## 2014. The missions met with Prime Minister Leanca, Deputy Prime

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---

### CONTEXT
- Parliamentary elections scheduled for November 30, 2014 and local elections for mid-2015.
- Political competition has prompted policy reversals, hindered response to banking-sector vulnerabilities, and stalled the reform agenda.
- In June, Moldova signed an Association Agreement with the EU including provisions establishing a Deep and Comprehensive Free Trade Area (DCFTA): immediate elimination of both sides' export duties; asymmetric removal of import duties with EU tariffs on key products entering Moldova removed over five to ten years.
- Russia introduced several restrictions on import of Moldovan products.
- In September, Moldova signed a free trade agreement with Turkey expected to enter into effect in 2015.

### RECENT DEVELOPMENTS AND OUTLOOK
- Russia’s restrictions on imports from Moldova are projected to exacerbate the ongoing slowdown in activity.
- First half of 2014: activity indicators slightly better than expected at the time of the 2014 Article IV consultation (reflecting good performance of agriculture).
- Second half of 2014: growth held back by a more pronounced decline in growth in key trading partners, moderating agricultural output, and Russia’s additional restrictions on imports of Moldovan food products (Annex I).
- GDP projections and inflation:
  - 2014: GDP is projected to grow by 2 percent, compared to 8.9 percent in 2013.
  - Inflation in 2014: projected to remain within the National Bank of Moldova’s (NBM) target range of 5 percent ± 1.5 percentage points.
  - Inflation: projected to pick up next year reflecting long overdue utility tariff increases after the elections, before converging to the middle of the target range.
- International reserves and external position:
  - Despite a collapse in wine exports to Russia during the first half of 2014, agricultural producers have found new markets in the EU and other CIS countries.
  - Remittances have remained stronger than anticipated so far in 2014.
  - Capital outflows and holdings of foreign currencies have arisen from geopolitical tensions and elections, culminating in depreciation of the leu by about 12½ percent vis-à-vis the US dollar since end-2013.
  - International reserves have declined to US$2.7 billion but remain adequate by standard metrics.
  - Current account deficit projected to widen to 7¼ percent in 2015, reflecting projected decline in remittances growth and a recovery in imports as uncertainties subside.
- External shock magnitude:
  - Russia’s ban on Moldovan food products affects 4 percent of total exports (2 percent of GDP).
  - Russia introduced a 7.8 percent import duty on imports of Moldovan agricultural products (previously exempt).
  - Some of these products rely heavily on the Russian export market (up to one half of output).
- Risks to the outlook are tilted to the downside: banking system vulnerabilities and governance problems, protracted slowdowns in trading partners, intensified geopolitical tensions, and additional policy slippages before elections.

### AUTHORITIES’ VIEWS
- Ministry of Economy (MoE): envisaged higher output growth of 3 percent in 2014, expecting a softer impact of restrictions on exports and remittances.
- National Bank of Moldova (NBM): expressed concerns; sees output growth likely flat or slightly negative in 2014. NBM inflation projections broadly in line with staff projections.
- Authorities agreed with staff’s assessment of risks, transmission channels, and policy responses.

### POLICY DISCUSSIONS — Overview
- Policy discussions focused on:
  - Safeguarding systemic financial stability by strengthening regulatory and supervisory frameworks, governance, and dealing with weak banks.
  - Ensuring sustainability of public finances.
  - Reinvigorating the structural reform agenda.

### A. Financial Sector Policy — Staff’s Views
- Reported bank performance indicators are mixed and concerns exist about accuracy.
  - As of end-June 2014, aggregate capital adequacy ratio: 19.9 percent (above required minimum of 16 percent but significantly lower than in past years).
  - Some banks reported remarkably high ratios of nonperforming loans; several banks were loss-making; some complying with capital requirements by narrow margins; one mid-size bank was undercapitalized.
  - Reported level of liquid assets appears unreliable as some assets may be encumbered through undisclosed side agreements.
- Weak conditions in several banks require urgent attention:
  - Staff recommended NBM maintain high scrutiny over operations and liquidity of weak banks—some have large interbank exposures among themselves.
  - Staff recommended limiting deposit growth in banks offering deposit rates significantly above average market rates.
  - Staff advised authorities to refrain from providing privileged access of public sector deposits to individual banks.
  - Strengthen framework to deal with problem and vulnerable banks.
- Legal and crisis management concerns:
  - Recent amendments (approved in October 2014) include crisis management provisions allowing the government to issue public debt or guarantees to protect financial institutions without parliamentary approval or oversight; NBM could be asked to provide emergency lending to troubled banks without invocation of special administration. Staff expressed concern these amendments might open room for potential abuse.
- Legislation and enforcement:
  - Legislation restoring the NBM’s regulatory powers was enacted in August 2014, but enforcement remains weak; courts continue to block some NBM decisions.
  - Legislation to strengthen legal protection of NBM staff and directors, and legislation to restore powers of the National Commission for Financial Markets (NCFM), has not been enacted.
- Implementation of FSAP recommendations:
  - Little progress overall. FSAP recommendations aim to strengthen financial stability framework, bank governance and supervision, crisis resolution framework, deposit insurance system, and financial market infrastructure (see Box 1).
  - NBM developed a draft action plan covering recommendations under its responsibilities and intends to embed some recommendations in the NBM Strategic Plan for 2014–2015 and develop separate plans for FSAP technical notes.
  - No progress on cross-institutional discussions to assign responsibilities and timetables for recommendations spanning other institutions.
  - Subcomponents of NBM’s strategic plan require further elaboration; measures need to be detailed and prioritized.
  - Staff strongly recommended disclosure of banks’ ultimate beneficial owners and controllers to the NBM, reassessment of fit and proper criteria, and strengthened implementation of the AML/CFT framework (see Box 2).

### Box 1 — Key Recommendations of the FSAP (summary of recommendations)
- Financial Stability Framework: Amend Law on NBM and Law on NCFM, and other legislation, to provide NBM and NCFM ability to enforce supervisory and regulatory actions in a timely manner.
- Bank Governance: Re-evaluate bank shareholders to ensure disclosure of ultimate beneficial owners.
- Banking Supervision: Amend Law on NBM to provide full legal protection to all NBM employees in case of lawsuits for action in good faith.
- Crisis Resolution: Develop comprehensive financial crisis resolution contingency plan and identify necessary legislative amendments.
- Deposit Insurance System: Enhance funding of the Deposit Guarantee Fund (DGF) by developing a target fund methodology; amend legislation to provide a line-of-credit to the DGF from the Ministry of Finance; amend Law on DGF and Law on NBM to include NBM as an additional source of back-up funding for the DGF.
- Financial Market Infrastructure: Develop a comprehensive risk management framework for the National Securities Depository.

