Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.

Aide-Mémoire of the IMF Mission to the
Republic of Moldova

November 7-21, 2012

1. This aide-mémoire summarizes the discussions held between the IMF mission and the Moldovan authorities in Chişinău during November 7-21, 2012. The discussions aimed at completing the sixth reviews of the authorities’ IMF supported program under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) arrangements. For technical reasons, the authorities have requested several months to introduce the policy adjustments necessary to achieve the objectives of the program. This aide-mémoire describes the points of agreement between the authorities and the mission regarding the macroeconomic diagnosis and the specific policy measures for the period ahead. Implementation of these measures, as described below, is critical for the completion of the sixth reviews under the ECF/EFF arrangements in early 2013.

2. The mission would like to thank the Moldovan authorities and technical staff for a warm welcome, constructive discussion, and the positive spirit of cooperation that prevailed throughout the duration of the IMF-supported program.

I. Macroeconomic Developments and Outlook

3. Economic growth came to a halt in 2012, weighed down by a series of adverse shocks. Staunched by a cold winter and the slowdown in Europe, foreign and domestic trade, industrial production, and remittances have stagnated, while agricultural production collapsed after a severe summer drought. The hitherto resilient credit growth is also beginning to show signs of weakening. Real GDP growth is now projected to settle at 0.3 percent in 2012 before rebounding to 4 percent next year on account of recovering agriculture and gradual improvement in external conditions. Nonetheless, downside risks to this outlook remain significant.

4. The ensuing deceleration of domestic demand has narrowed the current account deficit. Declining private investment and stagnating consumption have kept imports broadly flat. As a result, the current account deficit is expected to decline by 1½ percent of GDP to 10¾ percent of GDP in 2012. In the medium term, the deficit should narrow to 9 percent of GDP on the back of sustained reform and export promotion efforts, recovering external demand, and increased access to EU and CIS markets. The real effective exchange rate has depreciated by about 4 percent in the first three quarters of 2012, partially reversing the 9 percent appreciation in 2011.

5. Alongside, inflation declined and is likely to remain broadly stable. A cooling economy and relative stability of food and energy prices have slowed annual inflation to 3.9 percent in October. The expected rise in food prices will likely push inflation to about 4½ percent by end-year, still well within the National Bank of Moldova’s (NBM) target range.

6. While most banks remain sound, declining asset quality and the troubles of the majority state-owned Banca de Economii (BEM) are symptomatic of emerging risks. The nonperforming loans (NPL) ratio has increased from 11 to 14½ percent in the first nine months of 2012 while the system-wide capital adequacy ratio declined somewhat. BEM’s capital has dropped close to a critical level in September, requiring urgent action, and a few small banks’ large exposures have worsened their financial conditions. Nonetheless, the core of the banking sector remains well capitalized and liquid.

II. Economic Policy Framework

7. The authorities and the mission recognize the need to continue with the economic reform agenda to maintain macroeconomic stability and boost the economy’s growth potential. In this context, economic policies need to be adjusted in response to the challenging economic conditions. Specific policy efforts should seek to preserve fiscal sustainability, maintain low and stable inflation, strengthen financial sector stability, increase transparency in the banking system, and deepen structural reforms in education, health care, energy, and privatization, while improving the business climate.

A. Fiscal Policy

8. The budget deficit is projected to reach 1.9 percent of GDP in 2012. This higher-than-expected level is largely due to lower revenue, stemming from a shortfall in external grants (0.7 percent of GDP), the cyclical weakness of the economy, and under-collection of car registration fees (0.1 percent of GDP) stemming in part from Parliament’s decision to adopt significantly lower than planned road toll rates. The shortfall in grant receipts was partially reflected in lower capital expenditure (0.2 percent of GDP). Moreover, the Government has committed to provide drought-related assistance to agriculture, with 0.1 percent of GDP made available already in 2012.

