## 1. Implementation of Past IMF Policy Recommendations

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### Context and recent performance
- Recovery from the 2009 recession reflected Fund-supported policies and structural reforms.
- Key outcomes 2010–13:
  - Economic activity grew cumulatively by about 24 percent.
  - Consumer price inflation was brought under control.
  - Real wages increased cumulatively by about 13 percent.
  - In November 2013, Moldova initialed an Association Agreement with the EU including a Deep and Comprehensive Free Trade Area (DCFTA).
- Political context:
  - Political crisis in early 2013 led to policy slippages.
  - Pro-European center-right/center coalition government appointed in May 2013.
  - Delays prevented completion of final ECF/EFF reviews; parliamentary elections scheduled for late 2014 and local elections for early 2015.
- Poverty and structural reform needs:
  - Based on the ECA regional poverty line of US$5/day (PPP), 55 percent of the population was poor in 2011 (down from 94 percent in 2002; ECA average 25 percent).
  - National Development Strategy—Moldova 2020 focuses on education, infrastructure, financial sector, business climate, energy consumption, pension system, and judicial framework.

### Implementation record of past IMF recommendations (2010–13)
- Overall assessment:
  - Solid track record implementing Fund advice under a Fund program.
  - Strong performance on fiscal adjustment, inflation control, and structural reforms; weaker on banking sector advice and FSAP recommendations.
  - Data provision broadly adequate; Moldova subscribes to the SDDS.
- ECF/EFF program (approved January 2010):
  - Access totaling SDR 369.6 million (300 percent of quota) split equally between ECF and EFF.
  - Actually disbursed amount SDR 320 million (around US$500 million).
  - Program expired in April 2013; on August 28, 2013, Executive Board expected Moldova to engage in Post-Program Monitoring (PPM).
  - Program outcomes:
    - Overall budget deficit reduced from 6.3 percent of GDP in 2009 to 2.2 percent of GDP in 2012.
    - Government debt brought to about 30 percent of GDP.
    - Inflation brought to mid-single digits with an inflation targeting regime.
    - International reserves rebuilt.
    - Structural reforms advanced in energy, education, social assistance, and financial sector.
- 2012 Article IV consultation:
  - Macroeconomic policies and structural reforms broadly in line with Fund recommendations.
  - Weak implementation of financial sector reforms; Banca de Economii (BEM) condition deteriorated and subsequent stabilization diverged from Fund advice.
  - Amendments to the Law on Financial Institutions passed but implementation slow.
  - Overall budget deficit declined largely due to under-execution of investment projects; 2013 crisis measures increased current spending.
  - NBM’s monetary policy stance remained appropriate; inflation within target; international reserves increased.

### Recent economic developments, outlook, and risks
- 2013 outcomes:
  - Economy expanded by 8.9 percent in 2013 following a decline of 0.7 percent in 2012.
  - Growth led by rebound in agriculture and related industries, private consumption, and exports.
  - Inflation remained within NBM’s target range of 5 percent ± 1.5 percentage points.
  - Overall budget deficit narrowed to 1.8 percent of GDP in 2013 from 2.2 percent in 2012.
  - Current account deficit narrowed to about 5½ percent of GDP.
  - International reserves increased to US$2.8 billion (5 months of imports or 105 percent of short-term debt).
  - Real effective exchange rate (REER) depreciated by 3½ percent.
- 2014 outlook and projections:
  - Output growth expected to moderate to 2¼ percent in 2014.
  - Inflation projected to remain stable at about 5¼ percent.
  - Current account deficit projected to widen to about 7½ percent of GDP.
- Key vulnerabilities and transmission channels:
  - Remittances: 24 percent of GDP.
  - Exports to CIS and EU: 88 percent of total exports.
  - Donor support: about 10 percent of government spending.
  - Main transmission channels: remittances, external trade, and capital flows.
  - Staff recommends strengthening fiscal and external buffers.

### Authorities’ views on outlook
- Ministry of Economy (MoE): argued reassessment premature; under some scenarios growth could exceed 4 percent assumed in the budget.
- National Bank of Moldova (NBM): expected output in 2014 to be flat or decline; H2 2014 inflation projections lower than staff’s.
- Authorities agreed risks are on the downside and accepted staff’s transmission channels and policy responses in the Risk Assessment Matrix.

### Potential impact from regional geopolitical tensions
- Impact depends on crisis spread, escalation of trade tensions with Russia, and disruption of trade routes and gas supply.
- Specific exposures:
  - Ukraine: Ukraine’s share of Moldovan exports about 6 percent; remittances from Ukraine ~1 percent of GDP.
  - Russia: Russia’s share of Moldovan exports about 26 percent; remittances from Russia ~15 percent of GDP; Moldovan banks rely on funding from Russian banks; Russia accounts for about 10 percent of total stock of FDI in Moldova.
  - Trade routes and gas: CIS share in Moldovan exports about 40 percent; Moldova relies on Russian gas transported via Ukraine for over 90 percent of total gas consumption.
- Policy response recommendations:
  - Near term: prudent macro policies, let exchange rate adjust, allow automatic stabilizers, seek additional donor support, facilitate absorption of returning migrants.
  - Medium term: increase integration into global trade and energy markets to reduce reliance on any single trading partner.

### Key short-term macro indicators (selected)
- GDP growth (annual real growth rates, percent): 2009: -6.0; 2010: 7.1; 2011: 6.8; 2012: -0.7; 2013: 8.9; 2014 (Prel.): 2.2; 2015–2019 (projections): 3.5, 4.0, 4.0, 4.0, 4.0.
- Current account balance (percent of GDP, 2009–2019): -9.5; -9.6; -12.3; -7.7; -5.5; -7.4; -8.2; -8.1; -8.0; -7.9; -7.7.
- Gross official reserves (millions of U.S. dollars, 2009–2019): 1,480; 1,718; 1,965; 2,515; 2,820; 2,751; 2,621; 2,599; 2,551; 2,511; 2,409.
- Remittances and compensation of employees (net, millions U.S.$, 2009–2019): 1,124; 1,273; 1,549; 1,745; 1,913; 1,864; 1,839; 1,892; 1,950; 2,010; 2,073.
- Non-performing loans (end-of-period, percent): 16.3; 13.3; 10.7; 14.5; 13.0; 12.7; 12.4; 11.6; 13.2 (selected years and Mar 2014 point).

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### A. Maintaining Financial System Stability — risks and staff recommendations
- Staff’s assessment:
  - Significant systemic risks due to governance problems despite aggregate indicators showing capitalization and liquidity.
  - Aggregate indicators (March 2014):
    - Aggregate capital adequacy ratio: 23.5 percent (minimum required 16 percent).
    - Return on equity: 8.6 percent.
    - Liquid assets: 34.7 percent of total assets.
    - NPL ratio: 13.2 percent.
  - Concerns: concealment of ultimate beneficial owners, encumbered reported liquid assets, slow NPL resolution.
- Staff recommendations:
  - Implement FSAP recommendations and enforce regulatory requirements.
  - Re-evaluate bank shareholders to ensure disclosure of ultimate beneficial owners and controllers.
  - Strengthen enforcement of AML/CFT framework.
  - Urgently pass legislation to fully restore NBM and NCFM regulatory powers and strengthen legal protection of board members and employees.
  - Agencies should resolutely enforce regulatory requirements.
- Specific measures regarding BEM and affiliated banks:
  - Three banks combined: comprise 28 percent of banking system assets and equivalent to about 20 percent of GDP.
  - Staff actions recommended:
    - NBM to maintain high scrutiny of BEM operations and monitor liquidity daily, including interbank exposures.
    - Ensure BEM shareholders and management cooperate with external auditor conducting a diagnostic study.
    - Ministry of Finance to ensure strong representation at BEM’s board; government still owns 33 percent after dilution following recapitalization in August 2013.
    - Initiate inspections in the other two banks without delay; assess financial situation of all other banks.
    - Require time-bound remediation plans for banks in breach.
    - Limit deposit growth in banks paying above-market deposit rates, potentially via higher deposit insurance premiums.
    - Government should refrain from providing privileged access of public sector deposits to some banks; gradually transfer public sector deposits from commercial banks to the NBM as situation permits.
- Contingency planning and deposit insurance:
  - Develop contingency plans aligned with international best practice.
  - Improve coordination between NBM and MoF; close statutory power gaps for least-cost bank resolution.
  - Enhance deposit insurance framework: back-up funding and better information sharing between Deposit Guarantee Fund and NBM.

### Authorities’ views on financial stability
- Authorities agreed on governance concerns and importance of independent financial regulators.
- Support for passing legislation to restore NBM and NCFM powers.
- NBM prepared a draft action plan for FSAP implementation and awaits stakeholder feedback.
- Divergence remains on degree of legal protection for NBM staff and on contingency cost allocation between government and NBM.

---

### B. Safeguarding Fiscal Sustainability — findings, projections, and recommendations
- Recent fiscal trajectory:
  - Overall budget deficit excluding grants reduced from 8.4 percent of GDP in 2009 to 3.9 percent of GDP in 2012.
  - 2013: consolidation waned; deficit excluding grants remained broadly unchanged.
- 2014–15 projection:
  - Budget deficit excluding grants projected to widen to 5½ percent of GDP and 6½ percent of GDP, respectively, reflecting wage and pension increases, ad hoc tax benefits, normalization of investment projects, and weaker activity.
- Public and publicly guaranteed debt projected to increase to 41½ percent of GDP in 2019 from 30 percent in 2013.
- Staff medium-term objective:
  - Reduce budget deficit excluding grants to about 2½ percent of GDP (consistent with an overall budget deficit of 1½ percent).
- Staff policy recommendations to achieve 2015 objective:
  - Target for 2015: overall budget deficit at 2¼ percent of GDP (compared to 2.6 percent in the 2014 budget) with gradual reduction of ¼ percent of GDP per year thereafter.
  - Suggested measures for 2015:
    - Limit wage increases to projected average inflation (0.3 percent of GDP).
    - Freeze expenditures in goods and services, excluding healthcare (0.4 percent of GDP).
    - Increase excise tax on tobacco products (0.2 percent of GDP).
    - Update real estate valuations for tax purposes (0.1 percent of GDP).
  - Additional recommendations:
    - Prioritize public investment.
    - Improve revenue mobilization by fighting tax avoidance and evasion and addressing tax expenditures (CIT, PIT, property/land tax, VAT).
    - Resist pressures for additional ad hoc tax benefits.
    - Avoid delaying utility tariff adjustments; estimated needed adjustment in heating and utility tariffs is about 10 percent.
    - Replace generalized price subsidies with strengthened targeted social support.
- Structural reforms recommended:
  - Social security reform: adjust past earning, increase retirement age, increase contributions from self-employed and farmers, refrain from ad-hoc pension increases.
  - Fiscal decentralization: introduce binding debt limits on sub-national governments; consolidate the number of local governments.
  - Fiscal responsibility legislation: revise draft FRL; recommend fiscal rule of general government deficit excluding grants of 2½ percent of GDP combined with an expenditure growth limit excluding targeted social assistance.
  - Allow relaxation of fiscal objectives for productivity-enhancing investment if financing on reasonable terms and absorption capacity respected.
- Authorities’ views:
  - Agreed on fiscal sustainability importance but emphasized addressing social/infrastructure needs if financing available.
  - Argued fiscal policy should be guided by financing availability; expected auctioning telecom licenses and privatization proceeds to cover some increases.
  - Considered staff projections for permanent donor support low; expected substantial increase after DCFTA signing.
  - On utility tariffs: recent large adjustments harmed payment discipline; negotiated lower electricity and gas prices for 2014.
  - Emphasized careful planning of structural reforms and cooperation with development partners.
  - View domestic revenue mobilization and domestic debt market development as key to funding development initiatives.
  - Argued targeted tax benefits essential to attract FDI and employment.

---

### C. Monetary and Exchange Rate Policy — actions, risks, and guidance
- Recent monetary actions and developments:
  - NBM cut base (policy) rate by 100 basis points to 3.5 percent in April 2013.
  - NBM cut base rate by 550 bp between November 2011 and February 2012.
  - Further easing in summer 2013 via unsterilized FX purchases; NBM purchased US$300 million in 2013.
  - Early 2014 NBM sold about US$80 million in response to downward pressures on the leu.
  - Growth of bank credit to the economy increased to about 19 percent at December–2013.
- Inflation and policy stance:
  - Headline and core inflation on the rise and over the mid-point of the target range (5 percent).
  - Headline inflation artificially contained by about ½–1 percentage point due to unchanged utility tariffs.
  - Mission recommended NBM remain vigilant and be ready to adopt a tightening bias to counter inflation risks, while noting reasons to wait-and-see given projected slowdown.
- Exchange rate and reserves:
  - Staff recommended cautious interventions; recent interventions to ease pressures on the leu were appropriate.
  - Recommended opportunistic reserve accumulation; sustaining about 100 percent coverage of short-term debt suggested as critical.
- Strengthening monetary transmission:
  - Develop interbank money market once banking weaknesses addressed.
  - Develop plan to address large liquidity surplus in banking system.
  - Strengthen coordination between treasury cash flows and NBM operations.
  - Develop a benchmark yield curve for government debt.
- Authorities’ views:
  - Agreed with assessment but did not see a need to adopt tightening bias short term.
  - NBM projected significant slowdown and possible deflationary pressures offset by planned wage/pension increases and likely utility price adjustments.
  - Agreed on a wait-and-see approach while ready to tighten if inflation emerges; supported FX intervention recommendations and strengthening inflation-targeting.

