## _cr13269

## Source details

**Canonical URL:** [_cr13269](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13269.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13269.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13269.pdf.json)

---

### Introduction — strategic vision and features of current growth
- National Development Strategy "Moldova 2020" presents a long-term sustainable economic development vision based on a diagnostic study of constraints to economic development.
- Strategy aims to consolidate sectoral governance approach and increase budget coverage of health, culture, social protection, and environmental protection with accelerated economic development.
- Continued support from development partners considered crucial where foreign assistance currently plays a role.
- Growth and poverty reduction closely correlated with remittance inflows and consumption they generate; remittances increased disposable household income and aggregate consumption, much of which was met by imports and contributed to a large trade deficit.
- Two key conclusions:
  - Maintaining current pace of economic growth will be difficult without structural change.
  - Need to replace inertial consumption/remittance-based growth with investment- and export-driven growth.
- Labor dynamics and migration:
  - Labor force participation fell from 60% down to 44%.
  - Actual labor declined from 1.514 million to 1.143 million in 2010.
  - This corresponds to an average annual decline of 2.8%.

### Changing the development paradigm and growth potential
- Economic development depends on accumulation of capital, labor, and labor productivity (technologies, governance, skills).
- Without concerted change, potential growth over the next ten years is limited to a maximum of 4.5% to 5% annually; this scenario assumes labor outflow will be stopped and remittances will remain at current levels.
- 2000-2010 growth drivers:
  - Increase in fixed capital: productive stock of fixed capital increased on average by 8.2% annually.
  - Increase in productivity of labor and capital: 4.7% annually.
  - Growth characterized as more extensive than intensive — jobless growth with limited re-equipment.
- Reform implications:
  - "Easy" transition reforms largely exhausted; further multi-factor productivity gains limited without deeper reforms.
  - Physical labor supply rigid given migration.
- New paradigm priorities: attract investment; develop export industries; promote knowledge-based society (R&D, innovation, technology transfer); ensure equitable distribution of development benefits; emphasize speed, scale, consistency of reforms.

### Development priorities (seven prioritized policy actions)
- 1. Align the education system to labor market needs to enhance labor productivity and increase employment.
- 2. Increase public investment in national and local road infrastructure to reduce transportation costs and increase speed of access.
- 3. Reduce financing costs by increasing competition in the financial sector and developing risk management tools.
- 4. Improve the business climate, promote competition policies, streamline regulatory framework, apply information technologies in public services.
- 5. Reduce energy consumption by increasing energy efficiency and using renewable energy sources.
- 6. Ensure financial sustainability of the pension system to secure an appropriate rate of wage replacement.
- 7. Increase quality and efficiency of justice and fight corruption to ensure equitable access to public goods.
- Cross-cutting priorities: energy efficiency and affordability; pension equity and sustainability; justice efficiency and anti-corruption; health as critical to labor force and productivity.
- Institutional/emphatic requirements: transition to green economic development, integrate environmental protection, accelerate institutional reforms, strengthen public authority capacity, modernize public services with transparency and accessibility.

### Impact on economic development — scenarios and projections
- Historical GDP growth:
  - GDP grew on average by 5.1% annually during 2000-2010.
  - Growth subperiods: 7.1% during 2000-2004, 5.2% during 2005-2008.
- Base case scenario (continuation of recent decade trends):
  - Assumes same economic, social, political phenomena and rising remittances, same pace of reforms.
  - Estimates an average annual GDP growth of 4.7% during 2012-2020.
- Alternative scenario (implementation of Strategy priorities):
  - Implementation supplements base growth by more than 1.2% annually.
  - Annual supplement accelerates from 1.1% (2015) to 2.1% (by 2020), continuing after planning schedule.
  - Result: in 2020 GDP will be 12% higher compared to the base case scenario.
- Interpretation: small annual GDP growth differences (e.g., 2%) can separate stagnation from growth or normal growth from economic booms in developed economies.

### Impact on income and poverty — projections and mechanisms
- Income per capita:
  - With implementation of priorities, annual income per capita by 2020 will be on average 12% higher compared to the base case scenario.
  - Income per capita by 2020 will be 79% higher compared to 2011.
- Poverty-elasticity mechanism:
  - Empirical elasticity coefficient between poverty rate and economic growth was minus 0.7 during 2000-2010 — each annual supplementary percentage of GDP growth reduces the poverty rate that year by 0.7%.
  - Base case average GDP growth 4.7% and scenario with seven priorities 6.7% by 2020.
  - Direct effect of pension reform on poverty estimated at about 2%; effects cumulate.
- Poverty projection:
  - 2010 poverty rate was 21.9%.
  - Base case scenario reduces poverty rate to approximately 16% by 2020.
  - With implementation of priorities poverty reduces to 12.7% in 2020 — 3.3 percentage points lower than base case, corresponding to 149,000 people moved out of poverty.

### Education — relevance, diagnostics, reforms, and targets
- Situation and diagnostics:
  - Number of students enrolled in higher education doubled over two decades, detracting from secondary vocational and general specialized education.
  - 71.3% of students enrolled on a contractual basis and pay a tuition fee.
  - Spending on education reached 9.2% of GDP (European average 5.5% of GDP).
  - 2009 financial allocations per pupil:
    - secondary vocational education: MDL 10,224
    - general specialized education: MDL 8,709/student/year
    - higher education: MDL 6,802/student/year
  - 2010 unemployment by education (ILO methodology):
    - Unemployed with secondary vocational education: 22,800 people (24.8% of 92 thousand unemployed).
    - Higher education unemployed: 18.3 thousand.
    - General specialized education unemployed: 12 thousand.
  - Drop-out level for secondary vocational: 24.5%.
  - Labor market 2010: 970 thousand people aged 15-29 (27.2% of total population); unemployment rate in this group 13.9% (1.9 times nationwide unemployment 7.4%).
  - Only 22% of young people found a job immediately after graduation in 2010; 17.7% went to work abroad.
  - About 30% of graduates do not work according to qualifications obtained.
  - 85% of companies report lack of qualified labor force; 52.2% of companies report young workers lack devotion to work.
- Strategic reforms:
  - Modernize vocational education and continuous training; strengthen education–labor market partnerships.
  - Enact new education legislation adjusted to European experience.
  - Reform research and innovation financing; support excellence in education and science.
  - Establish National Agency for Higher Education and Research Quality Assurance.
  - Develop National Framework for employment qualifications and standards; strengthen labor forecasting.
  - Quality target: share of 75% of professors with teaching and research titles.
  - Modify university financing formula to stimulate competition and broader financial autonomy; eliminate corruption factors.
- Expected impact assumptions and GDP effects:
  - Reduce migration of young graduates by at least 50%.
  - Graduates benefiting from reform are 20% more productive in aggregate.
  - Under such conditions, annual GDP growth over the medium term may be 0.6-0.9% higher compared to "without reforms" scenario.
- Specific monitoring indicators (2010 | 2015 | 2020):
  - Unemployment rate, %: 7.4 | 6 | 5
  - Outflow of young labor force, %: 17.7 | 15 | 10
  - Share of employers satisfied with labor force quality, %: 15 (2011) | 40 | 60
  - Share of employed graduates needing additional training after graduation, %: 40 | 20 | 10