9. The authorities and the mission agree that the 2013 budget should be amended to target a deficit of 1½ percent of GDP (prior action). The agreed deficit target along with the revised revenue and expenditure composition reflect the impact of the weaker economy while safeguarding fiscal sustainability. In this context, the mission recommends revising revenue down to 37.5 percent of GDP due to lower projected tax receipts, while containing expenditure at 39.0 percent of GDP. Achieving this will require continued strengthening of structural revenue, as well as tax and customs administration, correcting a number of recent permanent spending commitments, and implementation of other planned structural reforms. Specifically:

  • The recent revenue-eroding initiatives should be revisited and other revenue bolstered to ensure the credibility of the authorities’ budget plans. In this context, the authorities and the mission agree on the following: (i) the recently introduced tax exemptions for scrap materials will be reviewed and revised as needed to eliminate their negative impact on the budget; (ii) road toll taxes (vignette) will be revisited with the view to find the right balance between support for the budget and their effects on the transportation sector; and (iii) a rule tying growth of excise rates on all types of fuel to at least the growth rate of nominal GDP will be introduced into the tax code starting in 2013, together with the necessary additional excise rate adjustments (5½ percent). The mission welcomes the authorities’ intention to prepare, in consultation with IMF staff, and adopt a package of legal amendments enacting these measures prior to or together with amending the 2013 budget as a prior action. Furthermore, the mission urges the authorities to resist proposals to replace the current tax system in agriculture with a single land-based tax in 2013.


  • Structural expenditure should be contained by abstaining from unaffordable long-term commitments. To this end, the mission supports the authorities’ plan to limit the total wage bill in the budget sector to MDL 8,535 million (8.8 percent of GDP) in 2013, by: (i) capping the wage bill in the judicial sector at MDL 307 million in 2013 (still an increase of 40 percent, aimed to support the ongoing reform); (ii) providing for a gradual phasing in of the envisaged wage increase for public dignitaries, with a 7 percent average raise in 2013; (iii) increasing the budget sector’s minimum wage to MDL 900 from June 2013. Also, the government will limit the 2013 budget allocation for goods and services (excluding the Health Fund) to MDL 4,900 million by implementing reform-based rationalization of current expenditure.

10. Going forward, the fiscal strategy should remain focused on preserving fiscal sustainability in the medium term. In this context, the authorities share the mission’s concern regarding delayed implementation of several important reforms, and undertake to:

  • Begin developing the new medium-term budget framework (MTBF) for 2014-16 in December 2012, and present a draft for public discussions by end-March 2013. The revised framework will reflect the agreed guidelines in the SMEFP dated August 31, 2012, with revenue and expenditure targets adjusted for the exclusion of the accounts of higher education institutions from the general government budget, given their operation as self-managed entities.


  • Enact the draft law on public finance containing a new fiscal responsibility framework by end-March 2013. The framework will introduce a rule-based approach to budgeting, enhance fiscal discipline, and improve transparency.


  • Ensure government approval by end-March 2013 of a new mechanism for allocating capital expenditure based on projects’ viability, economic growth potential, and capacity for implementation with the view to increasing efficiency of public investment. The new mechanism is to be applied starting 2014.


  • Strengthen tax administration along several dimensions. To reduce VAT fraud, by end-February 2013, the State Tax Inspectorate will prepare a feasibility study for the introduction of a system of reverse VAT charge in selected sectors starting in 2014. The study will estimate the impact and identify the sectors, the required legislative amendments, and the training needs. The IMF will provide technical assistance to STI for this project. Alongside, the STI will continue to prepare for the introduction of indirect assessment methods for high-wealth individuals (HWI) with the view to conduct first audits in the second half of 2013. In this context, STI intends to strengthen its IT systems to allow for automated data collection and accelerate conclusion of agreements with data providers, approve a HWI compliance strategy by end-2012, and propose further legal amendments to facilitate implementation of this reform by end-March 2013, in line with the recommendations of the recent IMF technical assistance mission. Furthermore, to improve its dialogue with the business community and facilitate compliance, the STI will step up the use of binding tax rulings on frequently emerging issues while raising awareness through a targeted public information campaign. Moreover, STI will engage in intensive dialogue with the large taxpayers on securing high compliance without increasing the administrative burden.