---

### D. Structural Reforms — priorities to boost growth and reduce poverty
- Staff priorities:
  - Shift from consumption/remittances-led growth to investment, productivity, and competitiveness per NDS Moldova 2020.
  - Priority areas: business environment, physical infrastructure, human resource development, public administration reform.
- Education: refocus to labor market needs to raise productivity, job creation, and reverse migration.
- Financial intermediation reforms:
  - Loans equal only 43 percent of GDP; weak risk management practices.
  - Lack of access to finance identified by OECD as top business constraint.
  - Recommend entry of new strategic investors (subject to scrutiny), improve collateral execution, add new information sources to credit bureau, and develop non-bank financial institutions.
- Authorities’ commitments:
  - Affirmed commitment to NDS Moldova 2020; priority areas: business environment, infrastructure, human resources.
  - Ministry of Economy prepared Roadmap for Enhancing Competitiveness with EU technical assistance.
  - Ministry of Education prepared Sector Development Strategy for 2014-20.
  - NBM working on draft law on consumer lending to establish a unified benchmark lending rate for consumer protection and improved monetary transmission.

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### External stability, Debt Sustainability Analysis (DSA), and spillovers
- Annex I findings:
  - External indicators improved over three years; reserves built up.
  - Important vulnerabilities remain; need to maintain macro stability and raise potential growth.
- Exchange rate assessment:
  - No evidence of significant misalignment; mild overvaluation estimates:
    - External sustainability approach: 5.0 to 9.7 (Percent)
    - Macro balance approach: 2.3 to 4.6 (Percent)
    - Equilibrium exchange rate approach: 6.9 (Percent)
  - Underlying current account: 7.7 percent of GDP; current account norm: 6.4 percent of GDP.
- Reserve adequacy measures (selected series):
  - Gross official reserves (millions of U.S. dollars): 1480.3; 1717.7; 1965.3; 2515.0; 2820.1; 2751.3; 2620.9.
  - Months of imports: 3.9; 3.4; 3.9; 4.7; 5.0; 4.7; 4.3.
  - Percent of the IMF composite measure (fixed): 115.6; 118.0; 120.8; 139.4; 136.8; 129.7; 116.5.
- SVAR analysis of external shocks:
  - Negative one-standard deviation shock to trading partners’ GDP (decrease 0.8 percent) decreases Moldova’s GDP by 0.7 percent on impact and about 1.8 percent after three quarters; REER appreciates initially by about 1.5 percent; remittances-to-GDP ratio declines immediately by about 0.7 percentage points and reaches maximum decline of 2.5 pp by three quarters.
  - Negative one-standard deviation shock to Russia’s GDP (-1.1 percent) decreases Moldova’s GDP by 0.6 percent on impact and 1.5 percent two quarters after; remittances-to-GDP ratio decreases by about 2 pp one quarter after.
- DSA key findings:
  - Risk of debt distress remains low for public external debt but overall risk heightened by domestic debt and private external debt vulnerabilities.
  - Total external debt end–2013: 84.4 percent of GDP (up from 82.4 percent at end–2012).
  - Public and publicly guaranteed (PPG) external debt decreased by about 1 percentage point; private external debt increased by 3 percentage points.
  - PPG debt at end–2013 about 30 percent of GDP; PPG external debt largely held by multilateral and bilateral donors (98 percent).
- Public debt projections and DSA metrics (selected):
  - PPG total debt: 29.8 percent of GDP at end of 2013; 39.4 percent by end–2018; 54.5 percent by 2033.
  - PV of debt-to-GDP projections: 24.2 percent in 2013; 32.6 percent in 2018; 49 percent in 2033; benchmark level: 56 percent.
  - PV of debt-to-revenue and grants: 65.4 percent in 2013; 89.4 percent in 2018; 134.6 percent by 2033.
  - Stress test: a permanent one standard deviation decline in real GDP growth would increase PV of debt-to-GDP to 58 percent by 2033 and 107 percent in 2033 in a stated stress case, breaching the 56 percent benchmark.
  - Banking sector recapitalization shock: if cost = 10 percent of GDP, public debt stock rises to 41.8 percent of GDP in 2014; PV of debt-to-GDP 32.5 percent in 2014 and 52 percent by 2033.
- Liquidity and external risks:
  - Significant private external debt with short maturities creates roll-over risk.
  - Deterioration or reversal of trade credit and private inflows could raise gross financing needs and debt service ratios.
- Policy implications:
  - Continue prudent fiscal policy and structural reforms.
  - Strengthen domestic debt market; lengthen average maturity of domestic debt and deepen secondary market.
  - Maintain external buffers and monitor banking sector contingent liabilities.

---

### Risk Assessment Matrix — selected risks, likelihoods, impacts, and policy responses
- Risk 1: Sharp increase in geopolitical tensions surrounding Russia/Ukraine.
  - Relative Likelihood: Medium.
  - Impact if Realized: High — disruption of trade routes and gas supply; decline in remittances.
  - Policy Response:
    - Accelerate diversification of external trade products and markets, and energy sources.
    - Let the exchange rate adjust.
    - Continue prudent macroeconomic policies; allow automatic fiscal stabilizers full play.
    - Strengthen monitoring of bank exposures to exchange rate and cross border risks.
- Risk 2: Protracted slower European growth.
  - Relative Likelihood: High.
  - Impact if Realized: High — lower export demand, falling remittances and financial flows, higher budget deficit, exchange rate pressures, banking difficulties.
  - Policy Response:
    - Let fiscal automatic stabilizers work.
    - Let the exchange rate adjust.
    - Speed up structural reform to increase competitiveness.
- Risk 3: Deterioration of banking system soundness due to weak governance.
  - Relative Likelihood: High.
  - Impact if Realized: High — soaring system-wide NPLs, credit supply contraction, possible government intervention.
  - Policy Response:
    - Enforce shareholder and beneficial ownership transparency.
    - Intervene in large systemically important banks and liquidate small ones; step up anti-corruption and AML/CFT efforts.
- Risk 4: Decline in official external financing.
  - Relative Likelihood: Low.
  - Impact if Realized: Medium — scaling down development projects and budget financing.
  - Policy Response:
    - Seek alternative funding sources for priority projects in the context of prudent fiscal policy.

---

### Executive Board assessment and concluding guidance
- Directors welcomed strong performance and poverty reduction but urged consolidation to guard against downside risks.
- Urgent priorities highlighted:
  - Restore and enforce NBM and NCFM regulatory and supervisory powers and legal protections.
  - Strengthen banking governance and enforce prudential requirements; maintain high scrutiny of BEM.
  - Gradually reduce budget deficit to levels consistent with available official assistance; mobilize revenue and enact structural fiscal reforms (social security, fiscal decentralization).
  - NBM to remain vigilant on inflation risks; allow exchange rate to adjust while managing volatility and reserve adequacy.
  - Steady implementation of structural reforms to boost potential growth; priority areas: business environment, infrastructure, human resources.

*Prepared by Staff of the International Monetary Fund and the World Bank; June 5, 2014.*

### 1. Implementation of Past IMF Policy Recommendations __________________________________________5

### 1. Implementation of Past IMF Policy Recommendations

### Context and recent performance
- Moldova’s recovery from the 2009 recession reflected sound macroeconomic and financial policies and structural reforms implemented under a Fund-supported program.
- Key outcomes 2010–13:
  - Economic activity grew cumulatively by about 24 percent.
  - Consumer price inflation was brought under control.
  - Real wages increased cumulatively by about 13 percent.
  - In November 2013, Moldova initialed an Association Agreement with the EU including a Deep and Comprehensive Free Trade Area (DCFTA).
- Political developments:
  - A political crisis in early 2013 led to policy slippages in fiscal and financial areas.
  - A pro-European center-right/center coalition government was appointed in May 2013.
  - Delays in policy implementation prevented completion of the final reviews under the ECF/EFF arrangements.
  - Parliamentary elections scheduled for late 2014 and local elections for early 2015; elections expected to be highly contested.
- Poverty and structural reform needs:
  - Based on the ECA regional poverty line of US$5/day (PPP), 55 percent of the population was poor in 2011 (down from 94 percent in 2002; ECA average 25 percent).
  - The National Development Strategy—Moldova 2020 (NDS) focuses on education, infrastructure, financial sector, business climate, energy consumption, pension system, and judicial framework.

### Box 1 — Implementation record of past IMF recommendations (2010–13)
- Overall assessment:
  - Moldova established a solid track record of implementing Fund advice in the context of a Fund program.
  - Strong performance on fiscal adjustment, inflation control, and structural reforms.
  - Weaker implementation on banking sector advice, including FSAP recommendations.
  - Data provision broadly adequate for surveillance; Moldova subscribes to the SDDS.
- ECF/EFF program (approved January 2010):
  - Access totaling SDR 369.6 million (300 percent of quota) split equally between ECF and EFF.
  - Actually disbursed amount SDR 320 million (around US$500 million).
  - Program expired in April 2013; on August 28, 2013, Executive Board expected Moldova to engage in Post-Program Monitoring (PPM).
  - Program outcomes:
    - Overall budget deficit reduced from 6.3 percent of GDP in 2009 to 2.2 percent of GDP in 2012.
    - Government debt brought to about 30 percent of GDP.
    - Inflation brought to mid-single digits with introduction of an inflation targeting regime.
    - International reserves rebuilt.
    - Structural reforms advanced in energy, education, social assistance, and financial sector.
- 2012 Article IV consultation:
  - Macroeconomic policies and structural reforms broadly in line with Fund recommendations.
  - Weak implementation of financial sector reforms; condition of Banca de Economii (BEM) continued to deteriorate and subsequent stabilization steps diverged from Fund advice.
  - Amendments to the Law on Financial Institutions passed but implementation slow, partly due to legal challenges.
  - Overall budget deficit declined largely due to under-execution of investment projects; measures during the 2013 political crisis increased current spending.
  - NBM’s monetary policy stance remained appropriate; inflation within target; international reserves increased.

### Recent economic developments, outlook, and risks
- 2013 outcomes:
  - Following a decline of 0.7 percent in 2012, the economy expanded by 8.9 percent in 2013.
  - Growth led by rebound in agriculture and related industries, private consumption, and exports.
  - Inflation remained within the NBM’s target range of 5 percent ± 1.5 percentage points.
  - Overall budget deficit narrowed to 1.8 percent of GDP in 2013 from 2.2 percent of GDP in 2012 (partly reflecting under execution of investment projects).
  - Current account deficit narrowed to about 5½ percent of GDP.
  - International reserves increased to US$2.8 billion (5 months of imports or 105 percent of short-term debt).
  - Real effective exchange rate (REER) depreciated by 3½ percent.
- 2014 outlook and projections:
  - Output growth expected to moderate to 2¼ percent in 2014, mainly due to slowdown in agriculture and weaker activity in main trading partners (Russia and Ukraine).
  - Inflation projected to remain stable at about 5¼ percent.
  - Current account deficit projected to widen to about 7½ percent of GDP due to slower export growth and a decline in remittances after completion of construction projects related to the Sochi Olympic Games in Russia.
- Key vulnerabilities and transmission channels:
  - Remittances: 24 percent of GDP.
  - Exports to CIS and EU: 88 percent of total exports.
  - Donor support: about 10 percent of government spending.
  - Main transmission channels: remittances (including potential returning migrants), external trade, and capital flows.
  - Staff’s spillover analysis recommends strengthening fiscal and external buffers due to strong links and synchronized business cycles with trading partners.

### Authorities’ views on outlook
- Divergent official assessments:
  - Ministry of Economy (MoE): argued it was premature to reassess near-term outlook given lack of new data; under some scenarios Moldova could benefit from geopolitical developments and growth could be higher than the 4 percent assumed in the budget.
  - National Bank of Moldova (NBM): concerned about slowdown in the Russian economy, latest remittances data, and agriculture outlook; expected output in 2014 to be flat or decline; NBM’s inflation projections for H2 2014 are lower than staff’s projections.
- Authorities agreed risks are on the downside and accepted staff’s transmission channels and policy responses as outlined in the Risk Assessment Matrix.

