Republic of Moldova
2007 Article IV Consultation and Third Review Under the Three: Year Arrangement Under the Poverty Reduction and Growth Facility: Staff Report; Staff Supplement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Moldova
Author:
International Monetary Fund
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Publication Date:
25 Apr 2008
eISBN:
9781451825152
Language:
English
Keywords:
ISCR; CR; annex; state; growth; PRGF arrangement; State tax inspectorate; Moldovan authorities; U.S. dollar; interest rate; government Decision; private sector; Privatization; Budget planning and preparation
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Moldova showed improved growth prospects and decline in poverty despite a series of consecutive shocks under the economic program. Executive Directors commended the balanced macroeconomic policies and urged to maintain macroeconomic stability. They also appreciated the strong monetary policy by National Bank of Moldova (NBM), disciplined fiscal policies, financial sector stability and consolidation of education and health care networks, and stressed the need to strengthen tax administration while maintaining the deficit target. The need for modernization of energy sector and effective implementation of Anti Money Laundering and Combating the Financing of Terrorism (AML/CLT) law were also found to be essential.

Abstract

Moldova showed improved growth prospects and decline in poverty despite a series of consecutive shocks under the economic program. Executive Directors commended the balanced macroeconomic policies and urged to maintain macroeconomic stability. They also appreciated the strong monetary policy by National Bank of Moldova (NBM), disciplined fiscal policies, financial sector stability and consolidation of education and health care networks, and stressed the need to strengthen tax administration while maintaining the deficit target. The need for modernization of energy sector and effective implementation of Anti Money Laundering and Combating the Financing of Terrorism (AML/CLT) law were also found to be essential.

I. Introduction

1. Much is going well, but Moldova is increasingly facing many of the strains experienced by other countries undergoing transition. Since the 2006 Article IV consultation, the authorities have established a good track record of macroeconomic stability, despite successive shocks, and the Russian ban on wine imports. Investment is picking up, and is beginning to replace remittances as the main driver of growth. Improved growth prospects have also brought new challenges, with strong appreciation pressures from foreign exchange inflows complicating the disinflation objective. Structural reforms aimed at advancing the transition process and improving the competitiveness of the economy have become correspondingly more urgent.

2. Political pressures are growing with the upcoming national elections in 2009. The ruling communist party of President Voronin, reelected in 2005 on a pro-Europe, pro-reform platform, lost support in the capital city of Chişinău in the June 2007 local elections. Politics have yet to noticeably influence macroeconomic policy, however, apart from disputes at the municipal level, particularly on heating tariffs.

3. The external environment has improved. An advantageous autonomous trade preferences (ATP) agreement with the EU is expected to come into force in March 2008, and wine exports to Russia are resuming. The successor to the EU-Moldova Action Plan is expected to be negotiated in mid-2008.

4. The authorities remain committed to the PRGF-supported program. European aspirations and prospects of growing financial assistance from the EU and international donors continue to drive reform. Program implementation under the Third Review has been satisfactory, despite some slippages.

Implementation of Past Fund Policy Recommendations 1/

The authorities’ responsiveness to Fund advice in earlier Article IV consultations has been good, as reflected in the completion of two reviews under the program. Macro policies have been prudent, though monetary policy has been less aggressive than Fund recommendations. Implementation of structural reforms has also been successful with only minor slippages. As a result, the authorities have managed to maintain macroeconomic stability, even in the face of a series of significant shocks.

1/See PIN for 2006 Article IV Consultations at http://www.imf.org/external/np/sec/pn/2006/pn0654.htm

II. Recent Developments

5. The economy is doing well, but has been set back by consecutive shocks. Moldova was hit hard by the regional financial crisis in 1998, with the poverty rate doubling to 70 percent in 1999, and substantial outward migration. The subsequent recovery was setback by Russia’s ban on imports of Moldovan wine in March 2006, a doubling of natural gas prices by Russia’s Gazprom in 2006, and a drought in 2007, which led to a sharp drop in agricultural output.

  • Growth has been resilient. Strong non-agricultural output maintained overall growth at a projected 5 percent in 2007, supported by robust exports and higher investment.

  • Disinflation has been set back by the drought. Good progress by the National Bank of Moldova (NBM) in reducing inflation since 2006 was reversed by a spike in food prices. After having already met the end-year target of 10 percent by June, headline inflation ended the year at 13 percent.1

uA01fig02

Inflation

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

Source: Moldovan authorities; IFS; and Fund staff calculations.

  • The current account deficit narrowed. The current account deficit improved to 10 percent of GDP in 2007 from 12 percent in 2006. A deterioration in the merchandise trade balance due to strong import growth has been offset by stronger net income flows and transfers. A resumption of wine exports to Russia in October was a major positive development, although volumes are likely to recover only slowly.

uA01fig03

Export Shares

(millions of US$)

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

Source: Moldovan authorities and IMF staff estimates.

6. The pattern of growth is also changing, with developments in Moldova increasingly mirroring those in other transition economies:

  • Growth is increasingly been driven by investment. There are signs that the earlier model of consumption-driven growth financed by remittances is shifting. While large inflows of remittances continue, information from the banks and investment data suggest that they are increasingly flowing into investment rather than consumption (Box 2). FDI has also picked up and is estimated to have reached 12 percent of GDP in 2007, up from 7 percent in 2006.

uA01fig04

Macroeconomic Trends, 1996–2007

(share of GDP)

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

Source: Moldovan authorities.

Remittances and Investment in Moldova 1/

A large proportion of remittances should probably be reclassified as investment in Moldova. Remittances are defined as personal transfers by non-resident workers (those abroad for more than a year), often involve related persons, and appear in the current account. Transfers by non-residents to buy goods or services, however, should be classified under the financial account—what the money is intended for matters.

The authorities have initiated the process of reclassifying remittances. Recent analysis of disaggregated data by the NBM revealed some very large transactions, accounting for a substantial proportion of total money transfers. It is likely that these were intended as payments for goods or services, but were channeled as personal transfers due to lower transaction and administrative costs. This revision might ensure a better consistency with survey data on remittances. A recent 2006 household survey estimates that overall remittances (including compensation of employees) were less than half of those recorded in the BoP, implying that other transfers may be intended for investment. The table shows 2007 BoP numbers, plus what is implied if some 50 percent of remittances were to be reclassified.

2007 Balance of Payments Flows

article image
1/The headline remittances number quoted for Moldova, about one-third of GDP, includes both remittances and compensation of employees (wages paid to Moldovans living abroad for less than one year).

  • The structure of the economy is also changing. Construction and trade are growing rapidly, while agricultural employment has declined. There has been a shift of employment within the industrial sector away from winemaking into manufacturing, particularly to textiles, where Moldova’s low labor costs continue to provide a comparative advantage. This has led to an increase in private sector employment and a recent slowdown in emigration.

uA01fig05

Employment Structure by Sectors of Economy

(shares in total employment)

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

Source: Moldovan authorities

  • Poverty has fallen. Migration has ameliorated poverty as remittances have been channeled to the poor. Rural wages have also increased due to tighter labor markets. Overall poverty has fallen to 30 percent in 2007 with notable improvements in access to water supplies and reducing infant mortality. New estimates indicate that extreme poverty is lower than previously thought (at less than 5 percent, compared with an earlier estimate of 16 percent in 2005). The recent drought may have led to some reversal of some of these gains, despite donor and government efforts to address the social consequences.

7. Strong growth performance has presented new challenges:

  • A surge in capital inflows, driven by FDI. Net capital inflows topped 20 percent of GDP in 2007, up from 8 percent in 2006, and would be higher if remittances were to be reclassified.

  • Strong appreciation pressures. The strengthening of the real effective exchange rate has raised concerns about competitiveness, while large sterilization costs have weakened the financial position of the central bank.

  • A weakening of the trade balance. While export growth has been robust, imports have grown faster than expected, fuelled by remittances and stronger FDI. The deterioration in the underlying current account position has been masked by remittances.

8. While the trends are similar to those in other transition countries, Moldova has fewer effective policy levers to address these pressures. Fiscal policy is constrained by Moldova’s low-income and high development needs, while the effectiveness of monetary policy is limited due to weak transmission mechanisms.

uA01fig06

Moldova in Transition: Looks Familiar?

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

Source: WEO and Fund staff projections.1/ Average rates are used to partly offset impact of the regional drought in 2007.

9. The policy response has been mixed:

  • Fiscal policy has been restrained. Fiscal performance remained strong in 2007, with the end-year deficit of 0.3 percent of GDP below the programmed deficit of 0.5 percent. Revenue performance was driven by higher VAT on imports, while expenditures were kept in line with budget commitments.

General Government Fiscal Balance, 2003-07

(in percent of annual GDP)

article image
Sources: Moldovan authorities and Fund staff estimates.

  • Monetary policy has been playing catch-up. Despite the tightening in early 2007, strong inflows of foreign exchange led to a surge in reserve money, and the end-year ceiling was breached (Figure 1). Faced with mounting inflationary pressures due to second-round effects of the drought, the NBM raised reserve requirements from 10 to 15 percent at end-September, accompanied by an increase in the sterilization rate of 2.5 percentage points to 16 percent. The NBM accelerated the build-up of reserves, which by end-2007 reached US$1.3 billion, well in excess of US$1 billion projected at the Second Review, limiting the strong appreciation of the leu (Figure 2).

Figure 1.
Figure 1.

PRGF Performance, 2007

(In millions of lei, unless indicated otherwise)

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

Sources: Moldovan authorities; and Fund staff calculations.
Figure 2.
Figure 2.

Liquidity Conditions

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

Source: Moldovan authorities.

