Press Release No. 12/184
IMF Reaches Staff-Level Agreement with Moldova on Fifth Review of Extended
Credit Facility/Extended Fund Facility Arrangements
May 17, 2012
An International Monetary Fund (IMF) mission for the Article IV consultation and the fifth review under the Extended Credit Facility/Extended Fund Facility (ECF/EFF) arrangements with Moldova led by Nikolay Gueorguiev visited Chişinău during May 3–17.
At the conclusion of the visit, Mr. Gueorguiev made the following statement:
“The mission and the Moldovan authorities have reached a staff-level agreement on the completion of the fifth review under the ECF/EFF arrangements. The agreement is subject to approval by the IMF Management and the Executive Board. Completion of the reviews will enable Moldova to draw SDR50 million (about US$77 million) in support of its external reserve position.
“After two years of impressive growth, the economy has entered a soft patch in 2012. In the first quarter, foreign and domestic trade, industrial production, and remittances decelerated markedly. With weak economic conditions in the EU counterbalanced by resilient growth in the CIS, real GDP growth should reach 3 percent in 2012 and bounce back next year, while macroeconomic stability should remain intact. Inflation has declined and is expected to remain low, within the National Bank of Moldova’s (NBM) target range. The real exchange rate appears moderately overvalued, while the external current account deficit remains elevated at around 12 percent of GDP and should gradually narrow as structural reforms bear fruit.
“The program remains broadly on track, although a few of the end-March program conditions were missed. In particular, the ceiling on the general government budget deficit and the target on reducing government expenditure arrears were missed, and the structural benchmark related to reforming the debt restructuring framework has not yet been met. All other end-March performance criteria, indicative targets, and applicable structural benchmarks were met. We are encouraged by the authorities’ commitment to implement appropriate corrective measures to meet the missed program conditions.
“The fiscal policy priority is to complete fiscal consolidation this year by containing the budget deficit to 1.2 percent of GDP in 2012—in line with available financing—and ensuring a sustainable fiscal position going forward. In this context, we welcome the authorities’ commitment to close loopholes in the value-added tax (VAT) and imported car registration regimes, bring the Chişinău municipal budget in line with broader fiscal targets, upgrade tax and customs administration, and clear government expenditure arrears. These measures, combined with timely adoption and implementation of the 2013-15 medium-term budget framework should ensure fiscal sustainability and independence from exceptional external aid.
“The NBM’s current monetary policy stance is appropriate given stable inflation and moderating economic activity, as well as the need to assess the impact of the recent monetary policy easing which is still making its way through the financial system. The high current account deficit, rising external debt, and declining official aid imply the need for some augmentation of the NBM’s foreign exchange reserves in times of excess supply of foreign exchange and in line with the inflation targeting framework.
“The financial sector on aggregate remains strong with ample capital and liquidity buffers. The worrying situation at the majority state-owned Banca de Economii (BEM) requires decisive actions, notwithstanding the bank’s large capital and liquidity. We welcome the plans to continue close monitoring of the bank, improve coordination between financial sector regulators, ensure timely implementation of remedial measures, and strengthen the bank’s management.
“Two fundamental weaknesses—a weak judicial system and non-transparent ownership—continue to haunt the economy, including the financial sector. In this context, the judicial reform as well as legislative changes to improve shareholder transparency in the banking sector should be implemented as soon as possible.
“The mission also discussed specific reforms aimed at raising the efficiency of the public sector, enhancing stability of the energy sector, and improving the business environment. Implementing these reforms should spur foreign direct investment, and thus raise the economy’s potential, employment and living standards.”