### Box 2 — Improving the Transparency of Banks’ Beneficial Owners (summary of findings and recommendations)
- Lack of transparency of ultimate beneficial owners and controllers has been persistent; problem highlighted since 2011 “raider attacks”.
- Lack of ownership transparency impedes identification of related party exposures with implications for legal compliance and financial stability.
- 2011 LEG Technical Assistance suggested reforms; NBM strengthened legal framework including the Law on Financial Institutions (LFI):
  - Requiring prior approval of NBM for bank share acquisitions exceeding 5 percent of shares.
  - Requiring subsequent notification to NBM for additional acquisitions increasing holdings by more than 1 percent.
  - Requiring banks to publish a list of shareholders and their beneficial owners on their websites (came into force in October 2014).
- Major challenges remain:
  - Published forms show 41 percent of shares of the five main deposit taking institutions are in groupings between 4 and 4.99 percent of shareholding—immediately below 5 percent threshold requiring NBM prior approval, illustrating feasibility of structuring shareholdings to avoid scrutiny.
  - These banks each indicate more than 25 percent of their shares are beneficially owned by foreign individuals, raising verification challenges.
- Recommendations to improve verification:
  - Impose burden of proof on proposed acquirer/shareholder to provide verifiable information on beneficial owners.
  - Address opaque share registry system.
  - Increase cooperation with foreign counterparts, financial intelligence units, and supervisors to verify beneficial ownership when foreign entities and individuals involved.
  - Obtain systematic access to information on criminal records and ongoing investigations on beneficial owners, internally and from foreign counterparts.
- Shareholding breakdown (source: NBM; public information on banks’ websites and staff estimates) for Agroindbank, Moldindconbank, Banca de Economii, VictoriaBank, Banca Sociala:
  - Average proportion of shares held in holdings between [4.9%-5.0[: 8%
  - Average proportion of shares held in holdings between [4.0%-4.9[: 33%
  - Remaining shareholdings: 59%

### Authorities’ views on financial sector actions
- Authorities acknowledged weaknesses in some banks and agreed addressing them is a priority.
- Authorities agreed to continue close monitoring of weak banks and require any bank in breach of prudential requirements to swiftly submit time-bound plans to address shortcomings.
- Authorities agreed further efforts needed to strengthen contingency framework; noted recent legal amendments should provide tools to tackle potential banking distress.
- Authorities argued legal amendments were the best achievable before a new parliament is formed and noted further legal changes will be needed once parliament reconvenes to assure appropriate checks-and-balances.
- Authorities stated any NBM emergency lending secured by state securities or guarantees would require invocation of special administration.

### Reserve Adequacy Measures (selected reported figures)
- Gross official reserves (millions of U.S. dollars) 1/: 1480.3 1717.7 1965.3 2515.0 2820.1 2700.0 2587.6
- Months of imports of goods and services: 3.9 3.4 3.9 4.7 5.2 4.8 4.3
- Percent of short-term debt at remaining maturity: 88.6 91.3 90.2 106.7 104.0 100.1 92.0
- Percent of short-term debt at remaining maturity plus current account deficit: 66.3 62.2 69.1 88.7 87.9 77.5 69.6
- Percent of the IMF composite measure (flexible): 156.1 159.0 163.6 196.4 191.7 181.6 167.3
- Note: 1/ Includes revaluation changes, which were not captured by changes of gross official reserves in the BOP.

### Financial Sector and FSAP Implementation
- Authorities and staff agreed implementing FSAP recommendations should be a priority, especially those related to enforcement of prudential regulations.
- Courts suspended the regulation on large exposures, illustrating that without comprehensive judiciary reform it will remain challenging to enforce bank regulations, particularly those related to banks’ ultimate beneficial owners and controllers.
- Authorities will continue seeking expertise and technical assistance to address judiciary reform.
- Staff emphasized priority actions:
  - Ensure adequate fitness and propriety of banks’ ultimate beneficial owners and controllers.
  - Enforce regulatory requirements regarding related party lending, capital adequacy, and liquidity requirements.
  - Strengthen implementation of the anti-money laundering framework.
  - Enforce reporting of accurate data on bank performance and financial condition.
  - Strengthen legal protection of NBM staff and empower the National Commission for Financial Markets to carry out duties.

### FISCAL POLICY — Staff’s Views
- Fiscal discipline weakened ahead of the elections.
- Projections and fiscal stance:
  - Budget deficit excluding grants projected to widen from 3.8 percent of GDP in 2013 to 5.4 percent in 2014 and, in the absence of measures, to 7.1 percent in 2015.
  - One-off telecom license fee revenues in 2014: about 1 percent of GDP.
  - Grants brought forward by the EU from 2015–16: 0.5 percent of GDP.
  - Under current policies, public debt projected to increase from 30 percent of GDP in 2013 to about 45 percent in 2019.
  - Staff advised fiscal policy should aim at narrowing the deficit to 1½ percent of GDP by 2018 (equivalent to about 2½ percent of GDP excluding grants).
- Recommended 2015 adjustment:
  - Front-loaded fiscal adjustment in 2015, followed by gradual annual reduction of ¼–½ percent thereafter until 2018.
  - MoF draft 2015 budget seeks to reduce general government budget deficit to below 3 percent of GDP (around 4½ percent excluding grants); achieving this requires measures with a yield of about 2½ percent of GDP, including:
    - Wage moderation.
    - Prioritization of public investment.
    - Increases in tobacco excises.
  - Expenditure adjustments should protect needed social and capital spending.
- Medium-term measures (2016–18):
  - Limit wage increases to expected inflation.
  - Tax administration gains.
  - Structural fiscal reforms: social security, local governments, public administration.
- Strengthening fiscal framework:
  - Full rollout of fiscal decentralization planned for 2015 will challenge consolidation.
  - Improve controls on local government finances and revenue-raising capacity.
  - Close gaps in monitoring local public enterprises, many financially unviable.
  - Strengthen the Fiscal Responsibility Law (FRL) to link to public debt sustainability, reduce pro-cyclicality, and provide accountability across government layers.
  - Unify fragmented tax administration system (currently 36 state tax inspectorates forming the State Tax Service).

### Fiscal Policy — Authorities’ Views
- Authorities committed to medium-term fiscal objectives in FRL, while arguing Moldova should spend to meet social and infrastructure needs without inflationary financing or arrears.
- Draft 2015 budget seen as first step and consistent with projected financing availability.
- Measures considered by MoF broadly in line with staff recommendations.
- Authorities intend to strengthen FRL, make legislative changes, and adopt staff-recommended policies and procedures.
- Emphasized strengthening fiscal decentralization framework and expressed interest in additional technical assistance.