### Box 2 — Potential impact from recent regional geopolitical tensions
- Overall summary:
  - Impact depends on crisis spread beyond Ukraine, escalation of trade tensions with Russia, and disruption of trade routes and gas supply.
  - Mitigation would be aided by increased donor support and appropriate policy responses (near-term absorption and medium-term integration into global trade and energy markets).
- Specific exposures:
  - Ukraine:
    - Ukraine’s share of Moldovan exports about 6 percent.
    - Remittances from Ukraine represent around 1 percent of GDP.
    - Direct financial linkages negligible.
  - Russia:
    - Russia’s share of Moldovan exports about 26 percent.
    - Remittances from Russia represent about 15 percent of GDP.
    - Moldovan banking system heavily reliant on funding from Russian banks; disruption of interbank funding could destabilize the banking system.
    - Russia accounts for about 10 percent of the total stock of FDI in Moldova.
  - Trade routes and gas:
    - CIS’s share in Moldovan exports about 40 percent; all land routes to CIS pass through Ukraine.
    - Moldova relies on Russian gas transported via pipelines in Ukraine for over 90 percent of total gas consumption.
    - Limited short-term options to substitute gas imports from Russia.
- Policy response recommendations:
  - Near term: prudent macroeconomic policies, letting the exchange rate adjust, allowing automatic stabilizers to operate fully, ideally with additional donor support; policies to facilitate absorption of returning migrants into the labor market.
  - Medium term: increased integration into global trade and energy markets to reduce reliance on any single trading partner.

### Policy discussions — A. Maintaining Financial System Stability
- Staff’s assessment of risks:
  - Significant risks to systemic financial stability due to governance problems in the banking system despite aggregate indicators showing banks are well capitalized, profitable, and liquid.
  - Key aggregate indicators (March 2014):
    - Aggregate capital adequacy ratio: 23.5 percent (minimum required 16 percent).
    - Return on equity: 8.6 percent.
    - Liquid assets: 34.7 percent of total assets.
    - NPL ratio: 13.2 percent.
  - Concerns:
    - Active concealment of banks’ ultimate beneficial owners and controllers to circumvent NBM vetting and conceal related party lending.
    - Reported liquid assets of some banks may be encumbered.
    - Resolution of NPLs slow due to problems with repossession and sale of collateral.
  - Staff recommendations:
    - Implement FSAP recommendations, particularly enforcement of regulatory requirements (Annex III).
    - Re-evaluate bank shareholders to ensure disclosure of ultimate beneficial owners and controllers.
    - Strengthen enforcement of AML/CFT framework.
- Institutional constraints and legal issues:
  - A Constitutional Court ruling substantially reduced NBM powers by authorizing any court to suspend NBM decisions (except bank liquidation and license cancellation) until court process ends.
  - December legislation addressed CC ruling implications for NBM decisions related to monetary and exchange rate policies but NBM’s independence as bank supervisor not yet fully restored.
  - A separate CC ruling limits independence and effective operation of the National Commission for Financial Markets (NCFM).
  - Staff advice:
    - Urgently pass legislation to fully restore NBM and NCFM regulatory powers.
    - Strengthen legal protection of board members and employees of these agencies.
    - Agencies should resolutely enforce regulatory requirements.
- Specific concerns about Banca de Economii (BEM) and two affiliated mid-sized banks:
  - These three banks combined:
    - Comprise 28 percent of banking system assets.
    - Equivalent to about 20 percent of GDP.
    - Have large interbank exposures among themselves and large exposures to several Russian banks.
  - Staff recommendations regarding these banks:
    - NBM to maintain high scrutiny of BEM operations and monitor liquidity indicators daily, including interbank exposures.
    - Ensure BEM shareholders and management fully cooperate with external auditor conducting a diagnostic study of BEM’s financial situation.
    - Ministry of Finance to ensure strong representation at BEM’s board to safeguard public interest given government still owns 33 percent of the bank after dilution of its share following recapitalization in August 2013.
    - Initiate inspections in the other two banks without delay and assess financial situation of all other banks.
    - Any bank found in breach of regulatory requirements should submit time-bound plans to address shortcomings.
    - Limit deposit growth in banks paying above-market deposit rates, potentially by requiring higher deposit insurance premiums for such banks.
    - Government should refrain from providing additional privileged access of public sector deposits to some banks.
    - Gradually transfer public sector deposits from commercial banks to the NBM as situation permits.
- Contingency planning and deposit insurance:
  - Staff urged development of contingency plans aligned with best international practice.
  - Need for improved coordination between authorities (NBM and MoF) and closing statutory power gaps for least-cost bank resolution (for example, lack of statutory power for government to provide funding or guarantees quickly).
  - Regular inter-agency cooperation process recommended.
  - Deposit insurance framework enhancements suggested, including greater assurance of back-up funding and better information sharing between Deposit Guarantee Fund and NBM.

### Authorities’ views on financial stability
- Agreement with staff on governance concerns and the importance of independent financial regulators.
- Support for implementing some FSAP recommendations, notably passing legislation to fully restore regulatory powers of NBM and NCFM.
- NBM prepared a draft action plan for implementing FSAP recommendations and is awaiting stakeholder feedback.
- No consensus among authorities on other key recommendations, including the adequate degree of legal protection for NBM staff.

*Republic of Moldova — IMF staff report excerpt: “1. Implementation of Past IMF Policy Recommendations”*

### 13.      The authorities agreed with staff’s views regarding BEM’s financial situation and that

### _cr14190 - 13.      The authorities agreed with staff’s views regarding BEM’s financial situation and that

### Banking sector concerns and authorities’ positions
- Authorities agreed with staff’s views regarding BEM’s financial situation and that of banks believed to be affiliated to it, but had divergent views on the way forward.
- Authorities agreed with the recommendation of maintaining a high level of scrutiny of these banks, which—according to the NBM—has already been in effect in recent months.
- External auditor’s diagnostic study of BEM, despite some delays, was seen by authorities as providing a good basis to request BEM’s shareholders to put in place a plan to become compliant with regulatory requirements.
- Authorities preferred that shareholders be given ample time to come up with a solution, in contrast to staff views.
- There was disagreement among authorities on the design of a contingency framework, including which institution—the government or the NBM—should shoulder any costs arising from bank resolution or recapitalization.

*Key policy implication*
- Maintain high scrutiny of banks affiliated with BEM; use the external auditor’s diagnostic to require shareholder remediation plans; resolve intra-authority differences on contingency cost allocation.

### B. Safeguarding Fiscal Sustainability — Staff’s views (findings and projections)
- Recent fiscal consolidation: overall budget deficit excluding grants reduced from 8.4 percent of GDP in 2009 to 3.9 percent in 2012.
- 2013: fiscal consolidation efforts waned; deficit excluding grants remained broadly unchanged despite under execution of investment projects and buoyant revenues.
- 2014–15 projection: budget deficit excluding grants widening to 5½ percent of GDP and 6½ percent, respectively, reflecting:
  - significant wage and pension increases (in addition to those granted last year),
  - cost of new ad hoc tax benefits,
  - normalization in execution of investment projects,
  - weaker economic activity.
- Public and publicly guaranteed debt projected to increase to 41½ percent of GDP in 2019 from 30 percent in 2013.
- Debt sustainability analysis: public debt remains vulnerable to shocks, including potential banking system recapitalization needs.
- Medium-term objective recommended by staff: reduce the budget deficit excluding grants to about 2½ percent of GDP (consistent with an overall budget deficit of 1½ percent).
- Recommendation rationale: put government debt on a downward trajectory, be consistent with projected financing availability, and prevent permanent expenditure increases financed by temporary donor support.

### B. Safeguarding Fiscal Sustainability — Staff policy recommendations (to achieve 2015 objective and medium term)
- Target for 2015: set overall budget deficit at 2¼ percent of GDP (compared to 2.6 percent in the 2014 budget) with gradual reduction of ¼ percent of GDP per year thereafter.
- Suggested measures to achieve the 2015 objective:
  - Limit wage increases to projected average inflation (0.3 percent of GDP).
  - Freeze expenditures in goods and services, excluding healthcare (0.4 percent of GDP).
  - Increase the excise tax on tobacco products (0.2 percent of GDP).
  - Update real estate valuations for tax purposes (0.1 percent of GDP).
- Additional recommendations:
  - Prioritize public investment.
  - Improve revenue mobilization by fighting tax avoidance and evasion and addressing existing tax expenditures (CIT, PIT, property/land tax, VAT).
  - Resist pressures to grant additional ad hoc tax benefits.
  - Avoid delaying utility tariff adjustments; estimated needed adjustment in heating and utility tariffs is about 10 percent.
  - Replace generalized price subsidies with strengthened targeted social support.

### B. Safeguarding Fiscal Sustainability — Structural reforms recommended
- Social security reform:
  - Adjust past earning to halt the drop of the replacement rate.
  - Increase retirement age.
  - Increase contributions from self-employed and farmers.
  - Refrain from ad-hoc pension increases.
- Fiscal decentralization:
  - Introduce binding debt limits on sub-national governments.
  - Consolidate the number of local governments.
- Fiscal responsibility legislation:
  - Revise draft Fiscal Responsibility Law to provide an adequate fiscal anchor.
  - Recommend a fiscal policy rule: general government budget deficit excluding grants of 2½ percent of GDP.
  - Combine with a rule limiting growth of total expenditures (excluding targeted social assistance).
  - Allow relaxation of fiscal objectives for productivity-enhancing investment projects if financing on reasonable terms is secured and absorption capacity is respected.

### B. Safeguarding Fiscal Sustainability — Authorities’ views
- Authorities agreed on the importance of fiscal sustainability but emphasized addressing social and infrastructure needs if financing is available.
- Authorities argued fiscal policy should be guided by financing availability, given most financing is loans for donor-supported projects.
- Expectation for financing sources:
  - Additional wage and pension increases expected to be covered by fees from auctioning telecom licenses in 2014 and additional privatization proceeds in following years.
  - Authorities considered staff’s projections for permanent donor support to be on the low side and expected a substantial increase following the signing of the DCFTA.
- Utility tariffs:
  - Authorities noted large recent tariff adjustments have harmed payment discipline; further increases now could increase losses of public enterprises.
  - For 2014 they negotiated lower electricity and gas prices with foreign suppliers.
- Structural reform views:
  - Authorities concurred on the importance of social security, healthcare, decentralization, and strengthening draft laws on local public finance and fiscal responsibility.
  - Emphasized need for careful planning of reforms and continued cooperation with development partners.
- Revenue mobilization and tax policy:
  - Authorities see domestic revenue mobilization and development of domestic debt market as key for funding development initiatives.
  - Plans include tax policy and administration reforms to broaden the tax base, fight tax avoidance and evasion, and increase tax fairness.
  - Authorities argued targeted tax benefits are essential to attracting FDI and generating employment, noting regional competition in granting such benefits.

### C. Monetary and Exchange Rate Policy — Staff’s views and recommendations
- Monetary policy actions and recent developments:
  - NBM cut base (policy) rate by 100 basis points to 3.5 percent in April 2013.
  - NBM previously cut the base rate by 550 bp between November 2011 and February 2012.
  - Further easing in summer 2013 via unsterilized foreign exchange purchases; in 2013 the NBM purchased US$300 million.
  - In early 2014 the NBM sold about US$80 million in response to downward pressures on the leu.
  - Growth of bank credit to the economy increased to about 19 percent at December–2013.
- Inflation and policy stance:
  - Headline and core inflation on the rise and over the mid-point of the target range (5 percent).
  - Headline inflation has been artificially contained by about ½–1 percentage point due to unchanged utility tariffs.
  - Mission recommended the NBM remain vigilant and be ready to adopt a tightening bias to counter emerging inflation risks, while also acknowledging reasons to wait-and-see given projected slowdown and muted credit acceleration.
- Exchange rate and reserves:
  - Staff recommended cautious approach to interventions; recent interventions to ease pressures on the leu were appropriate to prevent disorderly adjustments.
  - Recommended opportunistic reserve accumulation; sustaining about 100 percent coverage of short-term debt suggested as critical for external stability.
- Strengthening monetary transmission:
  - Develop the interbank money market once banking system weaknesses are addressed.
  - Develop a plan to address the large liquidity surplus in the banking system.
  - Strengthen coordination between treasury cash flows and NBM operations.
  - Develop a benchmark yield curve for government debt.