10. The structural reform agenda also remains long, despite recent efforts. Moldova continues to perform poorly under EBRD transition and World Bank “Doing Business” indicators, and slipped from 86 to 97 in the 2007 World Economic Forum competitiveness rankings due to the weak business environment. Given the poor ratings, the authorities have been making considerable efforts to strengthen market reforms. Key measures underway comprise regulatory and public administration reforms, including utility tariff reform, establishment of the National Commission for Financial Markets (NCFM), improved business legislation through the use of a ‘Guillotine law’, modernization of the tax administration, a new privatization law, and financial sector restructuring.

uA01fig07

EBRD Transition Indicators, 2006

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

Source: EBRD Transition Report 2006.Note: Transition indicators range from 1 (little change from centrally planned economy) to 4.33 representing the standards of an industrialised market economy).
uA01fig08

World Bank Doing Business 2008

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

Note: Higher ranking indicates worse business climate.Source: World Bank Doing Business 2008 report, www.doingbusiness.org

III. Performance under the Third Review

11. Performance has been satisfactory, with some slippages. All end-September quantitative PCs were observed. A quantitative benchmark on non-accumulation of domestic expenditure arrears was missed as Chişinău failed to fully pay the heating subsidies it decided to grant to households. The indicative target on reserve money has also been missed as the National Bank of Moldova (NBM) has pursued the multiple objectives of inflation, low interest rates and exchange rate stability in the face of strong foreign exchange inflows.

12. All structural PCs have been met. There has been good progress in strengthening the independence of the central bank, improving financial sector supervision, and enhancing public finance management.

13. But some structural benchmarks were missed. The end-September structural benchmark (SB) on the adoption of the methodology for a targeted social assistance system was implemented with a slight delay. Reform of the heating sector suffered delays. The end-September structural benchmark on increasing tariffs for heat and water to 70 percent of cost recovery was missed. Tariffs for water were increased to full cost recovery in October, but the increase in tariffs for heat was delayed pending further work on a municipal social assistance scheme. An SB on transferring the tariff-setting responsibility for heat and water to ANRE, the independent national regulator, was not implemented owing to uncertainty whether the transfer would comply with the constitutional division of rights between local and central governments. As a compensatory measure, heat tariffs paid to utilities were raised to full cost-recovery of lei 540 in January (prior action).

14. Previous concerns about the weakening of the AML regime related to the passage of a capital amnesty law have been addressed through the new AML law and by fixing loopholes in the capital amnesty law. Revisions to associated laws aimed at bringing them in conformity with the international standards have been prepared with the help of the IMF and bilateral partners.

IV. Outlook

15. The macroeconomic outlook for 2008 and beyond appears favorable. Growth is projected to pick-up to in 2008 and 2009, reflecting stronger investments and the unraveling of the shocks, and then slow to around 6 percent in the medium-term. While rising FDI and domestic investments, and some weakening of private savings, are expected initially to feed imports, export recovery and strong transfers should help contain the current account deficit at about 10 percent of GDP. At the same time, large capital inflows are projected to more than compensate for the current account deficit, boost reserve accumulation and add to appreciation pressures. With appropriately tight macroeconomic policies, inflation is projected to gradually decline to mid-single digits by 2010–11, and help maintain Moldova’s competitive margin.

Medium-Term Outlook, 2005–12

article image
Sources: Moldovan authorities; and Fund staff projections.

Excludes injection of 0.6 percent of GDP to NBM capital in late 2006.

In 2005 there was a statistical discrepency of -0.2 percent of GDP.

16. While the authorities see upside risks to the outlook, the mission emphasized that the current favorable environment is still fragile, even if Moldova was little affected by the recent international financial turmoil. Staff stressed that coming late to transition, Moldova could benefit from the experience of other countries in the region that have faced growing current account and inflationary pressures. In particular, smooth convergence will require maintaining a strong fiscal anchor to bring inflation down quickly and to allow more policy flexibility when Moldova faces inevitably declining private savings, mounting capital inflows, and appreciation pressures. At about 43 percent of GDP, the size of the government is excessive for a country at Moldova’s level of development, and limits growth potential. Gradual retrenchment of the public sector over the medium term will be essential to provide room for the private sector. At the same time, a look at Moldova’s neighbors clearly shows the importance of structural reforms and a healthy financial sector, for boosting longer-term growth prospects.

uA01fig09

Government Size and GDP per capita, Emerging Europe, 2006

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

Source: WDI, WEO, GFS, and Moldovan authorities.

17. While the authorities agreed that the current exchange rate is broadly in line with fundamentals, they expressed concerns about possible loss of export competitiveness due to continued appreciation. However, a range of indicators shows that there is scope for further appreciation without undermining competitiveness (Box 3). The trend appreciation of the real exchange rate in Moldova mirrors the experiences of neighboring CEE countries during transition in 1990s, reflecting high rates of return and the beginning of the convergence process.

uA01fig10

REER Appreciation

(Average 1992–97, in percent)

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

Source: Fund staff estimates and projections.

Competitiveness and the Equilibrium Exchange Rate

Estimates of the equilibrium rate vary within a wide range, and have the usual caveats, but seem to suggest that the exchange rate is broadly in line with fundamentals. A standard econometric analysis suggests that the real effective exchange rate moves broadly in line with fundamentals. The CPI-based REER is roughly unchaned from the 2001 level; the macroeconomic balance approach indicates the exchange rate is overvalued by about 7 ½ percent; while an estimate of the equilibrium rate based on wage costs for transition countries indicates a modest overvaluation. Data also suffer from problems. The coefficients for the macroeconomic balance approach are from the advanced-country CGER exercise (Moldova has insufficient data), and transition economies exhibit very different characteristics. In addition, Moldova recently suffered from a series of external shocks that adversely affect the medium-term current account, and an exchange rate devaluation to bring it into balance would be necessarily biased upwards.

uA01bx03fig01

Real Effective Exchange Rates: Country Comparison

(2001=100)

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

Sources: WEO; Fund staff calculations.
uA01bx03fig02

Real Effective Exhcange Rate: VAR Approach

(logarithmic scale)

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

Source: Fund staff calculations.

Despite appreciation pressures, competitiveness is still high. Unit labor costs remain low and productivity is growing fast compared with new EU member states. Moldova is one of the few countries in the region that continues to attract investments in textiles and other low value-added industries. This assessment dovetails with a recent business survey, where only 5 of 33 companies viewed excessive strengthening of the leu as a major obstacle to business development. The large appreciation has not hampered robust export growth (30 percent y-o-y to November, and 43 percent excluding wine).

uA01bx03fig03

Unit Labor Costs

(Manufacturing, USD/month)

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

Sources: ILO; Moldovan authorities; and Fund staff estimates
uA01bx03fig04

Labor Productivity

(Index; 2000=100)

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

Sources: WEO; and Fund staff estimates

18. The improved macroeconomic outlook further decreases the low risk of debt distress. Since July 1, 2007, Moldova is classified as a low middle-income country and above the IDA cutoff. This implies a shift in World Bank financing towards a blend of IDA and IBRD funds—a move included in the July DSA. The debt-sustaining non-interest current account deficit is estimated at 17.1 percent of GDP, compared with the expected outturn in 2007 of 8.1 percent of GDP. Although the priority remains to attract concessional financing, the debt ceiling was raised at the time of the Second Review to accommodate loans from the EBRD and EIB for roads, and for a health project financed by the Council of Europe Development Bank.2 Given the outlook, absorptive capacity is likely to be more of a constraint than debt sustainability.

V. Policy Discussions

19. The Article IV consultation was a timely opportunity to focus on medium-term policies and the reform agenda. The program is at the half-way point, and it is clear that the country is facing different problems than at the time of the last Article IV consultation. Key areas for discussion were:

  • how to strengthen macroeconomic stability and resume disinflation in the face of strong capital inflows and appreciation pressures;

  • the appropriate fiscal framework given development needs, including the importance of creating fiscal space through strengthened capital budgeting, and enhancing public sector efficiency by balancing employment with the need to attract high quality staff;

  • how to promote financial deepening, drawing on the FSAP update, and boost structural reforms to strengthen competitiveness; improve the business climate, accelerate privatization, and

  • the implementation of a targeted social assistance system to alleviate poverty, a core objective of the three-year PRGF arrangement.

A. Strong Challenges for Monetary and Exchange Rate Policy

20. There was consensus on the need to make price stability the overarching objective of monetary policy, despite lingering appreciation concerns. Strong appreciation pressures and capital inflows have complicated monetary policy, and the NBM has been faced with hard choices, as it is not possible to juggle inflation, exchange rate and interest rate goals. The FSSA stressed that lack of clarity about the central bank objectives has caused difficulties in policy implementation. However, staff noted that the NBM had recently strengthened its de-facto independence, establishing disinflation as its central objective, with a planned move to an inflation targeting framework over the medium-term. Further, it was agreed that:

  • Monetary policy should remain tight until disinflation is firmly reestablished. The mission and the authorities agreed that real interest rates on sterilization operations need to stay substantially positive until monetary pressures are eased. Moreover, an early further tightening should be considered if disinflation does not quickly resume. The 2008 monetary program proposes to lock in the overperformance in 2007 on NDA and NIR, and tighten reserve money to ensure the objective of single-digit inflation is achieved.

  • More exchange rate flexibility is needed to shoulder some of the burden of monetary tightening. While the authorities expressed some concern about the impact of the strengthening of the real effective exchange rate on competitiveness, staff argued that the exchange rate has some scope for further appreciation. Moreover, although the leu has strengthened against the dollar, appreciation of the nominal effective rate has been less pronounced. The joint understanding was reached that the NBM will only intervene to smooth excessive exchange currency fluctuations, and that any required recapitalization of the NBM due to high sterilization costs will be covered from the budget.3

uA01fig11

Nominal and Real Exchange Rates Jan. 2001–Aug. 2007

(Index, 2000=100)

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

Source: IMF staff calculations

21. There was agreement on the need to bolster these short-term policy changes with structural measures to strengthen the weak monetary transmission mechanism and build confidence. These focused on measures to reduce excess liquidity and strengthen the NBM signaling function (Box 4):

  • To ease liquidity pressures, the accounts of the Social Fund, the Health Fund and local budgets have been moved from commercial banks to the treasury single account at the NBM at end-2007, while the introduction of zero-balancing accounts is planned by end-June 2008. At the same time, the planned securitization of the government debt to NBM in the first quarter of 2008 will provide the central bank with an additional liquidity management tool.