  • Continue implementation of other reforms underpinning the authorities’ fiscal strategy including the education reform (19 of SMEFP dated March 24, 2011 and the recommendations of the World Bank) and rationalization of the use of health care (10 of SMEFP dated August 31, 2012).

B. Monetary Policy

11. The NBM’s current policy stance remains appropriate in the context of low inflation and weak economic activity. The NBM has made significant progress in strengthening its inflation targeting framework, improving communication, and building credibility in the financial markets and general public. The accommodative monetary policy over the past year was successful in maintaining headline inflation within the NBM’s target range. Further accommodation may be necessary if core inflation shows persistent weakness. Conversely, the second-round effects from higher food prices should be monitored carefully for signs of pressure on core inflation. Meanwhile, the NBM’s policies in recent months created an adequate reserve buffer against potential external pressures in the near term. Going forward, the NBM should continue to ensure that reserves cover at least 85 percent of short-term external debt maturing in the next 12 months in a manner consistent with achieving its inflation objective.

12. The mission recommends adoption of the draft legal amendments to the central bank law after careful consideration. The draft amendments approved by the Government strike the right balance between strengthening the NBM’s independence in line with international best practice and recommendations of the IMF and the EC while enhancing the mechanisms of internal control over NBM’s corporate governance. The mission emphasizes the paramount importance of upholding NBM’s independence in the new law and resisting proposals that could restrict it.

C. Financial Sector Policy

13. 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 (delayed structural benchmark) is imperative in the face of emerging financial sector risks and recent non-transparent bank takeover attempts. In this context, the mission welcomes the authorities’ agreement to secure Parliamentary adoption of these legal amendments by end-2012 as a prior action, and to apply the new requirements to existing shareholders in the course of 2013-14 with a limited transition period.

14. The mission is deeply concerned over the precarious situation at BEM, which requires the authorities’ urgent and undivided attention. Over the past three years the bank has engaged in dubious lending practices notwithstanding repeated warnings by the NBM. Recent efforts to strengthen the bank’s performance have not brought meaningful results yet. Capital buffers continue to dwindle, the shareholders’ action plan is not fully adequate and its implementation has been slow, and the Financial Stability Committee (FSC) has not been sufficiently engaged in assessing the situation and its implications for the whole financial system. Against this background, the mission and the Government (representing the majority shareholder the state) agree that the following course of action is needed to facilitate the bank’s turnaround:

  • BEM’s action plan should be strengthened in the areas of raising profitability, selling foreclosed collateral, and collecting overdue loans. Decisive cost-cutting measures—including closure of unprofitable branches and staff optimization—should also be considered.


  • Line ministries should be tasked to work with the public enterprises under their control to resolve all nonperforming loans to BEM—either through repayment or transfer of collateral.


  • Members of the FSC should work closely with the bank to investigate the largest problem loans, especially those issued in the past three years, and facilitate their collection.


  • The FSC should meet on a regular basis to review progress with the implementation of these and other necessary measures.

In addition, the mission recommends that the Public Property Agency consider and approve, in line with applicable procedures, the BEM’s request for the sale-and-leaseback of tangible assets in compliance with Article 18 of Law No.121 and Articles 5 to 8 of Government Decision No.480. Opportunities for the sale-and-leaseback of BEM’s tangible assets should be actively explored by identifying and initiating contractual negotiations with leasing companies.

The mission also recommends that the NBM continue to monitor closely the financial condition of BEM as well as the implementation of the remedial measures imposed on the bank and the action plan adopted by BEM shareholders. It was agreed that the NBM will conduct an on-site audit of BEM based on end-2012 indicators and will communicate its results to IMF staff by mid-February 2013. Furthermore, by end-December 2012, the NBM plans to finalize a contingency plan to be applied in case of further worsening of the situation at the bank.

15. Alongside, the authorities and the mission agree that monitoring and mitigation of financial sector risks in other banks should be strengthened. In particular, on-site supervision should seek to ensure adequate provisioning in banks with rising NPLs and timely unwinding of large exposures to connected borrowers identified in NBM’s off-site analysis of banks’ portfolios. The NBM should closely monitor the sectoral and bank distribution of credit with the view of assessing whether pockets of vulnerability may be emerging. Among other actions:

  • The mission welcomes the NBM’s decision to abstain from raising the minimum capital adequacy ratio beyond 16 percent.


