IMF Executive Board Concludes 2020 Article IV Consultation with Moldova

March 18, 2020

The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Republic of Moldova on March 11, 2020. The Board also completed the sixth and final review of Moldova’s economic performance under the Extended Credit Facility (ECF) and Extended Fund Facility (EFF) arrangements. A related press release was issued separately.

Moldova’s economic growth remained solid in the first three quarters of 2019, with output expanding nearly 5 percent, supported by strong domestic demand. External demand remained favorable but net trade continued to be a drag on growth. Unemployment remained low by historical standards, at around 4 percent. Inflation breached the upper bound of the band around the National Bank of Moldova (NBM)’s target in late 2019, reaching 7.5 percent, largely driven by food prices and a turnaround in regulated prices—as the effect of previous tariff cuts dissipated—and by the impact of robust aggregate demand on core inflation. The fiscal deficit significantly overperformed the program target, despite widening to 1.5 percent of GDP in 2019. While revenues slightly underperformed, this was more than offset by under-execution in both current and capital expenditure, partly linked to uncertainty about external financing. Public debt declined and remains low, below 30 percent of GDP. The current account deficit likely narrowed slightly to 9.5 percent but remains large as remittance inflows fell short of compensating for the structural trade deficit. Despite heightened political uncertainty, the leu remained relatively stable, and foreign exchange reserves remained adequate.

The macroeconomic outlook is subject to risks. Growth is forecast to slow to 3.8 percent in 2020, driven by weaker external demand and more modest agricultural output. Domestic demand should remain robust, supported by a widening of the fiscal deficit to 3.9 percent of GDP due to a large increase in budgeted capital spending (although the growth impact of this spending will be limited due to public investment management weaknesses). While this growth composition will put pressure on the trade deficit, the current account is expected to widen only moderately given improved income inflows. Inflation is projected to return to the 5 percent target in 2020, largely driven by fading food price pressures. With the output gap broadly closed and in the absence of structural reforms, medium-term growth is projected to remain near 4 percent. Risks, however, are on the rise. The recent global outbreak of the coronavirus disease (COVID-19) could slow economic growth in 2020 further. Domestically, the resurfacing of political instability, policy reversals, or reform fatigue could hurt confidence and limit external financing options. Regional and global spillovers from a protracted slowdown in major trading partners and geopolitical and trade tensions cannot be ruled out.

Resolute progress in tackling outstanding and widespread governance and institutional vulnerabilities in Moldova would strengthen public trust in state institutions and popular support for the reform agenda. Despite successful stabilization efforts and significant progress made on banking sector supervision, weak oversight of the non-bank financial sector, gaps in Moldova’s AML/CFT framework, and lack of progress on asset recovery are recurring sources of concern. Furthermore, perceptions of corruption and weak rule of law are entrenched, the regulatory framework is not properly implemented or enforced, informality is high, and a large state-owned enterprise (SOE) sector poses fiscal risks and undermines competition and productivity.

Executive Board Assessment [2]

The Executive Directors welcomed the completion of the three-year ECF/EFF arrangements, which have been successful in rehabilitating Moldova’s financial sector and restoring financial sector stability. This progress has been made possible by broad support for the reforms among various stakeholders from across the political spectrum. Directors noted, however, that the country still faces structural weaknesses, and growth remains insufficient to boost income levels. They emphasized that prudent and well-coordinated policies, including further strengthening the financial sector, pursuing growth-friendly fiscal policy, and addressing governance and institutional weaknesses will be important to address risks to the outlook and improve the economy’s resilience.

Directors noted the authorities’ 2020 fiscal plans to address Moldova’s significant infrastructure and developmental needs. Given the ambitious plans, they encouraged the authorities to continue to engage with external developmental partners to secure the needed financing. Directors also stressed the importance of improving revenue mobilization, streamlining tax expenditures, increasing the efficiency of public investment management, and reforming SOEs to preserve fiscal discipline and ensure debt sustainability.

Directors welcomed the significant progress made under the program to strengthen the National Bank’s governance, transparency and accountability as well as its operational framework for emergency assistance as a lender of last resort. Noting that the inflation targeting regime remains appropriate, they concurred on the need for the National Bank to step up efforts to improve policy credibility and promote exchange rate flexibility. Directors also called on the authorities to closely monitor rising risks in the non-bank financial sector, promptly implement MONEYVAL recommendations to strengthen the AML/CFT framework and make decisive progress on asset recovery. They underscored the importance of safeguarding the National Bank’s independence to preserve hard-won gains in banking sector rehabilitation, stressing that the NBM’s independence is critical for its ability to deliver on its mandates of maintaining price and financial sector stability.

Directors emphasized that structural reforms aimed at enhancing governance and addressing institutional vulnerabilities are important to boost the economy and support income convergence with the rest of Europe. In this regard, they encouraged the authorities to give priority to strengthening the rule of law and reforming the judiciary. Reform efforts should also focus on SOEs and enhancing institutional capacity and improving public sector transparency.

