IMF Executive Board Concludes 2020 Article IV Consultation with Moldova
IMF News, March 18, 2020
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- Published: March 18, 2020
Summary of Board Conclusions and Context
- The Executive Board concluded the Article IV consultation with the Republic of Moldova on March 11, 2020, and completed the sixth and final review of Moldova’s economic performance under the Extended Credit Facility (ECF) and Extended Fund Facility (EFF) arrangements.
- A related press release was issued separately.
- The Managing Director, as Chairman of the Board, summarized the views of Executive Directors in the Executive Board Assessment.
Recent Economic Performance (2019 and earlier)
- Real GDP growth:
- Output expanded nearly 5 percent in the first three quarters of 2019.
- Annual growth figures in the selected indicators table: 2016: 4.4; 2017: 4.7; 2018: 4.0; 2019: 3.5; 2020 (Proj.): 4.2; 2021 (Proj.): 3.8.
- Demand components and investment:
- Demand indicators: 2016: 2.6; 2017: 6.8; 2018: 6.4; 2019: 5.8; 2020 (Proj.): 6.3; 2021 (Proj.): 5.7.
- Gross fixed capital formation: 2016: -0.9; 2017: 8.0; 2018: 14.0; 2019: 2.7; 2020 (Proj.): 13.6; 2021 (Proj.): 8.9.
- Net exports of goods and services: 2016: 5.9; 2017: -11.2; 2018: -14.3; 2019: -5.8; 2020 (Proj.): -5.4; 2021 (Proj.): -13.0.
- Labor and wages:
- Unemployment remained low by historical standards, at around 4 percent.
- Average monthly wage (Moldovan lei): 2016: 5,084; 2017: 5,697; 2018: 6,446; 2019: 7,320; 2020 (Proj.): 7,953; 2021 (Proj.): 8,619.
- Average monthly wage (U.S. dollars): 2016: 255; 2017: 308; 2018: 384; 2019: 413; 2020 (Proj.): 417; 2021 (Proj.): 432.
- Inflation and monetary conditions:
- Consumer price index (average): 2016: 6.6; 2017: 4.9.
- Consumer price index (end of period): 2018: 2.4; 2019: 7.3.
- Inflation breached the upper bound of the band around the National Bank of Moldova (NBM)’s target in late 2019, reaching 7.5 percent (largely driven by food prices, turnaround in regulated prices, and impact of robust aggregate demand on core inflation).
- Fiscal performance and public debt:
- Fiscal deficit widened to 1.5 percent of GDP in 2019 but significantly overperformed the program target.
- Revenues slightly underperformed, offset by under-execution in current and capital expenditure.
- Public debt declined and remains low, below 30 percent of GDP.
- Fiscal indicators (general government, percent of GDP):
- Primary balance 3/: 2016: -0.7; 2017: 0.3; 2018: -0.4; 2019: -2.2; 2020 (Proj.): -0.8; 2021 (Proj.): -3.1.
- Overall balance 3/: 2016: -1.8; 2017: -1.1; 2018: -3.0; 2019: -1.5; 2020 (Proj.): -3.9; 2021 (Proj.): -2.9.
- Stock of public and publicly guaranteed debt: 2016: 36.9; 2017: 32.7; 2018: 30.6; 2019: 31.5; 2020 (Proj.): 29.3; 2021 (Proj.): 30.8; 2022 (Proj. row shows 31.2 in table header continuation).
- External sector:
- Current account deficit likely narrowed slightly to 9.5 percent (2019) but remains large.
- Current account balance (Millions of U.S. dollars): 2016: -330; 2017: -592; 2018: -1,211; 2019: -1,116; 2020 (Proj.): -1,134; 2021 (Proj.): -1,204; 2022 (Proj.): -1,251.
- Current account balance (percent of GDP): 2016: -4.1; 2017: -6.1; 2018: -10.7; 2019: -9.5; 2020 (Proj.): -9.7.
- Remittances and compensation of employees (net, Millions of U.S. dollars): 2016: 1,326; 2017: 1,494; 2018: 1,672; 2019: 1,813; 2020 (Proj.): 1,759; 2021 (Proj.): 1,890; 2022 (Proj.): 2,012.
