Moldova & IMF IMF Activities Publications Press Releases


"Moldavskie vedomosti", July 28, 2001
(translation from Russian)

"To Give or Not to Give?"


Voronin does not want to run after loans "like a goat after a carrot"

Thursday a full-scale International Monetary Fund mission started its work in Chisinau. It is headed by Richard Haas, European II Department Advisor. The mission, which will stay in Moldova until August 8, is truly historical.
It is expected to answer almost Hamletian question "To give or not to give?"
"Imperialistic" money for communist authorities is at stake. 


Richard Haas

The authorities are optimistic about the mission and expect that it would recommend to the Fund's Board to provide money to Moldova.

"We expect to reach an agreement with the IMF", said at a briefing Victor Doras, Senior Advisor to the President of Moldova.

However, the next day Doras's boss made another rude attack against the IMF and declared at a meeting with pensioners that Moldova can do without foreign loans and does not have to run after them "like a goat after a carrot".

The IMF has frozen lending to Moldova after communists came to power in February. The mission, which will carry out annual consultations with Moldova and will assess the performance under the IMF-supported programs, will provide recommendations to the Fund's Board regarding further actions concerning our country.

Whether the World Bank and the European Union provide $36m worth of loans, which are already envisaged as the 2001 budget revenue and account for one seventh of the budget, depends on the IMF's resumption of lending to Moldova not later than October.

The IMF press release on the forthcoming mission read that it would pay special attention to the implementation of the Memorandum of Economic and Financial Policies measures, which Moldovan authorities coordinated with the IMF late last year.

In December 2000, the IMF Board approved a three-year $142m loan for Moldova in the framework of the Poverty Reduction and Growth Facility (PRGF). Moldova received two tranches totaling $24m under the Facility.

This is also when the Memorandum of Economic and Financial Policies of the Government and the National Bank of Moldova was submitted to the IMF.

The main objective set in the Memorandum for 2001-2003 is furthering of the policies ensuring high and sustainable economic growth, which is an important precondition for poverty reduction.

"We are aware that to achieve this objective we have to preserve macroeconomic stability, deepen the process of structural reforms, improve governance, and strengthen efforts to attract foreign investment", reads the document.

The remaining part of the Memorandum sets out detailed measures of macroeconomic and structural policies in the forthcoming period.

The government believes that the poverty reduction goal can only be achieved in the context of financial stability accompanied by high and sustainable growth. The medium-term objectives are: annual growth rates of 5 percent or higher (which would require an increase in non-government investment); lowering of the public debt burden (including domestic expenditure arrears) to around 70 percent of GDP in 2003 from 92 percent of GDP in 2000 (including a reduction in the stock of external public and publicly guaranteed debt from 75 percent of GDP in 2000 to around 60 percent of GDP in 2003); further reduction in the annual inflation rate to about 10 percent (end of period); and containing the external current account deficit to around 6 percent of GDP.

To achieve these medium-term objectives, the government will continue to implement a prudent fiscal policy. In particular, it will be important to aim at a primary budget surplus of at least 2 percent of GDP over the medium-term to reduce the debt burden and avoid crowding-out private investments. This implies an overall fiscal deficit of less than 2 percent of GDP. At the same time, the budget allocation for the social sectors will be consistent with the poverty reduction strategy. The government will also give a further impetus to the structural reform programs through more vigorous efforts to strengthen the legal framework, restructure/liquidate firms with large debt to the budget, complete the privatization program (including wineries, energy and telecommunication companies), strengthen the market for agricultural land, achieve additional public administration reform and further deregulation.

The government undertook an obligation to prepare a comprehensive poverty reduction strategy, which would be included in the Poverty Reduction Strategy Paper (PRSP) to be approved by the government by early 2002.

A separate section of the Memorandum describes the 2001 program. It reads:

"Macroeconomic policies for 2001 will aim at supporting a turnaround in GDP as well as reducing inflation and maintaining a prudent level of official reserves. To achieve the growth target of about 5 percent, we intend to proceed rapidly with structural reforms, improve governance, and implement the privatization process as described below. While there are downside risks for the targeted growth rate in 2001, the implementation of structural reforms, including the privatization program, a post-privatization plan for agriculture, the initiation of public administration reform, and a strengthening of the legal framework, as well as an improvement in the external environment, are expected to contribute to the turnaround in GDP in 2001. Inflation is targeted to further decline to about 10 percent (end of year basis) in line with the tight financial policies. External reserves are expected to increase to over 3 months of imports of goods and nonfactor services."

The 2001 budget aims at stabilizing Moldova's total stock of public and publicly guaranteed debt at around 74 percent of GDP through achieving a sizeable primary surplus of 4 percent of GDP. The overall cash deficit for the consolidated government is budgeted at 400 million lei (1.9 percent of GDP) with domestic budgetary arrears (including wages and pensions) budgeted to further decline by 100 million lei, resulting in an expected deficit on a commitment basis of 300 million lei (1.5 percent of GDP).

Moldova committed to reduce netting operations to 3 percent of total revenues of the combined central and local governments, down from 5 percent in 2000 and 10 percent in 1999 (except for those involving debt clearing operations with the Social Fund).

The document further states:

"We will resist all calls for new laws to provide for tax exemptions, holidays, amnesties, or deferrals of any kind. As regards the Free Economic Zones (FEZs), we will draft a new law with technical assistance from the Fund that will restrict the zones to export-oriented production and trans-shipment. The intention will be to strictly limit privileges and, ultimately, to phase out the FEZs. We will submit such a draft, together with other necessary legislative changes, to parliament by end-February, 2001 (structural benchmark)."