Moldova: Selected Economic Indicators, 2016–2021 ^1/

	2016	2017	2018	2019		2020	2021
				Country Report 19/305	Proj.	Proj.
	(Percent change, unless otherwise indicated)
Real sector indicators
Gross domestic product
Real growth rate	4.4	4.7	4.0	3.5	4.2	3.8	3.8
Demand	2.6	6.8	6.4	5.8	6.3	5.7	4.0
Consumption	2.6	4.7	3.2	4.4	3.0	2.9	3.1
Private	2.9	5.3	3.8	3.6	3.4	3.3	3.5
Public	0.6	1.1	-0.1	9.3	0.9	1.0	1.0
Gross fixed capital formation	-0.9	8.0	14.0	2.7	13.6	8.9	4.7
Net Exports of goods and services	5.9	-11.2	-14.3	-5.8	-5.4	-13.0	-4.9
Exports of goods and services	9.8	10.9	4.8	8.8	7.8	5.0	6.7
Imports of goods and services	2.8	11.0	8.9	7.5	6.7	8.6	5.9
Nominal GDP (billions of Moldovan lei)	160.8	178.9	190.0	207.3	208.7	228.4	248.9
Nominal GDP (billions of U.S. dollars)	8.1	9.7	11.3	11.7	11.9	12.4	13.1
Consumer price index (average)	6.4	6.6	3.1	4.9	4.9	5.7	5.0
Consumer price index (end of period)	2.4	7.3	0.9	7.5	7.5	5.0	5.0
GDP deflator	5.7	6.3	2.1	5.4	5.4	5.4	5.0
Average monthly wage (Moldovan lei)	5,084	5697	6,446	7,320	7,320	7,953	8,619
Average monthly wage (U.S. dollars)	255	308	384	413	417	432	454
Unemployment rate (annual average, percent)	4.2	4.1	3.0	3.0	3.0	3.0	3.0
	(Percent of GDP)
Saving-investment balance
Foreign saving	4.1	6.1	10.7	9.5	9.5	9.7	9.5
National saving	18.1	16.2	13.6	14.7	16.6	18.9	19.2
Private	16.4	13.7	11.3	13.6	14.7	18.4	17.8
Public	1.8	2.4	2.3	1.1	1.9	0.5	1.4
Gross investment	22.2	22.3	24.3	24.3	26.2	28.6	28.7
Private	19.1	19.1	20.9	20.2	22.7	23.6	24.3
Public 2/	3.1	3.2	3.4	4.1	3.4	5.0	4.5

Fiscal indicators (general government)
Primary balance 3/	-0.7	0.3	-0.4	-2.2	-0.8	-3.1	-2.1
Overall balance 3/	-1.8	-0.8	-1.1	-3.0	-1.5	-3.9	-2.9
Stock of public and publicly guaranteed debt	36.9	32.7	30.6	31.5	29.3	30.8	31.2
	(Percent change, unless otherwise indicated)
Financial indicators
Broad money (M3)	10.2	9.4	7.8	16.1	8.2	14.4	…
Velocity (GDP/end-period M3; ratio)	2.3	2.3	2.3	2.1	2.3	2.2	…
Reserve money	12.1	11.2	17.7	13.1	7.6	14.4	…
Credit to the economy	-7.6	-3.4	4.1	4.4	11.5	4.2	…
Credit to the economy, percent of GDP	24.5	21.3	20.9	20.0	21.2	20.2	…
	(Millions of U.S. dollars, unless otherwise indicated)
External sector indicators 4/
Current account balance	-330	-592	-1211	-1116	-1134	-1204	-1251
Current account balance (percent of GDP)	-4.1	-6.1	-10.7	-9.5	-9.5	-9.7	-9.5
Remittances and compensation of employees (net)	1,326	1,494	1,672	1,813	1,759	1,890	2,012
Gross official reserves	2,206	2,803	2,995	3,025	3,060	3,071	3,034
Gross official reserves (months of imports)	4.9	5.3	5.5	4.7	5.2	4.9	5.1
Exchange rate (Moldovan lei per USD, period average)	19.9	18.5	16.8	…	17.6	…	…
Exchange rate (Moldovan lei per USD, end of period)	20.0	17.1	17.1	…	17.3	…	…
Real effective exchange rate (average, percent change)	2.4	10.5	9.1	1.5	2.1	…	…
External debt (percent of GDP) 5/	76.8	70.5	66.4	64.9	63.6	64.7	64.9
Debt service (percent of exports of goods and services)	13.1	11.8	14.4	14.2	12.9	14.0	13.5
Sources: Moldovan authorities; and IMF staff estimates.
1/ Data exclude Transnistria.
2/ Includes externally financed on-lending to SOEs as of 2016.
3/ Includes net on-lending to SOEs.
4/ Balance of Payments (BOP) classification is revised in line with the Sixth Balance of Payments Manual (BPM6). Review columns reflect BOP according to BPM5 classification.
5/ Includes private and public and publicly guaranteed debt.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .

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