### C. Monetary and Exchange Rate Policy — Authorities’ views
- Authorities agreed with staff’s assessment but did not see a need to adopt a tightening bias in the short term.
- NBM projected significant slowdown in economic growth leading to significant deflationary pressures; acknowledged these could be offset by planned wage and pension increases later in 2014 and likely adjustment in utility prices early next year.
- Authorities agreed with a wait-and-see approach while being ready to tighten if inflationary pressures emerge.
- Authorities agreed with recommendations about FX market interventions and strengthening the inflation-targeting regime.

### D. Structural Reforms — Staff’s views (priorities)
- Structural reform is critical to boost potential growth and reduce poverty; shift from consumption/remittances-led growth toward investment, productivity, and competitiveness per NDS Moldova 2020.
- Priority areas:
  - Business environment.
  - Physical infrastructure development.
  - Human resource development.
  - Public administration reform.
- Education: refocus to labor market needs to raise productivity, job creation, and reverse migration trends.
- Financial intermediation reforms:
  - Moldova exhibits weak financial intermediation (loans represent only 43 percent of GDP) and weak risk management practices.
  - Lack of access to finance identified by the OECD as the top business constraint.
  - Entry of new strategic investors (subject to scrutiny) would boost competition and optimize financing costs.
  - Recommend improving collateral execution (e.g., lifting limitations on sale of repossessed collateral) and adding new information sources to the credit bureau.
  - Development of non-bank financial institutions important to increase competition for household savings and business financing.

*Italicized source attribution: Excerpt from IMF staff report content provided in the source PDF unit.*

### 27.      The authorities shared staff’s views and affirmed their commitment to implement the

### _cr14190 - 27.      The authorities shared staff’s views and affirmed their commitment to implement the

### Structural reforms and competitiveness
- Authorities affirmed commitment to implement structural reforms described in the NDS Moldova 2020.
- Priority areas identified:
  - Improving the business environment.
  - Improving physical infrastructure.
  - Human resource development.
- DCFTA implications:
  - Poses short-term challenges as Moldovan businesses must adopt EU standards and regulations and will face increased competition.
- Policy and program actions:
  - Ministry of Economy, with EU technical assistance, prepared a Roadmap for Enhancing Competitiveness of Moldova to address labor skills, physical infrastructure, access to finance, innovation and technology, and quality standards.
  - Ministry of Education prepared a Sector Development Strategy for 2014-20 aiming to increase public spending efficiency in education and align vocational curricula with labor market needs.

### Financial intermediation and consumer lending
- Authorities share staff’s view on the importance of structural reforms to increase financial intermediation over the longer term.
- National Bank of Moldova (NBM) actions:
  - Working on a draft law on consumer lending that would establish a unified benchmark lending rate.
  - The law aims mainly at consumer protection; a transparent benchmark rate is expected to help improve monetary policy transmission and stimulate financial intermediation.

### Post-program monitoring and Fund exposure
- Moldova’s capacity to repay the Fund remains strong overall.
- External debt trajectory and reserve adequacy:
  - External debt is projected to stay on a downward trajectory.
  - A metric-based approach and other traditional measures point to the adequacy of reserves.
- IMF exposure and debt service projections:
  - Fund’s exposure peaked at 9.4 percent of GDP in 2012 and is projected to continue declining over the medium term.
  - Total debt service to the Fund would reach 1.3 percent of total exports (around ½ percent of GDP) in 2015 and peak at 2.3 percent of exports in 2017 (1.1 percent of GDP).
- Risks noted:
  - Relatively high external debt to GDP ratio, largely from high private external debt relative to GDP.
  - Vulnerability to shocks, including escalation of geopolitical tensions leading to disruption of trade routes and gas supply.
  - Materialization of shocks identified in RAM could reduce creditworthiness and ability to repay the Fund.

### Staff appraisal — growth outlook and risks
- Recent and projected growth:
  - Economy expanded by 8.9 percent in 2013, led by a strong rebound in agriculture and related industries.
  - In 2014, output growth is expected to decelerate to 2¼ percent, reflecting moderation in agriculture production and weaker activity in main trading partners.
- Downside risks:
  - Serious vulnerabilities and governance issues in the banking sector.
  - Fiscal policy slippages in the run up to elections.
  - Further slowdown in activity in main trading partners.
  - Intensification of geopolitical tensions.
- Mitigating factors:
  - Strong buffers in the form of high international reserves and low public debt, combined with prudent policies.

### Banking sector stability and regulatory reform
- Urgent legal and regulatory actions needed:
  - Address significant weaknesses in legal and regulatory frameworks to ensure financial sector stability and soundness.
  - Expedite passage of legislation to empower the NBM and NCFM to take effective regulatory and supervisory actions, including adequate procedures for court suspension of regulatory and supervisory decisions (taking into account the CC ruling).
  - Protect staff from criminal prosecution or civil liability for carrying out their duties.
- Supervisory and enforcement priorities:
  - Implement norms for identification and adequate fit-and-proper requirements of ultimate beneficial owners and controllers in banks.
  - Enhance monitoring of related-party transactions and overall bank risk management.
  - Strengthen enforcement of the anti-money laundering framework.
- Immediate operational recommendations:
  - Resolute enforcement of capitalization and liquidity requirements to reduce vulnerabilities.
  - Following recapitalization of Banca de Economii (BEM) by minority shareholders, NBM should maintain very high scrutiny of BEM operations until:
    - The bank effectively resolves its high share of nonperforming assets.
    - Interbank exposures are reduced.
    - Compliance with all regulatory norms is verified.
  - Ministry of Finance must ensure strong representation at BEM’s board despite dilution of government share to safeguard public interest.
  - NBM should abstain from regulatory forbearance.
  - Government should not provide commercial banks privileged access to additional public sector deposits.
  - Banks failing to meet regulatory requirements must be required by NBM to develop and implement time-bound plans to address shortcomings.

### Fiscal policy stance and medium-term consolidation
- Short-term and medium-term fiscal posture:
  - Fiscal policy should be geared towards a gradual reduction of the budget deficit to a level compatible with the official assistance available over the medium term.
  - Projected increase in the budget deficit excluding grants in 2014 is 5½ percent of GDP; this represents a step in the opposite direction.
  - While the deficit could be allowed to widen in the near term to accommodate revenue shortfalls from weaker activity, the 2014 budget expenditure envelope should be maintained.
  - Resist pressures to grant ad hoc tax benefits and to increase salaries and pensions even if one-off revenues materialize.
  - Fiscal policy should aim to narrow the deficit to 1½ percent of GDP (about 2½ percent excluding grants) by 2018. This would put public debt as a share of GDP on a downward trend and be consistent with projected financing availability.
- Structural fiscal reforms needed:
  - Administrative reform to enhance public sector efficiency and service quality.
  - Strengthen fiscal decentralization model by tightening sub-national governments’ debt limits and consolidating the number of local governments.
  - Social security reform to put the pension fund on a sound financial basis, deal with demographic pressures, and reverse decline in pension benefits relative to wages.
  - Adjust utility tariffs to cost-recovery levels to avoid accumulation of arrears with energy suppliers and ensure adequate investment in the sector.
  - The draft law on fiscal responsibility is welcome but needs strengthening to provide an adequate fiscal anchor.

### Monetary policy
- Performance and guidance:
  - Monetary policy has been successful in maintaining inflation within the target range.
  - In the context of disinflationary pressures, the NBM’s current monetary policy stance has remained appropriate.
  - Build-up of international reserves in 2013 strengthened Moldova’s resilience to external shocks.
  - NBM needs to remain ready to adjust policies, including adopting a tightening bias to counter emerging inflation risks.

### Structural reforms to boost growth and reduce poverty
- National Development Strategy—Moldova 2020 objectives:
  - Shift to a medium-term growth model based on raising investment and increasing productivity and competitiveness.
- Key reform areas to achieve objectives:
  - Improve the business environment, physical infrastructure, and human resources development.
  - Refocus the education system to labor market needs to raise productivity, create jobs, and reverse migration trends.

### Recommended timing for Article IV consultation
- Proposed next Article IV consultation with Moldova to be held on the standard 12-month cycle.

### Moldova: Risk Assessment Matrix — selected entries
- Scale used: high, medium, or low.
- Risk 1: A sharp increase in geopolitical tensions surrounding Russia/Ukraine that creates significant disruptions in global financial, trade and commodity markets
  - Relative Likelihood: Medium
  - Impact if Realized: High — disruption of trade routes and gas supply and a decline in remittances could severely impact the economy
  - Policy Response:
    - Accelerate diversification of external trade products and markets, and energy sources
    - Let the exchange rate adjust to facilitate absorption of the external shock
    - Continue prudent macroeconomic policies to further strengthen external buffers; allow automatic fiscal stabilizers full play
    - Strengthen monitoring of bank exposures to exchange rate and cross border risks
- Risk 2: Protracted period of slower European growth
  - Relative Likelihood: High
  - Impact if Realized: High — lower export demand (from EU and CIS), falling remittances and other financial flows (e.g., trade credits) would induce lower growth, higher budget deficit, exchange rate pressures, and banking sector difficulties
  - Policy Response:
    - Let fiscal automatic stabilizers work
    - Let the exchange rate adjust to facilitate absorption of the external shock
    - Speed up structural reform to increase competitiveness
- Risk 3: Deterioration of Moldova’s banking system soundness e.g. as a consequence of weak governance
  - Relative Likelihood: High
  - Impact if Realized: High — reemergence of problems at individual banks, and/or soaring system-wide NPLs can undermine banking system soundness; credit supply would dwindle and government might need to intervene
  - Policy Response:
    - Enforce shareholder and beneficial ownership transparency and suitability requirements
    - For banks in trouble, intervene in large systemically important ones and liquidate small ones
    - Step up anti-corruption and AML/CFT efforts
- Risk 4: Decline in official external financing
  - Relative Likelihood: Low
  - Impact if Realized: Medium — scaling down of development projects and budget financing
  - Policy Response:
    - In the context of prudent fiscal policy look for alternative funding sources for priority projects

*Source: IMF staff report text provided in the content unit.*

### 5. Political cycle High

### 5. Political cycle High

### Risk assessment: political cycle and macroeconomic implications
- Intensifying political competition ahead of the 2014 parliamentary elections could lead to populist initiatives, delayings or reversing structural reforms. (Risk level: High)
- Deteriorating growth prospects and business climate would harm investment, competitiveness, and defer poverty reduction and would lead to fiscal slippages. (Risk level: Medium)
- Policy responses highlighted:
  - Restore prudent macroeconomic policies
  - Accelerate structural reforms
- Staff guidance on RAM probabilities: “low” = probability below 10 percent; “medium” = probability between 10 and 30 percent; “high” = probability of 30 percent or more.

### Real sector developments and near-term outlook
- GDP growth trajectory (selected annual real growth rates from Table 1, percent):
  - 2009: -6.0
  - 2010: 7.1
  - 2011: 6.8
  - 2012: -0.7
  - 2013: 8.9
  - 2014 (Prel.): 2.2
  - 2015–2019 (projections): 3.5, 4.0, 4.0, 4.0, 4.0
- Agriculture vs non-agriculture:
  - Agricultural: -9.9, 7.4, 5.2, -20.1, 40.6, 0.0, 4.0, 4.0, 4.0, 4.0, 4.0 (2009–2019)
  - Non-agricultural: -5.6, 7.1, 7.0, 2.0, 4.9, 2.5, 3.4, 4.0, 4.0, 4.0, 4.0 (2009–2019)
- Key short-term signals:
  - In 2014 growth is projected to moderate due to the anticipated slowdown in agriculture and a weaker activity in Russia and Ukraine.
  - Recovery in agriculture boosted real GDP growth to its historical peak in 2013.
  - Short-term activity indicators have shown first signs of a deterioration of the economic activity.
  - Unemployment is projected to increase in 2014.
  - Saving is expected to decline, with investment remaining broadly unchanged.
  - On demand side, private consumption and build-up of stocks contributed the most to growth in 2013.

### Fiscal developments and public debt
- Public sector debt levels and trajectory (percent of GDP, Table 3b / table headings):
  - Public and publicly guaranteed debt: 32.4, 30.5, 29.0, 31.1, 29.9, 31.8, 32.8, 34.7, 36.7, 39.4, 41.5 (2009–2019)
- Fiscal balances (percent of GDP, Table 3b):
  - Overall balance: -6.3, -2.5, -2.4, -2.2, -1.8, -2.6, -2.6, -4.6, -4.8, -5.1, -4.8, -4.7 (2009–2019)
  - Primary balance: -5.1, -1.8, -1.6, -1.4, -1.3, -2.0, -1.9, -3.9, -4.0, -4.0, -3.7, -3.4 (2009–2019)
- Fiscal outlook notes:
  - Public debt has been stable at a low level, but the trend of fiscal consolidation will reverse.
  - While total revenues will remain broadly unchanged, Moldova remains dependent on grants, which will decline over the coming years.
  - Expenditures will increase as a share of GDP, while the share of capital spending in total expenditure will remain unchanged.