  • Markets appear uncertain about NBM’s true objectives. To further improve policy effectiveness, the NBM intends to step up its policy communication strategy, streamline existing monetary instruments by adopting a base rate as its main policy rate by end-March 2008, and shifting sterilization operations to shorter maturities (MEFP ¶10).

  • The National Bank of Moldova and IMF staff organized an international conference in December on strengthening the monetary transmission process. The conference drew on the experience of countries in the region.

Interest Rate Channel of Monetary Transmission in Moldova 1/

Staff analysis indicates that the interest rate channel of transmission in Moldova is weak compared with more advanced European economies. The pass-through coefficient from the policy rate to money market rates is estimated at 0.27, while in more mature markets these are closer to unity. Pass-through from the money market to retail lending rates is also weak with a coefficient estimate of only 0.14 versus the average of 0.65 for the sample of selected countries in the region. Moldova appears to be a clear outlier. Its financial markets are segmented and there is no a well-established benchmark yield curve.

uA01bx04fig01

Banking Sector Liquidity, 2005

(Liquid assets/Total assets, percent)

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

uA01bx04fig02

Pass-Through in Selected European Countries

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

The main impediment to interest rate transmission in Moldova is excess liquidity. Unless the liquidity overhang is eliminated, transmission is likely to remain weak. Other factors undermining pass-through appear to be (i) the perceived uncertainty about monetary policy objectives, which undermines credibility of the NBM and weakens its signaling function; (ii) underdeveloped financial markets with an incomplete term structure of interest rates; and (iii) the lack of banking competition.

1/See Selected Issues Chapter I, ‘In Search of Monetary Transmission in Moldova’.

B. Fiscal Policy in the Face of Conflicting Needs

22. The authorities were concerned with striking a balance between development spending and disinflation needs. It was agreed that fiscal policy for 2008 would remain tight, while increasing spending on health and social assistance and protecting key investment projects, particularly on much-needed roads, where EBRD and EIB are supporting the government. In the medium-term, while keeping the budget deficit at 0.5 percent of GDP, the authorities plan to provide for greater fiscal space for social and investment spending through downsizing, reduction in spending inefficiencies, and strengthened tax administration.

Improving Structure of Expenditures, 2006-10

(in percent of annual GDP)

article image
Sources: Moldovan authorities and Fund staff projections.

23. The 2008 budget is prudent. The deficit target of 0.5 percent of GDP is consistent with the disinflation objective, implying higher negative domestic financing than in 2007. Negative domestic financing is likely to increase even further given the upside risks to privatization revenue. Despite the worldwide growth slowdown, overall revenue estimates are conservative, particularly revenue from VAT on remittance-financed imports, even though the budget has been squeezed by corporate and personal income tax cuts. The authorities proposed to spend any revenue overperformance, now estimated by staff at up to 1 percent of GDP, on investment. However, staff underscored that fiscal policy should remain tight and any spending of the overperformance be conditional on single digit inflation being firmly re-established. The authorities agreed to discuss any budget rectification in the framework of the Fourth Review (MEFP ¶6). The previously announced wage increase was scaled back, with the public sector wage bill projected to decline from 9.5 percent of GDP in 2007 to 9.4 percent in 2008, which is below the program ceiling of 10 percent of GDP, but still high for the region (Box 5). In support of the NBM’s efforts to bring inflation down to single digits, the quarterly profile of the fiscal program in 2008 envisages a balanced budget for the first half of the year.

Cooperation with World Bank on Public Administration Reform

Staff is working closely with the Bank on public administration reform. The ongoing World Bank Public Expenditure Review has identified the implementation of a transparent and uniform remuneration scheme and consolidation of school and health care networks as key reform areas. The number of budget sector workers is high by international comparison, particularly in the education sector. The public wage bill is also above regional averages: at a projected 9.9 percent of GDP in 2007, it is 2.4 percentage points higher than in peer countries. The 2008 wage increase, although scaled back, will continue to crowd out essential spending if downsizing is not considered. Public sector wages lag behind the private sector and a poorly designed pay structure creates difficulties in attracting and retaining skilled employees. The public sector rationalization plan under the PRGF is key for strengthening the link between the medium-term expenditure framework and public administration reform. Civil service reform is already part of the PRGF.

uA01bx05fig01

Budgetary Employment

(perecent of popultation)

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

uA01bx05fig02

Budgetary Monthly Wages to Industry Wages

(in percent)

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

uA01bx05fig03

General Government Wages: Share of Total

Expenditure, 2006

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

uA01bx05fig04

General Government Wages: Share of GDP, 2006

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

Sources of Deficit Financing, 2006-08

(in percent of annual GDP)

article image
Note: Net foreign financing includes project loans. Sources: Moldovan authorities and Fund staff projections.

24. Policy discussions on the medium-term framework focused on the need to create fiscal space given pressing development needs:

  • Staff welcomed the authorities’ intention to retain a fiscal deficit anchor of 0.5 percent of GDP, as reflected in the medium-term expenditure framework. While the DSA shows there would be room for modest additional borrowing, the fiscal anchor would support macroeconomic stability, and offset the projected decline in private savings, in line with the experience of other transition economies. At the same time, the authorities plan to create additional fiscal space to maintain social and investment spending, allowing a reduction in the overall footprint of the state.

  • It was agreed that strong revenue prospects provide a good opportunity for decisive reform of the public sector. In line with recommendations of the World Bank’s 2007 Public Expenditure Review, the authorities’ objectives are to reduce the size of public employment, especially in education, to consolidate school and health care networks and improve quality of service and education standards, and design a transparent and uniform remuneration scheme to closely align pay with skills (Box 5). The government’s medium-term action plan for rationalizing the public sector employment envisages downsizing of employment by 10,000 by 2010, with an initial reduction of 3,000 in 2008. As a first step towards development and implementation of a new wage grid, essential to rationalizing employment and increasing the quality of public services, by end-September 2008 the government—with the assistance of the WB and/or other donors—plans to approve a draft law, which will consolidate all forms of remuneration in base pay for civil servants, with a view to implementing it in 2009 (MEFP ¶7, ¶8). The rationalization of public sector employment and wage grid reform is estimated to reduce the wage bill by about 0.2 percent of GDP annually.

  • The mission welcomed the authorities’ strategy for strengthening tax administration. The reform effort in this area has been prompted by a tax amnesty implemented in May 2007, against staff advice, which canceled pre-2007 tax arrears and halted tax audits for the same period. The MEFP outlines the reform plan, which has been recently revised in accordance with the recommendations of the FAD TA mission. The key component of the reform is to strengthen tax enforcement and tax arrears management by upgrading the IT systems, developing prompt measures for forced arrears collection, and streamlining procedures for writing off uncollectible arrears. At the same time, all functions for assessing and collecting arrears, which are now spread among several entities, will be consolidated in the State Tax Inspectorate (STI), which will also be reorganized along functional lines (MEFP ¶9).

  • Staff stressed that timely implementation of a new targeted social assistance system will be key to reduce poverty. As noted in FAD’s poverty and social impact assessment (PSIA) report, the current system of social assistance based on social categories is poorly targeted.4 The new, means-tested system, whose methodology was adopted in early October, and which is scheduled to be implemented by end September 2008 (MEFP ¶27), promises to considerably improve targeting at an additional cost of about 0.2 percent of GDP in 2008.

C. Strengthening the Financial Sector

25. Overall, Moldova’s banking sector appears stable and vulnerabilities manageable. Robust capitalization and liquidity constitute a first-line buffer in case of possible distress, but may also indicate weaknesses in operating and risk management capacity. Rapid credit growth, partially funded through a decline in banks’ foreign assets, and high dollarization also need to be carefully monitored. In addition, high profitability of banks and high intermediation spreads suggest that competition may be inadequate. Ironically, underdevelopment and weak integration in international financial markets have helped Moldovan banks to weather external disturbances exceptionally well. The banking sector has proved to be remarkably resilient to external shocks, and the recent global liquidity squeeze had virtually no impact.

26. At the same time, the FSAP update highlighted the difficulty in introducing effective market reforms. Despite considerable efforts to strengthen the financial sector over past years, it continues to lag behind its peers in intermediating savings. Total assets and private sector credit have doubled since 2001, but at 54 percent and 31 percent of GDP respectively, the share of the financial sector in the economy is still small compared with more advanced countries in the region. More recently, a number of strategic foreign banks have started to show a keen interest in Moldova, but insufficient transparency of bank ownership continues to hamper development.

uA01fig12

Return on Assets, 2005

(Percent)

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

Source: IMF and Moldovan authorities
uA01fig13

Capital Adequacy Ratio, 2005

(Percent)

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

Summary of Key FSAP Update Recommendations

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27. Under the program, there was agreement on the importance of strengthening the supervisory and regulatory framework for the financial system, and promoting the transparency of bank ownership. To preserve independence and regulatory powers of financial sector supervisors, all entities regulated and supervised by the NBM and the NCFM have been excluded from the Law # 235 on Core Principles of Regulating Entrepreneurial Activities, which streamlines regulations of entrepreneurial activities (PA). Similarly, the draft licensing law, which was recently submitted to Parliament, will also be amended to that effect by end-March 2008 (PC). Further, to address the remaining weaknesses in transparency of bank ownership, the NBM will step up its efforts in identifying beneficial owners and study best international practices, especially those of EU countries, in applying ‘fit and proper’ test for significant shareholders (MEFP ¶16).

