development challenge; PRSP process used to coordinate government and development partner activities. - An Interim PRSP (I-PRSP) was presented in December 2000. Change in government in March 2001 delayed full PRSP progress; updated I-PRSP and PRSP Preparation Status Report submitted in April 2002. - The full PRSP, called the Economic Growth and Poverty Reduction Strategy Paper (EGPRSP), was adopted by the government in May 2004; the Joint Staff Advisory Note was discussed in November 2004. - IMF role: - IMF leads assistance to promote and maintain macroeconomic stability through prudent monetary and financial policies and has encouraged policy reforms to attract concessional financing and reschedule external debt. - The Fund supported Moldova’s economic reform program since 1993; a three-year PRGF program approved in December 2000 faced review delays and expired end-2003 leaving ¾ of funds undisbursed. - World Bank role: - Leads policy dialogue on structural issues relevant to growth and poverty reduction: private sector development, infrastructure, social protection, agricultural sector reforms. - Since 1994 the Bank carried out three structural adjustment operations and multiple sector projects; examples of lending and support include: - First Structural Adjustment Loan: $60 million (approved December 1994) - Second Structural Adjustment Loan and Credit: $100 million (IDA credit of $45 million) (approved 1997) - A $40 million Structural Adjustment Credit approved on June 24, 1999 (third tranche cancelled) - Supplement of $5 million disbursed in December 2001 for ice storm damages of November 2000 - Third Structural Adjustment Credit: $30 million (approved June 2002); the credit expired in September 2003 with 2/3 undisbursed - Recent analytical work includes: A Public Expenditure Management Review, an Investment Climate Assessment, a Country Procurement Assessment Review, a Country Financial Accountability Assessment, a Trade Diagnostic Study, and the second Poverty Assessment. - Division of responsibilities: - Bank leads in social sectors, infrastructure, environment, private sector development, and agricultural sector reform. - Both institutions share responsibility in trade and customs reform, financial sector policies, public sector management. - IMF leads in fiscal, monetary, exchange rate policies, and tax administration. ### IMF–World Bank collaboration in specific sectors (high-level points) - Bank-led areas: - Social: Poverty Assessments; Social Protection Management Project; Social Investment Fund Projects (including a second project approved June 2004). - Health: Health Investment Fund Project; Moldova TB/AIDS Control Project. - Education: General Education Project; Reconciliation Through General Education in the Transnistria Region. - Infrastructure: Energy II Project; Pilot Water Supply and Sanitation Project. - Environment: Agriculture Pollution Control Project; Biodiversity Strategy Development; Biodiversity Conservation Project. - Rural/agricultural: First Cadastre Project; Rural Investment and Services Project (Supplement effective August 2004). - Shared areas: - Private Sector Development: Bank studies (Investment Climate Assessment, Business Environment and Enterprise Performance Survey, Diagnostic Review of the Environment for Foreign Investment, Costs of Doing Business Surveys); Bank’s Private Sector Development II Project; IFC credit lines; Fund-focused macro stability and structural benchmarks under the PRGF. - Public Sector Management: Bank reviews and projects (Public Economic Management Review, Country Procurement Assessment Review, Country Financial Accountability Assessment, Trade and Transportation Facilitation in Southeast Europe); Fund technical assistance on customs, government financial statistics, and public expenditure policies. - IMF-led areas: - Fiscal and monetary policy formulation and execution, external policies, and economic and financial statistics; IMF leads tax policy and reforms. ### World Bank Group strategy in Moldova - Bank’s CAS and timeline: - Last full CAS for 1999–2001 discussed May 1999. - CAS Progress Report for 2002–2003 presented June 2002. - Full CAS for FY04–FY08 developed to support implementation of the government’s EGPRSP; Board presentation took place in December 2004. ### Moldova—Relations with the EBRD (as of November 30, 2004) - EBRD strategy objectives: support private