### Fiscal Indicators (Selected figures, percent of GDP unless otherwise indicated)
- Revenues: 2012: 37.9; 2013: 36.8; 2014: 39.3; 2015: 37.0; 2016: 36.4; 2017: 36.2; 2018: 36.1; 2019: 36.1
- Grants: 2012: 1.8; 2013: 2.1; 2014: 3.3; 2015: 1.7; 2016: 1.3; 2017: 1.1; 2018: 1.0; 2019: 1.0
- Expenditures: 2012: 40.1; 2013: 38.6; 2014: 41.4; 2015: 42.4; 2016: 42.5; 2017: 42.4; 2018: 42.0; 2019: 41.8
- Capital expenditure: 2012: 6.3; 2013: 7.1; 2014: 8.1; 2015: 8.0; 2016: 8.3; 2017: 8.3; 2018: 7.9; 2019: 7.7
- Overall balance: 2012: -2.2; 2013: -1.8; 2014: -2.2; 2015: -5.5; 2016: -6.0; 2017: -6.2; 2018: -5.8; 2019: -5.7
- Overall balance excluding grants: 2012: -3.9; 2013: -3.8; 2014: -5.4; 2015: -7.1; 2016: -7.4; 2017: -7.3; 2018: -6.9; 2019: -6.7
- Government debt: 2012: 31.0; 2013: 29.7; 2014: 31.3; 2015: 33.4; 2016: 36.5; 2017: 39.0; 2018: 42.0; 2019: 44.7
- Memorandum (Baseline Scenario): Real GDP growth: 2012: -0.7; 2013: 8.9; 2014: 2.0; 2015: 3.5; 2016: 3.8; 2017: 4.0; 2018: 4.0; 2019: 4.0
- Current account balance (Baseline): 2012: -8.3; 2013: -5.7; 2014: -5.3; 2015: -7.3; 2016: -7.7; 2017: -7.7; 2018: -7.5; 2019: -7.2

### MONETARY AND EXCHANGE RATE POLICY — Context and Staff’s Views
- NBM stance and actions:
  - NBM maintained base (policy) rate at 3.5 percent since April 2013.
  - Inflation hovered around 5 percent.
  - NBM intervened in foreign exchange market with net sales of about US$182 million.
  - Aggregate annual growth in bank credit stable at about 18 percent since end-2013.
  - NBM changed regulatory requirements on classification of bank loans to sectors affected by Russia’s trade restrictions.
- Staff assessment:
  - Current accommodative stance appropriate given slowdown, disinflationary pressures, and lack of acceleration in credit growth.
  - Little room for further easing given expected acceleration of inflation after elections, pressures on exchange rate, and historically low—and significantly negative in real terms—NBM base rate.
  - Financing of the budget by NBM would contravene NBM Law and compromise independence.
  - NBM should carefully assess regulatory changes to support productive sectors due to potential negative impacts on fragile banking sector.
  - Exchange rate: supported interventions to prevent disorderly adjustments but advised against resisting fundamental-driven movements; letting exchange rate adjust would help mitigate external shocks.

### MONETARY AND EXCHANGE RATE POLICY — Authorities’ Views
- Authorities agreed with staff.
- NBM expected significant deflationary pressures in 2014 and 2015 from weakening domestic demand but will remain vigilant and adjust policies as needed.
- Depreciation of the leu against the US dollar perceived as driven by external factors.
- Agreed interventions should aim at preventing disorderly adjustments while not resisting the trend.

### STRUCTURAL POLICIES
- Staff views:
  - Structural reforms are critical to boost output growth and reduce vulnerabilities.
  - Priorities consistent with National Development Strategy Moldova 2020: (i) business environment; (ii) physical infrastructure development; (iii) human resource development; (iv) public administration and social security reform.
  - Refocusing education to labor market needs to raise productivity, job creation, and reverse migration.
  - Alternative scenario: stepped up structural reforms combined with fiscal consolidation (as recommended) would boost potential output, strengthen external accounts, and maintain international reserves at comfortable levels.
- Authorities’ views:
  - Agreed on importance of diversifying output and exports.
  - Ministry of Economy emphasizes labor skills, physical infrastructure, access to finance, innovation and technology, and quality standards.
  - Specific projects: road infrastructure development and maintenance; reducing high costs at borders and for service delivery; enhancing customs efficiency; improving public services delivery.
  - Agreed that fiscal adjustment underpinning alternative scenario aligns with FRL; noted growth could be faster if adequate financing for infrastructure is obtained.

### CAPACITY TO REPAY THE FUND
- DSA conclusions:
  - Risk of debt distress: low.
  - External debt projected to stay on a downward trajectory.
  - Fund’s exposure: SDR 369 million (300 percent of quota); peaked at 9.4 percent of GDP in 2012 and projected to continue declining.
  - Total debt service to the Fund: reach 1.3 percent of total exports (around 0.6 percent of GDP) in 2015; peak at 2.3 percent of exports in 2017 (1.1 percent of GDP).
- Risks:
  - Relatively high external debt to GDP ratio driven largely by high private external debt.
  - Vulnerabilities to shocks: escalation of geopolitical tensions disrupting trade and gas supplies; serious banking system vulnerabilities.
  - Materialization of shocks could reduce creditworthiness and ability to repay the Fund.

### STAFF APPRAISAL — Key Findings and Recommendations
- Growth and inflation outlook:
  - 2014 output growth projected to decelerate to about 2 percent.
  - 2015 growth projected to recover to 3½ percent.
  - Inflation projected to remain within NBM’s inflation target range.
  - Current account deficit projected to widen in 2015 due to import recovery and projected decline in remittances growth.
- Risks:
  - Domestic and external risks tilted to the downside: banking sector governance issues, pre-election policy slippages, slowdown in trading partners, geopolitical tensions.
  - International reserves and low public debt are buffers but need prudent policies and banking regulation enforcement.
- Financial sector recommendations:
  - Strengthen regulatory framework and enforcement to maintain systemic stability.
  - Resolve NBM’s difficulties in regulatory and supervisory functions and strengthen legal protections.
  - Implement FSAP recommendations expeditiously.
  - Prioritize ensuring fitness and propriety of ultimate beneficial owners and controllers; enforce related-party lending, capital adequacy, liquidity requirements; strengthen anti-money laundering implementation; enforce accurate bank reporting.
- Dealing with weak banks:
  - Prompt action required to minimize financial stability risks at least cost to the state.
  - NBM should limit deposit and loan growth in weak banks using available powers.
  - Government should refrain from providing additional privileged access of these banks to public sector deposits (including state owned enterprises).
  - Strengthen framework to deal with problem and vulnerable banks to limit potential for abuse.
  - Revise recently approved legal amendments to restore adequate parliamentary oversight on issuance of debt to support banks and require NBM to introduce special administration when solvency problems are indicated.
- Fiscal policy recommendations (summary):
  - 2015 draft budget aim to keep general government deficit below 3 percent requires a balanced package with yield of about 2½ percent of GDP: wage restraint, expenditure rationalization, prioritization of investment.
  - Medium-term goal: narrow deficit to 1½ percent of GDP (about 2½ percent excluding grants) by 2018 to put public debt on a downward trend.
  - Monitor fiscal decentralization closely to avoid jeopardizing medium-term objectives.

### RISK ASSESSMENT MATRIX — Selected Risks and Policy Responses
- Sustained tensions between Russia and Ukraine
  - Relative Likelihood: Medium
  - Impact if Realized: High
  - Policy Response: Accelerate diversification of external trade products and markets and energy sources; let the exchange rate adjust; prudent macro policies; strengthen monitoring of bank exposures.
- Protracted period of slower growth in the EU
  - Relative Likelihood: High
  - Impact if Realized: High
  - Policy Response: Let fiscal automatic stabilizers work; let the exchange rate adjust; speed up structural reform.
- Deterioration of Moldova’s banking system soundness (weak governance)
  - Relative Likelihood: High
  - Impact if Realized: High
  - Policy Response: Enforce shareholder and beneficial ownership transparency and suitability requirements; intervene in large systemically important banks and liquidate small ones; step up anti-corruption and AML/CFT efforts.
- Decline in official external financing
  - Relative Likelihood: Low
  - Impact if Realized: Medium
  - Policy Response: Look for alternative funding sources for priority projects within prudent fiscal policy.
- Political cycle
  - Relative Likelihood: High
  - Impact if Realized: Medium
  - Policy Response: Restore prudent macroeconomic policies; accelerate structural reforms.

