Reaches Provisional Agreement with Moldova
visiting IMF mission led by Mr. Richard Haas reached provisional agreement on
Tuesday, November 10, 1998 with the Government and National Bank of Moldova on
a memorandum of economic policies for the remainder of 1998 and the first half
of 1999. Approval of the program
by the management and Executive Board of the IMF and implementation of key
measures in the coming weeks will lead to disbursement by the Fund of a SDR 25
million tranche (approximately US$35 million) to Moldova in late December or
early January under the three-year, SDR 135 million Extended Fund Facility
program approved by the IMF in May 1996.
The program is built around a substantially
strengthened fiscal framework for the fourth quarter of 1998 and for 1999.
The Moldovan government will secure passage by parliament of a package
of expenditure cuts for the fourth quarter totalling Mdl 225 million (1 U.S.
dollar equals approximately 7.12 Moldovan lei), in order to ease fiscal
pressures stemming from the impacts of the financial crisis in Russia and the
region and from a loss of investor confidence in the Moldovan Treasury bill
market. The 1999 budget will be
submitted this week to the Moldovan parliament and should be approved before
December 15. The budget will
target a deficit of Mdl 200 million or 2 percent of GDP with no increase of
arrears, as compared with a cash budget deficit estimated at 2.4 percent of
GDP in 1998, with an increase of expenditure arrears this year of just more
than five percent of GDP (i.e., a budget deficit of 7.5 percent of GDP on a
commitments basis). The tightened
fiscal stance will be achieved by cuts in spending commitments and/or policy
reforms in health and education, energy consumption and compensations,
pensions, agriculture support, defense and cuts in public administration.
Efforts will also be made to strengthen revenue collections at the
social (pension) fund, including via elimination of barter collections during
the course of the year. The
Moldovan government also will target an increase in excise taxes on diesel
fuel and gasoline, a substantial reduction of netting operations or “mutual
offsets,” and will strictly refrain from issuance of government guarantees,
in recognition of the difficult experience with called guarantees and the
current difficult financial circumstances.
It is intended that the strengthened budgetary position will ease
pressures on the Moldovan leu and allow for improvement in the Treasury bill
connection with the decision ten days ago to allow the leu to float freely in
the foreign exchange market, the National Bank of Moldova will continue to
maintain appropriately cautious monetary policy while providing support for
redemption of government securities coming due. Moldovan commercial banks have been obliged to meet higher
liquidity requirements via holdings of Treasury bills, which is hoped to ease
pressure both in the securities market and on the national currency.
During the course of 1999, the National Bank will aim to rebuild
gradually its foreign exchange reserves to more prudent levels, while aiming for
somewhat eased inflation targets of 13 percent.
The National Bank will also monitor carefully conditions in the banking
sector in order to avoid systemic liquidity constraints.
The tightened fiscal position and the depreciation of
the Moldovan leu is expected to contribute to a cut of the deficit of the
current account of the balance of payments from a projected 15 percent of GDP
this year to 12 percent of GDP in 1999.
Key structural measures under
the memorandum agreed with the IMF include continuation of the privatization
program for the electricity sector, for Moldtelecom, the tobacco sector, the
state fuels company Tirex-Petrol, and for key firms in agriculture supply and
marketing. The IMF mission was
pleased to learn of successful recent sales of enterprises in the cement
industry, fuel supply, textiles and pharmaceuticals, in each case to western
foreign investors. The new
agreement aims to reduce the maximum import tariffs from 40 to 15 percent and to
cut the number of tariff bands to three, to sharply reduce state subsidies for
the chronically inefficient agriculture sector and to strengthen
commercialization (collections, management) of the energy sector ahead of
privatization. The government will
continue its highly successful land reform and titling program, in cooperation
with the U.S. Agency for International Development and is expected to propose a
number of further legal reforms, including introduction of the civil code,
administrative and territorial reform, and changes to the collateral law.
Financial support from the IMF
will be combined with US$35 million worth of budgetary support from the second
Structural Adjustment Loan of the World Bank and support from other donors and
creditors, including via debt rescheduling.
The program anticipates a decline of GDP in 1998 by 3 to 5 percent,
reflecting the current financial difficulties, but targets modest growth of 1
percent in 1999.
Mark A. Horton
IMF Resident Representative