"As regards expenditures, public sector salaries, which had been kept unchanged in nominal terms from 1995 through 1999, are budgeted to increase by 83 million lei in 2001 (after increasing by 30 percent in 2000) as a result of the increase in the minimum wage to 100 lei per month, from 65 lei in 2000. This has been made possible in part by the large cuts in public sector employment which fell from 309,000 in 1999 to nearly 285,000 in 2000. Further reorganization of the public administration is expected in 2001 and beyond in line with the World Bank's Public Sector Reform project", reads the Memorandum.

Moldova confirmed its commitment to limit the subsidies in the budget. Direct subsidies to the agricultural sector in 2001 will be limited to the spending amount allocated in the 2000 budget for the Agricultural Support Fund (ASF). Funds available within the spending limit will be targeted to rural entrepreneurs and farmers through a matching grant credit fund developed in agreement with the World Bank.

The Memorandum notes that the Administrative and Territorial Reform Law was implemented in Moldova: "The number of local administrations has been reduced from 38 to 12 and the number of public sector employees has been cut by almost 10,000. Savings are also being utilized in non-wage expenditures as the new structures are progressively being put in place. We remain firmly committed to refrain from directing credits through the NBM or commercial banks, or instruct banks to extend credits on non-commercial terms, including to local administrations and the Social Fund."

"The situation at the Savings Bank is under careful continuous review following the government's take-over of the bank and the installation of new management in March 1999. The rehabilitation plan is being actively implemented and the bank has achieved a positive net worth. It is expected that the bank can be largely recapitalized by a further recovery of assets and efficiency gains in 2001 without any government capital injections. The government will prepare a plan for the privatization of the Savings Bank", says the Memorandum.

An important section of the document is dedicated to structural reforms and privatization. The government has undertaken to focus on the following:

“Privatization program. The privatization bill on five wineries and the tobacco sector was approved by Parliament in October 2000 (prior action). In the coming period, and according to a strategy to be agreed to with the World Bank, we will prepare the privatization of these wineries and tobacco companies. We expect to be able to announce a sales tender for at least two wineries by May 1, 2001. We also plan to proceed with the privatization of Moldtelecom, in consultation with the World Bank. In this regard, Parliament has already approved an independent regulatory agency for the telecommunication sector, appointed a board of directors and physically established the agency. Moldtelecom has not contracted any external debt since May 1999 and will not be permitted to contract debt pending its privatization, except for making necessary pre-privatization investments in agreement with the World Bank. We will launch a tender for selecting a financial advisor for the privatization of Moldtelecom by February 1, 2001 (structural benchmark).

Bankruptcy/reorganization procedures against 24 loss-making firms with arrears to the State and/or Social Fund budgets exceeding 3 million lei have already been initiated (prior action). Creditors have filed legal proceedings against these companies. We intend to put increased pressure on these and other enterprises undergoing reorganization through the creditor council's authority under the Law on Bankruptcy. However, the Law on Bankruptcy will need to be amended to accelerate the reorganization/liquidation process. We will submit an amended law to parliament by February 15, 2001 (structural benchmark) and expect its approval by May 1, 2001. This should contribute to financial discipline (i.e., through a demonstration effect), a reduction of tax arrears, and the promotion of efficiency and growth.

Strengthening legal and regulatory framework. We are continuing our efforts to establish a firm legal framework for a market economy, a key component to providing a business friendly environment and to improving transparency and good governance. In this regard, the first reading of the civil code--which is indispensable to regulate contractual relations--was approved by parliament in October; we expect the civil code to be approved by end-June 2001. We recognize that the liquidation of insolvent banks, after their license has been revoked, has placed a heavy burden on the NBM, absorbing a large number of staff and hampering the supervision of other banks. The NBM will submit by end-March 2001 amendments to the Law on Financial Institutions and other related laws to parliament to transfer the responsibility for appointing bank liquidators and monitoring progress of the liquidation process to the courts (structural benchmark). Moreover, the government will also submit an amended law on collateral and to parliament by end-March 2001, to allow for an easier enforcement of property rights and contractual obligations. In the area of improving governance and transparency, we intend to submit, with assistance from the Fund, a draft law on financial disclosure to parliament by end-June 2001 (structural benchmark), requiring regular reporting by senior elected and appointed government officials.

A section of the memorandum is called Technical Memorandum of Understanding. It determines the National Bank’s obligations. The following indicative targets were set by June 30:

- floors on the stock of net international reserves (NIR) and gross reserves in convertible currencies of the NBM - $59m and $229m;

- ceilings on the net domestic assets (NDA) and reserve money of the NBM – 1,394 million lei and 2,119 million lei;

- limits on net credit to general government from the NBM – 1,560 million lei;

- limits on the overall cash deficit of the general government - 464 million lei;

- limits on the contracting and guaranteeing of nonconcessional external debt with original maturities indicated below by the government of Moldova, the NBM or any other agency acting on behalf of the government, and on the accumulation of external arrears - $14m with a term over 5 years;

- ceilings on domestic expenditure arrears of the government - 863 million lei in the general government sector and 200 million lei on wages and pensions.

A lot in the memorandum looks very technical and complicated, but this is what mission comes for – to conduct a thorough analysis. It intends to hold a press conference before departure. And the Fund’s Board will answer the final question "To give or not to give?" The government needs to receive the “give” answer by the end of October. If the IMF says "no", the government can simply resign – it doesn’t stand a chance.


Anton Simionel