### ANNEX I. TRADE RESTRICTIONS — Key Points
- Timeline and types of restrictions after ratification of the DCFTA with the EU in July 2014:
  - Wine and wine products — Ban — September 2013
  - Meat and meat products, including pork, beef, sheep, and horse — Ban and/or restrictions on packaging — April 2014, then lifted; Re-introduced in July 2014
  - Canned agricultural products — Ban — July 2014
  - Fresh fruits, including apples, plums, apricots, peaches — Ban — July 2014
  - 19 agricultural products, including wine, meat, vegetables, fruits, grain — Import duty (7.8 percent instead of a zero rate) — September 2014
  - More recently (relative to the report), Russia also banned the importation of meat from Moldova.
- Share of Russia in Moldova’s exports and changes over time:
  - During the period 2005–13, the share of exports to Russia declined by 6 percentage points.
  - Despite increased geographical diversification, Russia still accounts for about 26 percent of Moldova exports.
- Commodity structure of exports to Russia (2005 vs 2013, verbatim):
  - Wine and wine products: 60% (2005); 5% (2013)
  - Apples: 27% (2005); 38% (2013)
  - Canned (cannery): 2% (Total exports, 2005) and 5% (Total exports, 2013)
  - Non-agriculture goods: 33% (2005); 76% (2013)
  - Agriculture overall: 5% (2005) rising to 18% (2013)
- Estimated impact on exports and economy:
  - Exports of affected agricultural goods to Russia are estimated to decline by about US$120 million.
  - Exports of wines could decline by about US$35 million.
  - Actual impact could be lower because affected agricultural producers have found new markets in the EU and other CIS countries, and there could be increased exports to other destinations, including Turkey.
- Authorities’ mitigation measures:
  - MoF: direct income support and product purchases in the amount of 238 million lei (about 0.2 percent of GDP); tax holiday for affected sectors until November 30, 2014.
  - NBM: relaxed classification of bank loans extended to agricultural enterprises.

*Source: International Monetary Fund staff report content provided in the PDF chapter/section._cr14346 - 2014.*

### 2014. The missions met with Prime Minister Leanca, Deputy Prime

### _cr14346 - 2014. The missions met with Prime Minister Leanca, Deputy Prime

### CONTEXT
- Parliamentary elections scheduled for November 30, 2014 and local elections for mid-2015.  
- Political competition has prompted policy reversals, hindered response to banking-sector vulnerabilities, and stalled the reform agenda.
- In June, Moldova signed an Association Agreement with the EU including provisions establishing a Deep and Comprehensive Free Trade Area (DCFTA): immediate elimination of both sides' export duties; asymmetric removal of import duties with EU tariffs on key products entering Moldova removed over five to ten years.
- Russia introduced several restrictions on import of Moldovan products.  
- In September, Moldova signed a free trade agreement with Turkey expected to enter into effect in 2015.

### RECENT DEVELOPMENTS AND OUTLOOK
- Russia’s restrictions on imports from Moldova are projected to exacerbate the ongoing slowdown in activity.
- First half of 2014: activity indicators slightly better than expected at the time of the 2014 Article IV consultation (reflecting good performance of agriculture).
- Second half of 2014: growth held back by a more pronounced decline in growth in key trading partners, moderating agricultural output, and Russia’s additional restrictions on imports of Moldovan food products (Annex I).
- GDP projections and inflation:
  - 2014: GDP is projected to grow by 2 percent, compared to 8.9 percent in 2013.
  - Inflation in 2014: projected to remain within the National Bank of Moldova’s (NBM) target range of 5 percent ± 1.5 percentage points.
  - Inflation: projected to pick up next year reflecting long overdue utility tariff increases after the elections, before converging to the middle of the target range.
- International reserves and external position:
  - Despite a collapse in wine exports to Russia during the first half of 2014, agricultural producers have found new markets in the EU and other CIS countries.
  - Remittances have remained stronger than anticipated so far in 2014.
  - Capital outflows and holdings of foreign currencies have arisen from geopolitical tensions and elections, culminating in depreciation of the leu by about 12½ percent vis-à-vis the US dollar since end-2013.
  - International reserves have declined to US$2.7 billion but remain adequate by standard metrics.
  - Current account deficit projected to widen to 7¼ percent in 2015, reflecting projected decline in remittances growth and a recovery in imports as uncertainties subside.
- External shock magnitude:
  - Russia’s ban on Moldovan food products affects 4 percent of total exports (2 percent of GDP).
  - Russia introduced a 7.8 percent import duty on imports of Moldovan agricultural products (previously exempt).
  - Some of these products rely heavily on the Russian export market (up to one half of output).
- Risks to the outlook are tilted to the downside: banking system vulnerabilities and governance problems, protracted slowdowns in trading partners, intensified geopolitical tensions, and additional policy slippages before elections.

### AUTHORITIES’ VIEWS
- Ministry of Economy (MoE): envisaged higher output growth of 3 percent in 2014, expecting a softer impact of restrictions on exports and remittances.
- National Bank of Moldova (NBM): expressed concerns; sees output growth likely flat or slightly negative in 2014. NBM inflation projections broadly in line with staff projections.
- Authorities agreed with staff’s assessment of risks, transmission channels, and policy responses.

### POLICY DISCUSSIONS — Overview
Policy discussions focused on:
- Safeguarding systemic financial stability by strengthening regulatory and supervisory frameworks, governance, and dealing with weak banks.
- Ensuring sustainability of public finances.
- Reinvigorating the structural reform agenda.

### A. Financial Sector Policy — Staff’s Views
- Reported bank performance indicators are mixed and concerns exist about accuracy.
  - As of end-June 2014, aggregate capital adequacy ratio: 19.9 percent (above required minimum of 16 percent but significantly lower than in past years).
  - Some banks reported remarkably high ratios of nonperforming loans; several banks were loss-making; some complying with capital requirements by narrow margins; one mid-size bank was undercapitalized.
  - Reported level of liquid assets appears unreliable as some assets may be encumbered through undisclosed side agreements.
- Weak conditions in several banks require urgent attention:
  - Staff recommended NBM maintain high scrutiny over operations and liquidity of weak banks—some have large interbank exposures among themselves.
  - Staff recommended limiting deposit growth in banks offering deposit rates significantly above average market rates.
  - Staff advised authorities to refrain from providing privileged access of public sector deposits to individual banks.
  - Strengthen framework to deal with problem and vulnerable banks.
- Legal and crisis management concerns:
  - Recent amendments (approved in October 2014) include crisis management provisions allowing the government to issue public debt or guarantees to protect financial institutions without parliamentary approval or oversight; NBM could be asked to provide emergency lending to troubled banks without invocation of special administration. Staff expressed concern these amendments might open room for potential abuse.
- Legislation and enforcement:
  - Legislation restoring the NBM’s regulatory powers was enacted in August 2014, but enforcement remains weak; courts continue to block some NBM decisions.
  - Legislation to strengthen legal protection of NBM staff and directors, and legislation to restore powers of the National Commission for Financial Markets (NCFM), has not been enacted.
- Implementation of FSAP recommendations:
  - Little progress overall. FSAP recommendations aim to strengthen financial stability framework, bank governance and supervision, crisis resolution framework, deposit insurance system, and financial market infrastructure (see Box 1).
  - NBM developed a draft action plan covering recommendations under its responsibilities and intends to embed some recommendations in the NBM Strategic Plan for 2014–2015 and develop separate plans for FSAP technical notes.
  - No progress on cross-institutional discussions to assign responsibilities and timetables for recommendations spanning other institutions.
  - Subcomponents of NBM’s strategic plan require further elaboration; measures need to be detailed and prioritized.
  - Staff strongly recommended disclosure of banks’ ultimate beneficial owners and controllers to the NBM, reassessment of fit and proper criteria, and strengthened implementation of the AML/CFT framework (see Box 2).