sector development, policy dialogue, financial sector support, private enterprise support, and public utilities with regulatory focus. - ETC Initiative announced June 2004 includes Moldova among seven countries. - Aggregate project values and examples: - Total value of projects supported in Moldova, in whole or in part, amounts to around €280 million. - Thirty two projects signed totaling €165 million of EBRD resources, including: - Wine export promotion and sector restructuring: €23.6 million - Equity investment into a glass producer: €6.4 million - Energy efficiency (Chisinau heating distribution): €7.5 million - Credit lines and equity investment for Moldova-Agroindbank for on-lending to SMEs: €28 million in total - Credit lines and equity investment for Victoria Bank: €9.9 million in total - Linking Moldovan satellite earth stations to the Eurovision Network: €0.8 million - Road rehabilitation loan: €9 million - Partial financing for new oil terminal at Giurgulesti: €9.1 million - Credit facilities for micro enterprises through four local banks: €2.5 million - Rehabilitating Chisinau’s water services: €16.5 million - Chisinau Airport Modernization: €7 million - Trade facilitation program (regional TFP) for several banks: €8.3 million in total - Equity participation and loan to micro-lending company: €2 million - Equity participation and loan financing for three privatized power distribution companies: €25.6 million - Technical Cooperation: some 65 Technical Cooperation projects completed or approved totaling €10.5 million. _Italic: Source document content provided from the IMF PDF unit as supplied._ ### 1. Although generally adequate for surveillance and program monitoring, Moldova’s ### _cr0548 - 1. Although generally adequate for surveillance and program monitoring, Moldova’s ### Data quality and dissemination - Overall assessment: Official statistics are "generally adequate for surveillance and program monitoring" but have notable shortcomings, especially for national accounts and price statistics; lack of an updated census hampers analysis. - Timeliness: "Data for monitoring macroeconomic developments are provided by the Moldovan authorities in a timely manner (see attached matrix)." - Participation and requests: Moldova is a participant in the GDDS. In December 2004 the Moldovan authorities requested a ROSC Data Module mission in 2005. ### National accounts - Methodology and coverage: - National accounts are prepared in accordance with the 1993 SNA methodology. - Estimates exclude the Transnistria region for which data have not been collected since 1991. - Compilation practice: - GDP estimated from production and expenditure sides, on annual and quarterly basis. - Data prepared in current and constant (previous-year) prices; annual data revised in two stages as updated information becomes available. - Quarterly data remain unadjusted, limiting consistency with revised annual data. - Identified needs for improvement: - (i) compiling annual and quarterly GDP in constant prices; - (ii) benchmarking the annual and the quarterly data; - (iii) estimating the consumption of fixed capital in line with international standards. ### Price statistics - Shortcomings: - Price collection for the CPI and PPI is limited geographically. - Missing price data are not imputed following a standard procedure. - CPI basket weights are derived primarily from the Household Budget Survey and "need to be improved to represent all segments of the population." ### Labor market statistics - Gaps for macro analysis: - (i) Unemployment data following ILO methodology are not available. - (ii) Wage data do not include fringe benefits, which form an important part of workers’ compensation. ### Fiscal statistics - Prior assistance and unresolved recommendations: - A 1999 GFS statistical mission assisted authorities; outstanding recommendations include: - (i) improving the consolidation of general government data; - (ii) reclassifying the financing data by type of debt holder and by type of debt instrument; - (iii) reporting by the MoF to STA for inclusion in International Financial Statistics of discrete monthly fiscal data, based on correspondent accounts at the National Bank of Moldova (NBM). - World Bank assistance: technical assistance provided to improve the budgetary reports of local authorities and the Social Fund. - GFS reporting history: - Authorities reported