### Roads — condition, economic cost, funding needs, and targets
- Situation and diagnostics:
  - National roads in good condition: about two thirds in 1992; less than half in 1998; only 7% in 2006.
  - 2006 study of 1,500 km local roads: about 96% in bad/very bad condition.
  - 1998-2006 road funding covered less than 10% of needs; allocated funds allowed only routine maintenance.
  - Road fund contributions: MDL 241 million in 2009 → MDL 788 million in 2011.
  - Institutional inefficiencies: 39 road maintenance companies; administration costs exceed 25-30% of total spending (legal ceiling 14.5%).
  - International competitiveness:
    - Global Competitiveness Report 2010-2011: infrastructure ranked 94th/139; road quality ranked 139.
    - World Bank Logistics Performance 2010: Moldova ranked 104th/155; 132nd for logistics competency; 124th for customs; 123rd for infrastructure.
- Social and economic costs:
  - Additional costs for users due to unsatisfactory roads: approximately MDL 2.5 billion annually.
  - Deaths per million vehicles: about 1,120; deaths per one million population: about 120.
  - Fuel consumption increase on bad roads: 20% higher, increasing emissions.
- Strategic objectives and funding:
  - Target: 80% of roads in good and very good condition by end of Strategy period.
  - Estimated annual requirement for national and local road maintenance and current repairs: approximately MDL 4.2 billion.
  - Capital reconstruction planned for 2011-2014: over 400 km with external funding amount EUR 334 million.
  - Additional domestic and foreign funding needed to attain objective by end of Strategy: EUR 1.1 billion.
  - Institutional measures: explore public-private partnerships; transparent procurement; reorganize and modernize road maintenance companies by 2013; implement multi-annual maintenance contracts by 2015; reduce administrative costs to statutory ceiling.
- Expected impact and quantified benefit:
  - MDL 2.5 billion wasted annually on additional repairs and fuel on segments planned for rehabilitation; fuel/repair savings may increase regular annual GDP growth by an estimated 0.3% in the short and medium term.
- Specific monitoring indicators (2010 | 2015 | 2020):
  - Rehabilitation of national public roads, km: 900 (2014) | 1900
  - Repairs of local public roads, km: 700 (2014) | 4900
  - Share of national public roads in very good condition, %: 38 | 42
  - Reduction in number of deaths caused by road accidents per million population: 120 | 60
  - Logistics Performance Index components (infrastructure / logistics competency): 2.57 / 2.05 / 2.17 (2010) → 2.87 / 2.65 / 2.77 (2020)
- Cost estimate (Table 3 total preserved):
  - Total estimated cost (ÎN TOTAL): 4,219,084 (MDL thousand)

### Finance — financial intermediation, constraints, and objectives
- Situation diagnostics:
  - Banking sector dominates; stable during 2008-2009 crisis.
  - Weak financial intermediation: average GDP share of banking loans during 2004-2010 was 31.5%.
  - Bank deposits average GDP share: 32.9%.
  - Excess liquidity: average liquid reserves share in total banking assets 27.3% during 2004-2009.
  - 14.2% of respondents in Global Competitiveness Report 2010-11 indicated access to finance as biggest obstacle.
  - Risk premiums in Moldova represented 8.6% during 2004-10.
  - Market concentration: largest five banks assets share: 70.12% (end-2011).
  - 3/4 of banks’ capital foreign in 2011; only four banks were branches of Western banks.
  - Capital market: volume of securities traded 2004-2010 as share of GDP: 1.28% (regional average 5.32%, EU average 92.4%).
  - Reform improving credit information led to Doing Business 2012 ranking improvement from 96 to 40.
- Strategic vision and measures:
  - Pillars: (i) develop financial intermediation; (ii) streamline costs of financial resources; (iii) streamline guarantee terms for credits and loans.
  - Measures: sell state’s share in banking capital; attract strategic investors; develop non-banking placement options (Diaspora Bonds); diversify financial instruments (business angels); enhance regulation and supervision to European practices; develop hedging instruments and improve collateral management; expand credit history bureaus.
- Expected impact and GDP assumptions:
  - Financial system to channel resources efficiently by 2020; increase financing volumes through banking and non-banking sectors to 50% of GDP by 2020.
  - Assumption: out of each additional MDL loaned to the real sector, at least 30 bani will be invested in productive capital; average loan maturity three years.
  - Additional annual GDP growth up to 0.5-0.7% higher compared to no-priority scenario.
- Specific monitoring indicators (2010 | 2015 | 2020):
  - Increasing GDP share of deposits, %: 35.8 | 40 | 45
  - Increasing GDP share of loans, %: 37.2 | 45 | 50
  - Reducing the risk premium, percentage points: 10.1 | 9 | 7
  - Increasing volume of exchange transactions with securities as share of GDP, %: 0.4 | 2 | 5

### Business environment — regulatory reform, competition, firm dynamics
- Situation diagnostics:
  - FDI peak: USD 713 million in 2008; decline post-crisis; partial recovery in 2010.
  - Doing Business 2012 ranking: Moldova 81st out of 183 countries.
  - Global Competitiveness Index 2011-2012: Moldova ranked 93rd out of 142; “Institutions” ranking 106th.
  - Index of Economic Freedom 2011: Moldova ranked 120th out of 179 countries.
  - Business cycle issues:
    - Starting a business: Moldova ranks 88th in Doing Business 2012; many pre-registration permits required.
    - Doing business: excessive inspections, frequent reporting, numerous permits, costly and non-transparent customs procedures; inventory found over 400 papers/permits, 272 considered justified and included in official Nomenclature.
    - Closing a business: Moldova ranks 91st in Doing Business 2012; insolvency procedures costly and lengthy; low asset recovery.
  - Regulatory issues generate excessive administrative costs, discretionary enforcement, corruption, and unfair competition.
- Strategic reforms:
  - Improve business environment by 2020: reduce risks and costs across business life cycle; promote competition.
  - Measures: digitize public service delivery; shift inspections to counseling with risk-based approach; involve private sector in regulatory design; improve courts’ responsiveness; establish transparent complaint systems; develop national competition and state aid program per best European practices; expand SME support; increase share of women entrepreneurs (currently 27.5%); develop quality infrastructure for exports.
  - Ensure environmental regulations distribute administrative burden evenly.
- Expected impact:
  - Reduced administrative and compliance costs → reinvestment of savings; increased trade volumes and exports; enhanced investor confidence and foreign investment; improved quality of investments (technology- and innovation-intensive).
- Specific monitoring indicators (2015 | 2020):
  - Starting a business: Time required, hours: 24 | 1; Reduce cost of starting a business by 50% | by 80%.
  - Dealing with construction permits: Time, days: 180 | 100; Reduce costs by 20% | by 40%.
  - Paying taxes: Reduce number of payments to 35 | to 25; Time, hours: 215 | 190.
  - Trading across borders: Documents required export/import: down to 5 | down to 4; Time to obtain documents, days: down to 25 | down to 10; Reduce costs (per container) by 5% | by 10%.
  - LPI (customs operation / logistics competency): 2.33 / 2.30 (2015) → 2.55 / 2.50 (2020).
  - Closing a business: Increase investment recovery rate by 50% | by 100%; Time required, years: 2 | 1.5.
  - Reduce state inspections by 20% | 40%; mandatory reports by 10% | 20%; permits by 20% | 40%; cost of dealing with permits by 20% | 40%.
  - Digitalizing public services for business (no. of services): 20 | All.

### Energy — security, efficiency, renewables, and targets
- Situation diagnostics:
  - 95% of energy resources imported; power generation capacities insufficient on right bank of Nistru; insufficient interconnections; high losses in electricity and heating; limited renewables use.
- Electricity and heating:
  - Electricity production decreased by 15% in 2010 compared to 2001.
  - CHP-2 produces 70-80% of domestic electricity.
  - Procurement from Moldovan Thermo-Electrical Power Plant declined about 21% in 2010 vs 2009.
  - Distribution grid losses up to 10%.
  - 2010 heating production increased about 9% vs 2009 but fell by 12.8% vs 2001.
  - Heat losses high: 22% in 2010; growth trend 2001-2010 about 7.2 percentage points.
  - Buildings consume 40% of energy; residential buildings 65% of building sector consumption; household heating shares range 15% to 50% of total household spending.
  - Potential reduction in energy consumption in existing buildings: about 30-50%, up to 70% in some cases.
- Natural gas:
  - Single-source import dependence increases vulnerability.
  - Natural gas volumes/prices (selected entries):
    - 2005: 1,418.6 million m3 / MDL 1,364.9 million; average price USD/1000 m3 76.1 / MDL/1000 m3 962.
    - 2010: 1,187.8 million m3 / MDL 3,674.0 million; average price USD/1000 m3 250.1 / MDL/1000 m3 3,093.
- Renewables and energy efficiency:
  - Energy efficiency about 3 times lower compared to European countries.
  - Technical potential of main RES:
    - Solar: 50.4 PJ (1.2 million tons equivalent of petroleum)
    - Wind: 29.4 PJ (0.7)
    - Hydro: 12.1 PJ (0.3)
    - Total biomass potential: 21.5 PJ (0.5)
    - Total RES potential: 113.4 PJ (2.7)
- Strategic vision and targets by 2020:
  - Competitive and efficient energy sector; liberalized energy market; integration with European market; diversify resources; create new generation capacity; reduce energy intensity.
  - Planned gradual increase of energy efficiency by up to 10% yields annual savings by 2020 of approximately MDL 830 million in current prices.
  - Estimated GDP effect: annual GDP growth at least 0.2% higher over medium and long term compared to base case scenario.
- Specific monitoring indicators (2015 | 2020):
  - Share of consumption from renewables, %: 10 | 20
  - Share of bio-fuels in total fuels used, %: 4 | 10
  - Increasing domestic production capacity for electricity, MW: 800 (2020 target)
  - Ensuring share of annual electricity production from renewables, %: 10 (2020)
  - Reducing energy intensity, %: 10
  - Reducing electricity losses in transport and distribution networks, %: 13 | 11
  - Reducing natural gas losses in transport and distribution networks, %: 20 | 39
  - Reducing heating losses in transport and distribution networks, %: 2 | 5
  - Reducing greenhouse gas emissions (compared to 1990), %: 25
  - Reducing energy consumption in buildings, %: 10
  - Share of renovated public buildings, %: 10