### Box 1 — Key Recommendations of the FSAP (summary of recommendations)
- Financial Stability Framework: Amend Law on NBM and Law on NCFM, and other legislation, to provide NBM and NCFM ability to enforce supervisory and regulatory actions in a timely manner.
- Bank Governance: Re-evaluate bank shareholders to ensure disclosure of ultimate beneficial owners.
- Banking Supervision: Amend Law on NBM to provide full legal protection to all NBM employees in case of lawsuits for action in good faith.
- Crisis Resolution: Develop comprehensive financial crisis resolution contingency plan and identify necessary legislative amendments.
- Deposit Insurance System: Enhance funding of the Deposit Guarantee Fund (DGF) by developing a target fund methodology; amend legislation to provide a line-of-credit to the DGF from the Ministry of Finance; amend Law on DGF and Law on NBM to include NBM as an additional source of back-up funding for the DGF.
- Financial Market Infrastructure: Develop a comprehensive risk management framework for the National Securities Depository.

### Box 2 — Improving the Transparency of Banks’ Beneficial Owners (summary of findings and recommendations)
- Lack of transparency of ultimate beneficial owners and controllers has been persistent; problem highlighted since 2011 “raider attacks”.
- Lack of ownership transparency impedes identification of related party exposures with implications for legal compliance and financial stability.
- 2011 LEG Technical Assistance suggested reforms; NBM strengthened legal framework including the Law on Financial Institutions (LFI):
  - Requiring prior approval of NBM for bank share acquisitions exceeding 5 percent of shares.
  - Requiring subsequent notification to NBM for additional acquisitions increasing holdings by more than 1 percent.
  - Requiring banks to publish a list of shareholders and their beneficial owners on their websites (came into force in October 2014).
- Major challenges remain:
  - Published forms show 41 percent of shares of the five main deposit taking institutions are in groupings between 4 and 4.99 percent of shareholding—immediately below 5 percent threshold requiring NBM prior approval, illustrating feasibility of structuring shareholdings to avoid scrutiny.
  - These banks each indicate more than 25 percent of their shares are beneficially owned by foreign individuals, raising verification challenges.
- Recommendations to improve verification:
  - Impose burden of proof on proposed acquirer/shareholder to provide verifiable information on beneficial owners.
  - Address opaque share registry system.
  - Increase cooperation with foreign counterparts, financial intelligence units, and supervisors to verify beneficial ownership when foreign entities and individuals involved.
  - Obtain systematic access to information on criminal records and ongoing investigations on beneficial owners, internally and from foreign counterparts.
- Shareholding breakdown (source: NBM; public information on banks’ websites and staff estimates) for Agroindbank, Moldindconbank, Banca de Economii, VictoriaBank, Banca Sociala:
  - Average proportion of shares held in holdings between [4.9%-5.0[: 8%
  - Average proportion of shares held in holdings between [4.0%-4.9[: 33%
  - Remaining shareholdings: 59%

### Authorities’ views on financial sector actions
- Authorities acknowledged weaknesses in some banks and agreed addressing them is a priority.
- Authorities agreed to continue close monitoring of weak banks and require any bank in breach of prudential requirements to swiftly submit time-bound plans to address shortcomings.
- Authorities agreed further efforts needed to strengthen contingency framework; noted recent legal amendments should provide tools to tackle potential banking distress.
- Authorities argued legal amendments were the best achievable before a new parliament is formed and noted further legal changes will be needed once parliament reconvenes to assure appropriate checks-and-balances.
- Authorities stated any NBM emergency lending secured by state securities or guarantees would require invocation of special administration.

### Reserve Adequacy Measures (selected reported figures)
- Gross official reserves (millions of U.S. dollars) 1/: 1480.3 1717.7 1965.3 2515.0 2820.1 2700.0 2587.6
- Months of imports of goods and services: 3.9 3.4 3.9 4.7 5.2 4.8 4.3
- Percent of short-term debt at remaining maturity: 88.6 91.3 90.2 106.7 104.0 100.1 92.0
- Percent of short-term debt at remaining maturity plus current account deficit: 66.3 62.2 69.1 88.7 87.9 77.5 69.6
- Percent of the IMF composite measure (flexible): 156.1 159.0 163.6 196.4 191.7 181.6 167.3
- Note: 1/ Includes revaluation changes, which were not captured by changes of gross official reserves in the BOP.

*Source: International Monetary Fund staff report content provided in the PDF chapter/section._cr14346 - 2014.*

### 13.      The authorities agreed with staff that implementing FSAP recommendations should be

### _cr14346 - 13.      The authorities agreed with staff that implementing FSAP recommendations should be

### Financial Sector and FSAP Implementation
- Authorities and staff agreed implementing FSAP recommendations should be a priority, especially those related to enforcement of prudential regulations.
- Courts suspended the regulation on large exposures, illustrating that without comprehensive judiciary reform it will remain challenging to enforce bank regulations, particularly those related to banks’ ultimate beneficial owners and controllers.
- Authorities will continue seeking expertise and technical assistance to address judiciary reform.
- Staff emphasized priority actions:
  - Ensure adequate fitness and propriety of banks’ ultimate beneficial owners and controllers.
  - Enforce regulatory requirements regarding related party lending, capital adequacy, and liquidity requirements.
  - Strengthen implementation of the anti-money laundering framework.
  - Enforce reporting of accurate data on bank performance and financial condition.
  - Strengthen legal protection of NBM staff and empower the National Commission for Financial Markets to carry out duties.