28. The staff were encouraged by the authorities’ commitment to accelerate the privatization of the majority state-owned Banca de Economii (BEM) to a strategic banking investor, long seen as critical for enhancing competition. As mandated under the program, the authorities held an international tender for selecting a consulting company for the bank evaluation. However, in consultation with staff, negotiations have subsequently been revoked because of the winner’s unwarranted demands for exclusive proprietary rights to share information obtained during the evaluation and to advise on the sale of the bank after evaluation. Instead, the authorities have decided to skip this stage and will announce a new tender for a privatization advisor by end-March 2008, and will select a winner by end-September with a six-month timeframe for bringing BEM to market (MEFP ¶14). In the meantime, they will continue to abstain from granting any preferential treatment to the bank.

D. Boosting Structural Reforms

29. The authorities showed strong commitment to advancing transition by bolstering reforms designed to improve the investment climate and clarify the role of the state in the economy. Important initiatives include: the ongoing regulatory reform, which is intended to streamline the procedures for business licensing and registration in the non-financial sector, including setting-up a one-stop shop service, and optimizing the institutional structure and functions of controlling bodies to reduce business harassment; revision of insolvency legislation and development of bankruptcy procedures in accordance with best international practices; strengthening competition legislation and the effectiveness of the National Agency for Protecting Competition; implementation of the Strategy for Attracting Investments and Promoting Exports; strengthening product quality testing capacity and further liberalizing foreign trade by removing quantitative restrictions on imports of meat and dairy; and adoption of the law on public-private partnerships (PPP).

30. Staff noted that the zero-rated CIT is not likely to bring new FDI without improvements in the business climate. With declining CIT rates in other countries in the region, the relative importance of the overall institutional quality is likely to increase further (Box 6).

Zero Corporate Income Tax in Moldova and its Implications for Tax Competition1/

Global economic integration has intensified tax competition over mobile capital. This led to significant declines in corporate income tax (CIT) rates in Western and Eastern Europe during the last decade. Further cuts in CIT are likely to continue in the near future (in 2008 alone, ten countries in Europe reduced corporate tax rates). The declining CIT rates raised concerns about tax competition and the resulting “race to the bottom”, which could undermine public investment and social spending.

uA01bx06fig01

CIT rate in EU-15 and Eastern Europe

(unweighted average)

Citation: IMF Staff Country Reports 2008, 139; 10.5089/9781451825152.002.A001

The Moldovan zero CIT could encourage further cuts in CIT. Countries in Eastern Europe strategically respond to changes in CIT rates in the region. Corporate tax in the region are likely to further decline. Evidence suggests that FDI flows in the region will not be much affected, because taxes seem to have only secondary importance in attracting FDI. However, revenues are likely to decline. More positively, the shift in the composition of tax revenue towards consumption and labor taxes may increase economic efficiency, but at the cost of a decline in equity.

1/See Selected Issues Paper Chapter II, ‘Zero Corporate Income Tax in Moldova: Tax Competition and its Implications for Eastern Europe’.

31. In a welcome initiative, the authorities have decided to revitalize the stalled privatization process. The authorities recently published privatization list is a strong statement that they are committed to private sector development and reducing the role of the state. However, they were concerned that spending of privatization proceeds was constrained by the fiscal deficit limits under the program. In response, staff reiterated the importance of reducing inflation to single digits for macroeconomic stability and noted that quick progress on disinflation would already have provided more room for spending by the time privatization revenues materialized. At the same time, staff concurred that transparent privatization efforts that target strategic investors could become a catalyst for growth and provide a powerful signal of business-friendly policies.

32. The mission welcomed the government’s decision to sell remaining large state enterprises, where private involvement can bring new investment and provide a catalyst for growth. Specifically, they plan to reopen the privatization of Moldtelecom, the incumbent telecommunications operator. There is evidence that Moldtelecom’s privileged position distorts the telecommunication market. The World Bank has indicated its willingness to support the government’s efforts in this area, suggesting that consideration of privatization should be situated within a wider reform process that includes measures to bolster competition and liberalize the market to ensure distortions are removed. The authorities agreed to a structural benchmark on selecting an advisor to look at the modalities for possible privatization through an open tender by end-September 2008 (MEFP ¶19).

33. The implementation of utility tariff reform became controversial for heating, threatening the financial viability of the utility, Termocom. In line with past program conditionality, the regulator, ANRE, now calculates the cost-recovery tariff using appropriate inputs and normal rate-of-return methodology. However, it is the municipality that sets the actual tariffs paid to the utilities. In January 2007, the municipality of Chişinău set heat tariffs at cost recovery, but subsidized households. The municipality subsequently disputed the inputs to the methodology, arguing that the cost recovery tariff was lower (implying lower subsidies needed for households). In December 2007 the municipality canceled its earlier decision to raise tariffs and subsidize households, resulting in a build-up of arrears to Termocom. Heat tariffs have been restored to their previous cost-recovery level of lei 540 in January 2008 following a court decision. To avoid future disruptions in the heating sector, the authorities request a continuous structural benchmark that heat tariffs received by utilities be set at cost-recovery following the ANRE methodology, and that in cases of disputes, a lower tariff than provided by ANRE would imply new domestic expenditure arrears under the program (MEFP ¶27). To ease the burden on the poor, an interim municipal assistance scheme will be put in place until the introduction of a new targeted social assistance system in September 2008.

34. The authorities at times have shown a tendency to intervene in the trade regime through administrative measures, though the regime remains generally open. Moldova is a WTO member and benefits from both a free trade agreement with CIS countries and, from March 2008, an ATP with the EU. With world grain prices rising and volatile, several proposals to ban or limit wheat exports have been floated. In addition, the cumbersome new system for approving meat and dairy imports implemented in early 2007 is a worrying signal to potential foreign investors.5 The authorities agreed to a structural benchmark to remove the existing restrictions on meat and dairy, and to refrain from imposing any new restrictions in the future.

35. With the program at a halfway stage, discussions focused on key reforms for the remainder of the PRGF arrangement. It was agreed that high priority should be given to consolidation of the independence of the financial regulators with appropriate amendments to the ‘Guillotine law’ (PA) and licensing law (PC). Other core conditionality focuses on addressing the deteriorating financial condition of the heating sector, which has also undermined the fiscal position of the general government, the ongoing privatization of Banca de Economii to enhance competition in the banking sector and strengthen the monetary transmission process, and the rationalization of the public sector. On the latter, key measures include initial reforms of the payroll and the downsizing needed to achieve the overall spending objectives in the medium-term framework, as well as the privatization of the remaining two large state enterprises (BEM and Moldtelecom) which tie up substantial state resources and hamper competition in key strategic sectors.

VI. Program Issues

36. The authorities request to drop two structural benchmarks under the program.

Given the strengthened independence of ANRE, which sets natural gas and electricity tariffs according to normal rate-of-return methodology, and the demonstrated effectiveness of the system for these items, it is proposed to drop a continuous SB that these tariffs remain at cost-recovery levels.6 On the transfer of tariff-setting responsibility for heat to ANRE, the missed end-September SB, the authorities indicated that it does not comply with the constitutional division of rights between local and central governments. The staff agreed to propose dropping this condition from the program, but pointed out that unless the effectiveness of the current system in setting tariffs for heat and water at cost-recovery is demonstrated, the Fourth Review would return to this issue. The new structural conditionality for the review is summarized in the text table.

37. The authorities have prepared the National Development Strategy (NDS), which will replace the EGPRSP. The medium-term objectives of the NDS are: (1) strengthening democracy based on the rule of law and respect for human rights; (2) settling the Transnistrian conflict and reintegration; (3) enhancing competitiveness and the business environment; (4) enhancing employment and promoting social inclusion; and (5) developing regions. Staff discussed measures under the PRGF arrangement to support competitiveness and the business environment as well as the new social assistance system. The Bank has greater expertise in labor market and rural development issues. The JSAN, prepared jointly staffs of the IMF and the WB, summarizes the assessment.

Prior Actions, Performance Criteria and Structural Benchmarks

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VII. Staff Appraisal

38. Much has been achieved despite the shocks:

  • Growth remains robust. Investment is picking up, and is beginning to replace remittances as the main driver of the economy. Poverty has fallen, and Moldova has been reclassified as a middle-income country.

  • The PRGF arrangement remains on track. Program implementation under the Third Review has been satisfactory, and the authorities’ policies for 2008 are appropriately ambitious, with a welcome pick-up in the pace of structural reforms, despite the upcoming elections.

39. But much remains to be done, and the challenges are considerable:

  • Moldova’s progress has not come without tests. Transition has brought with it strong capital inflows, appreciation pressures, and a widening trade deficit.

  • The authorities have few policy levers to address these pressures. The impact of monetary policy is compromised by a weak transmission mechanism, and fiscal policy is burdened with large development needs.

40. Monetary policy needs to play a major and strengthened role. Inflation at 13 percent at end 2007 is higher than we had hoped, even accounting for the drought. Continued strong foreign exchange inflows and reserve money growth suggest the upside risks to inflation remain. The recent tightening by the National Bank and its commitment to establish price stability as its sole objective is therefore welcome. However, it needs to be prepared to allow greater exchange rate flexibility, and to tighten its policy rate further if disinflation does not resume.

41. Overall, vulnerabilities of the financial sector appear manageable, but reforms to deepen financial markets will be important to help strengthen the effectiveness of monetary policy. In line with the FSAP update, these should focus on strengthening the supervisory and regulatory framework, restructuring of the central bank with a view to eventual introduction of inflation targeting, and promoting transparency of bank ownership. The privatization of the majority state-owned bank should also help inject greater competition into the system. The authorities should ensure that implementation of the new AML/CFT law is effective.