### Pension system — diagnosis, reform components, and targets
- Situation diagnostics:
  - Pay-as-you-go scheme consuming 8.8% of GDP.
  - 2010: 69.6% of working population contributing; pensions paid for 84.7% of citizens who reached retirement age: total 460,500 people (13% of total population).
  - 2011: pensions accounted for 67.8% of total social security budget expenditures.
- Main challenges and numeric indicators:
  - Average retirement-age pension in 2010 was 70.6% of the subsistence minimum for pensioners.
  - Over 92% of retirement-age pensioners received pensions lower than the subsistence minimum.
  - Replacement rate (average retirement-age pension / average salary) was 28.2% (European Code recommended 40%).
  - Modeling shows replacement rate may decline to 23% in 2020 and to 14% around late 2040 under current system.
  - Active population fell 2011-2010 from 1.6167 million to 1.2354 million; employed from 1,499,000 to 1,143,400.
  - Taxpayers in social insurance ~860,000 in 2010.
  - Emigration: 311,000 people work outside the country.
  - Informal employment estimated 406,900 persons in Q2 2011.
  - Number of pensioners (all categories) stable: 627,100 on January 1, 2011.
  - Ratio active population to pensioners of all categories: 2:1; working population to pensioners: 1.8:1 (sustainability requires ~4:1–5:1).
  - Population ageing: share over 60 years 14.4% in 2010 (13.6% in 2000); share 0-15 years fell from 24.8% (2001) to 17.8% (2010); share of population over retirement age projected to increase to 31.5% in 2050.
  - Retirement age and contribution periods: women 57 years, men 62 years; minimum insurance period at least 15 years for partial pension; full pension requires at least 30 years (women 30, men 30.5) with total required work history to be extended to 35 years by 2020.
  - Average years worked for retirement pay in 2010: women 32.5 years, men 37.5 years.
  - Average old-age pension 2010: women MDL 797.1, men MDL 937.8.
  - Average monthly insured salary (individual contracts) about MDL 2,133 in 2010.
- Fiscal balances and deficit coverage:
  - State social insurance budget recorded deficit of MDL 25.55 million in 2009 and MDL 213.3 million in 2010.
  - In previous years the deficit was covered from balances of National Social Insurance House bank accounts; in 2009 covered from reserve fund and partially from state budget; starting in 2010 deficit covered from state budget.
- Long-term projections:
  - Long-term modeling indicates system will register a deficit in the next ten years and a surplus in the long run; long-run surplus caused only by considerable reduction of replacement rate.
- Privileged pensions and redistribution:
  - Privileged pension terms for judges, prosecutors, civil servants, MPs, government members, locally elected officials, customs employees.
  - Average pension differentials: Government members about 8 times higher than average old-age pension; civil servants 2.3 times higher.
  - Privileged pension beneficiaries: 7,311 persons in 2010 (~1.1% of total pension beneficiaries).
  - Pension expenditure for privileged categories reached MDL 116.49 million or 2% of total expenditure for payment of pensions in 2010.
- Coverage, incentives, and private pensions:
  - Total beneficiaries of social insurance and state pensions: only about 152,400 employed in national economy.
  - Continued payment of social insurance contributions by employed pensioners does not influence pension amounts.
  - Private pension funds: legislative framework adopted 1999 (3rd pillar); two private pension funds registered but insignificant activity.
  - No existing legal framework for mandatory second pillar; opportunity study for cumulative pension system (pillar 2) to be developed by end of 2015.
- Social security for migrants:
  - Urgent need to conclude bilateral social insurance agreements with main host countries for migrant workers.
- Reform components:
  - A. Modernize PAYG pillar 1: unify conditions for contribution period and retirement age; closer link between contributions and pensions; accumulate means in reserve fund; develop labor market and demographic measures.
  - B. Review timeliness for cumulative pillar 2: opportunity study by end of 2015; preparatory measures include pillar 1 modernization and financial market development.
- Expected impact:
  - Reform will reduce poverty rate: net impact estimate by 2020 the share of pensioners below absolute poverty line decreases by 2 p.p. over "without reforms" scenario.
  - Additional macro effects: reduce under-the-table salaries and shadow economy activities.
- Specific monitoring indicators (baseline / targets):
  - Minimum rate of replacement of salaries with pensions, %: 2020: 25
  - Ratio average retirement pension / subsistence minimum for pensioners, %: 2010: 70.6 | 2015: 75 | 2020: 85
  - Absolute poverty rate of pensioners, %: 2010: 28.1 | 2015: 26 | 2020: 23
  - Share of retired pensioners with pensions under subsistence minimum, %: 2010: 92 | 2015: 89 | 2020: 84
  - State social insurance budget deficit, % (compared to average 1% during 2006-2010): 2015: 0.5 | 2020: 0
  - Number of states with social security agreements with Moldova: 2010: 4 | 2015: 8 | 2020: 12

### Justice sector — trust, efficiency, corruption, and economic costs
- Diagnostic indicators:
  - Public trust: 2/3 of citizens do not trust the justice system.
  - 31.9% of economic agents consider courts reasonable, impartial and incorrupt in Moldova vs 38.9% in Eastern Europe.
  - Court satisfaction scores (out of 5): courts 3.91; courts of appeal 3.76; Supreme Court 3.62.
  - Case backlogs (2009 vs 2007): criminal cases +20%, civil cases +50%, economic cases +150%.
  - Number of judges increased from 380 (2007) to 420 (2009); monthly load decreased from 66.6 to 58.6.
  - Unresolved economic cases doubled from 2,000 (2007) to 5,200 (2009).
- Corruption and integrity:
  - Disciplinary sanctions to judges: 44 during 2001-2008; 10 in 2010.
  - Over 20,000 persons confessed to bribing judges in 2009; average judge requested/accepted about 4 bribes per month.
  - Approximately 40% of population states it is very likely to solve a problem by bribing a judge.
  - Justice Independence Indicator (Freedom House): 4.5 (1 highest independence, 7 lowest).
  - 69% of judges consider legal status does not ensure independence; 47% perceive performance indicators as useful for independence.
  - One in five persons admits being asked to offer a bribe; 23% said they offered bribes in social activity areas.
- Human rights/criminal justice:
  - Recidivism in 2010: 60%.
  - Low reporting and investigation for violence against women; one in three women subjected to domestic violence.
- Strategic vision (2020): impartial, qualitative, accountable, and timely justice; zero tolerance to corruption; contribute to sustainable economic development.
- Expected impact and quantified benefit:
  - Bribes paid from enterprises’ revenues in 2011 about MDL 390 million; reduction in corruption could reallocate part of this to productive investment, generating annual GDP growth by at least 0.1%.
  - Reduced postponed trials lower costs for citizens and businesses and improve investment climate.
- Specific monitoring indicators (2010 | 2015 | 2020):
  - Share of citizens that show lack of trust in justice, %: 2010: 67 | 2015: 60 | 2020: 40
  - Justice independence index (Freedom House): 2010: 4.5 | 2015: 4 | 2020: 3
  - Share of judicial cases examined with delays, %: 2010: 60 | 2015: 30 | 2020: 10
  - Share of courts observing norms and decisional transparency, %: 2010: 60 | 2015: 100 | 2020: 100
  - Share of litigations solved via alternative ways, %: 2010: 0 | 2015: 10 | 2020: 25
  - Number of corruption victims, %: 2010: 20 | 2015: 15 | 2020: 10
  - Share of economic agents believing courts are reasonable, impartial and non-corrupt, %: 2010: 31.9 | 2015: 40 | 2020: 60
- Economic cost of court delays (selected figures from Table 9):
  - Number of delays per year in the system: 576,213
  - Average number of people participating in a session: 7
  - Average monthly salary in the economy per working hour, MDL: 20
  - Time spent by a participant during the day when the case was postponed, hours: 4
  - Total "lost" economic effect by a participant per day, MDL: 95
  - Average monthly salary in the economy (2010), lei: 3,500
  - Total economic effect per delayed session, MDL: 668
  - Average transport expenses of a participant (2010), MDL: 15
  - Total losses in the system without intervention, MDL: 385,036,338
  - Reported lost gross national revenue due to absence from work because of postponed court trials: about MDL 390 million annually.