### Fiscal Policy — Staff’s Views
- Fiscal discipline weakened ahead of the elections.
- Projections and fiscal stance:
  - Budget deficit excluding grants projected to widen from 3.8 percent of GDP in 2013 to 5.4 percent in 2014 and, in the absence of measures, to 7.1 percent in 2015.
  - One-off telecom license fee revenues in 2014: about 1 percent of GDP.
  - Grants brought forward by the EU from 2015–16: 0.5 percent of GDP.
  - Under current policies, public debt projected to increase from 30 percent of GDP in 2013 to about 45 percent in 2019.
  - Staff advised fiscal policy should aim at narrowing the deficit to 1½ percent of GDP by 2018 (equivalent to about 2½ percent of GDP excluding grants).
- Recommended 2015 adjustment:
  - Front-loaded fiscal adjustment in 2015, followed by gradual annual reduction of ¼–½ percent thereafter until 2018.
  - MoF draft 2015 budget seeks to reduce general government budget deficit to below 3 percent of GDP (around 4½ percent excluding grants); achieving this requires measures with a yield of about 2½ percent of GDP, including:
    - Wage moderation.
    - Prioritization of public investment.
    - Increases in tobacco excises.
  - Expenditure adjustments should protect needed social and capital spending.
- Medium-term measures (2016–18):
  - Limit wage increases to expected inflation.
  - Tax administration gains.
  - Structural fiscal reforms: social security, local governments, public administration.
- Strengthening fiscal framework:
  - Full rollout of fiscal decentralization planned for 2015 will challenge consolidation.
  - Improve controls on local government finances and revenue-raising capacity.
  - Close gaps in monitoring local public enterprises, many financially unviable.
  - Strengthen the Fiscal Responsibility Law (FRL) to link to public debt sustainability, reduce pro-cyclicality, and provide accountability across government layers.
  - Unify fragmented tax administration system (currently 36 state tax inspectorates forming the State Tax Service).

### Fiscal Policy — Authorities’ Views
- Authorities committed to medium-term fiscal objectives in FRL, while arguing Moldova should spend to meet social and infrastructure needs without inflationary financing or arrears.
- Draft 2015 budget seen as first step and consistent with projected financing availability.
- Measures considered by MoF broadly in line with staff recommendations.
- Authorities intend to strengthen FRL, make legislative changes, and adopt staff-recommended policies and procedures.
- Emphasized strengthening fiscal decentralization framework and expressed interest in additional technical assistance.

### Fiscal Indicators (Selected figures from tables, percent of GDP unless otherwise indicated)
- Revenues: 2012: 37.9; 2013: 36.8; 2014: 39.3; 2015: 37.0; 2016: 36.4; 2017: 36.2; 2018: 36.1; 2019: 36.1
- Grants: 2012: 1.8; 2013: 2.1; 2014: 3.3; 2015: 1.7; 2016: 1.3; 2017: 1.1; 2018: 1.0; 2019: 1.0
- Expenditures: 2012: 40.1; 2013: 38.6; 2014: 41.4; 2015: 42.4; 2016: 42.5; 2017: 42.4; 2018: 42.0; 2019: 41.8
- Capital expenditure: 2012: 6.3; 2013: 7.1; 2014: 8.1; 2015: 8.0; 2016: 8.3; 2017: 8.3; 2018: 7.9; 2019: 7.7
- Overall balance: 2012: -2.2; 2013: -1.8; 2014: -2.2; 2015: -5.5; 2016: -6.0; 2017: -6.2; 2018: -5.8; 2019: -5.7
- Overall balance excluding grants: 2012: -3.9; 2013: -3.8; 2014: -5.4; 2015: -7.1; 2016: -7.4; 2017: -7.3; 2018: -6.9; 2019: -6.7
- Government debt: 2012: 31.0; 2013: 29.7; 2014: 31.3; 2015: 33.4; 2016: 36.5; 2017: 39.0; 2018: 42.0; 2019: 44.7
- Memorandum (Baseline Scenario): Real GDP growth: 2012: -0.7; 2013: 8.9; 2014: 2.0; 2015: 3.5; 2016: 3.8; 2017: 4.0; 2018: 4.0; 2019: 4.0
- Current account balance (Baseline): 2012: -8.3; 2013: -5.7; 2014: -5.3; 2015: -7.3; 2016: -7.7; 2017: -7.7; 2018: -7.5; 2019: -7.2
- (Active Scenario figures also presented in original tables.)

### Monetary and Exchange Rate Policy — Context and Staff’s Views
- NBM stance and actions:
  - NBM maintained base (policy) rate at 3.5 percent since April 2013.
  - Inflation hovered around 5 percent.
  - NBM intervened in foreign exchange market with net sales of about US$182 million.
  - Aggregate annual growth in bank credit stable at about 18 percent since end-2013.
  - NBM changed regulatory requirements on classification of bank loans to sectors affected by Russia’s trade restrictions.
- Staff assessment:
  - Current accommodative stance appropriate given slowdown, disinflationary pressures, and lack of acceleration in credit growth.
  - Little room for further easing given expected acceleration of inflation after elections, pressures on exchange rate, and historically low—and significantly negative in real terms—NBM base rate.
  - Financing of the budget by NBM would contravene NBM Law and compromise independence.
  - NBM should carefully assess regulatory changes to support productive sectors due to potential negative impacts on fragile banking sector.
  - Exchange rate: supported interventions to prevent disorderly adjustments but advised against resisting fundamental-driven movements; letting exchange rate adjust would help mitigate external shocks.

### Monetary and Exchange Rate Policy — Authorities’ Views
- Authorities agreed with staff.
- NBM expected significant deflationary pressures in 2014 and 2015 from weakening domestic demand but will remain vigilant and adjust policies as needed.
- Depreciation of the leu against the US dollar perceived as driven by external factors.
- Agreed interventions should aim at preventing disorderly adjustments while not resisting the trend.

### Structural Policies
- Staff views:
  - Structural reforms are critical to boost output growth and reduce vulnerabilities.
  - Priorities consistent with National Development Strategy Moldova 2020: (i) business environment; (ii) physical infrastructure development; (iii) human resource development; (iv) public administration and social security reform.
  - Refocusing education to labor market needs to raise productivity, job creation, and reverse migration.
  - Alternative scenario: stepped up structural reforms combined with fiscal consolidation (as recommended) would boost potential output, strengthen external accounts, and maintain international reserves at comfortable levels.
- Authorities’ views:
  - Agreed on importance of diversifying output and exports.
  - Ministry of Economy emphasizes labor skills, physical infrastructure, access to finance, innovation and technology, and quality standards.
  - Specific projects: road infrastructure development and maintenance; reducing high costs at borders and for service delivery; enhancing customs efficiency; improving public services delivery.
  - Agreed that fiscal adjustment underpinning alternative scenario aligns with FRL; noted growth could be faster if adequate financing for infrastructure is obtained.

### Capacity to Repay the Fund
- DSA conclusions:
  - Risk of debt distress: low.
  - External debt projected to stay on a downward trajectory.
  - Fund’s exposure: SDR 369 million (300 percent of quota); peaked at 9.4 percent of GDP in 2012 and projected to continue declining.
  - Total debt service to the Fund: reach 1.3 percent of total exports (around 0.6 percent of GDP) in 2015; peak at 2.3 percent of exports in 2017 (1.1 percent of GDP).
- Risks:
  - Relatively high external debt to GDP ratio driven largely by high private external debt.
  - Vulnerabilities to shocks: escalation of geopolitical tensions disrupting trade and gas supplies; serious banking system vulnerabilities.
  - Materialization of shocks could reduce creditworthiness and ability to repay the Fund.

