IMF Executive Board Concludes 2021 Article IV Consultation with Moldova
IMF News, December 21, 2021
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- Published: December 21, 2021
Economic outlook and recent developments
- The Executive Board concluded the Article IV consultation with the Republic of Moldova on December 20, 2021, and approved the authorities’ requests for arrangements under the Extended Fund Facility (EFF) and the Extended Credit Facility (ECF).
- The economy is recovering after a sharp downturn in 2020 due to the COVID-19 pandemic and a drought.
- Real GDP growth is projected to rebound by 7.5 percent in 2021 driven by buoyant domestic demand, supported by robust credit and wage growth as well as strong remittance inflows.
- Inflation accelerated, driven by the recovery in demand and surging energy and food prices.
- The fiscal deficit is projected to reach 5 percent of GDP in 2021 owing to higher crisis-related spending.
- Public debt has edged up to 34 percent of GDP.
- The external position has deteriorated due to rising global commodity prices and the pickup in domestic economic activity.
Key macroeconomic and sectoral findings
- Financial sector resilience improved after progress on shareholder transparency, fit-and-proper ownership, and governance in Moldovan banks.
- Steps to safeguard the independence, financial autonomy, and strong governance of the National Bank of Moldova (NBM) have promoted macro-financial stability.
- Recent improvements to financial integrity have helped safeguard the financial sector against illicit financial flows.
- Persistent structural weaknesses:
- Rule of law and anti-corruption frameworks remain weak.
- Public spending is inefficient and poorly targeted, with low-quality and inaccessible infrastructure.
- High emigration, particularly among better-educated Moldovans, hampers human capital accumulation.
- A weak business environment constrains private investment and productivity.
Downside risks
- External risks:
- A more severe or protracted fallout from the global energy crisis.
- A weaker than anticipated global recovery.
- Spillovers from geopolitical tensions with negative effects on trade, capital, and remittance flows and complications for policymaking.
- Domestic risks:
- New waves of Covid-19 infections and scarring of balance sheets from renewed unemployment and business closures.
- Re-emergence of political instability, pushback from vested interests, or reform fatigue could hurt confidence, limit external financing options, and exacerbate loss of professional expertise in government bodies, degrading implementation capacity.
Executive Board assessment and policy advice
- Directors welcomed the strong commitment of the new authorities to tackle governance vulnerabilities and leverage international partner support.
- Directors urged building on gains from the previous Fund arrangement to sustain the post-pandemic recovery, address developmental needs, and strengthen governance and institutional frameworks.
- Fiscal policy:
- Need for a sound policy mix to support recovery while ensuring fiscal and debt sustainability.
- Welcomed the new budget with targeted support for the healthcare system, social assistance programs, and business activity, and measures to address the energy crisis.
- Under-execution of approved Covid-related crisis measures highlights capacity constraints; called for continued capacity development (CD) support by international partners.
- As recovery takes hold, focus should be on improving domestic revenue mobilization, increasing public spending efficiency, decisively addressing fiscal risks from state-owned enterprises, and improving budget quality and transparency.
- Monetary and financial sector policy:
- Inflation targeting regime remains appropriate; Directors encouraged the NBM to act proactively to ensure inflation expectations are firmly anchored.
- Need to improve the NBM’s policy credibility and effectiveness, strengthen the monetary transmission mechanism, and continue promoting exchange rate flexibility to address vulnerability to external shocks.
- Call for decisive actions to address vulnerabilities in the non-bank financial sector, strengthen the AML/CFT regime, and follow up on recommendations of the latest MONEYVAL report.
- Decisive progress on asset recovery is particularly important.
- Governance and structural reforms:
- Commended efforts to strengthen the NBM’s independence, governance, transparency, and accountability.
- Supported plans to bolster financial sector supervisory, financial crisis management, and macroprudential frameworks per the 2021 Financial Sector Stability Review.