### Implementation, coordination, monitoring and evaluation
- Strategy implementation period: 2012–2020 with annual planning, resource allocation, monitoring and reporting.
- Implementation mechanisms:
  - Consolidated Action Plan (single framework for planning, monitoring and reporting).
  - Medium Term Budgetary Framework (MTBF) to prioritize and finance Strategy actions; State Chancellery and Ministry of Finance to ensure synchronization.
  - Annual planning and reporting cycle and mid-term evaluation after 2015; possibility of thematic or holistic evaluations.
- Reporting products:
  - Quarterly progress reports via online Consolidated Action Plan monitoring system.
  - Annual implementation report with analytical content.
  - Thematic evaluation reports as needed.
  - Intermediate implementation report after 2015.
  - Final implementation report upon completion.
- Institutional roles:
  - Government: supervision, review, approval of reports, ensure financing alignment.
  - State Chancellery: main coordinator for monitoring and evaluation; translate priorities into Consolidated Action Plan; manage online monitoring.
  - Line ministries: coordinate and report on priority implementation; present financing needs in sectoral expenditure plans and annual budgets.
  - Parliament: review implementation evaluation reports.
  - National Participation Council: platform for civil society consultation; review monitoring and evaluation reports.

*Source: Introduction and selected sections from National Development Strategy "Moldova 2020" (document content provided).*

### Introduction ...........................................................................................................

### Introduction

### Strategic vision for the development of the Republic of Moldova
- The National Development Strategy "Moldova 2020" presents a cohesive long-term sustainable economic development vision based on a diagnostic study of constraints to economic development.
- The Strategy aims to consolidate and guide a sectoral approach characteristic of the governance program and to increase budget coverage of policies in health, culture, social protection, and environmental protection as a result of accelerated economic development.
- Continued support from development partners is expected and considered crucial for areas where foreign assistance currently plays a role.

### Features of current economic growth
- Economic growth and poverty reduction in the Republic of Moldova have been closely correlated with remittance inflows and the consumption they generate.
- Remittances have increased disposable household income and aggregate consumption demand, much of which was met by imports, contributing to an alarming trade deficit.
- Two key conclusions:
  - Maintaining the current pace of economic growth will be difficult without structural change of the national economy.
  - There is a need to replace the inertial growth model based on consumption fueled by remittances with a dynamic model based on investment and development of goods- and services-exporting industries.
- Labor dynamics and migration have negatively affected the labor supply:
  - Labor force participation fell from 60% down to 44%.
  - Actual labor declined from 1.514 million to 1.143 million in 2010.
  - This corresponds to an average annual decline of 2.8%.

### Changing the development paradigm
- Economic development depends on accumulation of capital, labor, and labor productivity (including technologies, efficient governance, skills).
- Without concerted change, potential growth over the next ten years is limited to a maximum of 4.5% to 5% annually; this scenario assumes labor outflow will be stopped and remittances will remain at current levels.
- Growth during 2000-2010 was driven primarily by:
  - Increase in fixed capital: productive stock of fixed capital increased on average by 8.2% annually.
  - Increase in productivity of labor and capital: 4.7% annually.
  - Characterization: growth was more extensive than intensive; a jobless growth with limited re-equipment of production.
- Constraints and implications:
  - The “easy” reform opportunities from transition have been largely exhausted; further multi-factor productivity gains are limited without deeper reforms.
  - Physical labor supply is rigid and unlikely to expand rapidly given migration and mobility incentives.
- The new paradigm focuses on:
  - Attracting investment.
  - Developing export industries.
  - Promoting a knowledge-based society (strengthening research and development, innovation, and technology transfer).
  - Ensuring equitable distribution of development benefits.
  - Emphasizing speed, scale, and consistency of reforms rather than isolated instant reforms.

### Development priorities
- Growth-Diagnostics methodology was used to identify critical issues; unresolved binding constraints will continue to suppress investment potential.
- Four critical issues identified as priorities to remove investment-suppressing barriers:
  - Education.
  - Roads (infrastructure).
  - Access to finance.
  - Business environment.
- Additional priorities with direct impact on the poor or cross-cutting effects:
  - Efficiency and affordability of energy resource consumption.
  - Pension system equity and sustainability.
  - Justice system efficiency and anti-corruption (an inefficient judicial system endangers development and investment).
  - Health is identified as a critical problem reducing labor force and labor productivity; health issues are to be addressed across long-term development priorities.

*Source: Introduction, National Development Strategy "Moldova 2020" (document content provided).*

### 1. Aligning  the  education  system  to  labor  market  needs  in  order  to  enhance  labor

### 1. Aligning  the  education  system  to  labor  market  needs  in  order  to  enhance  labor 

### Prioritized policy actions
- 1. Aligning the education system to labor market needs in order to enhance labor productivity and increase employment in the economy;
- 2. Increasing public investment in the national and local road infrastructure, in order to reduce transportation costs and increase the speed of access;
- 3. Reducing financing costs by increasing competition in the financial sector and developing risk management tools;
- 4. Improving the business climate, promoting competition policies, streamlining the regulatory framework and applying information technologies in public services for businesses and citizens;
- 5. Reducing energy consumption by increasing energy efficiency and using renewable energy sources;
- 6. Ensuring financial sustainability of the pension system in order to secure an appropriate rate of wage replacement;
- 7. Increasing the quality and efficiency of justice and fighting corruption in order to ensure an equitable access to public goods for all citizens.

- Strategic focus: produce a social and economic impact across the seven dimensions, remove critical barriers preventing optimal use of resources, prioritize state intervention to ensure qualitative economic development and poverty reduction.
- Environmental commitment: undertake efforts to ensure the transition to a green economic development, integrate and strengthen environmental protection aspects in all social-economic development domains, and improve governance in the sustainable development domain.
- Institutional requirement: accelerate institutional reforms and strengthen capacity of public authorities to implement priorities; modernize public services with greater transparency and accessibility.

### Impact on economic development (findings and scenarios)
- Historical growth:
  - GDP grew on average by 5.1% annually during 2000-2010.
  - Growth subperiods: 7.1% during 2000-2004, 5.2% during 2005-2008.
  - Note: regional and global crises occurred in 1998 and 2008; high growth years often reflect recovery from crises or pre-crisis booms.
- Base case scenario (continuation of recent decade trends):
  - Assumes same economic, social, political phenomena, rising remittances, and same pace of reforms.
  - Estimates an average annual GDP growth of 4.7% during 2012-2020.
- Alternative scenario (implementation of Strategy priorities):
  - Implementation of the priorities supplements the base growth rate by more than 1.2% annually.
  - Annual supplement to additional GDP growth emerges gradually and accelerates from 1.1% (2015) to 2.1% (by 2020), continuing after the planning schedule.
  - Result: in 2020 the GDP will be 12% higher compared to the base case scenario; the difference grows significantly with each year beyond 2020.
- Interpretation: even apparently small annual GDP growth differences (e.g., 2%) can distinguish stagnation from growth or normal growth from an economic boom in developed economies.