### Money, prices, interest rates, and exchange rate
- Monetary aggregates and credit (selected indicators, Table 4 and Figure 3):
  - Broad money (M3) growth (annual percent change): 3.2, 13.4, 10.6, 20.8, 26.5, 15.9, 16.4 (selected years)
  - Reserve money growth (percent change; annual): -10.1, 15.9, 18.4, 22.9, 31.9, 13.4
  - Credit to the economy (percent change, annual): -4.9, 12.7, 15.0, 16.1, 18.8, 11.3, 11.4
- Interest rates and yields:
  - Deposit and lending rates have remained stable despite acceleration in broad money.
  - Treasury bill yields have been broadly stable recently (3-month, 6-month, 1-year series shown).
- Inflation and targets:
  - Headline and core inflation are close to the NBM’s mid-target.
  - NBM target band: Upper bound (6.5), Lower bound (3.5); target described as “mid single digit”.
- Exchange rate and FX interventions:
  - Effective exchange rates depreciated in 2013.
  - The exchange rate has depreciated despite NBM interventions; NBM's net FX purchases and MDL/US$ exchange rate series are shown.

### External sector: current account, reserves, FDI, and vulnerabilities
- Current account balance and projections (Table 1):
  - Current account balance (percent of GDP): -9.5, -9.6, -12.3, -7.7, -5.5, -7.4, -8.2, -8.1, -8.0, -7.9, -7.7 (2009–2019)
- Remittances (millions of U.S. dollars, Table 2 & Table 1):
  - Remittances and compensation of employees (net): 1,124; 1,273; 1,549; 1,745; 1,913; 1,864; 1,839; 1,892; 1,950; 2,010; 2,073 (2009–2019)
  - Remittances (annual millions U.S.$ in Table 2 rows): 589; 686; 760; 838; 816; 805; 828; 854; 880; 907; 935 (selected years)
- Reserves and reserve adequacy (Table 2 and Figure 4):
  - Gross official reserves (millions of U.S. dollars): 1,480; 1,718; 1,965; 2,515; 2,820; 2,751; 2,621; 2,599; 2,551; 2,511; 2,409 (2009–2019)
  - Months of imports (reserves): 3.9; 3.4; 3.9; 4.7; 5.0; 4.7; 4.3; 4.0; 3.7; 3.4; 3.1 (2009–2019)
  - IMF composite measure and other reserve adequacy measures increased, improving resilience, but external vulnerabilities remain.
- External debt and FDI:
  - External debt (percent of GDP): 80.2; 82.0; 77.6; 82.5; 83.6; 90.0; 87.8; 86.2; 84.9; 84.2; 82.3 (2009–2019)
  - Structural reforms are critical to reverse the recent decline in FDI.
- Narrative:
  - The current account has been improving, but is expected to deteriorate due to slowdown in the growth of remittances and exports.
  - External buffers have increased, improving the economy's resilience to shocks, but external vulnerabilities remain.

### Baseline versus Active scenario: policy and macro implications
- Scenario charts (Figure 5) indicate:
  - Under an Active scenario (return to fiscal consolidation and structural reforms), outcomes improve relative to the Baseline:
    - GDP Growth: Active above Baseline in projection years (2014–19; charted series).
    - Budget Deficit (percent of GDP): Active scenario shows lower deficits than Baseline in projection years.
    - Government Debt (percent of GDP): Active scenario helps keep government debt on a downward trend.
    - External indicators: Gross international reserves (months of imports) stabilize at higher levels under Active scenario; CA deficit is smaller under Active scenario.
- Policy implication summary:
  - A return to fiscal consolidation combined with structural reforms would help keep government debt on a downward trend, facilitate external adjustment, and stabilize reserve adequacy.
  - Structural reforms to boost productivity are emphasized as necessary to support investment, FDI, and long-run external sustainability.

### Key indicators (selected, exact values drawn from source tables)
- Nominal GDP (billions of Moldovan lei): 60.4; 71.9; 82.3; 88.2; 99.9; 108.7; 118.8; 130.6; 143.3; 156.6; 171.1 (2009–2019)
- Nominal GDP (billions of U.S. dollars): 5.4; 5.8; 7.0; 7.3; 7.9; 7.6; 8.1; 8.7; 9.2; 9.8; 10.4 (2009–2019)
- Unemployment rate (annual average, percent): 6.4; 7.4; 6.7; 5.6; 5.1; 6.0; 5.8; 5.6; 5.5; 5.5; 5.5 (2009–2019)
- Gross investment (percent of GDP): 22.6; 22.6; 23.3; 23.6; 22.6; 23.3; 20.3; 22.4; 22.4; 22.2; 22.0 (2009–2019)
- Broad money (M3, selected levels from Table 4): 32,684; 37,051; 40,977; 49,513; 62,632; 72,587 (2009–2014 series)
- Non-performing loans as a share of total loans (end-of-period, percent): 16.3; 13.3; 10.7; 14.5; 13.0; 12.7; 12.4; 11.6; 13.2 (2009–2013 and 2014 Mar data points)
- Gross official reserves (millions of U.S. dollars, Table 2): 1,718; 1,965; 2,515; 2,820; 2,751; 2,621; 2,599; 2,551; 2,511; 2,409 (2009–2019 series)

*Source: Republic of Moldova staff report (IMF), figures and tables as presented in the source PDF.*

### Annex I. External Stability Assessment

### Annex I. External Stability Assessment

### Overview
- Indicators relating to the external sector have substantially improved during the past three years, reflecting improved external environment and prudent macroeconomic policies.
- Contributing factors: improvement in economic performance in trading partners, fiscal consolidation, exchange rate flexibility, ongoing trade liberalization with positive impact on exports.
- With improved current account position and appreciable capital flows, the NBM has been able to build up reserves.
- Important vulnerabilities remain, pointing to the need to maintain macroeconomic stability and implement structural measures to raise potential economic growth.

### Exchange rate assessment and competitiveness
- No evidence of significant exchange rate misalignment; competitiveness appears broadly adequate despite some methodologies indicating mild overvaluation.
- Estimates of overvaluation of the Leu (IMF staff estimates):
  - External sustainability approach: 5.0 to 9.7 (Percent)
  - Macro balance approach: 2.3 to 4.6 (Percent)
  - Equilibrium exchange rate approach: 6.9 (Percent)
- Underlying current account: 7.7 percent of GDP.
- Current account norm: 6.4 percent of GDP.
- Note on elasticities and shares used in assessments:
  - Medium run export elasticity estimates: -0.71 and -1.60
  - Import elasticity estimates: 0.92 and 0.99
  - Export and import shares set at 47 and 80 percent, respectively, as projected for 2019.
- Interpretation: This mild overvaluation does not appear to affect external competitiveness, as strong export performance has been sustained.

### Competitiveness and business environment
- Reforms over the past three years contributed to some improvement in competitiveness and the business environment.
- Doing Business ranking: improved from 81 out of 189 countries in 2012 to 78 in 2013.
- Global Competitiveness Index: broadly stable over the same period.
- Key impediments (World Economic Forum): corruption, policy instability, and access to finance.
- Policy implication: Structural reforms focused on corruption, policy stability, and access to finance, within the implementation of the Association agreement with the EU, would enhance competitiveness, economic diversification, and employment generation.

### Reserve adequacy and external indicators (selected measures)
- Metric-based and traditional measures point to adequacy of reserves; as at end–2013, reserve adequacy measures outperformed levels envisaged in the 2012 Article IV consultation.
- Reserve adequacy and related indicators (values presented in the source table):
  - Gross official reserves (millions of U.S. dollars) 1/: 1480.3, 1717.7, 1965.3, 2515.0, 2820.1, 2751.3, 2620.9
  - Months of imports of goods and services: 3.9, 3.4, 3.9, 4.7, 5.0, 4.7, 4.3
  - Percent of short-term debt at remaining maturity: 88.6, 91.3, 90.2, 106.7, 104.2, 99.8, 89.3
  - Percent of short-term debt at remaining maturity plus current account deficit: 66.3, 62.0, 70.2, 89.2, 82.9, 77.9, 69.8
  - Percent of the IMF composite measure (fixed): 115.6, 118.0, 120.8, 139.4, 136.8, 129.7, 116.5
  - Percent of the IMF composite measure (flexible): 156.1, 159.0, 163.6, 196.4, 191.7, 182.3, 165.4
- 1/ Note: Includes revaluation changes, which were not captured by changes of gross official reserves in the BOP.

### Spillovers, trade concentration, and remittances
- High geographic concentration of exports; private transfers (remittances) constitute a significant source of financing for the trade deficit.
- Trade and remittance patterns:
  - In 2003–08, close to 40 percent of exports were destined to CIS countries; Russia received 45 percent of that CIS share, Ukraine 28 percent, Belarus 16 percent.
  - About 51 percent of total exports were shipped to the EU in the same period, with Romania, Italy, and Germany as main partners.
  - Food dominates exports; industrial products constitute the major share of imports.
- Large-scale labor emigration: remittances averaged about 29 percent of GDP in 2003–08; remittances fell considerably during 2009–10; Russia is a significant source of remittances, creating exposure to developments in Russia.

### SVAR analysis of external shocks (structural VAR results and impulse responses)
- Model: domestic variables (real GDP, REER, export volume, private personal transfers as remittances-to-GDP ratio) and an external activity variable (export-weighted trading partners’ real GDP or Russia’s real GDP); identification via Cholesky decomposition; quarterly data for 2000Q1-2013Q2 with four lags.
- Shock to trading partners’ GDP:
  - A negative one-standard deviation shock to Moldova’s main trading partners’ GDP (corresponding to a decrease of 0.8 percent) decreases Moldova’s real GDP by:
    - 0.7 percent on impact
    - about 1.8 percent after three quarters
  - REER appreciates initially by about 1.5 percent after such a shock.
  - Exports: decrease by about 4 percent a year after the shock (response on impact not statistically significant).
  - Remittances-to-GDP ratio: decline immediately by about 0.7 percentage points (pp) and reach maximum decline of 2.5 pp by three quarters after the shock.
- Shock to Russia’s GDP:
  - A negative one-standard deviation shock to Russia’s real GDP (corresponding to -1.1 percent) leads to a decrease in Moldova’s GDP by:
    - 0.6 percent on impact
    - dip of 1.5 percent two quarters after the shock
  - Transmission is faster through remittances than through exports:
    - Remittances-to-GDP ratio decreases by about 2 pp one quarter after the shock.
  - Moldova’s total exports are not found to be statistically significant in response to a Russia shock, possibly due to Moldova’s small share in total Russia imports.

### VELIC / Growth Decline Vulnerability Index (GDVI) and scenario analysis
- VELIC assessment: Moldova’s vulnerability to growth crises improved compared to the period before the global financial crisis; GDVI indicates increased risks before the crisis and improved situation in recent years due to enhanced fiscal and external performance.
- Scenario: A reduction in global growth by about ½ percentage point in 2014 would reduce Moldova’s growth by close to 0.3 percent.
  - Main transmission mechanisms: trade of goods and services (reduced external demand and remittances) and lower FDI.
  - Initial deterioration in the current account is mitigated by lower imports due to reduced growth and lesser energy costs.
  - Lower output growth results in higher fiscal deficit and debt, reducing fiscal space.
  - Incorporating fiscal adjustments yields less deterioration in fiscal indicators compared to no-adjustment scenario.
- Fiscal space definition: calculated as the difference between the observed primary balance and the primary balance that, if maintained at the same level every year, would enable the country to achieve a specified public debt target by 2030.

### Conclusions and policy recommendations (external and spillover context)
- Key conclusions:
  - Moldova faces the challenges of few export products destined to a small number of countries; trade deficit persists and is financed largely by private transfers, indicating dependency on the external environment.
  - Continuing prudent macroeconomic policy is critical to strengthen fiscal and external buffers and enhance resilience to external shocks.
  - A more regionally diversified trade structure would help reduce vulnerability to developments in a few trading partners.
- Policy recommendations (external-oriented and macro-prudential):
  - Continue prudent macroeconomic management to further strengthen fiscal and external buffers.
  - Pursue structural reforms to enhance export diversification, competitiveness, and job creation, focusing on corruption, policy stability, and access to finance within the Association agreement with the EU.