  • The mission recommends that the authorities move quickly to clarify and simplify the procedure for the use and sale of public property by joint stock companies, notably in the financial sector. To this end, we urge the authorities to develop and adopt legal amendments by end-February 2013 to remove the concept of “unused assets” under Law No.121 and Government Decision 480 to allow the sale or lease of any private property in the public domain, which is anticipated under the law, with a straightforward approval from the relevant authorized body. Other amendments to the Law on Joint Stock Companies, the Law on Financial Institutions and related Government decisions or regulations may be necessary to facilitate disposal of assets by financial companies, and will be developed in consultation with IMF staff by end-February 2013 as well.


  • The mission reiterates the importance for the FSC to establish, by end-2012, a subcommittee to examine technical financial sector issues and propose decisions to the FSC. The subcommittee should be chaired by the Ministry of Finance with the NBM performing the secretariat function. In this connection, the NBM and the NCFM, as well as other FSC members, should ensure proper information exchange and coordination, as per the memorandum of understanding (MoU) signed in 2011.

D. Structural Reforms

16. Heavy losses and inefficiencies in many state-owned enterprises (SOEs) underscore the urgency of their restructuring and reducing the state’s presence in the economy. Alongside the plans to continue active privatization of public assets, including through the creation of public-private partnerships, the mission urges the authorities to finalize the long-overdue restructuring plans for a number of large SOEs. In particular, with the privatization advisory work at Moldtelecom completed, it was agreed that the Ministry of Economy should propose by end-2012 a roadmap for introducing private participation in the company and implementing accompanying sector reforms. The mission supports the Government’s plan to adopt a strategic plan for reforming the railway company and a strategy on the privatization of Air Moldova by mid-2013. In close cooperation with the World Bank, the authorities should expedite the implementation of the energy sector restructuring strategy, which aims to reduce costs and raise efficiency in the sector.

17. The authorities and the mission agree that the payment framework in the energy sector requires further strengthening to ensure timely payment of current bills. Substantial progress has been achieved in the course of the program in normalizing the situation in district heating, including by bringing heating tariffs to cost-recovery levels, depoliticizing the tariff-setting process, discouraging disconnections from central heating, and enhancing Termocom’s ability to collect unpaid bills faster. The next step in this process—a government decision enabling reconciliation of individual and collective hot water bills—should be adopted by end-2012. This will eliminate an important source of structural losses for Termocom.

18. Having completed the transition to a system of means-tested social assistance, the authorities are appropriately working to improve its targeting and encourage employment. Specifically, in cooperation with the World Bank, the Ministry of Labor and Social Protection is in the process of revising the eligibility criteria (proxies) for Ajutor Social to ease transition of low-income households from the abolished nominative compensation system. Meanwhile, the Government plans to raise the eligibility criteria for cold-month assistance from 1.4 to 1.6 of guaranteed minimal income (GMI) in 2013. The Ministry of Labor and Social Protection in cooperation with the World Bank intends to complete its analysis and approve an action plan to put other benefits and social payments on a means-tested basis by end-March 2013. And to encourage employment, a draft law allowing local public administrations to engage recipients of social aid in public works is expected to be approved by the Government by end-2012. The mission supports these plans.

19. To boost economic growth and reduce poverty, the new medium-term National Development Strategy (Moldova 2020) should be enacted as soon as possible. The strategy outlines seven priority areas for reforms and development—education, access to financing, road infrastructure, business regulation, energy efficiency, justice system, and social insurance—which will guide the authorities’ reform efforts in the period ahead. Official enactment of the strategy is a necessary condition for completing the sixth reviews of the IMF-supported program.

E. Next Steps

20. The mission and authorities agree that the policies outlined above are critical to completing the last program review. To allow sufficient time for their implementation, the authorities intend to request a 3-month extension of the program. The mission plans to return to Chişinău in February2013 to review progress and finalize discussions on the completion of the program. This will pave the way for the IMF Executive Board consideration of the final reviews of the arrangements by end-April 2013.



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