### Impact on income and poverty (projections and mechanisms)
- Income per capita:
  - Along with implementation of the priorities, annual income per capita by 2020 will be on average 12% higher compared to the base case scenario.
  - Income per capita by 2020 will be 79% higher compared to 2011.
- Poverty-elasticity mechanism:
  - Empirical elasticity coefficient between poverty rate and economic growth was minus 0.7 during 2000-2010, meaning each annual supplementary percentage of GDP growth reduces the poverty rate that year by 0.7%.
  - Using the elasticity and average GDP growth rates: base case average GDP growth 4.7% and the scenario with seven priorities 6.7% by 2020.
  - Direct effect of pension reform on poverty is estimated at about 2%; these two effects will cumulate.
- Poverty projection:
  - In 2010, the poverty rate was 21.9%.
  - If the 2010 poverty line is used, the poverty rate will be reduced in the base case scenario to approximately 16% by

*Source: _cr13269 - 1. Aligning  the  education  system  to  labor  market  needs  in  order  to  enhance  labor*

### 2020. But, along with the implementation of priorities, it will be reduced significantly, to

### _cr13269 - 2020. But, along with the implementation of priorities, it will be reduced significantly, to

### Poverty reduction and sustainability of economic growth
- Finding: Implementation of development priorities reduces poverty to 12.7%, or by 3.3 percentage points over the base case scenario, accounting for 149,000 people out of poverty (Figure 3).
- Analysis:
  - Short-term: elimination of critical constraints and poverty reduction yield qualitative growth effects.
  - Medium- and long-term: authorities prioritize welfare (public health, personal security, access to culture, clean environment).
  - Risk: economic growth without sustained effort negatively impacts the environment through industrial pollution and increased consumption; regulations to counter this are seen by businesses as burdensome.
- Government strategic vision (medium/long term):
  - Reconcile accelerated economic development with environmental protection in conformity with European standards via:
    - (i) achievement of a rate of economic development that would allow increasing financing of environmental protection measures; and
    - (ii) balanced regulation of the business environment in terms of economic and environmental impact.
- Health as component of welfare:
  - Equity in health, ensuring the right to health for all, and societal accountability for health care measures are decisive for economic development and social prosperity.
  - Awareness-raising on health determinants and mainstreaming health in all policies will maximize health results.
  - Increased health system efficiency contributes to productivity, social inclusion and poverty reduction by reducing morbidity, premature mortality and increasing healthy life expectancy.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13269.pdf*

### Education: relevance for careers and human capital
- Situation analysis:
  - Trend: doubled number of students enrolled in higher education over two decades, to the detriment of secondary vocational and general specialized education (Figure 4).
  - 71.3% of students are enrolled on a contractual basis and pay a tuition fee.
  - Spending on education reached 9.2% of GDP (European average 5.5% of GDP).
  - 2009 financial allocations per pupil:
    - secondary vocational education: MDL 10,224
    - general specialized education: MDL 8,709/student/year
    - higher education: MDL 6,802/student/year
  - 2010 unemployment by education (ILO methodology): unemployed with secondary vocational education 22,800 people (24.8% of 92 thousand unemployed) — higher than unemployed with higher education (18.3 thousand) and general specialized education (12 thousand). Drop-out level for secondary vocational: 24.5%.
  - Labor market 2010: 970 thousand people aged 15-29 (27.2% of total population); unemployment rate in this group 13.9% (1.9 times nationwide unemployment 7.4%). Only 22% of young people found a job immediately after graduation in 2010. 17.7% went to work abroad.
  - About 30% of graduates do not work according to qualifications obtained.
  - 85% of companies mention lack of qualified labor force; 52.2% of respondent companies confirm young workers do not show devotion to work.
- Strategic vision and reforms:
  - Modernize vocational education and continuous training; strengthen partnerships between education and labor market.
  - Enact new education legislation adjusted to European experience.
  - Reform research and innovation financing; support excellence in education and science.
  - Establish National Agency for Higher Education and Research Quality Assurance.
  - Develop National Framework for employment qualifications and standards; strengthen labor forecasting.
  - Quality target for intellectual staff: share of 75% of professors with teaching and research titles.
  - Modify university financing formula to stimulate competition and provide broader financial autonomy.
  - Eliminate corruption factors in education; rely on market mechanisms to stimulate competition among universities.
- Expected impact:
  - Improved investment climate via skilled, responsible, flexible labor → greater labor productivity → improved product/service quality.
  - Channeling graduates into jobs, encouraging domestic investment, attracting foreign investors, reducing employers’ costs to re-skill workforce.
  - Assumptions for GDP growth effects:
    - Migration of young graduates reduced by at least 50%.
    - Graduates benefiting from reform are 20% more productive in aggregate.
    - Under such conditions, annual GDP growth over the medium term may be 0.6-0.9% higher compared to the scenario "without reforms".
- Specific objectives (Monitoring indicator: values for 2010, 2015, 2020):
  - Unemployment rate, %: 7.4 | 6 | 5
  - Outflow of young labor force, %: 17.7 | 15 | 10
  - Share of employers satisfied with labor force quality, %: 15 (2011) | 40 | 60
  - Share of employed graduates that claim to need additional training after graduation, %: 40 | 20 | 10

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13269.pdf*

### Roads: condition, economic cost, and strategic rehabilitation
- Situation analysis:
  - Historical deterioration: national roads in good condition: about two thirds in 1992; less than half in 1998; only 7% in 2006 (Figure 5).
  - 2006 study of 1,500 km local roads found about 96% in bad/very bad condition.
  - 1998-2006 road funding covered less than 10% of needs; allocated funds allowed only routine maintenance; over 80% of road length exceeded operating framework.
  - Road fund contributions: MDL 241 million in 2009 → MDL 788 million in 2011; still insufficient.
  - Institutional inefficiencies: 39 road maintenance companies (1 private, 35 joint stock with state participation, 3 state companies); administration costs exceed 25-30% of total spending (law-prescribed ceiling 14.5%).
  - International competitiveness indicators:
    - Global Competitiveness Report 2010-2011: quality of infrastructure ranked 94th out of 139; road quality infrastructure ranked 139.
    - World Bank Logistics Performance 2010: Moldova ranked 104th out of 155 countries; 132nd for logistics competency; 124th for customs; 123rd for infrastructure aspects (Table 2).
  - Social and economic costs:
    - Additional costs for users due to unsatisfactory roads: approximately MDL 2.5 billion annually.
    - Deaths per million vehicles: about 1,120; deaths per one million population: about 120.
    - Fuel consumption increase on bad roads: 20% higher, increasing emissions.
- Strategic vision and funding needs:
  - Objective: 80% of roads in good and very good condition by the end of the Strategy due date.
  - Estimated annual requirement for national and local road maintenance and current repairs: approximately MDL 4.2 billion (Table 3 totals).
  - Capital reconstruction planned for 2011-2014: over 400 km with external funding amount EUR 334 million.
  - Additional domestic and foreign funding needed to attain objective by end of Strategy due date: EUR 1.1 billion.
  - Institutional/operational measures:
    - Explore public-private partnerships.
    - Ensure transparent procurement friendly to advanced technology bids.
    - Reorganize and modernize road maintenance companies by 2013.
    - Implement multi-annual maintenance contracts by 2015.
    - Reduce administrative costs to statutory ceiling.
- Expected impact:
  - Reduced vehicle operating costs, saved fuel and avoided repairs.
  - Time savings for users and reduced accidents.
  - Increased freight and passenger traffic, investments, regional development, tourism.
  - Quantified benefit: MDL 2.5 billion wasted annually on additional repairs and fuel on segments planned for rehabilitation; fuel/repair savings may increase regular annual GDP growth by an estimated 0.3% in the short and medium term.
- Specific objectives (Monitoring indicator: 2010, 2015, 2020):
  - Rehabilitation of national public roads, km: 900 (2014) | 1900
  - Repairs of local public roads, km: 700 (2014) | 4900
  - Share of national public roads in very good condition, %: 38 | 42
  - Reduction in number of deaths caused by road accidents per million population: 120 | 60
  - Logistics Performance Index (infrastructure / logistics competency): 2.57 / 2.05 / 2.17 (2010) → 2.87 / 2.65 / 2.77 (2020) — table shows LPI component values across years.

