IMF Staff Reach Staff-Level Agreement on Third Review for Moldova’s Extended Credit Facility and Extended Fund Facility Arrangements
IMF News, March 14, 2023
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- Published: March 14, 2023
Mission and agreement
- An IMF mission, led by Mr. Ruben Atoyan, conducted discussions during March 1–14, 2023 for the third review of Moldova’s program under the IMF’s Extended Credit Facility (ECF) and Extended Fund Facility (EFF) arrangements.
- IMF staff and the Moldovan authorities have reached a staff-level agreement on policies to complete the third review under the ECF/EFF arrangements.
- The agreement is subject to approval by the IMF’s Management and Executive Board; this is expected by the end of April.
- Completing the review will make SDR 70.95 million (about US$94.40 million) available to Moldova, bringing total disbursements under the program to nearly US$369.30 million (about SDR 277.55 million).
Program performance and structural reforms
- Program implementation remains broadly strong despite challenging circumstances and overlapping crises.
- The authorities met all the quantitative performance criteria.
- Structural reforms are gradually advancing; additional work is needed to:
- promote the integrity, capacity, and independence of key anti-corruption institutions;
- enhance the enforcement of the anti-corruption legal framework.
- Progress has been made toward eliminating inefficiencies and inequities in the tax system, including by institutionalizing tax expenditure reviews as part of the annual state budget.
- The new government reaffirmed sustained ownership of the program and signaled strong determination to advance prudent fiscal policies in support of economic resilience.
Macroeconomic outlook and recent developments
- The economy contracted sharply in 2022, reflecting:
- spillovers from Russia’s protracted war in Ukraine;
- depressed demand due to inflation and higher cost of living;
- weaker-than-expected agricultural production.
- A modest recovery is expected in 2023, supported by a recovery of domestic demand and better growth prospects of trading partners.
- Inflation has decelerated as the National Bank of Moldova (NBM) reacted proactively to contain second-round effects and anchor inflation expectations.
- International reserves continue to provide adequate safeguards against external shocks.
- The banking system is described as well-capitalized, liquid, and profitable and has weathered well the initial impact of the war.
Fiscal and monetary policy stance
- Fiscal indicators remained robust in 2022, reflecting higher revenue collection, grants, and a continuation of past trends of budget under-execution.
- The authorities’ fiscal policies focus on mitigating the economic and social fallout of the war and the energy shock.
- As pressures from the overlapping energy and cost-of-living crises subside, the authorities plan to gradually reorient spending priorities toward supporting the economic recovery, including through increased infrastructure spending.
- The current monetary policy stance is appropriate.
- Since December 2022, the NBM has switched to a gradual monetary easing due to a faster-than-anticipated inflation deceleration owing to weak domestic demand and a tight overall policy mix.
- Further easing should be guided by firm and continuously declining trends of headline and core inflation.
- Given the uncertain external environment, the authorities remain committed to exchange rate flexibility, while limiting foreign exchange interventions to smoothing excessive volatility and preventing disorderly market conditions.
Risks, contingencies, and resilience-supporting financing
- Significant downside risks cloud the economic outlook:
- Prolonged or additional energy shocks could result in fiscal and balance of payments pressures, lower consumption, and output losses, possibly testing social cohesion.
- Policy trade-offs may become more challenging if inflationary pressures increase, confidence deteriorates, or additional external shocks occur.
- Further escalation of the war could lead to new waves of refugees or a deterioration of security and economic conditions.
- Upside risks include a faster recovery in domestic demand, a strong rebound in trading partners’ economic activity, and larger-than-expected support from external partners.
- Moldova’s progress on the EU accession path is identified as a critical anchor for strong implementation of reforms.
- The authorities expressed interest in financing under the IMF’s Resilience and Sustainability Facility (RSF).
- The mission held preliminary discussions on RSF-supported policy priorities.
- Detailed negotiations are expected in the context of the upcoming fourth ECF/EFF review in the Fall of 2023.
- RSF resources could help Moldova close adaptation gaps by supporting climate-related policy goals and sustainable long-term economic development, while catalyzing official and private financing for a range of green investments.
IMF Staff Reach Staff-Level Agreement on Third Review for Moldova’s Extended Credit Facility and Extended Fund Facility Arrangements — March 14, 2023