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Moldova - Concluding Statement of the IMF Mission

Chişinău, September 22, 2011 

This statement presents the conclusions of an IMF mission that visited Moldova during September 13-21, 2011 to discuss with the authorities the macroeconomic performance and outlook, the 2011 budget execution, the draft 2012 budget, and other program-related issues. The mission would like to thank the authorities for their warm hospitality, close cooperation, and candid and productive policy discussions.                                                                                           

1.             Moldova’s economy has performed strongly so far in 2011 on the back of robust domestic demand and booming exports, although a gradual moderation is on the horizon. Private consumption has been boosted by solid growth of remittances and wages, while strong investment reflected improved sentiment about business prospects and rising corporate profitability. Exports in January-July 2011 rose by 63 percent relative to the same period last year, aided by robust external demand, new production capacity, and favorable international prices. As a result, by mid-2011 GDP growth reached 7½ percent and unemployment declined to 6.2 percent. However, the ongoing slowdown in global economic activity is likely to weigh on Moldova’s economic performance in the period ahead. We therefore expect real GDP growth to settle at 6 percent in 2011 and 4½ percent in 2012.  Headline CPI inflation will peak in late 2011 before declining to 6½ percent by end-2012 as the lagged effects of the energy and food price hikes wear out. Despite fast export and remittances growth, the current account deficit would remain elevated as the strong domestic demand is drawing in large imports of consumer and investment goods.

2.             The 2011 budget execution has been uneven, and will require strong efforts to achieve the program targets by end-year. Marked slowdown in revenue collection relative to the booming economy, notably the VAT and social security contributions, and acceleration in current expenditure have led to overshooting of the fiscal deficit target in June. Tax collection appears to have since improved owing to measures to boost VAT compliance, while strengthened spending controls have curbed expenditure overruns. Nevertheless, even if this momentum is sustained, earlier slippages and new budget pressures put the annual deficit target at risk. In particular, the budget allocation for subsidies to agriculture has already been exhausted and the mission welcomes the authorities’ plans to prevent accumulation of unfunded commitments in this area in line with established procedure. Assuming this is done quickly, the general government’s revenue and expenditure for the full 2011 should fall broadly in line with the approved budget. On this basis, the mission can support the authorities’ intention to rebalance the budget by providing additional resources for social spending while continuing to target a budget deficit of MDL 1,596 million. That said, the mission urges the authorities to strengthen control over tax and social security contribution compliance further and close a number of legislative loopholes that erode the VAT base.

3.             The draft 2012 budget appropriately aims to further the structural fiscal adjustment and moderate the strong domestic demand. The mission supports the targeted general government deficit of 0.8 percent of GDP. This target would keep the budget on the programmed structural adjustment path, further reversing the deterioration that occurred in 2008-09. It will also contribute to a countercyclical moderation of domestic demand, which is essential to keep inflation and the current account deficit under control. Revenue will be strengthened by the proposed major tax policy reform, including the re-introduction of the corporate income tax at the competitive rate of 12 percent coupled with accelerated asset amortization, adjustments in excise rates, and the extension of cash VAT refunds for purchases of investment goods to the whole country. Planned reform-supported rationalization in current expenditure, based on timely passage of the necessary legislative and administrative measures, would allow a significant expansion of public investment to raise medium-term GDP growth.

4.             Progress in other program-related policies has been mixed. The mission welcomes the recent adoption of a government decision aimed at improving service quality and payment discipline in the Chişinău district heating sector. Alongside, a permanent arrangement for payment of current bills in the heating sector­­, taking into account seasonal lags in Termocom’s revenue collections, should be put in place before the new heating season. While being encouraged by the progress in the implementation of the education reform, we would advise timely passage of the delayed legal amendments needed to move the reform further. Furthermore, we are concerned about the delay in adopting the package of legal amendments to facilitate bank mortgage restructuring, collateral execution, and resolution of debtor insolvency, a reform outstanding from 2010. A swift government approval of the drafted amendments and their speedy consideration by parliament would greatly facilitate a reduction in banks’ bad loans and a concomitant increase in new lending. Similarly, parliamentary passage of the draft package of laws to resolve the difficult situation in Banca de Economii stemming from its involvement in the resolution of the failed Investprivatbank should proceed without further delay.  

An IMF review mission will return to Chişinău in late October to conduct discussions on the fourth review under the ECF/EFF-supported program. Provided understandings on policies to further the program objectives are reached, the IMF’s Executive Board is expected to consider the review in late 2011.