IMF Staff Completes the 2020 Article IV and Program Review Mission to Moldova

IMF News, February 5, 2020

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An IMF team, led by Mr. Ruben Atoyan, visited Chișinău from January 22 to February 5 to conduct the 2020 Article IV consultation and the sixth and final review of Moldova’s economic program supported by the IMF’s Extended Credit Facility (ECF) and Extended Fund Facility (EFF) arrangements.
IMF staff and the Moldovan authorities reached staff-level agreement on policies to complete the sixth and final ECF/EFF review, subject to approval by the IMF Management and the Executive Board.
Consideration by the Executive Board is tentatively scheduled for March 16, 2020.
The completion of the review will make available SDR 14.4 million (about $20 million).

Program performance is assessed to be strong, with all end-December 2019 performance criteria met.
Most structural benchmarks are on track to be implemented prior to the completion of the review, although some with delays.
The three-year program has been broadly successful in achieving its objectives.
Comprehensive reforms have rehabilitated the banking system and strengthened financial sector governance, entrenching macro-financial stability.

Real GDP growth is estimated at 4.2 percent in 2019.
Growth is expected to remain close to 4 percent over the medium term.
Inflation accelerated to 7.5 percent in December 2019 due to rising food prices and robust aggregate demand, but it is projected to revert towards the 5 percent target later this year.
The 2019 fiscal deficit was 1.5 percent of GDP and overperformed the program target as a weaker than projected revenue outturn was more than offset by under-execution of spending.
Public debt remained low at around 30 percent of GDP.
Banks were well capitalized, liquid, and profitable, supporting double-digit credit growth to the economy.
The current account deficit was sizable but remained comfortably financed by strong private and official inflows.
The leu remained broadly stable in 2019.

The mission forecasts inflation to decelerate and support the direction of the NBM’s monetary policy decision.
The mission judged the NBM’s timing of its recent decision to be premature given risks of inflationary pressures stemming from a looser fiscal policy stance and a weaker exchange rate.
Recommendation: The NBM should stand ready to adjust its monetary policy stance should risks to the inflation outlook materialize.
Recommendation: Maintain a flexible exchange rate as an effective shock absorber.
The NBM has appropriately reduced its footprint in the foreign exchange market, limiting interventions to smoothing excessive market volatility.

Despite successful stabilization efforts, widespread and significant governance and institutional vulnerabilities remain major impediments to boosting living standards.
Identified structural challenges:
- Perceptions of corruption and weak rule of law are entrenched.
- The regulatory framework is not properly enforced.
- High informality.
- A large SOE sector poses fiscal risks and undermines competition and productivity.
- Weak oversight of the non-bank financial sector.
- Gaps in Moldova’s AML/CFT framework.
- Lack of progress on asset recovery.
Potential gains from addressing vulnerabilities:
- Faster capital accumulation.
- Reduced labor and human capital headwinds from extensive emigration.
- Higher productivity.
Policy imperative: Decisive governance and institutional reforms are necessary for faster, sustainable, and inclusive growth.

The mission is grateful to the authorities and to other interlocutors for their cooperation, candid discussions, and generous hospitality.

IMF Staff Completes the 2020 Article IV and Program Review Mission to Moldova — Mission Concluding Statement