42. Fiscal policy has to play its part. The 2008 budget does a reasonable job in balancing development needs with disinflation. Modest fiscal deficits are an appropriate compromise. Nevertheless, the budget should remain tight until single digit inflation is firmly established, with the scope for higher development expenditure assessed at the time of the next review. Revenue performance will be helped by robust VAT on imports, which is likely to partly offset the impact of the earlier tax cuts. Social spending has been raised, investment remains high, and the effects of the recent wage increases limited.

43. Strong revenue prospects provide an opportunity for decisive public sector reform. The authorities’ plans for reducing the size of the public sector, introducing a transparent and attractive remuneration system, and consolidating education and health care networks, are all important steps to ensure the efficient management of scarce public resources and establish a modern public administration.

44. The authorities’ commitment to strengthen tax administration is welcome. The reforms, which draw on Fund technical assistance, should help avoid reemergence of the problems with tax arrears that we saw at the time of the last review.

45. The structural reform agenda remains long. Moldova continues to score unfavorably on most transition indicators. The second ‘Guillotine law’ is an important initiative to improve business licensing, but just as important will be planned measures to curtail discretionary powers of officials and to revitalize the privatization process to promote private sector-based growth.

46. The instinct for state intervention is nevertheless strong. This is seen most clearly in the trade sector where numerous initiatives have obstructed the normal workings of the trade system. The authorities have undertaken to remove recently imposed import restrictions, but attitudes are likely to take longer to change.

47. Modernization of the energy sector should remain high on the authorities’ agenda. The establishment of cost recovery tariffs in the heating sector will help alleviate the weak financial condition of the energy sector, and staff have encouraged the authorities to work with the Bank on broader energy reforms.

48. The staff assessment of the exchange rate raises no major concerns regarding external sustainability, with room to accommodate appreciation pressures. The current exchange rate appears to be broadly in line with fundamentals. With considerably lower labor costs and higher productivity growth compared to the region, there is scope for further appreciation without undermining competitiveness.

49. The staff recommends completion of the third review. Performance under the program has been satisfactory, and policies for 2008 remain appropriately ambitious.

50. It is proposed that the next Article IV consultation with Moldova remain on a 24-month cycle in line with the provisions of the decision on consultation cycles in program countries.

Table 1.

Moldova: Selected Indicators, 2005–10 1/

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Sources: Moldovan authorities; and Fund staff estimates.

Data exclude Transnistria.

For 2005, includes the positive effect of reclassification of $43 million.

Includes private and public debt.

Table 2.

Moldova: Balance of Payments, 2005–12

(In millions of U.S. dollars; unless otherwise indicated)

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Sources: National Bank of Moldova; and Fund staff estimates and projections.

Includes prospective disbursements.

Includes revaluation changes, which are not captured by changes of gross official reserves in the BoP.

Including energy arrears.

Table 3.

Moldova: General Government Budget, 2005–10

(In millions of lei; unless otherwise indicated)

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Sources: Moldovan authorities; and Fund staff estimates and projections.

Includes lei 250 mln of NBM recapitalization.

Table 3a.

Moldova: General Government Budget, 2007–08

(In millions of lei; unless otherwise indicated)

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Sources: Moldovan authorities; and Fund staff estimates and projections.
Table 4.

Moldova: Accounts of the National Bank of Moldova and Monetary Survey, 2006–08

(In millions of lei; unless otherwise indicated)

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Sources: National Bank of Moldova; and Fund staff estimates and projections.
Table 5.

Financial Sector Indicators, 2001–07

(End-of-period; in percent, unless otherwise indicated)

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Source: National Bank of Moldova.

Total regulatory capital over total risk-weighted assets.

Liquid assets over total deposits.

Table 6.

Moldova: Localized Millennium Development Goals (EGPRSP)

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The methodology was changed from 2006.

Sources: Economic Growth and Poverty Reduction Strategy Paper (EGPRSP) 2004-06, EGPRSP Monitoring Unit
Table 7.

Moldova: External Financing Requirements and Sources, 2004–10

(In millions of U.S. dollars)

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Sources: Moldovan authorities; and Fund staff estimates.

Excluding the IMF.

Original maturity of less than 1 year. Stock at the end of the previous period.

Includes those transactions that are undertaken for the purpose of financing a balance of payments deficit or an increase in reserves.

Includes both loans and grants.

Includes all other net financial flows, and errors and omissions.

Table 8.

Moldova: Capacity to Repay the Fund, 2005–16

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Source: Fund staff calculations

Based on existing and prospective drawings

Table 9.

Moldova: Reviews and Disbursements Under the Three-Year PRGF Arrangement

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Table 10.

Moldova: Status of Structural Performance Criteria and Benchmarks

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Table 11.

Moldova: Quantitative Performance Criteria and Indicative Targets, December 31, 2006–December 31, 2007 1/ 2/

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Sources: Moldovan authorities; and Fund staff estimates.

Numbers for 2007 refer to cumulative flows from end-2007, unless noted otherwise. Quantitative targets are based on the accounting exchange rate of MDL 13.2911/US$.

All variables are stocks, except general government fiscal balance and concessional external debt borrowing, which are flows.

In case disbursements of external debt exceed the program assumptions, the limits on the overall cash deficit of the general government will be increased by the corresponding amount up to a cumulative cap of MDL 200 million. In the case of shortfalls, the limits will be decreased by the full amount.

In accordance with the TMU, the 2006 deficit limit was increased by MDL 250 mln - by the amount of paid in cash for recapitalization of the NBM.

See MEFP ¶19 and TMU ¶15.

Table 11.

Moldova: Quantitative Performance Criteria and Indicative Targets, December 31, 2007–December 31, 2008 1/ 2/

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Sources: Moldovan authorities; and Fund staff estimates.

Numbers for 2008 refer to cumulative flows from end-2007, unless noted otherwise. Quantitative targets are based on the accounting exchange rate of MDL 13.2911/US$.

All variables are stocks, except general government fiscal balance and concessional external debt borrowing, which are flows.

In case disbursements of external debt exceed the program assumptions, the limits on the overall cash deficit of the general government will be increased by the corresponding amount up to a cumulative cap of MDL 200 million. In the case of shortfalls, the limits will be decreased by the full amount.

1

The pass-through from higher prices for imported natural gas has been small, since 90 percent of natural gas is consumed by households and its CPI share is only 2 percent.

2

Both projects are co-financed by IDA, and the authorities hope to raise additional co-financing to raise the concessionality of later disbursements.

3

In 2007 the NBM suffered large unrealized losses due to appreciation. However, thanks to the strengthened capital structure of the central bank, no recapitalization will be needed.

4

The PSIA report estimates that 55 percent of assistance goes to households from the upper 60 percent of income distribution, while more than 80 percent of the poorest households do not receive any benefits.

5

Companies face weekly quantitative restrictions on imports, and have to reapply for permission. This has led to shell companies being set up, and approvals are regarded as politically influenced and opaque.

6

The agreement with Gazprom calls for a gradual increase in gas import prices to European levels by 2011.

Attachment I

February 19, 2008

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

700 19th Street NW

Washington, DC 20431 USA

Dear Mr. Strauss-Kahn:

The attached Memorandum of Economic and Financial Policies(MEFP) for 2008 describes policies and measures we intend to implement this year and for which we request the support of the International Monetary Fund under the three-year arrangement under the Poverty Reduction and Growth Facility (PRGF). These policies are consistent with our National Development Strategy (NDS) as well as with the action plan agreed between the European Union and the Republic of Moldova.

Now that the external shocks have receded, the government and the National Bank believe that all efforts should focus on the core goals of the program, which are to promote sustainable growth and reduce poverty. To this end, the policies set forth in the attached memorandum aim at ensuring macroeconomic stability and financial sector development, and improving the business environment, including through reduction of the footprint of the state in the economy. In addition, in consultation with the Fund, we will take additional measures that may become appropriate for reaching these objectives.

We implemented all end-September performance criteria under the program, as well as prior actions for this review, and hereby request completion of the third review under the PRGF arrangement.

We will communicate to the IMF the information needed to monitor progress in implementing the program, and will conduct discussions with the Fund for the fourth review under the PRGF arrangement before end-May 2008. We anticipate that the fourth review under the PRGF arrangement will be conducted based on end-March 2008 data and be completed before end-June 2008. The Fifth Review will be based on end-September 2008 data, to be completed by the year-end.

We are committed to transparency, and thus we authorize the IMF to disseminate the MEFP and the associated Technical Memorandum of Understanding, as well as staff report that will be examined by the IMF Executive Board.

Sincerely yours,

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Attachments: Memorandum of Economic and Financial Policies for 2008 Technical Memorandum of Understanding

Attachment II. Memorandum of Economic and Financial Policies

February 19, 2008

A. Introduction

1. Building on the progress achieved over the past 2 years under the program supported by the three-year arrangement under the Poverty Reduction and Growth Facility (PRGF), this memorandum summarizes our strategic priorities for 2008 and sets forth policies and reform objectives.

2. Despite severe external shocks suffered by Moldova in 2006, macroeconomic developments this year have been favorable. The national economy grew by 8 percent in the first half of 2007, though it slowed thereafter due to a weak harvest caused by the summer drought. As a result, we expect GDP growth to reach 5 percent for the year, up from 4 percent in 2006. Export performance has been encouraging and the recovery is likely to accelerate further as wine exports to Russia resumed from the fourth quarter of 2007. While imports grew even faster, fuelled by rapidly increasing FDI and strong remittances, the current account deficit has still narrowed due to improvements in net income and transfers. Successful disinflation in the first six months of 2007 was set back by the drought. At 13.1 percent CPI inflation remains high for the region. Strong inflows of foreign exchange and the global weakening of the US dollar led to an appreciation of the leu, which strengthened by 12 against the dollar and by 2 percent against the Euro since the beginning of the year.