*Source: IMF staff estimates and findings as presented in Annex I and Annex II of the IMF mission documents for the Republic of Moldova.*

### Annex IV. Addressing Medium-Term Fiscal Challenges

### Annex IV. Addressing Medium-Term Fiscal Challenges

### Fiscal decentralization and subnational governance
- Moldova’s existing model: 32 regions (rayons) and over one thousand municipalities; characterized as "highly inefficient".
- Current problem: large number of subnational governments spending most resources on personnel and dependent on transfers from the central government to deliver services.
- Key finding: fiscal decentralization can improve service quality if subnational governments finance expenditures through own revenues rather than rely primarily on central transfers.
- Policy recommendation: develop a new design of intergovernmental fiscal relations that explicitly incorporates the principles of accountability and transparency and empowers subnational governments without endangering fiscal discipline at the national level.
- Institutional step noted: draft FRL and planned improvements to the local public finance law are welcome steps to anchor policy decisions to a sustainable path.

### Pension system, demographic pressures, and fiscal sustainability
- System description: pay-as-you-go pension system on a financially unsustainable path; demographic pressures to worsen long term.
- Historical changes and fiscal impact:
  - 20 percent increase in pension benefits in 2009.
  - Supplementary pension payment granted in 2013.
  - Social security deficit rose from 1.4 percent of GDP in 2008 to 3 percent in 2013.
  - Planned doubling of supplemental pension payment to about 600,000 pensioners projects the pension deficit to widen to 3.6 percent of GDP in 2014 and 3.8 percent in 2015.
- Dependency ratio:
  - Current dependency ratio: 1.3 (number of contributing workers to pensioners).
  - Financially sustainable dependency ratio: at least 4.
  - Migration effects: labor migration has led to substantial workforce decline; dependency ratio projected to further decline.
- Replacement rate and demographics:
  - Replacement rate (average pension to average wage): 28 percent (compared to an average of 43 percent in CEE/CIS countries).
  - Pensioners account for 20 percent of the country’s population.
  - Retirement ages: 62 years for men and 57 years for women—described as relatively low compared to other countries.
- Contribution base issues:
  - Contribution rate: at a level comparable to other countries.
  - Reported contribution-liable earnings are low.
  - Various groups (self-employed and farmers) allowed to make flat social security contributions established at a level that translates into a contribution base significantly below the average wage.

### Parametric pension reforms recommended
- No further ad-hoc increases in pension benefits.
- Raise male and female retirement ages to 65, with indexation to advancements in life expectancy, to make any increase in benefits affordable.
- Link pension contributions by self-employed and farmers to the level of income declared for tax purposes, rather than an arbitrary minimum.
- Improve compliance rates in terms of contribution to the pension system.

### Fiscal rules, medium-term framework, and design critique
- Draft FRL includes important elements including a fiscal policy rule defined as a general government budget deficit target of 3 percent of GDP excluding foreign-financed projects.
- Criticisms of the proposed rule:
  - Rule described as "too loose" and "not compatible with a level of the budget deficit that is sustainable over the medium term."
  - Example: under the proposed rule, the overall budget deficit including foreign-financed projects would have been 5.8 percent of GDP in 2013.
  - Without sound counter-cyclical properties, the rule could make fiscal policy more procyclical and lead to excessive volatility in government spending.
- Additional concerns:
  - Proposed fiscal rule lacks an explicit link to public debt sustainability.
  - An overall budget balance rule alone would not constitute an appropriate fiscal policy stance over the economic cycle and would not help reduce spending volatility without an appropriate constraint on expenditures.
  - Excluding foreign-financed capital expenditure from the rule’s coverage may distort budgetary classification and might not be consistent with aggregate demand management objectives.

### Proposed alternative fiscal rule formulation and operational guidance
- Staff recommendation (considering capacity constraints):
  - Define a fiscal policy rule as a general government budget deficit of 2½ percent of GDP excluding grants.
  - Introduce an expenditure rule that limits the annual growth rate of total expenditures excluding targeted social assistance to potential GDP growth (which could be estimated using an econometric model or simply defined as, for example, a 10-year average).
- Flexibility for investment:
  - Medium-term fiscal objective could be relaxed to accommodate productivity-enhancing investment projects if financing on reasonable terms is secured and additional investment is consistent with the economy’s absorption capacity.

### Escape clauses, enforcement, and institutional support
- FRL should provide clarity in escape clauses:
  - Specify the range and size of shocks and provide unambiguous guidelines on interpretation and determination of events such as natural disasters to prevent unwarranted deviations from the fiscal rule.
- Enforcement and corrective mechanisms:
  - Include specifics on adjustment mechanisms and modalities of enforcement when ceilings/floors are missed.
- Independent oversight:
  - Consider appointing an independent fiscal council with a mandate to evaluate ex post compliance with the fiscal rule and to assess macroeconomic forecasts and proposed fiscal policies, to foster greater transparency and buttress credibility of the fiscal rule.

*Source: Annex IV. Addressing Medium-Term Fiscal Challenges (IMF staff report excerpt).*

### 3.      The CPS has governance and gender lenses, and a calibrated engagement in localities from

### 3.      The CPS has governance and gender lenses, and a calibrated engagement in localities from

### Governance and Gender Lenses; Local Engagement
- Transnistria will be considered in close consultation with the authorities of the Republic of Moldova.
- The CPS continues to address governance issues at the country, sectorial and operational levels across the strategy.
- Interventions will be pursued to:
  - improve the business enabling environment;
  - enhance public administration reform and quality of public service delivery;
  - improve public financial management and procurement systems.
- A governance filter will be used to ensure that governance is systematically tackled in all operations (analytical and advisory activities and lending).
- The CPS will support enhanced involvement of Civil Society Organizations through the Global Partnership for Social Accountability to which Moldova has opted in.
- At the operational level, WBG will:
  - ensure the highest fiduciary standards in projects it supports;
  - help the Government to strengthen country systems.
- The CPS is informed by a gender assessment, the outcomes of which will be discussed at the concept stage of each relevant new operation (analytical and advisory activities and lending).

### World Bank Group Engagement and Portfolio (figures and scope)
- World Bank’s current portfolio includes seven investment financing projects and one budget support operation.
- Total commitments amount to US$189.9 million.
- The disbursement ratio for FY14 so far is 27.9 percent (as of May 7, 2014), and was 34.1 percent at the end of FY13.
- The ongoing IDA portfolio concentration:
  - highest concentration of operations in human development and agriculture and rural development, as well as in the financial and private sectors.
- Size of the active Trust Funds (TF) portfolio is US$35.8 million.
- IFC operations:
  - focus on investment and advisory activities that enable private sector growth and diversification;
  - plans an annual funding envelope of about US$30 million.
  - IFC exposure as of June 30, 2013, was US$90.3 million in 18 clients across the financial, manufacturing, agriculture, telecommunications, water, and energy sectors.
- MIGA:
  - net exposure in Moldova at the end of 2012 amounted to US$17.8 million in four projects;
  - all projects support foreign banks' subsidiaries, including micro-finance organizations and leasing operations.

### Statistical Issues — Assessment of Data Adequacy for Surveillance (As of May 12, 2014)
- General: Data provision is broadly adequate for surveillance.
- Improvements with Fund technical assistance in: national accounts, fiscal and monetary data, consumer prices, external trade and balance of payments.
- Technical assistance is ongoing in price and national accounts statistics.
- National Accounts:
  - prepared by the National Bureau of Statistics (NBS) based on the 1993 SNA System of National Accounts (SNA).
  - Estimates do not include the Transnistria region (data have not been collected since 1991).
  - GDP estimated from production and expenditure sides, annually and quarterly.
  - Data prepared in current and constant (previous year) prices; annual data are revised in two stages.
  - Starting in January 2014, short-term activity indicators re-classified according to CAEM Rev. 2.
  - National accounts will be published according to CAEM Rev.2, starting in Q1 2015.
  - Work is on-going to implement the 2008 SNA and to further improve quarterly and annual national accounts.
- Price statistics:
  - NBS publishes monthly CPI and PPI data and began publications of the core CPI from 2010.
  - CPI basket weights updated annually; on-going TA to improve reliability and expand coverage to include owner-occupied housing.
- Government finance statistics:
  - Moldova reports annual GFS based on GFSM 2001 methodology for publication in the Government Finance Statistics Yearbook (GFSY).
  - Data are on a cash basis and cover above as well as below the line operations and financial balance sheet of the general government sector.
  - With Fund TA, authorities introduced regular dissemination of monthly GFSM 2001 based data for the budgetary central government units.
- Monetary statistics:
  - Monetary and financial statistics broadly in line with recommendations of the Monetary and Financial Statistics Manual and of a generally good quality.
  - NBM compiles and submits monetary data using Standardized Report Forms (SRFs).
  - Monetary data reported by the NBM on a regular basis and published in the International Financial Statistics.
  - NBM reports Financial Soundness Indicators (FSIs) on a quarterly basis, posted on the FSI webpage.
- External sector statistics:
  - Compilation methodology follows the fifth edition of the Balance of Payments Manual.
  - Transition to the sixth edition of the Balance of Payments Manual is planned for Q3, 2014.
  - Moldova disseminates quarterly international investment position and external debt statistics.
  - Data on international reserves and foreign currency liquidity are disseminated monthly.
- Data Standards and Quality:
  - Moldova subscribed to the SDDS in May 2006.
  - Participation in the GDDS began in February 2003.
  - A data ROSC report was published in March 2006.

### Table of Common Indicators Required for Surveillance (As of May 12, 2014) — selected entries and dates preserved exactly
- Exchange Rates: Date of latest observation 5/12/2014; Date received 5/12/2014; Frequency of Data D/M; Frequency of Reporting D; Frequency of Publication D/M.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 04/30/2014; Date received 5/08/2014; Frequency of Data W/M; Frequency of Reporting W; Frequency of Publication M.
- Reserve/Base Money: Date of latest observation 04/30/2014; Date received 5/08/2014; Frequency of Data W; Frequency of Reporting W; Frequency of Publication M; Data Quality – Methodological soundness O, LO, O, O; Data Quality – Accuracy and reliability LO, O, O, O, O.
- Consumer Price Index: Date of latest observation March 2014; Date received 4/10/2014; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of latest observation March 2014; Date received 4/22/2014; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Data Quality – Methodological soundness O, LO, LO, O; Data Quality – Accuracy and reliability LO, O, O, O, LO.
- GDP/GNP: Date of latest observation Q4 2013; Date received 03/17/2014; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q; Data Quality – Methodological soundness O, LO, LO, O; Data Quality – Accuracy and reliability LO, O, LO, O, O.
- Gross External Debt: Date of latest observation 12/31/2013; Date received 03/27/2014; Frequency Q.
- International Investment Position: Date of latest observation 12/31/2013; Date received 03/27/2014; Frequency Q.

### Debt Sustainability Analysis — Key Findings and Context
- Moldova’s risk of debt distress:
  - remains low based on an assessment of its public external debt;
  - overall risk of debt distress is heightened, reflecting vulnerabilities related to domestic debt and private external debt.
- This finding aligns with the previous DSA conducted as part of the 2012 Article IV consultation.
- Continued fiscal discipline is critical given vulnerability to growth shocks and potential contingent liabilities from recapitalization needs of the banking system.
- Risks related to high external debt to GDP ratio, emanating largely from unusually high private debt for a low-income country.

### Background — External Debt and Composition (end–2013, comparisons)
- Moldova’s total external debt at end–2013 was 84.4 percent of GDP compared to 82.4 percent of GDP at end–2012.
- Public and public-guaranteed (PPG) external debt decreased by about 1 percentage point and private external debt increased by 3 percentage points.
- Moldova’s PPG debt at end–2013 was about 30 percent of GDP compared to 31 percent at end–2011.
- PPG debt is mainly external (¾ of total) and held by multilateral and bilateral donors that hold 98 percent of PPG external debt.
- Domestic debt (¼ of total) is mostly short term and about 66 percent is held by the domestic banking system.
- Private sector debt:
  - stock of external private sector debt reached US$4.9 billion as at end–2013, mostly due to increased trade credit and commercial loans.
  - bank’s share of total private external debt reached about 8.7 percent by end 2013.
  - medium and long-term share of total external private debt was about 55 percent as at end-2013.
  - majority of non-bank debt is short term and consists of trade credits, arrears and other payments liabilities, mostly for imports of natural resources.
- Private borrowing in Moldova, similar to other CEE countries, is extended mainly to foreign-owned companies from their parents abroad.