data in the GFSM 2001 format for publication in the 2003 GFS Yearbook which could not be published "due to serious data issues." - Data reported for publication in the 2004 GFS Yearbook "still have problems, but can be published." ### Balance of payments - Compilation methodology: Follows the fifth edition of the Balance of Payments Manual. - Remaining data problems: - (i) under-reporting of imports and exports; - (ii) collection of data on services; - (iii) measurement of private capital inflows, including direct investment data; - (iv) treatment of transactions with Transnistria. - Dissemination: Moldova disseminates quarterly data on its international investment position. ### Money and banking statistics - Improvements: Monetary statistics improved following a series of Fund technical assistance missions; new chart of accounts introduced for the NBM in 1996; commercial banks adopted a new chart of accounts and moved to IAS effective January 1, 1998. - April 2004 mission findings and recommendations: Monetary data were broadly in line with international statistical standards and generally good quality, but shortcomings remained in compilation of some monetary aggregates. Recommendations focused on: - (1) definition of money and monetary base; - (2) treatment of nonoperating banks; - (3) foreign assets and foreign liabilities of the NBM; - (4) valuation of government securities; - (5) classification of shares and other equity. - Institutional coverage: Mission advised periodic review of balance sheets of other financial corporations and possible expansion of institutional coverage to include institutions that collect deposits or issue deposit substitutes. ### Debt sustainability — Background (selected findings) - Total external debt: - End-2004 estimated at about $1,635 million, compared to $1,752 million at end-2003. - External debt as percent of GDP: 63 percent at end-2004, compared to 90 percent at end-2003. - NPV of debt-to-exports ratio: - Estimated to have fallen to 102 percent at end-2004, compared to 138 percent at end-2003. - Public and publicly-guaranteed (PPG) debt: - At end-2004 about $930 million or 36½ percent of GDP (compared to about 50 percent at end-2003). - Public domestic debt: - Increased by 1 percentage point to about 11½ percent of GDP in 2004, mainly due to a large loan from the NBM to finance the Gazprom buyback. - Government plans to start repaying that loan in 2005 with only limited net issuance of T-bills, implying a projected gradual decline of public domestic debt in percent of GDP. - Notable debt operations in 2004: - Gazprom buyback of promissory notes with face value $114.5 million for a cash payment of about $50 million, financed by the NBM. - Buyback with Hewlett-Packard finalized; rescheduling agreed with Romania and the Export Credit Bank of Turkey. ### Debt sustainability — Outlook and policy implications - Assessment: Moldova seems to face more of a liquidity problem than a structural debt sustainability problem. - Baseline scenario: - Under the baseline, debt indicators would continue to improve; by 2012 public debt service would have reached 4 percent of exports, down by 4½ percentage points from 2004. - Stress tests did not alter the general conclusion from the baseline scenario. - Policy implications: - Renewed involvement by IFIs, additional concessional loans and grants, and possibly further debt rescheduling would make it easier to close projected financing gaps. - Even assuming financing gaps are financed by external borrowing, results suggest debt indicators would still improve in the medium-term. ### Key numeric indicators and projections (selected rows from staff simulations) - External debt (nominal) as percent of GDP, 2001–2012: - 2001: 105.6 - 2002: 101.2 - 2003: 89.5 - 2004: 63.3 - 2005: 58.4 - 2006: 56.8 - 2007: 57.1 - 2008: 55.9 - 2009: 54.4 - 2010: 52.2 - 2011: 50.3 - 2012: 48.5 - o/w public and publicly guaranteed (PPG) as percent of GDP, 2001–2012: - 2001: 66.1 - 2002: 60.8 - 2003: 52.6 - 2004: 36.0 - 2005: 33.8 - 2006: 33.5 - 2007: 33.9 - 2008: 33.4 - 2009: 32.9 - 2010: 32.3 - 2011: 31.7 - 2012: 31.0 - Change in external debt (percent of GDP): - 2002: -4.4 - 2003: -11.7 - 2004: -26.2 - 2005: -4.9 - 2006: -1.6 - 2007: 0.3 - 2008: -1.1 - 2009: -1.5 - 2010: -2.2 - 2011: -2.0 - 2012: -1.8 - NPV of external debt (percent of GDP), 2004–2012: - 2004: 74.8 - 2005: 53.1 - 2006: 47.0 - 2007: 44.4 - 2008: 43.6 - 2009: 41.9 - 2010: 39.6 - 2011: 36.6 - 2012: 33.8 - NPV of external debt (in percent of exports), 2004–2012: - 2004: 138.1 - 2005: 101.6 - 2006: 87.5 - 2007: 82.7 - 2008: 80.3 - 2009: 76.8 - 2010: 72.5 - 2011: 67.7 - 2012: 63.1 - Debt service-to-exports ratio (percent), 2001–2012: - 2001: 25.1 - 2002: 28.2 - 2003: 21.2 - 2004: 21.3 - 2005: 17.2 - 2006: 15.4 - 2007: 12.3 - 2008: 12.5 - 2009: 12.6 - 2010: 13.9 - 2011: 12.9 - 2012: 12.2 - Key macroeconomic assumptions (selected): - Real GDP growth (percent): 2001: 6.1; 2002: 7.8; 2003: 6.3; 2004: 7.0; 2005–2012: 5.0, 4.0, 3.0, 3.0, 3.0, 3.0, 3.0, 3.0 respectively. - GDP deflator in US dollar terms (change in percent): 2002: 4.1; 2003: 10.8; 2004: 23.3; 2005: 5.5; 2006–2012: 3.3, 3.0, 3.0, 3.0, 3.0, 3.0, 3.0. - Effective interest rate (percent) 4/: 2002: 3.8; 2003: 3.6; 2004: 4.2; 2005: 4.5; 2006: 4.3; 2007: 4.2; 2008: 4.0; 2009: 4.0; 2010: 3.9; 2011: 3.7; 2012: 3.6. - Nominal GDP (billions of US dollars), memorandum item: - 2001: 1480.3 - 2002: 1661.8 - 2003: 1957.5 - 2004: 2582.1 - 2005: 2860.6 - 2006: 3073.2 - 2007: 3261.2 - 2008: 3460.8 - 2009: 3672.6 - 2010: 3897.4 - 2011: 4136.0 - 2012: 4389.2 ### Public sector debt indicators (selected) - Public sector debt (percent of GDP), 2001–2012: - 2001: 79.9 - 2002: 74.4 - 2003: 60.6 - 2004: 48.3 - 2005: 44.8 - 2006: 43.1 - 2007: 42.2 - 2008: 41.0 - 2009: 39.8 - 2010: 38.6 - 2011: 37.6 - 2012: 36.5 - o/w foreign-currency denominated (percent of GDP), 2001–2012: - 2001: 67.3 - 2002: 61.9 - 2003: 49.9 - 2004: 36.6 - 2005: 34.7 - 2006: 34.3 - 2007: 34.3 - 2008: 33.9 - 2009: 33.4 - 2010: 32.7 - 2011: 32.1 - 2012: 31.5 - Change in public sector debt (percent of GDP): - 2001: -11.4 - 2002: -5.5 - 2003: -13.8 - 2004: -12.3 - 2005: -3.5 - 2006: -1.7 - 2007: -0.8 - 2008: -1.2 - 2009: -1.3 - 2010: -1.1 - 2011: -1.1 - 2012: -1.1 - NPV of public sector debt (percent of GDP), 2001–2012: - 2001: 100.5 - 2002: 86.7 - 2003: 68.4 - 2004: 53.6 - 2005: 46.3 - 2006: 40.4 - 2007: 35.9 - 2008: 32.1 - 2009: 28.6 - 2010: 26.0 - 2011: 23.7 - 2012: 21.5 - Gross financing need (percent of GDP), 2001–2012: - 2001: 5.3 - 2002: 6.8 - 2003: 4.2 - 2004: 4.3 - 2005: 5.5 - 2006: 4.8 - 2007: 4.6 - 2008: 4.3 - 2009: 4.0 - 2010: 3.4 - 2011: 3.1 - 2012: 3.2 - NPV of public sector debt-to-revenue ratio (percent), 2001–2012: - 2001: 343.0 - 2002: 291.4 - 2003: 199.0 - 2004: 153.9 - 2005: 136.9 - 2006: 123.6 - 2007: 111.2 - 2008: 100.6 - 2009: 90.9 - 2010: 83.5 - 2011: 77.0 - 2012: 70.6 *Source: IMF staff report text and tables (as provided).* ### Appendix V. Table 1b. Moldova: Sensitivity Analysis for Key Indicators of Public and Publicly-Guaranteed External Debt, ### Appendix V. Table 1b. Moldova: Sensitivity Analysis for Key Indicators of Public and Publicly-Guaranteed External Debt, 2004–12 ### Sensitivity analysis and stress-test framework - The appendix presents sensitivity analyses and stress tests for indicators of public and publicly-guaranteed external debt for 2004–12 (ratios expressed in percent). - Note: "Most extreme stress test is test that yields highest ratio in 2012." - Note: "Revenue including grants." (as defined in source) ### Key macroeconomic context and projections cited - GDP growth: "Growth was robust at 7.3 percent." (2004, authorities' statement) - GDP growth earlier years: "GDP grew by 6.3 percent in 2003, advancing to 6.5 percent (y-o-y) in the first half of 2004." (PIN) - Inflation: "Twelve-month Consumer Price Index inflation peaked at 17 percent in October 2003" and "moderated to about 11 percent by October 2004." - Real effective exchange rate: "appreciated by 11½ percent (y-o-y) during the first three quarters of 2004." - Current account: "The official current account deficit widened markedly to 6.8 percent of GDP in 2003." - International reserves: "international reserves expanded considerably reaching USD 470 million compared to USD 302 million in 2003." - Remittances: described as "large and rising workers’ remittances" underpinning consumption-led growth and contributing to reserves, but also posing challenges to monetary policy and potentially increasing external vulnerability. ### Fiscal stance and public debt developments - Tax revenue: "tax revenue-to-GDP ratio is estimated to have further increased by about 1.1 percentage points reaching 29 percent." - Debt management actions noted: - Buyback operations with