Press Release No. 12/456

Press Release No. 12/456
November 21, 2012

An International Monetary Fund (IMF) mission for the sixth reviews under the Extended Credit Facility/Extended Fund Facility (ECF/EFF) arrangements with Moldova led by Nikolay Gueorguiev visited Chişinău during November 7–21.

At the conclusion of the visit, Mr. Gueorguiev made the following statement:

“The mission and the Moldovan authorities held discussions in the context of the sixth reviews under Moldova’s IMF-supported program. For technical reasons, the authorities have requested several months to introduce the policy adjustments necessary to achieve the objectives of the program. The mission plans to return to Chisinau in early 2013 to review progress and resume these discussions. Completion of the reviews will enable Moldova to draw SDR 49.6 million (about US$76 million) in support of its external reserve position.

“Economic growth is expected to settle at 0.3 percent in 2012. Staunched by a slowdown in Europe and a severe summer drought, trade, industrial production, and remittances have stagnated, while agricultural production collapsed. Alongside, deceleration of domestic demand is expected to reduce the current account deficit to 10¾ percent of GDP; inflation has declined and is expected to remain low; and the real effective exchange rate has depreciated by about 4 percent so far in 2012, partially reversing the 9 percent appreciation in 2011. In 2013, real GDP growth is projected to rebound to 4 percent helped by recovering agriculture and gradual improvement in external conditions.

“The program remains broadly on track despite some delays. In particular, the structural benchmarks related to the adoption of legal amendments to promote transparency of ultimate controllers in banks and the medium-term budget framework have been delayed. All other quantitative performance criteria, indicative targets, and structural benchmarks for end-September were met. We are encouraged by the authorities’ commitment to implement appropriate corrective measures to meet the missed program conditions.

“The budget deficit is projected to reach 1.9 percent in 2012 due to lower revenue stemming from a shortfall in external grants and cyclical weakness of the economy. The fiscal policy priority is to contain the budget deficit to 1½ percent of GDP in 2013 to reflect the impact of the weaker economy while safeguarding fiscal sustainability. In this context, we welcome the authorities’ commitment to address the recent revenue-eroding initiatives and bolster other revenue—by reviewing and revising as needed the tax exemptions for scrap materials and the vignette rates, and adjusting fuel excise rates—and to contain structural expenditure with a more gradual phasing in of the planned wage hikes and continued rationalization of other current expenditure.

“The monetary policy over the past year has been successful in maintaining inflation within the target range of the National Bank of Moldova (NBM). The NBM’s current accommodative monetary policy stance remains appropriate in the context of low inflation and weak economic activity. Further policy adjustment may be necessary in case of clear signs that the inflation outlook may become inconsistent with the NBM’s target range. Meanwhile, the NBM’s policies in recent months created an adequate reserve buffer against potential external pressures.

“The core of the banking sector remains sound. However, the mission is concerned with declining asset quality and the troubles of the majority state-owned Banca de Economii (BEM), which requires the authorities’ urgent attention. The mission recommends strengthening the BEM’s action plan and providing more active support by the Government and the Financial Stability Committee to facilitate the bank’s turnaround. Meanwhile, the NBM should continue close monitoring of the banks with rising non-performing loans to ensure adequate provisioning and unwinding of large exposures.

“The mission urges the authorities to overcome delays with improving the transparency of the banking system. Adoption of the legal amendments seeking full transparency and disclosure of ultimate controllers in banks is imperative in the face of emerging financial sector risks and recent non-transparent bank takeover attempts. The new requirements should be also applied to existing shareholders in the course of 2013-14 with a limited transition period.

“The mission also discussed specific reforms aimed at raising the efficiency of the public sector, enhancing stability of the energy sector, and improving the business environment with the view to raising the economy’s potential, employment, and living standards.”