- Cost estimates (Table 3 totals, preserved):
  - Total estimated cost (ÎN TOTAL): 4,219,084 (MDL thousand) as listed in the table (presented as 4219084 in table).

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13269.pdf*

### Finance: affordable and cheap financial intermediation
- Situation analysis:
  - Banking sector dominates financial system; sector stable during 2008-2009 crisis.
  - Weak financial intermediation: average GDP share of banking loans during 2004-2010 was 31.5%.
  - Bank deposits average GDP share: 32.9%.
  - Excess liquidity: average liquid reserves share in total banking assets 27.3% during 2004-2009.
  - High interest rates and high risk premiums:
    - 14.2% of respondents in Global Competitiveness Report 2010-11 indicated access to finance as biggest obstacle.
    - Risk premiums in Moldova represented 8.6% during 2004-10.
  - Market concentration and limited competition:
    - Largest five banks assets share: 70.12% (end-2011).
    - 3/4 of banks’ capital represented by foreign investments in 2011; only four banks were branches of Western banks.
    - State share in capital of one of largest five banks reduces efficiency.
  - Capital market: volume of securities traded during 2004-2010 as share of GDP: 1.28% (regional average 5.32%, EU average 92.4%).
  - Reform improving credit information led to Doing Business 2012 ranking improvement from 96 to 40.
- Strategic vision (2020 objectives):
  - Pillars: (i) develop financial intermediation; (ii) streamline costs of financial resources; (iii) streamline guarantee terms for credits and loans.
  - Objective: have a financial system channeling efficiently financial resources to businesses and households by 2020.
  - Measures: sell state’s share in banking capital, attract strategic investors, develop non-banking placement options (Diaspora Bonds), diversify financial instruments (business angels), enhance regulation and supervision to European practices, develop hedging instruments and improve collateral management, expand credit history bureaus.
- Expected impact:
  - Facilitate access to finance → increase financing volumes through banking and non-banking sectors as a percentage of GDP up to 50% by 2020.
  - Assumption for GDP impact: out of each modest additional MDL loaned to the real sector, at least 30 bani will be invested in productive capital; average loan maturity three years; additional annual GDP growth up to 0.5-0.7% higher compared to no-priority scenario.
- Specific objectives (Monitoring indicator: 2010, 2015, 2020):
  - Increasing GDP share of deposits, %: 35.8 | 40 | 45
  - Increasing GDP share of loans, %: 37.2 | 45 | 50
  - Reducing the risk premium, percentage points: 10.1 | 9 | 7
  - Increasing volume of exchange transactions with securities as share of GDP, %: 0.4 | 2 | 5

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13269.pdf*

### Business: regulatory environment, competition, and firm dynamics
- Situation analysis:
  - Foreign direct investment peak: USD 713 million in 2008; declined after global crisis; partial recovery in 2010 (Figure 11).
  - Doing Business 2012 ranking: Moldova 81st out of 183 countries.
  - Global Competitiveness Index 2011-2012: Moldova ranked 93rd out of 142 countries; “Institutions” ranking 106th.
  - Index of Economic Freedom 2011: Moldova ranked 120th out of 179 countries.
  - Business cycle problems identified at stages:
    - Starting a business: Moldova ranks 88th in Doing Business 2012 for “Starting a business”; many pre-registration permits required.
    - Doing business: burdens include many state inspections, frequent reporting, numerous permits, costly and non-transparent customs procedures, weak conformity assessment capacity; inventory found over 400 papers/permits, 272 considered justified and included in official Nomenclature.
    - Closing a business: Moldova ranks 91st in Doing Business 2012 on "Closing a business"; insolvency procedures costly and lengthy; low asset recovery.
  - Regulatory issues:
    - Unjustified and ambiguous/contradictory regulations generate excessive administrative costs and discretionary enforcement → corruption and unfair competition.
    - Moldova lagged behind Georgia in utilizing potential for reducing administrative barriers (Table 4).
- Strategic vision and reforms:
  - Improve business environment by 2020: reduce risks and costs at each stage of business life cycle; promote free competition.
  - Measures: digitize public service delivery, shift inspections to counseling (risk-based inspections), involve private sector in regulatory design, improve courts’ responsiveness, establish transparent complaints systems, develop national competition and state aid program per best European practices.
  - Encourage entrepreneurship and expand SME support; increase share of women entrepreneurs (currently 27.5%).
  - Develop quality infrastructure for exports and conformity assessment capacity.
  - Ensure environmental regulations distribute administrative burden evenly and avoid unfair competition.
- Expected impact:
  - Reduced administrative and compliance costs → reinvestment of savings, increased trade volumes and exports, enhanced investor confidence and foreign investment, improved quality of investments (technology- and innovation-intensive).
- Specific objectives (Monitoring indicator: 2015, 2020):
  - Starting a business: Time required to start a business, hours: 24 | 1; Reduce cost of starting a business by 50% | by 80%.
  - Dealing with construction permits: Time, days: 180 | 100; Reduce costs by 20% | by 40%.
  - Paying taxes: Reduce number of payments to 35 | to 25; Time dedicated to paying taxes, hours: 215 | 190.
  - Trading across borders: Documents required for export/import: down to 5 | down to 4; Time to obtain documents, days: down to 25 | down to 10; Reduce costs (per container) by 5% | by 10%.
  - LPI (customs operation / logistics competency): 2.33 / 2.30 (2015) → 2.55 / 2.50 (2020).
  - Closing a business: Increase investment recovery rate by 50% | by 100%; Time required for closing, years: 2 | 1.5.
  - Reduce state inspections by 20% | 40%; reduce mandatory reports by 10% | 20%; reduce permits by 20% | 40%; reduce cost of dealing with permits by 20% | 40%.
  - Digitalizing public services for business (no. of services): 20 | All.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13269.pdf*