Gazprom and Hewlett Packard finalized. - Agreements on debt rescheduling with several bilateral creditors reached and arrears considerably reduced. - Arrears to Paris Club creditors "still remain and need to be addressed in the near future." - Effect on indicators: "external debt and debt service indicators have notably improved." ### Principal alternative scenarios and bound tests (as structured in the appendix) - Alternative scenarios example descriptions (titles preserved from source): - A1. "Real GDP growth and primary balance are at historical averages" - A2. "Primary balance is unchanged from 2004" - A3. "Permanently lower GDP growth 1/" - Bound tests example descriptions (titles preserved from source): - B1. "Real GDP growth is at historical average minus one standard deviations in 2005-2006" - B2. "Primary balance is at historical average minus one standard deviations in 2005-2006" - B3. "Combination of 2-3 using one half standard deviation shocks" - B4. "One time 30 percent real depreciation in 2005" - B5. "10 percent of GDP increase in other debt-creating flows in 2005" - Footnote linked to A3: "Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period)." ### Selected numerical indicators and simulation references (figures and tables) - The appendix includes time series projections (2004–12) for: - NPV of debt-to-GDP ratio (percent) - NPV of debt-to-exports ratio (percent) - NPV of Debt-to-Revenue Ratio (revenue defined inclusive of grants) (percent) - Debt Service-to-Revenue Ratio (percent) - Debt service-to-exports ratio (percent) - Figures label scenarios: "Baseline" and "Stress test: New public sector loans on less favorable terms." and "Stress test: Net non-debt creating flows at historical average minus one standard deviation in 2005-06." - The appendix notes: "Source: Staff projections and simulations." ### Structural and policy issues affecting debt dynamics - Growth strategy and structural reforms: - Emphasis on revitalizing agriculture: sector "employs more than 40 percent of the workforce, accounts for about 20 percent of GDP and 60 percent of exports, but currently operates at only half of its capacity." - New program launched: "Moldovan Village" described as a "€ 2.8 billion program" to support rural development over the next decade (rehabilitation of infrastructure, water and natural gas supply, SME development, restoration of vineyards and food processing, environmental protection). - Business climate and governance: - Main obstacles: "weak governance, corruption and excessive government regulations." - Reforms underway: streamlining public sector, structural reorganization of the state chancellery, planned civil service reforms, and a recently approved national anti-corruption strategy. - Regulatory reform: "Law on implementation of the ‘guilliutine’ principle" approved December 2004 to revise by-laws and create a special Register; "Law on investments in entrepreneurial activity" adopted granting national treatment to foreign investors. - Repatriation regime adjustments (Law no. 432-XV, as of December 24, 2004): simplified repatriation procedures, exemption of commercial banks, NBM and Centre for Preventing of Economic Crimes and Corruption from repatriation control, transfer of control function to the State Fiscal Authority; extension of general repatriation periods up to one year; reduction of fines for delayed repatriation. - Social and expenditure priorities: - Budget geared toward the poor and guided by EGPRSP and the Medium-Term Expenditure Framework. - Increase in minimum pensions and consideration of public sector wage increases in context of civil service reform. - Authorities acknowledge need for "profound social reforms" for sustainability. ### Monetary policy implications for debt and vulnerability - Remittances and monetary policy: - Large remittance inflows raise reserves but fuel liquidity and exchange rate appreciation, complicating monetary management and potentially increasing inflationary pressures. - Central bank operations: - NBM sterilized part of FX interventions via outright sale of discount treasury bills and introduced "NBM certificates with maturities of 14, 28 and 56 days" to improve liquidity management. ### Policy implications and recommendations implicit in the analysis - Maintain fiscal discipline to consolidate revenue gains (tax revenue-to-GDP at 29 percent) and reduce external