IMF Executive Board Completes the Second Review Under the ECF and EFF
Arrangements for the Republic of Moldova and Concludes 2017 Article IV
Consultation
Press Release No. 17/514December 20, 2017
- GDP growth is
expected to moderate to around 3.5 percent in 2017 and 3.0 percent in 2018,
and inflation is expected to return to the NBM target in the coming months.
- Disciplined fiscal
policies and revenue overperformance are enabling additional priority
spending, while public debt remains sustainable.
- Financial stability has been maintained and resolute cleansing of the financial sector, along with broader reforms, are vital for faster growth and poverty reduction.
On December 20, 2017, the Executive Board of the International Monetary Fund (IMF)
concluded the
Article IV consultation[1]
and the second review under the Extended Credit Facility (ECF)[2]
and Extended Fund Facility (EFF)[3]
Arrangements for the Republic of Moldova.
Completion of this review makes available SDR 15.7 million (about US$ 22.2 million). The ECF/EFF arrangements in a total amount of SDR 129.4 million (about US$ 183.1million, or 75 percent of the Republic of Moldova’s quota) was approved on November 7, 2016 (see Press Release No 16/491).
Moldova has experienced a period of relative macroeconomic and financial stability since the 2014 banking crisis. Growth has returned and, while moderating somewhat, is expected to be around 3 percent next year. Inflation is forecast to return to target in 2018, following a pickup in 2017. The banking sector has been stable, the fiscal performance has improved and Moldova’s external position has strengthened. The outlook, however, is still subject to substantial risks.
The program is broadly on track, but continued reform efforts are needed to accelerate growth and improve living standards. Important progress has been made towards cleansing the financial sector, though with delay, including by strengthening supervisory and regulatory frameworks and increasing management and ownership transparency. However, significant challenges remain to put the banking system on a more sound footing. Beyond the financial sector, sound macroeconomic policies and structural reforms are critical to lift potential growth, create jobs, and reduce poverty. Policy priorities include addressing weak governance, corruption, and infrastructure gaps, strengthening the effectiveness of monetary policy, ensuring transparency and cost recovery in the energy sector and, further tackling the shadow economy and the relatively low development of human capital.
Following the Executive Board discussion, Mr. Mitsuhiro Furusawa, Deputy Managing Director and Acting Chair, made the following statement:
“Moldova continues to make important progress in strengthening macroeconomic and financial stability. This is supported by continued program implementation focused on decisively repairing the financial system, improving governance and the business climate, and attracting foreign and domestic investment. As significant challenges still remain, it is important that these efforts continue to further entrench recent gains and raise potential growth and living standards.
“Monetary policy should continue to focus on maintaining price stability in the context of a flexible exchange rate. The inflation targeting framework should be bolstered by refining the forecasting process, improving coordination across agencies, and strengthening communications, including by adhering to a regular calendar of monetary policy decisions.
“The 2018 budget and medium-term fiscal framework allow for growth-friendly priority public investment and social spending, while safeguarding debt sustainability. Looking forward, firm control over current spending and the wage bill will be important to prevent the latter from increasing in percent of GDP and unduly constraining priority spending. Efforts should also be made to improve public investment efficiency, take a measured approach to scaling up, and eliminate arrears at the local level.
“Important progress is being made in repairing the financial sector, including improving transparency in ownership and management, strengthening supervisory and regulatory frameworks, and carrying out bank level diagnostics. Nevertheless, significant challenges remain for progress to become irreversible. Efforts should continue to aim at facilitating the transfer ownership of “problem” shares in the largest banks to fit and proper shareholders, the certification of incoming shareholders and managers in line with the law, and continued clean-up of banks’ balance sheets and improvement in their risk management. Increased supervisory resources focused on key risks can support these efforts.
“Structural reforms remain indispensable for sustained growth and poverty reduction. Priorities include: improving the business climate to attract private investment to broaden the recovery and support economic diversification, targeted labor market reforms, investment in human capital, and efforts to reduce the shadow economy. In the energy sector, efforts should continue to focus on ensuring cost recovery and greater transparency.”
Executive Board Assessment[4]
Executive Directors welcomed the macroeconomic and financial stability experienced in Moldova over the past two years, and the progress achieved under the program. They cautioned, however, that the recent gains are not yet irreversible and downside risks to the medium‑term outlook remain. In this regard, Directors emphasized the importance of preserving fiscal sustainability, strengthening the effectiveness of monetary policy, and implementing reforms to decisively repair the financial system, improve governance and the business climate. These are critical to attract foreign and domestic investment and raise potential growth and living standards.
Directors commended the authorities for successfully reducing inflation and reiterated that monetary policy should continue to focus on maintaining price stability in the context of a flexible exchange rate regime. They concurred that a pause in rate cuts was appropriate at this juncture, given incipient inflationary pressures. Directors encouraged the authorities to strengthen the monetary transmission mechanism and bolster the inflation targeting framework, including by refining the forecasting process to strengthen outputs and decision making, improving coordination across agencies, and strengthening internal and external communications. They also encouraged the authorities to avoid resisting exchange rate movements that are driven by fundamentals.
Directors welcomed the 2018 budget and medium‑term fiscal framework, which allow for growth‑friendly public investment and social spending while safeguarding debt sustainability. They emphasized the need to continue to exercise firm control over current spending and the wage bill to avoid unduly constraining priority investments and social spending. Strengthening public investment management and efficiency was also encouraged.
Directors welcomed the important progress in repairing the financial sector, including improving transparency in ownership and management, strengthening supervisory and regulatory frameworks, and conducting bank-level diagnostics. Nevertheless, they cautioned that significant challenges remain. In this regard, Directors urged completion of the reform agenda aimed at improving governance and stability. Critical next steps include transfer of ownership of problem shares in the largest banks to fit and proper shareholders, and continued clean‑up of banks’ balance sheets and improvement in their risk management procedures to allow effective financial intermediation. Increased supervisory resources focused on key risks can support these efforts. Directors called for continued efforts to strengthen the AML/CFT framework.
Directors emphasized that steady implementation of structural reforms is indispensable for sustainable growth and poverty reduction, particularly in light of demographic pressures. Priorities include encouraging capital accumulation, targeted labor market reforms and investment in human capital, economic diversification, and reducing the shadow economy. Directors also underscored the importance of transparency and cost recovery in the energy sector.
It is expected that the next Article IV consultation with the Republic of Moldova will be held in accordance with the Executive Board decision on the consultation cycles for members with Fund arrangements.[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.
[2] The ECF is a lending arrangement that provides sustained program engagement over the medium to long term in case of protracted balance of payments problems. For more details see http://www.imf.org/en/About/Factsheets/Sheets/2016/08/02/21/04/Extended-Credit-Facility.
[3] The EFF was established to provide support of comprehensive programs that include policies of the scope and character required to correct structural imbalances over an extended period. For more details see http://www.imf.org/en/about/factsheets/sheets/2016/08/01/20/56/extended-fund-facility
[4] 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. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
