Moldova & IMF IMF Activities Publications Press Releases

Limba romana                                                                   

Donors’ Conference for Moldova 

Brussels, December 12, 2006 

Statement by the Staff of the International Monetary Fund



1.             On May 5, the IMF Executive Board approved a new PRGF-supported program
for Moldova
.[1] After four years without an active program, the PRGF arrangement—which has

broad political support—reflected Moldova’s goal of deeper integration into European structures, and helped Moldova secure a debt restructuring by Paris Club creditors on May 12, 2006.

2.             Since May, however, Moldova has suffered two serious external shocks. Natural gas prices have risen more rapidly than previously expected, and Russia has banned imports of Moldovan wine, citing phytosanitary concerns. These shocks have significantly altered the macroeconomic assumptions that were the basis for the original program.

3.             The authorities have worked to identify an appropriate strategy to deal with the macroeconomic and social impact of the shocks. This strategy envisages a combination of adjustment and financing to maintain macroeconomic stability and address emerging balance of payments gaps. IMF staff supports this strategy, and on Friday, December 15, the IMF Executive Board will consider Moldova’s request to complete the first review and augment access (i.e., increase the size of the loan) under the PRGF arrangement. Donors’ commitment to provide further financial assistance will be essential to support the authorities’ program.

Size of the external shocks

4.             The two external shocks experienced since the start of the program are serious and long-lasting

·                    After two steep jumps in 2006, IMF staff projects natural gas import prices to move permanently to European levels in early 2007. Gazprom raised prices for Moldova to $110/tcm in January 2006, and to $160/tcm in July, and IMF staff forecasts a price of $220/tcm from January 2007. Compared to the baseline in the May staff report, the BoP impact of the gas price shocks is about 3 percent of GDP in 2007-08, falling to 2½ percent by 2009.

·                    The wine ban has thus far had an even larger effect. Russia has traditionally absorbed 80-90 percent of Moldovan wine exports, or about 10 percent of GDP, and prospects for an early resumption of wine exports are uncertain. Current IMF staff projections for wine exports do not envisage a recovery to 2005 value levels until 2009, meaning that—relative to the baseline projection in the May IMF staff report—the BoP impact of the wine ban would be about 6½ percent of GDP in 2006 and 2007, falling to about 5 percent by 2009.[2]

Even if, as has been reported, an agreement has been reached to lift the wine ban, lingering reputational effects and increased competition from other suppliers who have established a foothold on the Russian market are likely to limit Moldova’s ability to recapture its previous market share.

5.             The shocks are expected to have major negative effects on the external position, growth, and inflation: 

·                    Taken together, the impact on the BoP of these shocks is very large; IMF staff forecasts the direct effect on the BoP to rise from 6½ percent of GDP in 2006 to 9½ percent of GDP in 2007, falling gradually thereafter.

·                    IMF staff expects a deceleration in growth to 3 percent per annum in 2006-07, relative to growth of 5-6 percent projected in the program.

·                    The first round effect of higher gas prices on headline inflation will be 1½ percentage points, and this effect comes on top of underlying inflationary pressure that by mid-summer was already exceeding program expectations (before the shocks). Thus, headline inflation in 2006 is expected to be 12 percent (December-to-December), falling to 10 percent in 2007 (as opposed to 9 percent and 8 percent, respectively, in the original program).

Mix of Financing and Adjustment

6.             The authorities understand that, since the shocks will have long-lasting effects, Moldova will need to adjust, with financing designed to smooth the transition. Importantly, the private sector has already begun to adjust, as higher natural gas prices are being passed through to consumers. IMF staff projects that the financing gap can be closed through monetary and exchange rate policies combined with additional financing with an unchanged fiscal position. The program budget deficit of ½ percent of GDP builds in significant fiscal adjustment, as it freezes planned public sector wage increases. Moreover, the authorities have committed to take additional measures if the macroeconomic situation calls for it. In particular, moderate nominal exchange rate depreciation is expected to lead to nonenergy import compression of 2–3 percent of GDP over 2007-09—compared to the estimates in the original program—while tighter monetary policies should return underlying (non-energy, non-food) inflation to the single-digit path envisaged in the original program.

7.             The IMF supports the authorities’ program and adjustment efforts. The program presents a residual gap that needs to be financed externally, which we envisage will take three forms:

·                    First, an increase in the size of the IMF loan. IMF staff supports the authorities’ request to augment access to IMF resources by about $45 million, with most of the additional resources available upon Board approval. 

·                    Second, stepped-up assistance by donors, preferably in the form of grants, to close the residual financing gap, building on the amounts that have already been received. The Netherlands has recently provided a grant of €2.5 million, while the World Bank is expected to disburse a $10 million Poverty Reduction Strategy Credit in early 2007. The authorities are hopeful that the EU will provide significant grants under their Macro-Financial Assistance program and the European Neighborhood and Partnership Instrument. Notably, the US Millennium Challenge Corporation has recently approved a request for Compact status that makes Moldova eligible for sizable grants over several years.

·                    Finally, reduced reserve accumulation, relative to the program. Increased exchange rate flexibility underpins the authorities’ adjustment strategy, reducing somewhat the urgency of reserve accumulation. After the shocks of 2006, Moldova would now be in a position to attain the targeted three months of import cover in 2009, rather than 2008 as originally programmed.


Structural reform agenda

8.             The authorities’ structural reform agenda emphasizes growth-enhancing measures as the appropriate policy response to the external shocks. In the first instance, these measures aim to clarify (and eventually reduce) the role of the state in the economy—thus improving the business environment to promote exports and FDI. The authorities have developed a comprehensive investment and export promotion strategy that centers on regulatory reform, and which dovetails with their ongoing public administration reform.  Public finance management reforms are meant to improve cash management and enhance the effectiveness of monetary policy, while a tax administration reform strategy has been approved that aims to lower the cost of compliance with tax law (though it will require some donor financing to bring it to fruition). The authorities also intend to accelerate the privatization process, including in the financial sector.

9.             The authorities have passed natural gas price increases through to consumers, and are moving to eliminate implicit subsidies for heat and water. Tariff setting responsibility for heat and water has rested with the municipalities since the late 1990s, and tariffs have not been increased since 1999. Thus, the authorities have proposed legislation to locate tariff setting responsibility for heat and water with ANRE, the national agency for energy regulation.   

10.         Increasing energy tariffs highlights the importance of reforming the social assistance system. International partners, including the recent IMF poverty and social impact assessment (PSIA) mission, have noted that the existing system of categorical social assistance is poorly targeted, making large errors of inclusion and exclusion. Although a better-targeted system is in preparation (with assistance from DfID and other donors), the authorities do not expect it to be in place before 2008. Thus, in addition to the categorical social assistance program, as a short term measure the government has introduced a lifeline tariff system for increases in natural gas tariffs this winter. A follow-up PSIA mission later this month will—in cooperation with other organizations—seek to help identify other short term measures to address the most serious poverty implications of higher tariffs.


11.         The authorities have shown impressive ownership of their economic reform program. They have undertaken strong adjustment efforts in the face of very serious external shocks during 2006. The IMF staff supports these efforts and has recommended an augmentation of the PRGF to the Executive Board. Additional financing from the international community would complement these efforts.


[1] This report is available at, May 24, 2006.

[2] Moldova has sought to address Russian concerns about the quality of exported wine by

 establishing a system to certify wine exports. The World Bank and other donors are considering
 assistance projects to help Moldova strengthen its quality assurance framework for agricultural
 exports, including wine.



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