Moldova: Back From The Brink, And Getting Better

IMF News, September 6, 2017

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Interview with Octavian Armasu, Minister of Finance (since 2016), and Sergiu Cioclea, Governor of the National Bank of Moldova, conducted during a conference on economic governance in Dubrovnik, Croatia, in July 2017.
Moldova is described as a landlocked country of 3.6 million, wedged between Romania and Ukraine.
The country posted economic growth of 4.1 percent in 2016 and is broadly on track with a $179-million economic reform program supported by the IMF.

Findings:
- Robust growth of 4.1 percent in 2016.
- IMF-supported economic reform program valued at $179-million.
Role of the IMF program:
- Restored trust of external development partners and citizens.
- Helped depoliticize the economic reform agenda and led to passage of important measures and legislation.
- Provided credibility that aided central bank engagement with prospective international strategic investors in the banking sector.
Timeline highlights:
- First meeting with the IMF in Washington in late April 2016.
- IMF dispatched a team to Moldova in May 2016.
- Mission to negotiate staff-level agreement in July 2017.
- IMF program approved on November 7, 2016.

Crisis context:
- A 2014 banking fraud triggered a bailout and a political crisis that lasted almost two years, causing loss of access to external financing and loss of political credibility.
Central bank response and reforms (actions described by Sergiu Cioclea):
- Curbing inflation and stabilizing foreign exchange rate expectations.
- Swift measures to stabilize the banking sector.
- Imposition of new shareholder transparency and management accountability rules.
- Promotion of bank recovery and resolution legislation and Basel III-inspired regulation.
- Nomination of two technocrats as vice-governors to make the central bank’s executive board fully independent from political parties.
- Promotion of cashless payment systems to increase accountability and tracking of financial flows.
Structural objective:
- Reorient banks to convert a large deposit base into healthy credits to the economy, addressing low financial intermediation and limited credit activity concentrated in large corporations.
- Attract international strategic investors to accelerate banking sector restructuring.

Reforms initiated by the government taking office in January 2016:
- Major reform of the banking sector.
- Reform of the pension system.
- Reform of public administration.
Policy priorities to support sustained growth (as stated by Octavian Armasu):
- Improve business climate to leverage access to the EU market via the free-trade agreement in 2014.
- Better tax and customs administration.
- Reduced bureaucracy and a business-friendly approach to state inspections.
- Human capital development and reform of the education system to build long-term competitive advantage.
- Reform of the justice system and intensified fight against corruption.

Core observation:
- Fighting corruption requires political will and stronger state institutions; weak, oversized, inefficient public administration and underpaid public servants undermine rule of law.
Government strategy:
- Public administration reform is the top priority to address major institutional weaknesses from which other problems arise.
Central bank perspective on transparency:
- Higher transparency in the banking sector, robust anti-money laundering and know-your-customer policies, and strengthened supervision regulations are powerful tools to increase overall economic and societal transparency.
- Transparency supports “economic democracy,” enabling business access to financing based on business plans and risk profiles rather than political affiliations.

Government and public response:
- After five governments since November 2014 and a deeply divided society, there was high trust in the IMF’s advice and technical competence.
- The IMF’s involvement helped depoliticize reforms and enabled passage of needed legislation.
IMF’s operational tempo and impact (as recounted by Cioclea):
- Rapid response: meetings and missions in April–May 2016 leading to program approval on November 7, 2016.
- The IMF’s speed of response is credited with preventing severe financial problems in 2016.
- IMF economists were perceived as experienced and reasonable in proposing suitable solutions.

Source: IMF News — Moldova: Back From The Brink, And Getting Better, September 6, 2017.