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IMF Executive Board Concludes 2012 Article IV Consultation with the Republic of Moldova

Public Information Notice (PIN) No. 12/116
October 1, 2012

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On September 28, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Moldova and endorsed the staff appraisal without a meeting.1


Moldova’s economy grew by an impressive 14 percent cumulatively in 2010–11, spurred by booming exports and domestic demand, recovering external inflows, and improved policies. Since January 2010, the authorities’ efforts to restore fiscal, external, and financial sustainability and promote growth were supported by two arrangements with the IMF: the Extended Credit Facility and the Extended Fund Facility, amounting in total to SDR 369.6 million (US$562.5 million at present). Five reviews have been completed so far, releasing SDR 320 million to support the balance of payments.

Economic activity slowed markedly in early 2012 due to weakening external conditions and harsh weather conditions, driving real GDP growth down to 0.8 percent in H1 2012 relative to a year ago. The slowdown was reflected in dwindling exports to the EU and domestic demand in line with weakening remittances. The economy is expected to pick up in the second half of the year, supported by resilient conditions in the CIS and investment in infrastructure. However, a severe drought that has hit Moldova over the summer and a deterioration of conditions in the EU could dampen this outlook. Twelve-month inflation decelerated to 4.4 percent in August, and is expected to remain anchored around the National Bank of Moldova (NBM) target of 5 percent during the remainder of 2012 and 2013.

Fiscal consolidation in 2010–11 has been strong, bringing the fiscal deficit down to 2.4 percent of GDP at end-2011. However, revenue shortfalls, due partly to the slowing economy and partly to increased losses from tax loopholes and collection problems, and new spending commitments have slowed down fiscal adjustment. The authorities have implemented corrective measures to safeguard the program’s fiscal consolidation objective in the context of the fifth program reviews.

Monetary policy was eased aggressively in late 2011 and early 2012 in response to the rapidly falling inflation, supporting credit growth and thus cushioning the slowing economic activity.

The banking sector is sound overall. Banks have remained generally liquid, well-capitalized, and profitable, although their nonperforming loans (NPLs) have risen somewhat as the economy slowed. The euro area debt crisis has had little direct effect on the financial system owing to limited links with banks in affected countries. However, risky lending practices and poor governance have significantly weakened the asset portfolio of the state-controlled Banca de Economii and necessitated a large increase in provisions. The bank, which accounts for about 13 percent of total assets in the banking sector, requires urgent measures to repair its balance sheet.

Executive Board Assessment

In concluding the 2012 Article IV consultation with the Republic of Moldova, Executive Directors endorsed staff’s appraisal, as follows:

Moldova enjoyed vigorous economic growth in 2010–11, supported by appropriate macroeconomic policies and structural reforms. Implementation of the ECF/EFF-supported program over that period has been strong.

The economy is slowing down in 2012 due to weakening external conditions, with serious downside risks. GDP is expected to grow by 3 percent in 2012, and inflation should settle close to the NBM target of 5 percent. Economic deterioration in the EU could significantly depress growth. However, with a lower structural fiscal deficit, improved monetary policy framework, and an overall sound banking sector, Moldova is in a much better position to withstand shocks than in 2009.

The amended 2012 budget puts fiscal consolidation back on track, while accommodating cyclical effects and supporting important reforms. Strong corrective measures have been taken to close tax loopholes and offset unbudgeted expenditure commitments that emerged in early 2012. Continued improvements in tax and customs administration, and reforms in the key areas of the pension system, education, and public administration will be needed to maintain fiscal sustainability in the medium term as foreign assistance declines.

The current monetary stance is consistent with the NBM’s inflation target, while the conduct of monetary policy could be honed further. After the aggressive easing in early 2012, the financial system has all it currently needs to support credit demand at advantageous interest rates. Further policy changes could be warranted if the economic outlook deteriorates or demand-driven inflation pressures re-emerge. To avoid unnecessary policy volatility, more weight should be given to demand-driven core inflation trends relative to supply shocks in determining the policy stance and in communications with the public.

The external position of the economy gives rise to some concerns. The large current account deficit, rising short-term private debt, and external risks call for augmentation of the NBM’s international reserves. The real effective exchange rate is moderately overvalued relative to underlying fundamentals, although it is expected to self-correct gradually, in light of falling inflation, slowing capital inflows, and a higher pace of reserve accumulation.

Moldova’s financial system is stable overall, but the deteriorating situation at the majority state-owned Banca de Economii (BEM) must be promptly addressed. Banks have generally remained liquid, well-capitalized, and profitable. Swift legislation amendments to facilitate owner disclosure requirements and introduce fit and proper criteria for bank managers and board members would further strengthen confidence in the banking system. However, urgent progress is needed to repair BEM’s balance sheet and improve its risk management. The new management, the Board of Directors, and the NBM should ensure that BEM cleans up its portfolio, quickly disposes of foreclosed collateral, and ends its risky lending practices before seeking recapitalization.