B. Performance under the Program

3. Except for a few instances, the government and NBM have implemented the measures under the updated Memorandum on Economic and Financial Policies (MEFP) of June 14, 2007. In particular, by September 30 the following actions have been completed:

  • a. On May 4, 2007 the parliament of Moldova approved the Law on Public Property Management and Divestiture. Furthermore, the government approved resolutions on (i) privatization of state-owned public land; (ii) measures to implement the Law on Public Property Management and Divestiture; and (iii) the structure and regulation of the Public Property Agency under the Ministry of Economy and Commerce;

  • b. On June 7, 2007, parliament approved Law #129-XVI, which effective July 6, 2007, established the National Commission for Financial Markets (NCFM) to take on the responsibility for supervision of insurance and capital markets, non-state pension funds, and loan and savings associations. To make the new body operational, parliament appointed the administrative board and the management of the NCFM, which in turn approved the organizational structure on August 3, 2007;

  • c. The concept paper on “Rationalization of the Number of Employees in the Budgetary Sector for 2008-2010” was approved on September 28, 2007, imposing a limit on the public sector wage bill of 10 percent of GDP. Since then the paper has been further revised to include a time-bound plan to downsize public employment, implementation of a new wage system for public servants, and an assessment of the fiscal impact;

  • d. On September 28, 2007, the prime-minister approved an action plan for improving the tax arrears management. We have further updated the plan based on recommendations of the FAD TA mission;

  • e. The draft 2008 Budget Law approved by the government on September 27, 2007 includes an assessment on financial performance in 2006 of state-owned enterprises and joint stock companies in which the state is the majority shareholder.

  • f. The plan for converting government’s debt into state securities was adopted by the Ministry of Finance on September 10, 2007 and by the National Bank of Moldova on September 12, 2007.

At the same time, four structural benchmarks were not observed:

  • The end-September structural benchmark on adoption of the targeted social assistance system was implemented on October 3, 2007. The government approved the draft Law on Social Assistance, which aims at ensuring a guaranteed minimum monthly income to vulnerable households based on proxy means testing;

  • The passage of the legislation ensuring that ANRE establishes tariffs for heat and water directly, rather than indirectly through the municipality, was not implemented because of legal uncertainty about the conformity of this measure with the constitutional division of responsibilities between local and central governments;

  • Tariffs for water were raised to cost-recovery in October, but the heating tariffs in Chisinau were not increased.

  • The municipal budget made only partial payment for the difference between the amount paid by households for heat and the cost recovery level. At end-September the arrears equaled about lei 50 million, down from lei 160 in April.

C. Program Objectives

4. The government’s medium-term objectives are outlined in the newly developed Strategy for 2008-2011 (NDS), which will replace the Economic Growth and Poverty Reduction Strategy Paper (EGPRSP). Unlike earlier practices in developing national strategies, this document focuses on a well-defined list of strategic priorities, both economic and political. The draft NDS Strategy includes five fundamental priorities:

  • strengthen a modern democratic state, based on the principle of rule of law;

  • settle the Transnistrian conflict and promote the reintegration of the country;

  • enhance national economic competitiveness;

  • develop human resources, raise the employment level, and promote social inclusion, and;

  • promote regional development.

In addition to setting out our medium-term priorities, one of the NDS goals is to integrate in one single strategy the key external commitments of the Republic of Moldova (without substituting bilateral policy papers) and to establish a single system to monitor the fulfillment of these commitments.

5. The main objective for 2008 remains unchanged: facilitating poverty reduction by ensuring macroeconomic stability and sustainable economic growth. We hope to achieve this objective by modernizing the public service and reducing state involvement in the economy, developing the financial sector, creating a favorable investment environment, encouraging the development of small and medium businesses, rehabilitating infrastructure, promoting exports, creating new jobs and providing social protection to vulnerable categories of the population. These objectives - that incorporate the achievement of the Millennium Development Goals - are reflected in the NDS.

D. Fiscal Policy

6. Fiscal policy for 2008 will remain tight, given continuing high inflation and the need to ensure macroeconomic stability and build confidence in the program. The government will keep a budget deficit of 0.5 percent of GDP. Any budget rectification will be discussed in the framework of the fourth review. Our priority is to channel overperformance to investments, which have a minimal inflationary impact.

7. While budget wages have been increased by 45 percent in 2006 and 12 percent in 2007, they remain insufficient for attracting and keeping qualified employees, many of whom have opted for a job in the private sector or abroad. To improve competitiveness of the public sector, wages will be increased by another 23 percent in 2008, though the total wage bill will be kept below 10 percent of the GDP, owing to a phasing in of the increases. However, we realize that raising salaries will not increase public sector effectiveness unless accompanied by bold reforms. For that purpose, the government plans to start implementation of the medium-term action plan for rationalizing the structure of employment in the budget sector for 2008-2010. which envisages:

  • downsizing of employment by 10 thousands by 2010, with a initial reduction of 3 thousands in 2008, and

  • the government approval of a draft law, which will consolidate all forms of remuneration in base pay for civil servants by end-September 2008, with a view to implementing it in the 2009 budget year.

8. Part of the savings from the optimization of staffing will be used towards improving the quality of public service. Moldovan authorities are to develop annual plans for the implementation of the program with plans for 2008 completed by end-March 2008, which should include, but not be limited to budget sector staff inventory; review of wage and non-wage payments to staff; and assessment of sector needs for highly qualified staff. Restructuring in the education sector will focus on rationalization of educational establishments.

9. To promote foreign and domestic investments in 2007, we announced a major reform of the corporate income tax system, as well as a wide-ranging amnesty of tax arrears and a liberalization of capital legalization regulations. We are aware that these reforms imply certain risks, in particular with respect to budget revenues. To address these concerns, we intend to speed up the implementation of Tax Administration Strengthening Strategy. The plan, which was adopted in September 2007, has now been updated to reflect recommendations of the FAD TA mission. It aims at strengthening the tax arrears management system, which will improve accounting of tax arrears to allow distinction of arrears by vintage, introduce a set of prompt unconditional measures for forced arrears collection, amend the current legislation to ensure a shorter, more streamlined procedure for writing-off uncollectible tax arrears, and consolidate all functions for assessment and collection of arrears in a single agency. The State Tax Inspectorate (STI) will be reorganized along functional lines, beginning with headquarters. By March 2008, we will adopt legislation to allow STI to write off uncollectible tax arrears. At the same time, we will develop a modern accounting and information technology platform, and ensure adequate resources for these reforms.

E. Monetary Policy

10. In 2008 the National Bank of Moldova will continue to pursue its main objective of price stability. The monetary policy stance will remain tight with the aim to resume disinflation and achieve single digit levels by the year-end (December-to-December). For that purpose, real interest rates on sterilization operations will be kept sufficiently positive in real terms until disinflation is well entrenched. Moreover, we stand ready to promptly increase reserve requirements and/or interest rates at the first signs of reversal of trend disinflation. Liquidity pressures are expected to be further eased by the transfer of the remaining deposits of the Social Fund, the Health Fund and territorial budgets from commercial banks to the Treasury Single Account at the NBM at end-2007, and the introduction of full zero-balancing by end-June 2008. To further improve effectiveness of monetary policy, the NBM will streamline its instruments by adopting a base rate as a main policy rate to remove the ambiguity between the two rates, and shifting sterilization operations to shorter maturities. At the same time, the planned securitization of the government debt to NBM in the first quarter of 2008 will provide the central bank an additional liquidity management tool.

11. The NBM will maintain a flexible exchange rate regime to ease the burden on monetary policy tightening. If inflows of foreign exchange and appreciation pressures persist, the NBM will intervene only to smooth excessive fluctuations of the national currency, while allowing markets to determine the exchange rate. We expect foreign exchange reserves to reach USD 1.7 billion, or at least 3 month of imports, by the end of 2008. While continued appreciation of the leu and growing sterilization costs may weaken the financial position of the NBM, we are committed to the disinflation objective, which will not be compromised for NBM profitability considerations. Any need to recapitalize the NBM will be met by the government in accordance with the NBM law. The NBM will develop an early warning system that it will use to detect potentially disruptive economic developments, including large capital flows

12. We are planning to move to a formal inflation targeting (IT) framework at an appropriate time in the future. Although we are aware that Moldova is not yet ready to implement IT, we are nevertheless undertaking intermediary steps to improve the current framework of monetary policy and lay the foundation for a new regime. Starting with the 2008 Budget, the Budget Law will no longer oblige the NBM to roll over state securities, including those acquired through securitization. Instead, the NBM and the Ministry of Finance will conclude yearly agreements on the annual redemption of state debt to the NBM. We will further improve our communication strategy and policy transparency to raise public awareness of risks to inflation and to strengthen the signaling function of the NBM. To help us achieve our objectives, we have requested technical assistance—a long-term advisor-- from the Fund in monetary research and capacity building for monetary policy implementation. As a first step, in line with MCM TA recommendations, the NBM will restructure its research and monetary policy department, and will hire new qualified staff.

13. The NBM will extend its supervision over all parts of the payment system, including those that are operating outside the central bank

F. Financial Sector Reforms

14. In order to strengthen competition in the banking system, we intend to accelerate privatization of Banca de Economii (BEM) to a strategic banking investor. Our previous plan to perform an independent valuation of the bank prior to bringing it to market has stalled due to unwarranted demands by the selected evaluation advisor. Instead, we have now decided to hire directly a privatization advisor. For that purpose, by end-March 2008 we will announce a tender for selecting a privatization advisor and by end-September 2008 will sign a contract with the winner with a 6-month timeframe for bringing BEM to market. In the meantime, the government and the NBM will continue to abstain from granting preferential treatment to the bank, including as regards taxation, prudential regulation or access to resources.