- Emphasized decisive implementation of structural reforms to enhance governance, market regulation (especially in the energy sector), rule of law, and anti-corruption to foster inclusive, private sector-led, and sustainable growth and accelerate income convergence with European peers.
Selected economic indicators, 2017–2022 (highlights from table)
- Real GDP growth (percent): 2017: 4.7; 2018: 4.3; 2019: 3.7; 2020: -7.0; 2021: 7.5; 2022: 4.5 (Proj.).
- Demand components (percent change): Consumption 2020: -5.9; 2021: 6.5; 2022: 4.0 (Proj.); Private consumption 2020: -6.8; 2021: 7.1; 2022: 4.4 (Proj.).
- Gross fixed capital formation (percent change): 2019: 11.9; 2020: -2.1; 2021: 5.8; 2022: 5.6 (Proj.).
- Exports of goods and services (percent change): 2020: -15.5; 2021: 11.1.
- Imports of goods and services (percent change): 2020: -8.9; 2021: 7.9.
- Nominal GDP (billions of Moldovan lei): 2017: 178.9; 2018: 192.5; 2019: 210.4; 2020: 206.4; 2021: 232.5; 2022: 255.6 (Proj.).
- Nominal GDP (billions of U.S. dollars): 2017: 11.5; 2018: 12.0; 2019: 13.0; 2020: 13.6.
- Consumer price index (average): 2019: 3.6; 2020: 4.8.
- Consumer price index (end of period): 2019: 0.9; 2020: 0.4; 2021: 5.0.
- Average monthly wage (Moldovan lei): 2017: 5695; 2018: 6,443; 2019: 7,356; 2020: 8,104; 2021: 8,619; 2022: 9,328 (Proj.).
- Average monthly wage (U.S. dollars): 2017: 308; 2018: 383; 2019: 419; 2020: 468; 2021: 483; 2022: 496 (Proj.).
- Unemployment rate (annual average, percent): 2017: 4.1; 2018: 3.1; 2019: 5.1; 2020: 5.5; 2021: 3.0 (Prelim. actual).
- Gross investment (percent of GDP): 2017: 22.3; 2018: 24.3; 2019: 25.2; 2020: 25.7; 2021: 26.2; 2022: 26.6 (Proj.).
- National saving (percent of GDP): 2017: 16.5; 2018: 13.7; 2019: 15.9; 2020: 18.2; 2021: 14.9; 2022: 16.4 (Proj.).
- Current account balance (Millions of U.S. dollars): 2017: -555; 2018: -1212; 2019: -1112; 2020: -893; 2021: -1469; 2022: -1384 (Proj.).
- Current account balance (percent of GDP): 2017: -5.7; 2018: -10.6; 2019: -9.3; 2020: -7.5; 2021: -11.3; 2022: -10.2 (Proj.).
- Remittances and compensation of employees (net, Millions of U.S. dollars): 2017: 1,494; 2018: 1,669; 2019: 1,729; 2020: 1,893; 2021: 2,006 (Prelim. actual).
- Gross official reserves (Millions of U.S. dollars): 2017: 2,803; 2018: 2,995; 2019: 3,060; 2020: 3,784; 2021: 4,298; 2022: 4,056 (Proj.).
- Gross official reserves (months of imports): 2017: 6.1.
- Stock of public and publicly guaranteed debt (percent of GDP): 2017: 32.7; 2018: 30.3; 2019: 27.9; 2020: 35.0; 2021: 37.1; 2022: 40.0 (Proj.).
- External debt (percent of GDP): 2017: 70.4; 2018: 65.5; 2019: 62.7; 2020: 64.8; 2021: 63.7; 2022: 63.8 (Proj.).
- Debt service (percent of exports of goods and services): 2017: 12.6; 2018: 14.7; 2019: 13.4; 2020: 15.8; 2021: 12.2; 2022: 11.4 (Proj.).
Source: IMF Communications Department — Press Release No. 21/395, December 21, 2021.