vulnerabilities through continued arrears reduction and normalization of relations with creditors. - Pursue structural reforms to improve the business climate, tackle corruption, deregulate entrepreneurial activity, and accelerate privatization to support sustainable growth and reduce pressure on public finances. - Address remittance-driven macro pressures by improving domestic employment opportunities and redirecting remittances toward investment rather than consumption. - Use monetary tools and market instruments (e.g., NBM certificates) to manage liquidity and sterilize excessive FX inflows while pursuing structural measures to restore broader competitiveness. - Monitor stress-test outcomes (including the "most extreme stress test" identified as the test producing the highest 2012 ratio) and prepare policy buffers to withstand scenarios such as a one-time 30 percent real depreciation or a 10 percent of GDP increase in other debt-creating flows. *Sources: Moldovan authorities; and Fund staff estimates and projections. Note: 1/ Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period). 2/ Revenue is defined inclusive of grants.* ### 2004. While tax revenues remained buoyant, owing to more aggressive tax collection efforts ### _cr0548 - 2004. While tax revenues remained buoyant, owing to more aggressive tax collection efforts ### Fiscal developments and public debt - Tax revenues remained buoyant, owing to more aggressive tax collection efforts and higher-than-expected inflation. - Projected nontax revenues and grants fell short of expectations. - Primary expenditure exceeded original budget projections. - The budget was revised in October 2004. - Staff projects a general government deficit of 1.1 percent of GDP for 2004, compared to a deficit of 0.4 percent of GDP in the original budget. - With limited fresh external financing and lower-than-expected privatization receipts: - The government increased recourse to bank financing. - The government continued to run up arrears to some bilateral creditors, but resumed interest payments to the Paris Club. - Recent external debt restructuring agreements—including a buyback of Gazprom promissory notes—together with the leu appreciation, resulted in a marked decline in the external debt/GDP ratio. ### Monetary policy, reserves, and money growth - Monetary policy was expansionary in 2004, on account of continued large inflows of remittances. - With inflation moderating in 2004, the National Bank of Moldova (NBM) stepped up its foreign exchange purchases. - International reserves hit a record high of US$392 million at end- September, finally reaching pre-1998 levels. - Despite more intense sterilization efforts, by end-October both reserve and broad money were growing at over 30 percent (y-o-y). ### Structural reforms, business climate, and governance - Progress in structural reforms remains slow; high transaction costs continue to hold back private sector-led growth. - Some progress registered in: - Fiscal reforms. - Revising the legal framework affecting investment, microfinance, audit, accounting, and leasing. - No significant improvement in the business climate despite efforts to simplify licensing and business registration. - Privatization program has stalled. - Corruption remains widespread and governance weak. - Government interference in the private sector—including formal and informal restrictions on exports of certain agriculture goods—casts doubt over the authorities’ commitment to market-oriented reforms. - The completion of the Economic Growth and Poverty Reduction Strategy (EGPRSP) is a step in the right direction, but implementation has been slow and uneven. ### Executive Board assessment — risks and priorities - Directors welcomed recent recovery, moderation of inflation, and strengthened external position, but noted the recovery’s fragile basis. - Key challenges and risks highlighted: - Excessive dependence on remittances. - Emerging labor shortages and increasing capacity constraints resulting from large-scale emigration. - Rising inflationary pressures from strong inflows of remittances and rapid wage growth. - A difficult business environment. - Vulnerability to external shocks. - Importance of efforts to resolve the conflict in Transnistria. - Directors stressed acceleration of structural reforms to: - Encourage investment. - Reverse the current emigration trend. - Channel