### Underlying Assumptions and Macroeconomic Outlook (selected projections and comparisons)
- 2013: real GDP growth 8.9 percent.
- 2014: GDP expected to grow at 2.2 percent.
- Baseline scenario assumes lower potential and actual output growth over medium-to long-term versus previous DSA.
- Evolution of Selected Macroeconomic Indicators, 2012-2017 (as presented):
  - Real GDP growth (Percent):
    - Previous DSA: 1/3.0 5.0 5.0 5.5 5.3 5.3
    - Current DSA: -0.7 8.9 2.2 3.5 4.0 4.0
  - Nominal GDP (Billions of U.S. dollars):
    - Previous DSA: 1/7.6 8.2 9.0 9.8 10.6 11.7
    - Current DSA: 7.3 7.9 7.6 8.1 8.7 9.2
  - Overall fiscal balance:
    - Previous DSA: 1/-1.3 -1.1 -1.0 -0.9 -0.8 -0.8
    - Current DSA: -2.2 -1.8 -2.6 -4.6 -4.8 -5.1
  - Current account balance:
    - Previous DSA: 1/-12.2 -11.7 -10.9 -10.4 -9.9 -9.5
    - Current DSA: -7.7 -5.5 -7.4 -8.2 -8.1 -8.0

### External Debt Sustainability Analysis — Summary
- All external public debt ratios remain well below the thresholds under the baseline and stress scenarios.
- Alternative scenario with key variables at historical averages (2013–2033):
  - present value of debt-to-GDP and remittances ratio would reach 21 percent compared to 13 percent under the baseline scenario.
  - present value of debt-to-exports and remittances as well as to revenue would also increase substantially.
- Interpretation:
  - indicates significant fiscal and external adjustments in recent years;
  - underscores importance for Moldova of staying on the path of sound economic policies and reforms.

### Box 1 — Macroeconomic Assumptions behind the DSA (preserved text)
- Real GDP increased by 8.9 percent in 2013 and is projected to grow at 2.2 percent in 2014 driven by the anticipated slowdown in agriculture.
- An expected recovery in FDI following the signing of the DCFTA with the EU as well as advances in structural reforms will help sustain the economy’s potential growth rate at 4 percent in the medium term.
- Inflation is expected to average 5½–6 percent in 2014–15, reflecting robust domestic demand combined with increased utility tariffs.
- Headline inflation is expected to be 5 percent over the medium to long term in line with the NBM’ mid-target.
- Exports are projected to reach 49.8 percent of GDP in 2033 (compared with 44.1 percent in 2013).
- Imports projected at 84percent of GDP in 2033.
- Remittances: growth envisaged to slow in the medium term and decline relative to GDP in the long term.
- Current account deficit projected to narrow slightly in the medium term and stabilize at about 7.7 percent of GDP.
- FDI expected to reach close to about 4½ percent of GDP in the long run.
- Overall budget balance projected: deficit of 2.6 percent of GDP in 2014 and increase to 4.7 percent by 2019 under the baseline scenario.
- Over the long run (2020–2033), the primary budget balance is assumed to be an average deficit of 2.9 percent of GDP.
- Financing assumptions:
  - grant equivalent financing projected to decline from 2.1 percent of GDP in 2018 to 1.4 percent in 2033;
  - grant element of new borrowing projected to fall from 37 percent to 22 percent during the same period.

*Prepared by Staff of the International Monetary Fund and the World Bank; June 5, 2014.*

### 5.      While fiscal consolidation, higher exports, and significant levels of remittances should

### _cr14190 - 5.      While fiscal consolidation, higher exports, and significant levels of remittances should

### Liquidity and external risks
- While none of the indicators of debt service breaches the threshold, some liquidity pressures could emerge.
- Significant private external debt and its short maturity represent a risk in case roll-over-rates were to decline sharply.
- The improvement in the current account position in 2012 and 2013 has allowed the NBM to build-up reserves, enhancing the economy’s resilience to adverse exogenous shocks.
- In Moldova, remittances are classified as either current transfers or compensation of employees. Both categories are included in the DSA (under “current transfers”).

### Public Sector Debt Sustainability Analysis
- Public debt dynamics appear to be sustainable under the baseline scenario, but the level of PPG total debt is projected to increase over the medium term.
- With the current set of macroeconomic policies outlined above, the primary budget deficit path is projected to be wider than the level that would stabilize the debt-to-GDP ratio.
- PPG total debt projections:
  - 29.8 percent of GDP at the end of 2013
  - 39.4 percent by end–2018
  - 54.5 percent by 2033
- PV of debt-to-GDP projections:
  - 24.2 percent in 2013
  - 32.6 percent in 2018
  - 49 percent in 2033
  - Benchmark level: 56 percent
- PV of debt-to-revenue and grants ratio projections:
  - 65.4 percent in 2013
  - 89.4 percent in 2018
  - 134.6 percent by 2033
- Stress-test findings:
  - A permanent one standard deviation in real GDP growth under the baseline scenario would increase the PV of debt-to-GDP to 58 percent by 2033 and 107 percent in 2033, breaching the 56 percent benchmark level.
  - The DSA framework points to a low risk of debt distress over the period 2014–19, but stress tests indicate vulnerability to exogenous (growth) shocks and potential fiscal risks.
- Banking sector recapitalization shock:
  - If the cost of bank recapitalization were 10 percent of GDP, the stock of public debt would increase to 41.8 percent of GDP in 2014.
  - PV of debt-to-GDP would be 32.5 percent in 2014 and would increase to 52 percent by 2033, marginally below the benchmark level of 56 percent (see Table 2a, Bound Test 5).
- Moldova’s three-year average score on the Bank’s Country Policy and Institutional Assessment (CPIA) is 3.77, which places the country at the upper-end of the medium policy performance category.

### The Authorities’ View
- The authorities concurred with the staff assessment, and agreed that the introduction of a rule-based fiscal policy framework would help alleviate risks.
- The authorities acknowledged that the current fiscal position (as discussed with the IMF 2014 Article IV mission in April 2014) does not improve debt sustainability.
- The authorities proposed to introduce fiscal rules to anchor fiscal policy and thereby ensure debt sustainability over the long term.
- The authorities noted that short-term debt is mostly related to trade credits and indicated that the country’s ambitious development plan requires a sustained increase in borrowing.
- The authorities aim to develop a long-term debt management strategy with a focus on exploring alternative sources of financing while maintaining a sustainable debt level.
- As part of the strategy to develop the domestic debt market, the Treasury has started issuing long-term government bonds and the NCFM has approved the trading of government securities (with maturity over one year) on the stock exchange.

### Conclusion and policy implications
- The DSA indicates that Moldova’s risk of debt distress remains low, in line with the 2012 assessment, but with heightened overall risk.
- All external indicators for public debt remain well under the thresholds under the standard bound tests and alternative scenarios.
- Significant private external debt poses roll over risks to debt sustainability.
- Although public debt dynamics are projected to remain on a sustainable path under the baseline scenario, alternative scenarios highlight particular sensitivity to assumptions on output growth and the path of fiscal policy.
- Policy recommendations and priorities:
  - Pursue prudent fiscal policy and advance structural reforms to ensure debt sustainability.
  - Ensure sound macroeconomic management and continued progress on institutional and structural issues to unlock growth potential and reduce vulnerability to shocks.
  - Address limited development of the domestic debt market to reduce financing risks given development needs and dependence on foreign assistance in the form of grants and concessional loans.
  - Lengthen average maturity of domestic debt and deepen the secondary market to reduce PPG domestic debt rollover and interest rate risks.

*IMF staff assessment as presented in the provided DSA excerpt.*

### 12.      A reduction or reversal of trade credit and other private financial inflows could have

### 12.      A reduction or reversal of trade credit and other private financial inflows could have

### Risks from reduced trade credit and private financial inflows
- A possible decline in banking sector liquidity in foreign countries or deterioration in banking sector confidence could lead to reduced availability of trade financing.
- Deterioration in economic conditions in Moldova’s main economic partners—where the parent companies are located—could lead to some decline in external financing for the private sector.
- These developments point to roll-over risks for the private sector.

### Debt sustainability indicators and stress-test findings (selected figures and scenarios)
- Figure note: "The most extreme stress test is the test that yields the highest ratio on or before 2023."
- Selected baseline and projection highlights (Table 1, Public Sector Debt, baseline scenario):
  - Public sector debt: 30.2 (2010), 28.8 (2011), 31.0 (2012); projections include 48.5 (2023) and 54.8 (2033).
  - Of which: foreign-currency denominated: 22.8 (2010), 21.7 (2011), 24.0 (2012); projections include 23.9 (2023) and 20.4 (2033).
  - Change in public sector debt: -1.5 (2010), -1.4 (2011), 2.2 (2012); projection 0.1 (2033).
  - Identified debt-creating flows: -3.3 (2010), -2.6 (2011), 0.5 (2012); projection 1.1 (2033).
  - Primary deficit: 1.7 (2010), 1.6 (2011), 1.4 (2012); 3.5 (2023) and 3.1 (2033).
  - Revenue and grants: 38.3 (2010), 36.6 (2011), 37.9 (2012); 36.4 (2023) and 36.4 (2033).
  - Primary (noninterest) expenditure: 40.0 (2010), 38.2 (2011), 39.3 (2012); 39.2 (2023) and 39.3 (2033).
  - Automatic debt dynamics: -4.5 (2010), -3.7 (2011), -0.6 (2012); -1.8 (2023) and -1.9 (2033).
  - Residual, including asset changes: 1.8 (2010), 1.2 (2011), 1.7 (2012); 1.0 (2023) and -1.0 (2033).
  - Gross financing need: 11.0 (2010), 10.2 (2011), 10.0 (2012); 26.3 (2023) and 37.3 (2033).
  - Debt service-to-revenue and grants ratio (in percent): 6.0 (2010), 6.4 (2011), 5.7 (2012); 9.5 (2023) and 13.9 (2033).
  - Primary deficit that stabilizes the debt-to-GDP ratio: 3.2 (2010), 2.9 (2011), -0.8 (2012); 0.8 (2023) and 2.9 (2033).
- External debt (Table 3a, baseline scenario):
  - External debt (nominal): 81.6 (2010), 77.6 (2011), 82.4 (2012); 78.5 (2018) and 68.0 (2023).
  - Of which: public and publicly guaranteed (PPG): 22.8 (2010), 21.7 (2011), 24.0 (2012); 23.9 (2018) and 20.4 (2023).
  - Non-interest current account deficit: 8.7 (2010), 11.3 (2011), 6.8 (2012); 5.8 (2018) and 6.0 (2023).
  - Net FDI (negative = inflow): -3.6 (2010), -4.1 (2011), -2.3 (2012); -4.4 (2018) and -4.8 (2023).
  - Endogenous debt dynamics: -4.4 (2010), -13.0 (2011), -1.9 (2012); -1.3 (2018) and -1.4 (2023).
  - PV of external debt (selected): 76.4 (2013), 78.8 (2014), 84.5 (2015); 70.9 (2023) and 62.2 (2033).
  - PV of PPG external debt (in percent of exports): 41.5 (2013), 39.6 (2014), 40.2 (2015); 32.9 (2023) and 29.4 (2033).
  - Debt service-to-exports ratio (in percent): 17.8 (2010), 15.9 (2011), 15.5 (2012); 18.0 (2023) and 17.6 (2033).
  - Total gross financing need (Millions of U.S. dollars): 2,037 (2010), 2,471 (2011), 2,592 (2012); 4,404 (2023) and 7,645 (2033).
- Sensitivity analyses (Table 2 and Table 3b) show:
  - PV of Debt-to-GDP Ratio (baseline and stress scenarios): baseline values listed as 24 25 27 28 30 33 41 49 for selected years; severe scenarios (e.g., one-time 30 percent real depreciation) increase ratios substantially (examples in table entries such as 35, 36, 37, 39, 45, 53).
  - PV of Debt-to-Revenue Ratio and Debt Service-to-Revenue Ratio similarly rise under adverse scenarios (tables list multiple scenario-specific numeric sequences).

### Macroeconomic and fiscal outlook (select projections and assumptions)
- From the press release (IMF Executive Board conclusion, July 8, 2014):
  - The Moldovan economy recovered strongly from the drought-related contraction of 2012, but activity will significantly slow in 2014 due to a moderation in agriculture production and related industries and weaker economic activity in main trading partners.
  - Inflation is projected to remain within the National Bank of Moldova’s (NBM) inflation target range of 5 percent ± 1.5 percentage points.
  - The external accounts temporarily improved in 2013 but will deteriorate in 2014.
  - The current account deficit is projected to widen to about 7.5 percent of GDP resulting from a slowdown in export growth and a decline in remittances.
  - Moldova achieved fiscal consolidation under the program; the overall budget balance was reduced in 2013 to 1.8 percent of GDP compared to 6.3 percent in 2009, but on current policies is projected to widen (projection truncated in source).
- Key macroeconomic assumptions (Table 1 and Table 3a):
  - Real GDP growth (selected entries): 7.1 (2010), 6.8 (2011), -0.7 (2012); baseline projections include 4.0 (2023), 4.0 (2023 repeated), and 4.9 (2033 average in one table).
  - Average nominal interest rate on forex debt (in percent): 1.3 (2010), 1.2 (2011), 1.0 (2012); 1.8 (2023) and 1.8 (2033) in one table, with other tables showing 2.0, 2.2, 2.1 in specified rows.
  - Average real interest rate on domestic debt (in percent): -3.4 (2010), 1.8 (2011), 0.6 (2012); 2.4 (2023) and 2.4 (2033) in one table.
  - Real exchange rate depreciation (in percent, + indicates depreciation): -10.1 (2010), -8.2 (2011), -3.1 (2012); other entries noted but truncated in source.
  - Inflation rate (GDP deflator, in percent): 11.1 (2010), 7.3 (2011), 7.9 (2012); 5.1 (2023) and 5.0 (2033).
  - Grant element of new external borrowing (in percent): selected values include 43.3, 46.7, 44.6, 40.6, 38.5, 37.3, 41.8, 33.9, 22.2 in the projection rows.