The authorities’ efforts to improve the business climate and promote exports have been productive, but important challenges lie ahead. Wide-ranging structural reforms have enhanced competitiveness and fostered investment. However, further improvements in several key areas, including protection of property rights, a transparent and stable policy environment, effective governance, and a reliable judicial system, are essential to attract investors.

A decisive energy sector reform should finally commence. The authorities should persevere with establishing payment discipline among both households and public entities, and implement their energy sector restructuring strategy to reduce losses and resolve historic arrears.

Staff recommends completion of the fifth reviews and approval of the requests for a waiver of non-observance of the end-March 2012 performance criterion (PC) on the general government budget deficit and modifications of the end-September 2012 PCs on the general government budget deficit, the NBM’s net domestic assets, and net international reserves. Program implementation has been generally good. The authorities maintain the commitment and the capacity to implement their Fund-supported program. The slippages in early 2012 have been adequately addressed, and the policies planned for the remainder of 2012 and beyond, including the requested new targets, support the program’s objectives. The capacity to repay the Fund remains strong.

Moldova: Selected Indicators, 2010–15 1/
  2010 2011 2012 2013 2014 2015
I. Real sector indicators (Percent change, unless otherwise indicated)
Gross domestic product            
Real growth rate 7.1 6.4 3.0 5.0 5.0 5.5
Demand 9.2 7.5 3.9 6.0 5.9 6.3
Consumption 7.3 6.5 2.8 5.3 5.7 6.1
Private 9.6 8.5 2.7 5.6 6.1 6.3
Public -1.1 -1.6 3.2 4.1 3.9 5.5
Gross capital formation 17.2 10.7 8.5 9.5 6.9 7.2
Private 18.5 8.8 6.0 8.0 8.0 8.0
Public 12.4 17.8 17.0 14.2 3.5 4.6
Nominal GDP (billions of Moldovan lei) 71.9 82.2 90.1 99.4 109.6 121.4
Consumer price index (average) 7.4 7.6 5.1 5.0 5.0 5.0
Consumer price index (end of period) 8.1 7.8 5.0 5.0 5.0 5.0
GDP deflator 11.1 7.4 6.5 5.0 5.0 5.0
Average monthly wage (Moldovan lei) 2,972 3,194 3,550 3,950 4,350 4,800
Unemployment rate (annual average, percent) 7.4 6.7 6.6 6.4 6.0 5.5
Saving-investment balance (Percent of GDP)
Foreign saving 9.8 12.6 12.2 11.7 10.9 10.4
National saving 12.9 10.6 11.5 12.7 13.5 14.2
Private 10.3 7.7 6.9 7.6 8.6 9.3
Public 2.5 2.9 4.6 5.0 4.9 4.9
Gross investment 22.6 23.2 23.6 24.4 24.4 24.5
II. Fiscal indicators (general government)        
Primary balance (cash) -1.7 -1.6 -0.5 -0.4 -0.3 -0.4
Overall balance -2.5 -2.4 -1.3 -1.1 -1.0 -0.9
Stock of public and publicly guaranteed debt 29.8 28.0 28.8 27.2 24.6 22.6
III. Financial indicators (Percent change, unless otherwise indicated)
Broad money (M3) 13.4 10.6 11.7 12.5 10.2 10.8
Velocity (GDP/end-period M3; ratio) 1.9 2.0 2.0 1.9 1.9 1.9
Reserve money 2/ 15.9 11.1 12.2 12.7
Credit to the economy 3/ 17.4 22.1 11.2 14.6
IV. External sector indicators  
Current account balance (percent of GDP) -9.8 -12.6 -12.2 -11.7 -10.9 -10.4
Gross official reserves (months of imports) 3.4 3.6 3.7 3.7 3.5 3.3
Exchange rate (Moldovan lei per USD, period avge) 12.4 11.7
Real effective exch.rate (average, percent change) -6.0 6.1 3.9 0.5 1.4 1.1
External debt (percent of GDP) 4/ 67.0 64.6 69.7 72.9 72.5 72.6
Debt service (percent of exports of goods and services) 18.6 14.9 16.2 13.2 15.1 16.1
Sources: Moldovan authorities; and IMF staff estimates.
1/ Data exclude Transnistria.

2/ Adjusted for changes in reserve requirement ratios.

3/ Adjusted for exchange rate changes and write-offs.

4/ 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. 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.