Republic of Moldova: IMF Executive Board Concludes Second Post-Program Monitoring Discussions
On December 8, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the second post-program monitoring discussions with the Republic of Moldova.1
Output growth is projected to decelerate to about 2 percent in 2014, reflecting a moderation in agriculture production, weaker economic activity in main trading partners, and the impact of Russia’s restrictions on imports of Moldovan products. In 2015, growth is projected to recover to 3½ percent as recently negotiated free trade agreements enter into effect and domestic demand recovers with the dissipation of election-related uncertainties. Inflation is projected to remain within the National Bank of Moldova’s (NBM) inflation target range. After narrowing for three consecutive years, the current account deficit is projected to widen in 2015 as a consequence of a recovery in imports, and a projected decline in remittances growth.
Fiscal discipline has weakened ahead of the elections. Following a substantial adjustment in 2010-13, Moldova’s fiscal position is projected to deteriorate significantly, with the budget deficit excluding grants projected to widen from 3.8 percent of GDP in 2013 to 5.4 percent in 2014 and, in the absence of measures, to 7.1 percent in 2015. This reflects significant pre-election increases in wages and pensions, some ad hoc tax benefits, weaker economic activity, and measures to compensate those affected by trade restrictions.
Severe governance problems in the banking system continue to represent a risk to financial stability. Legislation restoring the NBM’s powers was recently enacted but enforcement of regulatory requirements on banks remains weak. Legislation to restore the regulatory powers of the National Commission for Financial Markets (NCFM) still needs to be enacted.
Executive Board Assessment2
Executive Directors noted that weaker economic activity in trading partners, trade restrictions, and uncertainties related to the elections have exacerbated the economic slowdown, and that risks are to the downside. They urged the authorities to pursue prudent macroeconomic and financial sector policies as well as deep structural reforms to reduce vulnerabilities and boost potential output growth.
Directors underscored the urgency of addressing vulnerabilities in the banking sector, and strengthening the financial sector regulatory framework and its enforcement. Regretting limited progress, they stressed the importance of swiftly implementing recent FSAP recommendations. The regulatory and supervisory powers of the National Bank of Moldova (NBM) and the National Commission for Financial Markets should be fully restored, and the legal protection of their staff should be strengthened. Directors also recommended enhancing governance in the banking sector, including by improving the transparency of banks’ ultimate beneficial owners. They called on the authorities to maintain a high level of scrutiny over weak and vulnerable banks, to enhance the bank resolution and crisis management framework, and to rapidly resolve the banks recently intervened.
Directors noted that fiscal discipline has recently weakened, mainly reflecting large wage and pension increases. They welcomed the authorities’ intention to keep the general government budget deficit below 3 percent of GDP in 2015, and underscored that further fiscal consolidation will be needed over the medium term to ensure sustainability and lower reliance on exceptionally high donor support. This will require a balanced combination of revenue and expenditure measures, including wage restraint, expenditure rationalization while protecting social spending, and prioritization of investment projects. Directors called for close monitoring of the ongoing fiscal decentralization to ensure that it does not jeopardize the medium-term fiscal objectives.
Directors commended the National Bank of Moldova for achieving its price stability objective, and considered the current monetary policy stance to be appropriate in light of the ongoing slowdown in economic activity. They called on the NBM to remain vigilant and to adjust policies as needed. Directors supported the NBM’s approach to intervene to prevent disorderly exchange rate adjustments without resisting movements driven by fundamentals.
Directors encouraged the authorities to accelerate the pace of structural reforms. They noted that improving competitiveness and diversifying the production and export structure would place Moldova in a better position to benefit from recently signed free trade agreements. Consistent with the National Development Strategy Moldova 2020, special attention should be given to the business environment, physical infrastructure development, human resource development, and public administration and social security reform. Refocusing the education system to match labor market needs would also play an important role.
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