### Staff Appraisal — Key Findings and Recommendations
- Growth and inflation outlook:
  - 2014 output growth projected to decelerate to about 2 percent.
  - 2015 growth projected to recover to 3½ percent.
  - Inflation projected to remain within NBM’s inflation target range.
  - Current account deficit projected to widen in 2015 due to import recovery and projected decline in remittances growth.
- Risks:
  - Domestic and external risks tilted to the downside: banking sector governance issues, pre-election policy slippages, slowdown in trading partners, geopolitical tensions.
  - International reserves and low public debt are buffers but need prudent policies and banking regulation enforcement.
- Financial sector recommendations:
  - Strengthen regulatory framework and enforcement to maintain systemic stability.
  - Resolve NBM’s difficulties in regulatory and supervisory functions and strengthen legal protections.
  - Implement FSAP recommendations expeditiously.
  - Prioritize ensuring fitness and propriety of ultimate beneficial owners and controllers; enforce related-party lending, capital adequacy, liquidity requirements; strengthen anti-money laundering implementation; enforce accurate bank reporting.
- Dealing with weak banks:
  - Prompt action required to minimize financial stability risks at least cost to the state.
  - NBM should limit deposit and loan growth in weak banks using available powers.
  - Government should refrain from providing additional privileged access of these banks to public sector deposits (including state owned enterprises).
  - Strengthen framework to deal with problem and vulnerable banks to limit potential for abuse.
  - Revise recently approved legal amendments to restore adequate parliamentary oversight on issuance of debt to support banks and require NBM to introduce special administration when solvency problems are indicated.
- Fiscal policy recommendations (summary):
  - 2015 draft budget aim to keep general government deficit below 3 percent requires a balanced package with yield of about 2½ percent of GDP: wage restraint, expenditure rationalization, prioritization of investment.
  - Medium-term goal: narrow deficit to 1½ percent of GDP (about 2½ percent excluding grants) by 2018 to put public debt on a downward trend.
  - Monitor fiscal decentralization closely to avoid jeopardizing medium-term objectives.

*Source: Excerpt from IMF staff report for the Republic of Moldova (content unit provided).*

### 31.      The NBM has successfully achieved its price stability objectives in the context of an

### The NBM has successfully achieved its price stability objectives in the context of an inflation targeting framework and a flexible exchange rate regime

### Monetary policy and price stability
- The NBM has successfully achieved its price stability objectives in the context of an inflation targeting framework and a flexible exchange rate regime.
- The NBM’s current monetary policy stance is appropriate in light of the ongoing slowdown in economic activity and deflationary pressures.
- Going forward, the NBM needs to remain vigilant and be ready to adjust policies.
- The NBM’s interventions in the foreign exchange market should continue aiming at preventing disorderly exchange rate adjustments while not resisting the trend.

### Exchange rate management
- Exchange rate flexibility has helped mitigate the impact of external pressures.
- Interventions should prevent disorderly adjustments but avoid resisting prevailing exchange rate trends.

### Structural reforms to boost potential output and reduce vulnerabilities
- Structural reforms are critical to boost potential output growth, and reduce vulnerabilities.
- These reforms would create the conditions for the economy to:
  - grow faster,
  - improve its competitiveness, and
  - diversify its production and export structure.
- Reinvigorating the structural reform agenda would place Moldova in a better position to benefit from recently signed free trade agreements.
- In line with the National Development Strategy Moldova 2020, special attention should be given to:
  - (i) business environment;
  - (ii) physical infrastructure development;
  - (iii) human resource development; and
  - (iv) public administration and social security reform.
- Refocusing the education system to labor market needs would play an important role in:
  - raising productivity,
  - job creation, and
  - reversing migration trends.

*REPUBLIC OF MOLDOVA 16 INTERNATIONAL MONETARY FUND*

### Box 3. Risk Assessment Matrix 1/

### Box 3. Risk Assessment Matrix 1/

### Overview of the Risk Assessment Matrix
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff).
- The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline:  
  - "low" is meant to indicate a probability below 10 percent,  
  - "medium" a probability between 10 and 30 percent, and  
  - "high" a probability of 30 percent or more.
- The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.
- In case the baseline does not materialize.

### Risk: Sustained tensions between Russia and Ukraine
- Relative Likelihood: Medium
- Impact if Realized: High
- Description of impact:
  - Geopolitical tensions in Ukraine and any related slowdown of the Russian economy would worsen the external outlook for Moldova.
  - A disruption of trade routes and gas supply, a drop in exports, or 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.
  - 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: Protracted period of slower growth in the EU
- Relative Likelihood: High
- Impact if Realized: High
- Description of impact:
  - Lower-than-anticipated potential growth and persistently low inflation due to a failure to fully address legacies of the financial crisis, leading to secular stagnation.
  - Lower export demand, 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: Deterioration of Moldova’s banking system soundness (e.g., as a consequence of weak governance)
- Relative Likelihood: High
- Impact if Realized: High
- Description of impact:
  - Reemergence of problems at individual banks, and/or soaring system-wide NPLs can undermine the banking system soundness.
  - Credit supply would dwindle, and the government might need to intervene to prevent or resolve bank failures.
- 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: Decline in official external financing
- Relative Likelihood: Low
- Impact if Realized: Medium
- Description of impact:
  - Budget cuts in Europe or setbacks in Moldova could worsen donor sentiment and curtail donor aid.
  - 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.

### Risk: Political cycle
- Relative Likelihood: High
- Impact if Realized: Medium
- Description of impact:
  - Intensifying political competition ahead of the parliamentary and local elections could lead to populist initiatives, delaying or reversing reforms.
  - Deteriorating business climate would harm investment, competitiveness, and defer poverty reduction and would lead to fiscal slippages.
- Policy Response:
  - Restore prudent macroeconomic policies.
  - Accelerate structural reforms.

*Source: IMF staff Risk Assessment Matrix as presented in Box 3.*

### Annex I. Trade Restrictions

### Annex I. Trade Restrictions

### Timeline and types of restrictions
- Following ratification of the DCFTA with the EU in July 2014, Moldova faced increasing restrictions on trade with Russia.
- Key product restrictions and effective dates:
  - Wine and wine products — Ban — September 2013
  - Meat and meat products, including pork, beef, sheep, and horse — Ban and/or restrictions on packaging — April 2014, then lifted; Re-introduced in July 2014
  - Canned agricultural products — Ban — July 2014
  - Fresh fruits, including apples, plums, apricots, peaches — Ban — July 2014
  - 19 agricultural products, including wine, meat, vegetables, fruits, grain — Import duty (7.8 percent instead of a zero rate) — September 2014
- More recently (relative to the report), Russia also banned the importation of meat from Moldova.

### Share of Russia in Moldova’s exports and changes over time
- During the period 2005–13, the share of exports to Russia declined by 6 percentage points.
- Despite increased geographical diversification, Russia still accounts for about 26 percent of Moldova exports.
- The shift toward the EU reflected continuous trade liberalization between Moldova and EU.

