Press Release: IMF Approves Stand-By Credit for the Republic of Moldova

IMF News, March 22, 1995

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Canonical URL: Press Release: IMF Approves Stand-By Credit for the Republic of Moldova

The International Monetary Fund (IMF) approved a 12-month stand-by credit for the Republic of Moldova of up to SDR 58.5 million (about $90 million).
The credit is in support of the Government's economic program for 1995.

Key prior actions:
- Introduction of Moldova's national currency in November 1993.
- Support from IMF stand-by and systemic transformation facility (STF) credits and additional multilateral and bilateral financing.
Outcomes under IMF-supported programs in 1994:
- Broadly stable exchange rate.
- Reduction in inflationary pressures.
- Lower interest rates during 1994.
Ongoing challenges in 1994:
- Continued output decline due to the collapse of central planning, drought, and other weather-induced damage to the agricultural sector.
- Weak financial discipline in the state enterprise sector despite an ambitious auction schedule.
- Severe balance of payments pressure resulting from the move to world prices for imported energy and weather-related disasters.
IMF membership and quotas:
- Moldova became a member of the IMF on August 12, 1992.
- Its quota is SDR 90.0 million (about $138 million).
- Its outstanding use of IMF credit currently totals SDR 122 million (about $188 million).
- Note: SDR amount changed from 112 million to 122 million.

Overall objectives:
- Consolidate financial stabilization.
- Implement structural transformation measures to restore economic growth and improve living standards.
Specific program targets for 1995:
- Economic growth of 1.5 percent, led by a recovery in the agricultural sector with the return of normal weather conditions.
- Reduction in the annual rate of inflation to about 10 percent from 116 percent in 1994.
- Containment of the deficit in the current account of the balance of payments.
Fiscal policy:
- Aim to sharply reduce the budgetary deficit to the equivalent of 3.5 percent of GDP from 8.1 percent of GDP in 1994.
- Measures to achieve this:
- Adjustments to tax rates.
- Strengthening of tax administration and arrears collection.
- Overall expenditure reductions while maintaining outlays in high-priority areas such as health care and education.
Monetary policy:
- Will remain tight to support the inflation and balance of payments objectives.
- Will rely increasingly on indirect, market-based instruments of monetary control.

Privatization:
- Accelerated privatization program under which 1,500 enterprises will be sold in 1995/96 at market prices.
Legal and institutional reforms:
- Review of key legislation to meet market economy requirements, including establishing the legal basis for bankruptcy proceedings against insolvent state enterprises.
Financial sector reforms:
- Development of indirect, market-based monetary controls following the introduction of treasury bill auctions and other market instruments.
- Measures to strengthen the capital base of the banking system.
- Facilitation of entry of new foreign and domestic banks.
Main objective:
- Establish an environment conducive to private investment by reducing direct government intervention and enhancing the role of market forces in resource allocation.

Emphasis:
- Structural reforms are crucial for the ultimate success of Moldova's transition to financial stabilization and a market economy.
Risks and lessons:
- Delays in early 1994 were costly in terms of eroding public support for financial stabilization and growth restoration.
- The acceleration of structural reforms in late 1994 needs to be sustained in 1995 and over the medium term for economic transformation to succeed.

Real GDP (percent change):
- 1992: –29.1
- 1993: –8.7
- 1994*: –22.2
- 1995**: 1.5
Consumer price inflation (end of period):
- 1992: 2,198.0
- 1993: 837.0
- 1994*: 116.0
- 1995**: 9.4
External current account balance (deficit –) (millions of dollars):
- 1992: –38.9
- 1993: –181.8
- 1994*: –177.0
- 1995**: –181.1
Government budget balance (deficit –) (percent of GDP):
- 1992: –23.4
- 1993: –6.8
- 1994*: –8.1
- 1995**: –3.5
Sources: Moldovan authorities; and IMF staff estimates.
Note: *Preliminary. **Program.

International Monetary Fund