### Energy: security, efficiency, and renewables
- Situation analysis:
  - Structural vulnerabilities: 95% of energy resources imported; power generation capacities insufficient on the right bank of Nistru; insufficient interconnections for gas and electricity; high losses in electricity and heating sectors; limited renewables use (Table 5, Table 7, Table 8).
- Electricity:
  - Electricity production level decreased by 15% in 2010 compared to 2001.
  - Central Heating-and-Power Plant nr.2 (CHP-2) produces 70-80% of domestic electricity.
  - Procurement from Moldovan Thermo-Electrical Power Plant declined by about 21% in 2010 vs 2009.
  - Distribution grid losses are declining but remain up to 10%, higher than developed countries.
- Heating:
  - 2010 heating production increased by about 9% vs 2009 but fell by 12.8% vs 2001.
  - Central heating-and-power plants produce 60-65% of heating.
  - JSC “Termocom” has large historic debts to central heating-and-power plants; CHP-2 debts show a 2-fold increase over reviewed period; average payment rate 40-60%.
  - Heat losses high: 22% in 2010; general growth trend 2001-2010 of about 7.2 percentage points.
  - Buildings consume 40% of energy; residential buildings 65% of building sector consumption. Household heating shares range from 15% up to 50% of total household spending.
  - Potential reduction in energy consumption in existing buildings: about 30-50%, up to 70% in some cases.
- Natural gas:
  - Dependence on single-source imports increases vulnerability.
  - Volume of natural gas procured (million m3 / MDL million): 2005: 1418.6 / 1364.9; 2010: 1187.8 / 3674.0 (Table 7).
  - Average price of natural gas (USD/1000 m3 / MDL/1000 m3): 2005: 76.1 / 962; 2010: 250.1 / 3093.
  - Delivered gas volumes and prices increased in monetary terms despite declining volumes.
- Renewables and energy efficiency:
  - Energy efficiency very low — about 3 times lower compared to European countries.
  - Technical potential of main RES (Table 8):
    - Solar: 50.4 PJ (1.2 million tons equivalent of petroleum)
    - Wind: 29.4 PJ (0.7)
    - Hydro: 12.1 PJ (0.3)
    - Total biomass potential: 21.5 PJ (0.5)
    - Total RES potential: 113.4 PJ (2.7)
    - Sources of energy with low heating potential (>80.0 PJ, >1.9 million tons equivalent)
- Strategic vision:
  - Create by 2020 a competitive and efficient energy sector providing quality energy on affordable and reliable terms; liberalized energy market; integration with European energy market; develop interconnections; optimize energy mix and diversify resources; create new generation capacity.
  - Ensure energy efficiency via reduction of energy intensity in residential, industrial, transport and agriculture sectors; modernize energy system; implement efficient technologies and renewables; raise public awareness; support low-cost technologies in hospitals and biosafety.
  - Attract investments and create mechanisms to mobilize funding for energy projects.
- Expected impact and quantified benefits:
  - Planned gradual increase of energy efficiency by up to 10% would yield annual savings by 2020 of approximately MDL 830 million in current prices.
  - Estimated GDP effect: annual GDP growth rate over medium and long term at least 0.2% higher compared to base case scenario, attributable to savings achieved.
- Specific objectives (Monitoring indicator: 2015, 2020):
  - Energy interconnections (electricity lines, km / natural gas pipelines, km): 139 | 40 (figures listed)
  - Share of consumption from renewables, %: 10 (2015) | 20 (2020)
  - Share of bio-fuels in total fuels used, %: 4 (2015) | 10 (2020)
  - Increasing domestic production capacity for electricity, MW: 800 (2020 target)
  - Ensuring share of annual electricity production from renewables, %: 10 (2020)
  - Reducing energy intensity, %: 10
  - Reducing electricity losses in transport and distribution networks, %: 13 | 11
  - Reducing natural gas losses in transport and distribution networks, %: 20 | 39
  - Reducing heating losses in transport and distribution networks, %: 2 | 5
  - Reducing greenhouse gas emissions (compared to 1990), %: 25
  - Reducing energy consumption in buildings, %: 10
  - Share of renovated public buildings, %: 10

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13269.pdf*

### Pension system: equitable and sustainable
- Situation analysis:
  - Pension system operates on pay-as-you-go scheme, consuming 8.8% of GDP.
  - 2010: 69.6% of working population contributing; pensions paid for 84.7% of citizens who reached retirement age: total 460,500 people (13% of total population).
  - 2011: pensions accounted for 67.8% of total social security budget expenditures.
- Main challenges:
  - Small quantum of benefits and low replacement rate:
    - Average retirement-age pension in 2010 was 70.6% of the subsistence minimum for pensioners.
    - Over 92% of retirement-age pensioners received pensions lower than the subsistence minimum.
    - Replacement rate (average retirement-age pension / average salary) was 28.2% (European Code recommended 40%).
    - Modeling shows replacement rate may decline to 23% in 2020 and to 14% around late 2040 under current system.
    - Causes: pension indexation method and non-indexation of insured income for pre-1999 periods.
  - Small number of contributors and unfavorable contributors-to-pensioners ratio:
    - Active population fell 2011-2010 from 1.6167 million to 1.2354 million; employed from 1,499,000 to 1,143,400.
    - Taxpayers in social insurance ~860,000 in 2010.
    - Emigration: 311,000 people work outside the country.
    - Informal employment: estimated 406,900 persons in Q2 2011.
    - Number of pensioners (all categories) stable: 627,100 on January 1, 2011.
    - Ratio active population to pensioners of all categories: 2:1; working population to pensioners: 1.8:1. Stability for PAYG requires ~4:1–5:1.
  - Population ageing:
    - Ratio of population aged over 60 to total population: 14.4% in 2010 (13.6% in 2000).
    - Share of young population (0-15 years) fell from 24.8% (2001) to 17.8% (2010).
    - Share of population over retirement age projected to increase from 15.2% to 31.5% in 2050.
    - Pessimistic projections: population could shrink by up to one million inhabitants by 2050; working-age population share may fall by about 11 to 16 percentage points by 2050 (from 69.2% to 57.9%).
  - Different retirement ages and gender disparities:
    - Retirement age: women 57 years, men 62 years.
    - Minimum insurance period: at least 15 years for partial pension; at least 30 years for women and 30.5 years for men for full pension; total required work history to be extended to 35 years by 2020.
    - Average years worked for retirement pay in 2010: women 32.5 years, men 37.5 years.
    - Average old-age pension 2010: women MDL 797.1, men MDL 937.8.
  - Low insured income of contributors:
    - Average monthly insured salary (individual contracts) about MDL 2,133 in 2010.
    - Payroll under-reporting reduces pensions.
- Financial non-sustainability:
  - Social insurance system reported budget deficit since 2005, rising from MDL 1.74 million to MDL 87.33 million in 2007; 2008 showed a surplus (text truncated).
- (The provided content ends mid-discussion of 2008 surplus.)

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13269.pdf*

### 47.7 million. However, the situation changed in 2009 and 2010, when the state social

### _cr13269 - 47.7 million. However, the situation changed in 2009 and 2010, when the state social

### Fiscal balances and deficit coverage
- The state social insurance budget recorded a budget deficit of MDL 25.55 million in 2009 and MDL 213.3 million in 2010.
- In previous years the deficit was covered from the balance of funds on National Social Insurance House bank accounts.
- In 2009 the budget deficit was covered from means in the reserve fund of the state social insurance budget and partially from state budget means.
- Starting in 2010, the budget deficit is covered from the state budget.

### Projections and long-term modeling
- Long-term modeling indicates that, if current conditions remain, the system will register a deficit in the next ten years and a surplus in the long run.
- The pension fund surplus in the long run is caused only by the considerable reduction of the replacement rate.

### Unfair redistribution of funds — privileged pension terms
- Moldovan legislation stipulates privileged pension terms for certain categories of citizens: judges, prosecutors, civil servants, MPs, members of government, locally elected officials, and customs employees.
- The difference between these terms and general conditions for old-age pensions consists in lower retirement age and lower required number of years worked.
- The stated objective of such privileges is for the state to reward the special merits of these categories; the text notes that "in the transition process to a market economy these principles lose their relevance."
- Average pension differentials:
  - In the case of Government members, about 8 times higher than the average old-age pension set under general terms.
  - In the case of civil servants, 2.3 times higher than the average old-age pension set under general terms.
- Efforts toward unification:
  - First steps are being undertaken to unify the pension system to ensure that all contributors to the social insurance system benefit from the right to receive an old-age pension based on general conditions.
- Beneficiary statistics:
  - The total number of privileged pension beneficiaries was 7,311 persons in 2010 or approximately 1.1% of the total number of pension beneficiaries.
  - The pension expenditure for these categories reached MDL

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13269.pdf*

### 116.49 million or 2% of total expenditure for payment of pensions in 2010.

### _cr13269 - 116.49 million or 2% of total expenditure for payment of pensions in 2010.

### Pension system: scope, financing, and coverage
- Payment of pensions in 2010: 116.49 million or 2% of total expenditure.
- Total beneficiaries of social insurance and state pensions: only about 152,400 are employed in the national economy.
- Current legislation does not provide for a re-calculation of pensions for people who continue to work; continued payment of social insurance contributions by employed pensioners does not influence the amount of their pension and is used to cover other social risks (e.g., benefits for temporary loss of working capacity).

### Low attractiveness of the pension system — diagnosis
- Credibility problem driven by low level of pensions and insufficient information on the retirement system.
- Resulting behavior: people avoid paying contributions based on real wages, jeopardizing pension system operation.