remittances into productive use. - Specific reform priorities noted: - Reduce government intervention in the economy. - Revamp the privatization process. - Phase out excessive regulation. - Reform the public sector to improve service delivery. - Strong implementation of the recently approved anti-corruption strategy. - Remove remaining impediments to trade to improve competitiveness. ### Policy recommendations - Fiscal policy: - Directors recommended a tighter fiscal stance than that envisaged by the authorities to support the central bank’s efforts to control inflation and make room for current external debt service, thereby preventing further accumulation of arrears. - Fiscal policy should adopt a more forward-looking perspective and greater emphasis on a medium-term expenditure framework that provides for adequate resources for poverty-related purposes. - Measures to broaden the tax base, including through the removal of tax exemptions, were emphasized. - Importance of efforts to strengthen the long-term viability of the pension system highlighted. - Monetary and exchange rate policy: - Directors recommended that monetary policy place greater emphasis on the inflation objective. - Given rapid credit growth and strong foreign currency inflows, the NBM should tighten its stance, including through greater sterilization efforts, if needed, to counteract rising inflationary pressures. - Ensuring the independence of the NBM would help achieve the low-inflation objective. - Some Directors suggested that a nominal exchange rate appreciation would be appropriate if foreign exchange inflows continue to grow rapidly, and that a more flexible exchange rate policy would help absorb external shocks. - Some Directors expressed reservations about allowing appreciation at this time because of competitiveness concerns and uncertain remittance flows. - Financial sector and governance: - Address remaining vulnerabilities in line with the FSAP’s recommendations. - Reduce the government’s role and administrative interference in the financial sector. - Increase transparency in the ownership structure of financial institutions and corporations. - Address remaining weaknesses in the AML/CFT framework. - External debt and relations with creditors: - Commended restructuring and resumption of interest payments to Paris Club creditors, but stressed outstanding arrears still need to be resolved and relations with external creditors normalized. - Statistics and technical assistance: - Moldova’s official statistics generally adequate for surveillance, but remaining shortcomings—particularly regarding price and national accounts statistics—should be addressed with Fund technical assistance. - Policy dialogue: - Effective implementation of a credible and well articulated reform program in line with the EGPRSP, together with restrained short-term policies, is essential for building the track record necessary for securing possible new financing from the Fund. ### Key quantitative indicators (as presented) - Production and prices - Nominal GDP (in MDL millions): 22,556 (2002); 27,297 (2003); 31,836 (2004 Est.); 36,779 (2005 Proj.) - Real GDP growth: 7.8 (2002); 6.3 (2003); 7.0 (2004 Est.); 5.0 (2005 Proj.) - Consumer prices (end of period): 4.4 (2002); 15.7 (2003); 11.0 (2004 Est.); 9.5 (2005 Proj.) - Public finance (general government) - Overall balance (cash): -1.8 (2002); 0.7 (2003); -1.1 (2004 Est.); -2.5 (2005 Proj.) - Overall balance (commitments): -0.9 (2002); 0.2 (2003); -1.5 (2004 Est.); -2.5 (2005 Proj.) - Money and credit - Broad money (M3) (percent change): 36.0 (2002); 30.7 (2003); 32.9 (2004 Est.); 29.2 (2005 Proj.) - Credit to the economy (percent change): 34.3 (2002); 45.4 (2003); 18.5 (2004 Est.); 20.6 (2005 Proj.) - External sector - Current account balance (in percent of GDP): -4.4 (2002); -6.8 (2003); -6.7 (2004 Est.); -6.3 (2005 Proj.) - Total external debt (in percent of GDP): 101.2 (2002); 89.5 (2003); 63.3 (2004 Est.); 58.4 (2005 Proj.) - Total debt service (in percent of exports of goods and services): 28.3 (2002); 21.3 (2003); 21.3 (2004 Est.); 17.2 (2005 Proj.) - Gross official reserves (in millions of dollars): 268.8 (2002); 302.3 (2003); 421.3 (2004 Est.); 504.7 (2005 Proj.) *Source: Republic of Moldova staff report (2004 Article IV Consultation) as summarized in the provided content.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0548.pdf_