- Gross official reserves (Millions of U.S. dollars): 2016: 2,206; 2017: 2,803; 2018: 2,995; 2019: 3,025; 2020 (Proj.): 3,060; 2021 (Proj.): 3,071; 2022 (Proj.): 3,034.
- Gross official reserves (months of imports): 2016: 5.5; 2017: 5.2; 2018: 5.1.
- Exchange rate (Moldovan lei per USD, period average): 2016: 19.9; 2017: 18.5; 2018: 16.8; 2019: 17.6.
- External debt (percent of GDP) 5/: 2016: 76.8; 2017: 70.5; 2018: 66.4; 2019: 64.9; 2020 (Proj.): 63.6; 2021 (Proj.): 64.7.
Medium-Term Outlook and Risks
- Growth and inflation projections:
- Growth is forecast to slow to 3.8 percent in 2020, driven by weaker external demand and more modest agricultural output (table shows 2020 proj. 4.2 and 2021 proj. 3.8 under different rows; narrative notes 3.8 percent for 2020).
- Domestic demand should remain robust, supported by a widening of the fiscal deficit to 3.9 percent of GDP due to a large increase in budgeted capital spending (growth impact limited by public investment management weaknesses).
- Inflation is projected to return to the 5 percent target in 2020, largely driven by fading food price pressures.
- With the output gap broadly closed and absent structural reforms, medium-term growth is projected to remain near 4 percent.
- Downside risks highlighted:
- Global: recent global outbreak of coronavirus disease (COVID-19) could slow economic growth in 2020 further; regional and global spillovers from a protracted slowdown in major trading partners and geopolitical and trade tensions.
- Domestic: resurfacing political instability, policy reversals, or reform fatigue could hurt confidence and limit external financing options.
- Structural: trade deficit pressures given growth composition; large current account deficit despite remittances.
Structural and Governance Vulnerabilities
- Persistent concerns that undermine growth, resilience, and public trust:
- Weak oversight of the non-bank financial sector and rising risks in that sector.
- Gaps in Moldova’s AML/CFT framework and the need to promptly implement MONEYVAL recommendations.
- Lack of progress on asset recovery.
- Entrenched perceptions of corruption and weak rule of law.
- Regulatory framework not properly implemented or enforced; high informality.
- Large state-owned enterprise (SOE) sector posing fiscal risks and undermining competition and productivity.
- Financial sector progress:
- ECF/EFF arrangements were successful in rehabilitating the financial sector and restoring financial sector stability.
- Significant progress made to strengthen the National Bank’s governance, transparency and accountability and its operational framework for emergency assistance as a lender of last resort.
- Directors stressed safeguarding the National Bank’s independence as critical for maintaining price and financial sector stability.
Executive Directors’ Policy Recommendations and Priorities
- General policy stance:
- Continue prudent and well-coordinated policies to address risks and improve resilience.
- Pursue growth-friendly fiscal policy while strengthening the financial sector and addressing governance/institutional weaknesses.
- Fiscal and public finance recommendations:
- Improve revenue mobilization.
- Streamline tax expenditures.
- Increase the efficiency of public investment management.
- Engage with external developmental partners to secure financing for ambitious 2020 infrastructure and developmental plans.
- Reform SOEs to preserve fiscal discipline and ensure debt sustainability.
- Financial sector and monetary recommendations:
- Step up efforts to improve policy credibility and promote exchange rate flexibility while maintaining an inflation targeting regime.
- Closely monitor rising risks in the non-bank financial sector.
- Promptly implement MONEYVAL recommendations to strengthen the AML/CFT framework.
- Make decisive progress on asset recovery.
- Safeguard the National Bank’s independence.
- Structural and governance reforms:
- Give priority to strengthening the rule of law and reforming the judiciary.
- Reform SOEs and enhance institutional capacity and public sector transparency to boost growth and income convergence with the rest of Europe.
International Monetary Fund, Press Release No. 20/90 (IMF Executive Board conclusions issued March 11, 2020).