### Underdeveloped private pension funds and absence of mandatory second pillar
- Legislative framework for non-state pension funds adopted in 1999 (3rd pillar / optional pension systems).
- Private pension system is virtually non-existent: two private pension funds are registered but do not have any significant activity.
- Causes of stagnation:
  - Lack of interest from population due to low incomes that prevent allocating wages to private funds.
  - Insufficient incentives for employers and individuals.
  - Legal framework for mandatory private pension funds (second pillar) is non-existent so far.
- Planned action: Opportunity study for cumulative pension system implementation (pillar 2) to be developed by the end of 2015.

### Social security guarantees for migrant workers
- Increased labor mobility and migration create long-term negative effects when migrant workers or their families return or are displaced without social insurance entitlements.
- Urgent need to conclude bilateral social insurance agreements with main host countries for migrant workers.

### Strategic vision and reform objectives
- Vision: "A fair and sustainable pension system, ensuring a decent living after retirement to all categories of population, men and women alike."
- Risks: inadequate pension levels and pressure for ad hoc pension increases threaten system viability and economic development in the "without reforms" scenario.
- Reform aims to minimize adverse effects and avoid funding pension increases from outside the pension system.

Reform components:
A. Modernization of pay-as-you-go pension system (pillar 1):
- adjust the pension system to principles of organization and operation of the public social insurance system and existing international standards;
- improve financial sustainability by increasing and unifying conditions regarding the contribution period and retirement age, and accumulate financial means in the reserve fund of the state social insurance budget;
- ensure a closer link between paid state social insurance contributions and amount of pension set for insured persons;
- undertake complex measures to develop the labor market, increase labor remuneration and improve the demographic situation.

B. Reviewing timeliness for cumulative pension system implementation (pillar 2):
- within which social insurance contributions are invested instead of being spent immediately for payment of benefits to current pensioners;
- Opportunity study to be developed by the end of 2015.
- Introduction of cumulative system implies preparatory measures: modernization of pillar 1 and development of the financial market.

### Expected impact of pension reform
- Reform will contribute to a reduction in poverty rate.
- Net impact estimate: by 2020 the share of pensioners below the absolute poverty line will decrease by 2 p.p. over the scenario "without reforms".
- Additional expected macro effects: reduce salaries paid under the table and shadow economy activities.

### Specific objectives and monitoring indicators
- Minimum level of rate of replacement of salaries with pensions, %:
  - 2020: 25
- Increasing the ratio between average retirement pension and subsistence minimum for pensioners, %:
  - 2010: 70.6
  - 2015: 75
  - 2020: 85
- Reducing the absolute poverty rate of pensioners, %:
  - 2010: 28.1
  - 2015: 26
  - 2020: 23
- Reducing the ratio between the number of retired pensioners with pensions under the subsistence minimum for pensioners and the total number of retired pensioners, %:
  - 2010: 92
  - 2015: 89
  - 2020: 84
- Reducing the state social insurance budget deficit, % (compared to an average of 1% during 2006-2010):
  - 2015: 0.5
  - 2020: 0
- Increasing the number of states that have concluded social security agreements with Republic of Moldova:
  - 2010: 4
  - 2015: 8
  - 2020: 12

### Justice sector: linkages to economic outcomes and reform rationale
- Public trust in justice: 2/3 of citizens do not trust the justice system.
- Perception among economic agents: 31.9% consider courts reasonable, impartial and incorrupt (Republic of Moldova) versus 38.9% in Eastern Europe.
- Court satisfaction scores (out of 5): courts 3.91; courts of appeal 3.76; Supreme Court of Justice 3.62.
- Productivity and efficiency trends (2009 versus 2007):
  - Remaining cases by year-end increasing: criminal cases +20%, civil cases +50%, economic cases +150%.
  - Number of judges increased from 380 in 2007 to 420 in 2009; monthly load decreased from 66.6 to 58.6.
  - Case settlement rate decreasing; unsolved economic cases doubled from 2,000 in 2007 to 5,200 in 2009.
- Consequences for business and investment: lack of judicial predictability, unequal decisions, negative effect on property rights and investor confidence.
- Integrity and corruption indicators:
  - Disciplinary sanctions to judges: 44 during 2001-2008; 10 in 2010.
  - Over 20 thousand persons confessed that they bribed judges in 2009; every judge requested or accepted on average about 4 bribes per month.
  - Approximately 40% of population states it is very likely to solve a problem by bribing the judge.
  - Justice Independency Indicator (Freedom House): 4.5 (1 highest independence, 7 lowest).
  - 69% of judges consider their legal status does not ensure their independence; 47% perceive performance indicators to be useful in ensuring independence.
  - One in five persons admits being asked to offer a bribe; 23% said they offered bribes in social activity areas.
- Human rights and criminal justice concerns:
  - Recidivism (relapses) in 2010: 60%.
  - Low reporting and investigation rates for violence against women; one in three women subjected to domestic violence.
- Strategic vision for justice (2020): impartial, qualitative, accountable and timely justice; zero tolerance to corruption; contribute to sustainable economic development.

### Expected impact of justice reform
- Quantified estimate: bribes paid from enterprises’ revenues in 2011 about MDL 390 million; lower corruption could reallocate part of this to productive investment, generating an annual GDP growth by at least 0.1%.
- Reduced postponed court trials will lower costs for citizens and businesses and improve investment climate and country attractiveness.

### Specific objectives and justice sector monitoring indicators
- Share of citizens that show lack of trust in justice, %:
  - 2010: 67
  - 2015: 60
  - 2020: 40
- Improved justice independence index (Freedom House):
  - 2010: 4.5
  - 2015: 4
  - 2020: 3
- Share of judicial cases examined with delays, %:
  - 2010: 60
  - 2015: 30
  - 2020: 10
- Share of courts that observe norms and decisional transparency (publish court decisions and have audio-video records of court sessions), %:
  - 2010: 60
  - 2015: 100
  - 2020: 100
- Share of litigations solved via alternative ways (extra-judicial):
  - 2010: 0
  - 2015: 10
  - 2020: 25
- Number of corruption victims, %:
  - 2010: 20
  - 2015: 15
  - 2020: 10
- Share of economic agents which believe that courts are reasonable, impartial and non-corrupt, %:
  - 2010: 31.9
  - 2015: 40
  - 2020: 60

### Economic cost of court delays (selected figures from Table 9)
- Number of delays per year in the system: 576,213
- Average number of people participating in a session: 7
- Average monthly salary in the economy per working hour, MDL: 20
- Time spent by a participant during the day when the case was postponed, hours: 4
- Total "lost" economic effect by a participant per day, MDL: 95
- Average monthly salary in the economy (2010), lei: 3,500
- Total economic effect per delayed session, MDL: 668
- Average transport expenses of a participant (2010), MDL: 15
- Total losses in the system without intervention, MDL: 385,036,338
- Reported lost gross national revenue due to absence from work because of postponed court trials: about MDL 390 million annually.

### Implementation, coordination, monitoring and evaluation
- Strategy implementation period: 2012–2020 with annual planning, resource allocation, monitoring and reporting.
- Implementation mechanisms:
  - Consolidated Action Plan (single framework for planning, monitoring and reporting).
  - Medium Term Budgetary Framework (MTBF) to prioritize and finance Strategy actions; State Chancellery and Ministry of Finance to ensure synchronization.
  - Annual planning and reporting cycle and a mid-term evaluation after 2015; possibility of thematic or holistic evaluations.
- Reporting products:
  - Quarterly progress reports via online Consolidated Action Plan monitoring system.
  - Annual implementation report with analytical content.
  - Thematic evaluation reports as needed.
  - Intermediate implementation report after 2015.
  - Final implementation report upon completion.
- Institutional roles:
  - Government: supervision, review, approval of reports, ensure financing alignment.
  - State Chancellery: main coordinator for monitoring and evaluation; translate priorities into Consolidated Action Plan; manage online monitoring.
  - Line ministries: coordinate and report on priority implementation; present financing needs in sectoral expenditure plans and annual budgets.
  - Parliament: review implementation evaluation reports.
  - National Participation Council: platform for civil society consultation; review monitoring and evaluation reports.

*Source: _cr13269 - 116.49 million or 2% of total expenditure for payment of pensions in 2010.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13269.pdf_