15. The establishment of the NCFM in June 2007 as a regulatory and supervisory body for the non-bank financial sector was the first step aiming at strengthening this segment of the financial market. We will ensure a solution for the stable financing of the NCFM, and financial sector supervisory/regulatory agencies will be required to conclude formal agreements of cooperation with each other. The medium-term goal is to promote development of capital and insurance markets, the market for non-state pension funds, and the micro-credit institutions by reducing risks and vulnerabilities, increasing transparency, updating the regulations in conformity with the best international practices, and encouraging introduction of new financial products. To this end, we intend to request technical assistance from international financial institutions.

16. The government and the NBM will continue to strengthen the supervisory and regulatory framework for the financial system and ensure transparency to promote stability and steady development. Following the recommendations of the recent FSAP update, to preserve independence and adequate powers of financial sector regulators, all entities licensed, regulated and supervised by the NBM and/or the NCFM have been excluded from the provisions of the law #235 on the Core Principles of Regulating Entrepreneurial Activity, which was adopted by Parliament at end-2007. Similarly, the draft licensing law now before Parliament will also exclude the financial sector and delegate the full licensing authority in this area to the NBM and the NCFM. Further, to strengthen transparency of bank ownership and control, following FSAP update recommendations, we will step-up our efforts in identifying beneficial owners of banks and will study best international practices, especially those of EU countries, in applying ‘fit and proper’ tests for significant shareholders.

17. The parliament of Moldova has adopted a new Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) Law (drafted with the assistance of the IMF and other partners). We will continue revision of associated laws to bring the AML/CFT framework of Moldova in conformity with the international standard. With the assistance of the IMF and others, we intend to strengthen the capacity of the Financial Intelligence Unit, as well as of the NBM in preventing and combating money laundering and the financing of terrorism, and streamline AML/CFT procedures to reduce the burden of compliance.

G. Other Structural Reforms

18. External shocks faced by the Republic of Moldova during the last two years have revealed the country’s limitations with regard to competitiveness and resilience towards potential macroeconomic risks. Government agenda for 2008 will include structural measures aimed at building the economy’s resilience to external shocks and laying a sustainable foundation for strong inclusive growth. In this context, the central public administration reform, as well as the reform of the business regulatory framework will continue, while measures will be taken to encourage private sector investment. To increase competitiveness, special attention will be paid to improving the quality of infrastructure. To that effect, we will ensure that public investment in infrastructure is sustained at a high level.

Privatization, Trade Policy and Investment Promotion

19. A component of our strategy will be the acceleration of the privatization of public assets to attract know-how and promote private sector development. A clear statement of our commitment to private sector development will be the selection of an advisor through an open tender by end-September 2008 to assess the modalities for the possible privatization of Moldtelecom. Our objective is to continue the privatization of state assets through a competitive and transparent process. Any adjustor for the use of possible excess privatization revenues will be discussed with the IMF during the fourth and subsequent reviews. In the meantime, in line with the recommendations of the IMF, OECD guidelines, and international best practice, we will seek technical assistance from international institutions to strengthen financial discipline of remaining state enterprises, set up procedures to select management of state enterprises through a competitive process.

20. By the end of this year, Moldova will benefit from an autonomous trade preferences regime with the EU. For businesses to benefit from the new trade regime, the government will make efforts to improve the quality of management systems in Moldova. In this context, a number of actions will be undertaken: (i) the National Program for the Development of Technical Regulations by Converting the Relevant Normative Acts of the EU will be fully implemented; (ii) the structure of the laboratories for testing and ensuring the product quality will be assessed and a strategic plan for further strengthening and development of the laboratories will be developed; (iii) the National Training Program for Businessmen in Quality Management, Modern Techniques for Ensuring the Quality of Produced Goods (ISO), and Systems for Ensuring Safety at Enterprises (HACCP) will be developed and implemented; (iv) guidance manuals for consumers will be developed to increase public awareness and literacy in quality standards.

21. The National Competition Protection Agency will adopt a clear definition of state aid, to avoid confusion of such terms as subsidies, subventions, tax facilities, to set clear rules for granting state aid in 2008.

22. To encourage investment inflow into the national economy in 2008, Government will make efforts to implement the actions set by the 2008 Action Plan for the Implementation of the Strategy for Attracting Investments and Promoting Export for 2006-2015. Strengthening of small and medium business is one of the key elements that will contribute to economic growth and poverty reduction in the Republic of Moldova. To support SME development, the Organization for SME Sector Development was established, and its capacity will continue to be built next year. During 2008 Government will continue implementation of the actions set in the Strategy for SME Development Support and will ensure compliance with the provisions of the SME Law.

23. To diversify ways to attract investments, the Law on Industrial Parks was approved. Thus, based on the performance indicators for investment attraction to the North, Center, and South regions we are planning to establish the first pilot industrial parks in 2008 in several settlements in these regions. These projects will have a minor impact on the budget, and will be implemented in a way that will eliminate any economic distortions. Government will be looking for ways to attract private investors in the process of industrial parks’ management.

24. The government approved the law on public-private-partnerships (PPP) in December 2007. Parliament will adopt the law by end-July 2008, and the PPP unit will be fully operational by the end of 2008. In addition to reporting to parliament any contingent liabilities that could be introduced through this mechanism, and assessing the potential fiscal impact that would be included in the budget, we intend to consult with the IMF before concluding any significant PPP arrangements.

25. The non-accumulation of external payments arrears, as defined in the TMU, will constitute a continuous performance criterion, as will our commitment not to impose or intensify restrictions on current payments, introduce multicurrency practices, including bilateral payments agreements that are inconsistent with Article VIII, or imposing or intensifying import restrictions for balance of payments reasons. The government will remove the recently imposed quantitative import restrictions on meat and dairy products by June 2008.

Enhancing the Business Environment and Regulatory Reform

26. With the aim to improve the business climate, the government intends to streamline the regulatory environment in the non-financial sector by substantially reducing excessive licensing, permit and authorization requirements; burdensome and loosely regulated activities of controlling bodies; and proliferation of public services provided for fees. In particular, the new licensing law that will be effective by March 2008, will establish a more liberal, consolidated and transparent licensing system valid for all licensing authorities except for the NBM and the NCFM, and set up a free of charge access for the public (through the internet) to register licenses. At the same time, Government will take steps to optimize the institutional structure and the functions of the state control bodies, focusing mostly on supervision of activities in the non-financial sector without on-site visits, and carrying out inspections only if information is gathered during supervision that shows that enterprises are violating current legislation. Starting with 2008, all informative notes accompanying new draft acts will include regulatory impact analyses. In addition, during 2008 one stop-shop services will be launched for relevant public services. Insolvency legislation will be reviewed taking into account the best international bankruptcy practices.

27. Tariffs for natural gas and electricity have stayed at cost-recovery levels, for all consumer categories. Moreover, as energy prices change, these tariffs will also adjust accordingly in line with the ANRE methodology. As a prior action, tariffs for heat will be set at the cost-recovery level according to the ANRE methodology. As originally planned, the new system of targeted social benefits will be put in place by September 30, 2008. As an interim measure, appropriate social assistance for those that cannot afford the higher tariffs will be put in place

Table 1.

Prior Actions, Performance Criteria and Structural Benchmarks

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Attachment III. Technical Memorandum of Understanding

1. This Technical Memorandum of understanding (TMU) defines the variables subject to quantitative targets (performance criteria and indicative benchmarks as shown in Table 1), established in the Memorandum of Economic and Financial Policies (MEFP) and describes the methods to be used in assessing the program performance with respect to these targets.

Table 1.

Moldova: Quantitative Performance Criteria and Indicative Targets, December 31, 2007–December 31, 2008 1/ 2/

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Sources: Moldovan authorities; and Fund staff estimates.

Numbers for 2008 refer to cumulative flows from end-2007, unless noted otherwise. Quantitative targets are based on the accounting exchange rate of MDL 13.2911/US$.

All variables are stocks, except general government fiscal balance and concessional external debt borrowing, which are flows.

In case disbursements of external debt exceed the program assumptions, the limits on the overall cash deficit of the general government will be increased by the corresponding amount up to a cumulative cap of MDL 200 million. In the case of shortfalls, the limits will be decreased by the full amount.

I. Program Assumptions

2008

2. Loan disbursements of $73.5 million.

3. Receipts to the general government budget of privatization proceeds in the amount of MDL 131 million in 2008.

4. For program monitoring purposes, U.S. dollar denominated components of the NBM balance sheet will be valued at the program exchange rate. The program exchange rate of the Moldovan leu (MDL) to the U.S. dollar has been set at MDL 13.2911/$. Amounts denominated in other currencies will be converted for program purposes into U.S. dollar amounts using the cross rates USD/€ = 1.2660, USD/£= 1.8702, SDR/USD = 0.6773.

5. To calculate the adjustments for disbursements from external sources exceeding the programmed amounts, the actual exchange rate at the time of the disbursement will be used. To calculate the adjustments for shortfalls of disbursement, the assumed exchange rate in the program for that disbursement will be used.

II. Reporting Requirements

6. Macroeconomic data necessary to assess performance criteria and indicative benchmarks to measure performance will be provided to Fund staff with including, but not limited to data as specified in Table 2. The authorities will transmit promptly to Fund staff any data revisions.

Table 2.