### Commodity structure of exports to Russia (as reported)
- In 2013 agricultural goods represented 18 percent of Moldovan exports to Russia (compared with lower agricultural shares in 2005).
- Specific commodity shares to Russia (2005 vs. 2013) reported in the source:
  - Wine and wine products: 60% (commodity structure to Russia, 2005); 5% (commodity structure to Russia, 2013)
  - Apples: 27% (2005); 38% (2013)
  - Canned (cannery): 2% (Total exports, 2005) and 5% (Total exports, 2013) — (figures presented in the source graphics)
  - Non-agriculture goods: 33% (commodity structure to Russia, 2005); 76% (commodity structure to Russia, 2013)
  - Agriculture overall: 5% (2005) rising to 18% (2013) in the commodity structure to Russia
- (Note: these commodity-structure percentages are reproduced verbatim from the source graphics and text.)

### Estimated impact on exports and economy
- In 2013, almost one fifth of Moldovan exports to Russia were agricultural goods.
- Estimated declines in exports as a result of restrictions:
  - Exports of affected agricultural goods to Russia are estimated to decline by about US$120 million.
  - Exports of wines could decline by about US$35 million.
- The report notes the actual impact could be lower because affected agricultural producers have found new markets in the EU and other CIS countries, and there could be increased exports to other destinations, including Turkey.

### Authorities’ mitigation measures
- Ministry of Finance (MoF) measures:
  - Introduced direct income support and product purchases in the amount of 238 million lei (about 0.2 percent of GDP).
  - Introduced a tax holiday for the affected sectors until November 30, 2014.
- National Bank of Moldova (NBM) measures:
  - Relaxed the classification of bank loans extended to agricultural enterprises to ease the impact of trade restrictions on banks.
- The report states these initiatives were put in place to help contain the impact of restrictions on domestic economic performance.

*Source: _cr14346 - Annex I. Trade Restrictions*

### 12.1 per cent of GDP in 2011 to about 5.7 percent in 2013, the external trade dynamic was

### _cr14346 - 12.1 per cent of GDP in 2011 to about 5.7 percent in 2013, the external trade dynamic was

### External trade and macro risks
- External trade dynamics were affected by the Russian ban.
- Vulnerabilities:
  - Remittances are vulnerable.
  - Further uncertainties related to interactions with the Russian Federation pose important longer-term risks for the economy.
- Impact of economic sanctions will largely depend on additional efforts by industry and authorities to redirect exports to alternative markets, including by taking full advantage of the DCFTA with the EU.
- The free trade agreement signed on September 11, 2014 with Turkey, applicable from 2015, is expected to bring additional benefits.

### Fiscal policy
- Medium-term fiscal objectives aim to achieve national public budget sustainability by developing a predictable fiscal policy and keeping the budget deficit under control.
- Projections and targets:
  - For 2014 the budget deficit is projected to reach about 2.2 percent of GDP.
  - For 2015, the Moldovan authorities aim to keep the general budget deficit below 3 percent of GDP.
  - The Fiscal Responsibility Law (FRL) approved in 2014 envisages that the overall budget deficit ceiling, excluding grants, shall not exceed 2.5 percent of GDP by 2018.
- Decentralization reform:
  - Government engaged in an ambitious decentralization effort to provide greater autonomy to local public administrations (LPAs).
  - Reform aims to improve local revenue collection and better set medium term fiscal policy objectives across all levels of government.

### Monetary policy
- Price stability performance:
  - The central bank has achieved its price stability objectives.
  - During more than two-and-a-half years, the annual inflation rate has been maintained within a range of ± 1.5 percentage points from the target of 5.0 percent.
- Policy rate:
  - The policy rate was gradually reduced and maintained at 3.5 percent since April 2013.
- Drivers of CPI increase:
  - Increasing food prices, core inflation and depreciation of the local currency.
- Reserves and interventions:
  - Reserves covered around 4.8 months of imports and fully covered the short-term debt at remaining maturity.
  - The NBM’s interventions in the foreign exchange market were done in a cautious manner to ensure the exchange rate’s adjustments to external pressures.
- Forward guidance:
  - The NBM remains committed to monitor and anticipate developments in domestic and external markets, including dynamics of consumption, remittances, foreign exchange market indicators and foreign trade outlook, to ensure price stability in the medium term through specific operational flexibility related to the inflation-targeting framework.

### Financial sector
- Aggregate soundness:
  - Banking sector on aggregate is well-capitalized, liquid, and profitable.
  - Average risk-weighted capital adequacy per sector stood at 20 percent at the end of October (above the required 16 percent).
  - Liquidity ratio remained practically unchanged—34.8 percent.
- Nonperforming loans (NPLs):
  - NPL ratio declined from its peak at 17.8 percent in mid-2010 to 12.5 percent.
  - Authorities acknowledge the need to further address the still high level of NPLs.
- Regulatory and crisis tools:
  - In September 2014, the Government approved amendments to several laws (on public debt, on the NBM and on financial institutions) to empower the government and the NBM to promptly intervene in case of a potential systemic financial crisis.
  - On November 28, 2014 the NBM introduced an external management in two banks (including Banca de Economii), to be further controlled and corrected by the special NBM representative, to ensure proper functioning and integrity of the banks' assets, reduce their costs and safeguard the banks’ deposits.
- Supervision and reforms:
  - Authorities aim to consolidate the framework for prudential supervision and strengthen a sustainable and competitive banking sector through ambitious reforms.
  - A two-year twinning project envisaged to start in 2015 under a consortium of the Central Bank of the Netherlands and the National Bank of Romania will deliver extensive assistance to the NBM to strengthen capacity in banking regulation and supervision, including implementation of BASEL III requirements.
- Governance and transparency:
  - Under technical assistance from IFIs, the NBM pursued improvements in corporate governance and increased transparency of bank ownership.
  - New October 2014 NBM requirements oblige banks to disclose all information about shareholders or groups of persons acting in concert and owning substantial shares in a bank as well as the beneficial owners of such persons.
  - To implement the FSAP (February 17–March 2, 2014) recommendations, the NBM has prepared an action plan covering recommendations envisaged by the Basel Core Principles Assessment and Bank Crisis Resolution.

### Structural reforms
- Legal and regulatory improvements:
  - Moldova has carried out extensive reforms of its legal framework and put in place a comprehensive legislative base for transition to a market economy.
  - Recent adoptions include a new bankruptcy law, a new competition law, and legislation on payment services and electronic money.
- Education strategy:
  - Adoption in October 2014 by the Government of the Strategy “Education 2020” as a step toward reaching the NDS “Moldova 2020.”
  - Improving quality, relevance and efficiency of the education system is essential for creating jobs, fostering a thriving business environment, and attracting investments.
- Infrastructure and energy:
  - Significant efforts, supported by IFIs, to improve road, port and railway infrastructure should reduce the cost of international trade and help Moldova capitalize on its transit potential.
  - The Romania-Moldova gas pipeline inaugurated in August 2014 along with the integration of both countries’ electricity grids will promote energy diversification for Moldova.
- Competitiveness and business environment:
  - Authorities committed to cut red tape, decrease regulatory burden, reduce corruption and stimulate competition via “The Road Map for Improving Competitiveness” approved early 2014.
  - Doing Business 2015 outcomes:
    - Moldova advanced 19 positions from the previous year, currently ranked 63 of 189 countries.
    - Best results in property registration: placed 22nd in the world.
    - Best results in getting credits: placed 23rd.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

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