### Policy-relevant implications highlighted by the content
- The combination of potential reductions in trade credit and declines in private external financing implies heightened roll-over and liquidity risks for the private sector.
- External-sector vulnerabilities are present: the current account deficit is projected to widen to about 7.5 percent of GDP in 2014, and gross financing needs and debt-service ratios rise under adverse scenarios.
- Fiscal consolidation achieved by 2013 (overall budget balance 1.8 percent of GDP, down from 6.3 percent in 2009) has eroded under current policies, implying a need to monitor and reinforce fiscal positions to reduce debt-creating flows and financing vulnerabilities.

*Source: IMF staff estimates, projections, and press release text in the provided content unit.*

### 2.6 percent in 2014 and 4.6 percent in 2015. As a result, public and publicly-guaranteed debt

### 2.6 percent in 2014 and 4.6 percent in 2015. As a result, public and publicly-guaranteed debt

### Risks to systemic financial stability
- Risks have built up due to severe governance problems in the banking system.
- Regulators’ ability to take action is constrained by Constitutional Court rulings that:
  - reduced the powers of the NBM; and
  - limited the independence and effective operation of the National Commission for Financial Markets (NCFM).

### Executive Board Assessment: main messages
- Directors welcomed Moldova’s strong economic performance and progress on poverty reduction underpinned by sound policies.
- To consolidate gains against significant downside risks, Directors encouraged:
  - avoiding a weakening of policies;
  - reducing vulnerabilities; and
  - deepening structural reforms.
- Significant banking system weaknesses require decisive action to ensure stability and soundness of the financial sector. Directors urged:
  - building consensus and acting on FSAP recommendations, including swiftly passing legislation fully restoring regulatory and supervisory powers of the National Bank of Moldova (NBM) and the National Commission for Financial Markets;
  - strengthening legal protection of board members and staff of these agencies;
  - resolutely enforcing compliance with prudential requirements and strengthening governance in the banking sector, including ensuring disclosure of ownership structure;
  - maintaining high scrutiny of Banca de Economii’s operations until the bank complies with regulatory norms;
  - requiring banks that fail regulatory requirements to implement time-bound plans to address shortcomings;
  - further strengthening crisis management and the anti-money laundering regime.
- On fiscal policy, Directors:
  - commended recent fiscal consolidation but cautioned that planned significant wage and pension increases and ad hoc tax benefits risk reversing gains;
  - encouraged a gradual reduction in the budget deficit to a level compatible with projected official assistance over the medium term;
  - stressed importance of mobilizing revenue and advancing structural fiscal reforms, including in social security and fiscal decentralization, and adopting a fiscal responsibility law.
- On monetary policy, Directors:
  - commended the NBM for keeping inflation within the target range in the past two years;
  - considered the current monetary stance appropriate but recommended vigilance to inflation risks;
  - welcomed occasional NBM interventions on the foreign exchange market to boost international reserves and reduce volatility, while stressing importance of allowing the exchange rate to adjust to external pressures.
- On structural reforms, Directors underscored that steady implementation is critical to boost potential growth and reduce poverty; priority areas include improving the business environment, investing in infrastructure, and strengthening human resource development.

*Executive Board Assessment (summary transmitted to authorities at conclusion of discussion).*

### Recent macroeconomic developments and outlook
- Near-term outlook described as highly unpredictable; a disruption of regional trade routes and/or gas supply can adversely impact the economy.
- Moldova is vulnerable to adverse developments in main trading partners.
- First four months of 2014:
  - exports slowed by 1.9 percent (y/y);
  - exports to CIS countries declined by 9.3 percent (y/y);
  - imports declined by 3.9 percent (y/y);
  - trade balance improved by 5.5 percent (y/y).
- Remittances from Moldovan workers abroad, about one quarter of GDP, have declined, mainly reflecting slowdown of the Russian economy.
- Opportunities from regional developments and DCFTA with the EU:
  - Moldova’s exports to the EU grew by 9.3 percent (y/y) in January–April;
  - imports from the EU grew by 2.4 percent (y/y);
  - committed donor support equivalent to about 10 percent of total annual budget spending.
- Recent outcomes:
  - industrial production grew by 6.3 percent in the first quarter (y/y);
  - investment grew by 3 percent (y/y);
  - agricultural production grew by 7.4 percent in the first quarter (y/y).

### Fiscal sustainability and policy actions
- 2014 overall government budget deficit target: 2.6 percent of GDP, including grants.
- Budget accommodates increases in social programs and catching up on underexecuted investment projects from 2013.
- Social measures already implemented:
  - heating allowance increased by 25 percent;
  - minimum monthly income guaranteed by the state (Ajutor Social) increased by 9 percent.
- Negotiated more favorable electricity and gas prices with foreign suppliers to alleviate expenditure pressures.
- Provisions made to protect purchasing power of retirees, teachers, and some other vulnerable groups.
- Authorities committed to the Medium-Term Budget Framework for 2015–17 and have implemented revenue mobilization measures.
- Structural fiscal reforms planned or advanced:
  - drafting/adopting legislation on local public finances, public debt and state guarantees, and fiscal responsibility;
  - preparing to enhance privatization and strengthen market competition when conditions improve;
  - launching comprehensive restructuring of centralized heating system in the Municipality of Chisinau (in cooperation with the World Bank);
  - intensifying efforts to fight smuggling and corruption in line with DCFTA obligations.
- Fiscal policy objective over the medium term: reduce the budget deficit to a level that can be sustained without exceptionally high donor support.

### Banking system restructuring
- Banking system requires strengthening of regulatory framework, corporate governance, and authorities’ capacity for risk management.
- Building political consensus and passing adequate legislation to fully restore regulatory power of the NBM and National Commission for Financial Markets has proved difficult and will take more time despite sizable IMF TA.
- Authorities need more time to discuss FSAP recommendations and prepare a comprehensive action plan involving all stakeholders.
- Interim measures:
  - NBM imposed enhanced scrutiny of most affected banks;
  - Banca de Economii (BEM) hired an internationally reputable auditor per agreed terms of reference with IMF and World Bank staff;
  - a diagnostic study prepared to facilitate resolution of impaired assets and compliance with regulatory norms;
  - authorities maintain strong representation at BEM’s Board to safeguard public interest;
  - NBM remains vigilant of developments in other banks and stands ready to address emerging weaknesses with available instruments.

### Structural reforms
- Authorities remain committed to NDS “Moldova 2020” structural reforms.
- Adoption of DCFTA may pose short-term challenges; authorities developed, with the EU, a Roadmap for Enhancing Competitiveness of Moldova aligned with staff recommendations.
- Education reform:
  - Education Sector Development Strategy for 2014–20 prepared to increase public spending efficiency in the sector and align vocational curricula with labor market needs.

### Moldova: Selected Economic Indicators, 2011–15 (extract)
- Real growth rate: 2011: 6.8; 2012: -0.7; 2013: 8.9; 2014: 2.2; 2015 (Projection): 3.5
- Demand: 2011: 8.3; 2012: 0.4; 2013: 6.2; 2014: 2.1; 2015: 2.4
- Consumption: 2011: 7.5; 2012: 0.9; 2013: 5.2; 2014: 2.8; 2015: 3.0
  - Private consumption: 2011: 9.4; 2012: 1.0; 2013: 6.5; 2014: 1.9; 2015: 1.9
  - Public consumption: 2011: -0.7; 2012: 0.6; 2013: -0.8; 2014: 7.2; 2015: 8.3
- Gross capital formation: 2011: 13.0; 2012: 1.8; 2013: 3.3; 2014: 3.8; 2015: 2.2
  - Private: 2011: 11.3; 2012: -3.9; 2013: -3.7; 2014: 0.5; 2015: 1.0
  - Public: 2011: 19.3; 2012: 21.6; 2013: 22.4; 2014: 11.0; 2015: 4.5
- Nominal GDP (Billions of Moldovan lei): 2011: 82.3; 2012: 88.2; 2013: 99.9; 2014: 108.7; 2015: 118.8
- Nominal GDP (Billions of U.S. dollars): 2011: 7.0; 2012: 7.3; 2013: 7.9; 2014: 7.6; 2015: 8.1
- Consumer price index (Average): 2011: 7.6; 2012: 4.6; 2013: 4.6; 2014: 5.7; 2015: 6.0
- GDP deflator: 2011: 7.3; 2012: 7.9; 2013: 4.0; 2014: 6.5; 2015: 5.6
- Average monthly wage (Moldovan lei): 2011: 3,194; 2012: 3,478; 2013: 3,765; 2014: 4,080; 2015: 4,450
- Unemployment rate (Annual average, percent): 2011: 6.7; 2012: 5.6; 2013: 5.1; 2014: 6.0; 2015: 5.8
- Foreign saving (Percent of GDP): 2011: 12.3; 2012: 7.7; 2013: 5.5; 2014: 7.4; 2015: 8.2
- National saving (Percent of GDP): 2011: 11.0; 2012: 16.0; 2013: 17.1; 2014: 16.0; 2015: 14.8
  - Private saving: 2011: 8.1; 2012: 11.7; 2013: 11.7; 2014: 10.6; 2015: 11.5
  - Public saving: 2011: 2.9; 2012: 4.3; 2013: 5.3; 2014: 5.4; 2015: 3.3
- Gross investment (Percent of GDP): 2011: 23.3; 2012: 23.6; 2013: 22.6; 2014: 23.3; 2015: 23.0
- Primary balance (General government): 2011: -1.6; 2012: -1.4; 2013: -1.3; 2014: -1.9; 2015: -3.9
- Overall balance (General government): 2011: -2.4; 2012: -2.2; 2013: -1.8; 2014: -2.6; 2015: -4.6
- Stock of public and publicly guaranteed debt (Percent of GDP): 2011: 29.0; 2012: 31.1; 2013: 29.9; 2014: 31.8; 2015: 32.8
- Broad money (M3, Percent change): 2011: 10.6; 2012: 20.8; 2013: 26.5; 2014: 15.9; 2015: 16.4
- Velocity (GDP/end-period M3; ratio): 2011: 2.0; 2012: 1.8; 2013: 1.6; 2014: 1.5; 2015: 1.4
- Reserve money (Percent change): 2011: 18.4; 2012: 22.9; 2013: 31.9; 2014: 13.4; 2015: 14.0
- Credit to the economy (Percent change): 2011: 15.0; 2012: 16.1; 2013: 18.8; 2014: 11.3; 2015: 11.4
- Current account balance (Millions of U.S. dollars): 2011: -863; 2012: -559; 2013: -438; 2014: -564; 2015: -662
- Current account balance (Percent of GDP): 2011: -12.3; 2012: -7.7; 2013: -5.5; 2014: -7.4; 2015: -8.2
- Gross official reserves (Millions of U.S. dollars): 2011: 1,965; 2012: 2,515; 2013: 2,820; 2014: 2,751; 2015: 2,621
- Gross official reserves (Months of imports): 2011: 3.9; 2012: 4.7; 2013: 5.0; 2014: 4.7; 2015: 4.3
- Exchange rate (Moldovan lei per USD, period avge): 2011: 11.7; 2012: 12.1; 2013: 12.6
- Real effective exchange rate (Average, percent change): 2011: 5.3; 2012: 4.5; 2013: -3.4; 2014: -3.5; 2015: 0.4
- External debt (Percent of GDP) 2/: 2011: 77.6; 2012: 82.5; 2013: 83.6; 2014: 90.0; 2015: 87.8
- Debt service (Percent of exports of goods and services): 2011: 15.7; 2012: 15.6; 2013: 17.5; 2014: 18.6; 2015: 19.5

*Sources: Moldovan authorities; and IMF staff estimates. Data exclude Transnistria. External debt includes private and public and publicly guaranteed debt.*

*Statement by Mr. Snel and Mr. Manchev on Republic of Moldova, June 23, 2014.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14190.pdf_