Moldova: Data to be Reported to the IMF

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III. Program Targets and Definitions

Floor on the Stock of Net International Reserves (NIR)

(In millions of lei)

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7. Net international reserves of the NBM in convertible currencies are defined as gross reserves minus reserve liabilities in convertible currencies. For program monitoring purposes, gross reserves of the NBM are defined as monetary gold, holdings of SDRs, reserve position in the Fund, and holdings of foreign exchange in convertible currencies that are readily available and controlled by the NBM, including holdings of securities denominated in convertible currencies that are freely usable for settlement of international transactions, calculated using program assumptions on bilateral exchange rates. Excluded from reserve assets are capital subscriptions to foreign financial institutions, long-term non-financial assets, funds disbursed by the World Bank or other international institutions assigned for on-lending and project implementation, assets in nonconvertible currencies, and foreign assets pledged as collateral or otherwise encumbered, including claims in foreign exchange arising from transactions in derivative assets (futures, forwards, swaps, and options). Reserve liabilities in convertible currencies are defined as use of Fund credit, and convertible currency liabilities of the NBM to nonresidents with an original maturity of up to and including one year. Excluded from reserve liabilities are liabilities with original maturities longer than one year.

Ceilings on Reserve Money and the Net Domestic Assets (NDA) of the NBM

(In millions of lei)

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8. Reserve money is defined as currency in circulation (outside banks), vault cash of banks, total required reserves, and balances on corresondent accounts of banks in the NBM in lei.

9. Net domestic assets of the NBM is defined as the difference between reserve money (defined in paragraph 8) and net foreign assets of the NBM.

10. Net foreign assets of the NBM are defined as gross reserves in convertible currencies (defined in paragraph 7) plus foreign assets in nonconvertible currencies, funds disbursed by the World Bank or other international institutions assigned for on-lending and project implementation, and foreign assets pledged as collateral or otherwise encumbered, including claims in foreign exchange arising from transactions in derivative assets, and net other foreign assets, minus foreign exchange liabilities of the NBM to nonresidents.

Floor on the Overall Cash Balance of the General Government

(In millions of lei)

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11. The general government is defined as comprising the central and local government budgets. The central government includes also the Social Insurance Fund, the Health Insurance Fund, special and extrabudgetary funds, and foreign-financed investment projects. The local government includes also special and extrabudgetary funds. The authorities will inform the Fund staff of any new special or extrabudgetary funds that may be created during the program period to carry out operations of a fiscal nature and will ensure that these will be included in the general government. Excluded are any government-owned entities with a separate legal status. Net credit of the banking system to general government is defined as outstanding claims of the banking system on the general government (exclusive of the claims associated with accrued interest, tax and social contribution payments by commercial banks, and foreign financed on-lending by banks), including overdrafts, direct credit and holdings of government securities, less deposits of the general government (excluding accrued interest on government deposits, and including the accounts for foreign-financed investment projects).1 The Ministry of Finance will provide data on the holdings of government securities and foreign-financed investment projects.

12. The quarterly limits on the overall cash deficit of the general government are cumulative and will be monitored from the financing side as the sum of net credit of the banking system to the general government (excluding the change in the stock of government securities issued to recapitalize the central bank), the general government’s net placement of securities outside the domestic banking system, other net credit from the domestic non-banking sector to the general government, the general government’s receipt of disbursements from external debt2 for direct budgetary support and for specific projects minus amortization paid, and privatization proceeds stemming from the sale of the general government’s assets, after deduction of the costs directly associated with the sale of these assets.

13. The quarterly limits on the general government wage bill are cumulative and measured as the sum of total salaries, bonus payments and other types of remuneration, social security contributions to the National Social Insurance House, and contributions to the National Health Insurance Company paid to all employees in the general government sector as defined in paragraph 11, excluding wages paid to employees of the National Social Insurance House and the National Health Insurance Company. For 2007, the general government wage bill based on such a definition amounted to 4,970 million lei.3

Ceiling on the General Government Wage Bill

(In millions of lei)

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14. Government securities in the form of zero-coupon obligations sold at a discount to face value will be treated as financing items in the fiscal accounts, in the amount actually received from buyers. At the time of redemption, the sales value will be recorded as amortization, and the difference between amortization so defined and the face value will be recorded as domestic interest payments.

15. External-debt limits apply to the contracting or guaranteeing of (i) short-term non-concessional external debt (with an original maturity of up to and including one year) and (ii) non-concessional medium- and long-term debt with original maturities of more than one year. The limit is zero with the exception of the health project financed by €9 million from the Council of Europe Development Bank (CEB). In 2007, the ceiling was raised for a road project to be partly financed by €30 million from the European Investment Bank (EIB) and by €30 million from the European Bank for Reconstruction and Development (EBRD). The first phases of the EBRD and EIB road project (in the amount of €12.5 million each) will not have grant co-financing, but the second phases (in the amount of €17.5 million each) are expected to include grant co-financing sufficient to bring the overall level of concessionality on the second phases of the project to at least the target level of 35 percent. Short-term debt includes all short term obligations, excluding import trade credits. Short-term debt denominated in currencies other than the U.S. dollar shall be valued in U.S. dollars at the exchange rate prevailing at the time of disbursement. Medium- and long-term debt denominated in currencies other than the U.S. dollar shall be valued in U.S. dollars at actual cross-exchange rates.

Ceilings on Contracting or Guaranteeing of Non-concessional External Debt of the General Government

(In millions of lei)

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16. The term debt has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85), adopted August 24, 2000).4 This performance criterion applies not only to debt as defined above, but also to commitments contracted or guaranteed for which value has not been received.

17. For purpose of the program, the guarantee of a debt arises from any explicit legal obligation of the government or the NBM or any other agency acting on behalf of the government to service such a debt in the event of nonpayment by the recipient.

18. Concessionality will be calculated using currency-specific discount rates based on the OECD commercial interest reference rates (CIRRs). The ten-year average of CIRRs will be used as the discount rate to assess the concessionality of loans of an original maturity of at least 15 years, and a six-month average of CIRRs will be used to assess the concessionality of loans with original maturities of less than 15 years. To both the ten-year and six-month averages, the following margins will be added: 0.75 percent for repayment periods of less than 15 years; 1 percent for 15–19 years; 1.15 percent for 20–30 years; and 1.25 percent for over 30 years. Under this definition, only loans with a grant element equivalent to 35 percent or more will be excluded from the borrowing limits. The debt limits will not apply to loans classified as international reserve liabilities of the NBM.

19. For the purposes of the program, external payments arrears will consist of all overdue debt-service obligations (i.e. payments of principal or interest) arising in respect of any debt contracted or guaranteed or assumed by the government of the Republic of Moldova, or the NBM, or any agency acting on behalf of the government of the Republic of Moldova. The ceiling on new external payments arrears shall apply on a continuous basis throughout the period of the arrangement. It shall not apply to external payments arrears arising from external debt being renegotiated with external creditors, including Paris Club creditors; and more specifically, to external payments arrears in respect of which a creditor has agreed that no payment needs to be made pending negotiations.

20. Expenditure arrears are defined as the difference between payment obligations due, and actual payments made. They can arise on any expenditure item, including transfers, debt service, wages, pensions, energy payments and goods and services. Expenditure arrears for goods and services to suppliers are defined as obligations to suppliers, which are due but not paid for more than 30 days and are non-disputed. Arrears between the state budget, local government, social and health funds, and all extrabudgetary funds are not counted towards the expenditure arrears’ ceiling on the general government.

IV. Adjusters

21. In the event that privatization receipts exceed the program assumptions, the limits on the overall cash deficit of the general government will not be increased.

22. In case disbursements of external loans exceed the program assumptions, the limits on the overall cash deficit of the general government will be increased by the corresponding magnitude up to a cumulative cap of lei 200 million. In case of shortfalls, the limits will be decreased by the full amount.

23. The limits on the overall cash deficit of the general government will be increased by the amount of paid in cash for recapitalization of the NBM or by the face value of government securities issued for the same purpose.
1

For the calculation of the net credit of the banking system to general government the following accounts will be excluded: 1731, 1732, 1733, 1735, 1761, 1762, 1763, 1801, 1802, 1805, 1807, 2711, 2717, 2721, 2727, 2732, 2733, 2796, 2801 and 2802.

2

Debt is defined as in footnote 5 in the section on limits on external debt.

3

For the calculation of the total general government wage bill the following accounts for central government, local government, and special funds from the Treasury system in the Ministry of Finance will be used: 112, 1161.

4

Debt is defined as a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

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Cover IMF Staff Country Reports
Republic of Moldova: 2007 Article IV Consultation and Third Review Under the Three: Year Arrangement Under the Poverty Reduction and Growth Facility: Staff Report; Staff Supplement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Moldova
Author:
International Monetary Fund
Volume/Issue:
Volume 2008: Issue 139
Publisher:
International Monetary Fund
ISBN:
9781451825152
ISSN:
1934-7685
Pages:
118
DOI:
https://doi.org/10.5089/9781451825152.002

Inflation

Export Shares

(millions of US$)

Macroeconomic Trends, 1996–2007

(share of GDP)

Employment Structure by Sectors of Economy

(shares in total employment)

Moldova in Transition: Looks Familiar?
Figure 1.

PRGF Performance, 2007

(In millions of lei, unless indicated otherwise)
Figure 2.

Liquidity Conditions

EBRD Transition Indicators, 2006

World Bank Doing Business 2008

Government Size and GDP per capita, Emerging Europe, 2006

REER Appreciation

(Average 1992–97, in percent)

Real Effective Exchange Rates: Country Comparison

(2001=100)

Real Effective Exhcange Rate: VAR Approach

(logarithmic scale)

Unit Labor Costs

(Manufacturing, USD/month)

Labor Productivity

(Index; 2000=100)

Nominal and Real Exchange Rates Jan. 2001–Aug. 2007

(Index, 2000=100)

Banking Sector Liquidity, 2005

(Liquid assets/Total assets, percent)

Pass-Through in Selected European Countries

Budgetary Employment

(perecent of popultation)

Budgetary Monthly Wages to Industry Wages

(in percent)

General Government Wages: Share of Total

Expenditure, 2006

General Government Wages: Share of GDP, 2006

Return on Assets, 2005

(Percent)

Capital Adequacy Ratio, 2005

(Percent)

CIT rate in EU-15 and Eastern Europe

(unweighted average)