IMF staff and the Moldovan authorities reached staff-level
agreement on policies to complete the sixth and final Extended Credit
Facility and Extended Fund Facility (ECF/EFF) review, subject to approval by
the IMF Management and the Executive Board.
The three-year program has been broadly successful in
achieving its objectives. Comprehensive reforms have rehabilitated the
banking system and strengthened financial sector governance, entrenching
Prudent and well-coordinated policies are needed to safeguard
the progress achieved. Decisive governance and institutional reforms are
necessary for faster, sustainable, and inclusive growth.
An International Monetary Fund (IMF) team, led by Mr. Ruben Atoyan,
visited Chișinău from January 22 to February 5 to conduct the 2020 Article IV
consultation and the sixth and final review of Moldova’s economic program
supported by the IMF’s Extended Credit Facility (ECF) and Extended Fund Facility
The team reached staff-level agreement on
policies needed to complete the sixth review under the program and held
constructive discussions on the 2020 Article IV Consultation with the
authorities. Program performance is
assessed to be strong, with all end-December 2019 performance criteria met. Most
structural benchmarks are on track to be implemented prior to the completion of
the review, although some with delays. The agreement is subject to approval by
the IMF Management and the Executive Board. Consideration by the Executive Board
is tentatively scheduled for March 16, 2020. The completion of the review will
make available SDR 14.4 million (about $20 million).
The program has been broadly successful in
achieving its objectives. Comprehensive
reforms have rehabilitated the banking system and strengthened financial sector
governance, entrenching macro-financial stability. This progress is commendable
given a volatile political landscape, with the course of the program stretching
over tenures of three different governments. This has been made possible by
broad support for the reforms ultimately aimed at strengthening governance and
improving living standards of Moldova’s people.
Reforms under the program helped improve
confidence and supported a turnaround in the economy.
Real GDP growth is estimated at 4.2 percent in 2019 and is expected to remain
close to 4 percent over the medium term. Inflation accelerated to 7.5 percent in
December 2019 due to rising food prices and robust aggregate demand, but it is
projected to revert towards the 5 percent target later this year. The 2019
fiscal deficit, at 1.5 percent of GDP, overperformed the program target as a
weaker than projected revenue outturn was more than offset by under-execution of
spending. Public debt remained low at around 30 percent of GDP. Well
capitalized, liquid, and profitable banks helped support double-digit credit
growth to the economy. Notwithstanding a sizable current account deficit, it
remained comfortably financed by strong private and official inflows. The leu
remained broadly stable in 2019.
The outlook is cautiously positive but subject
to risks. The resurfacing of political
instability, policy reversals, or reform fatigue could hurt confidence and limit
external financing options. At the same time, regional and global spillovers
from a protracted slowdown in major trading partners cannot be ruled out.
Prudent and well-coordinated policies are needed to mitigate these risks and
The 2020 budget envisages a growth-friendly
fiscal expansion to help address large infrastructure needs, but implementation
and financing risks remain significant.
Moldova’s subpar track record in executing budgeted capital spending reflects
significant weaknesses in public investment management that need to be urgently
addressed. Also, securing financing from external development partners, as
envisaged in the budget, requires a strong reform momentum. Meanwhile,
contingency plans need to be developed in the event that external inflows fall
short of expectations.
We forecast inflation to decelerate and support
the direction of the NBM’s monetary policy decision. In our view, its timing
was premature given risks of inflationary pressures stemming from a looser
fiscal policy stance and a weaker exchange rate. The NBM should stand ready to
adjust its monetary policy stance should risks to the inflation outlook
materialize. Moldova’s vulnerability to external shocks requires having a
flexible exchange rate as an effective shock absorber. Towards this objective,
the NBM has appropriately reduced its footprint in the foreign exchange market,
limiting its interventions to smoothing excessive market volatility.
Despite successful stabilization efforts,
widespread and significant governance and institutional vulnerabilities are
major impediments to boosting living standards of Moldovan people.
Perceptions of corruption and weak rule of law are entrenched, the regulatory
framework is not properly enforced, informality is high, and a large SOE sector
poses fiscal risks and undermines competition and productivity. While
significant progress has been made on banking sector supervision, weak oversight
of the non-bank financial sector, gaps in Moldova’s AML/CFT framework, and lack
of progress on asset recovery are a recurring source of concern. Addressing
these vulnerabilities could have significant growth dividends through faster
capital accumulation, reduced labor and human capital headwinds from extensive
emigration, and higher productivity.
The mission is grateful to the authorities and
to other interlocutors for their cooperation, candid discussions, and generous
PRESS OFFICER: Gediminas Vilkas
Phone: +1 202 623-7100