Limba romana                                                                       Russian

Republic of Moldova
Consultative Group Meeting
Tuesday, December 12, 2006
Brussels 

Concluding Remarks of the Co-Chairs 

1.               The Government of Moldova and its international partners convened on December 12, 2006, in Brussels, Belgium, for a Consultative Group Meeting. The objectives were twofold: (a) to assess progress and to confirm commitment in the implementation of the country’s reform program and development agenda, as set out in the EU-Moldova European Neighbourhood Policy (ENP) Action Plan  and the Moldova Economic Growth and Poverty Reduction Strategy Program (EGPRSP), and (b) to provide indications of additional external financing in response to recent external shocks that have opened a short term financing gap putting Moldova’s poverty reduction and growth objectives in question.

2.               The meeting was jointly hosted by the European Commission and the World Bank. The Government delegation was led by H.E. the Prime Minister of Moldova, Vasile Tarlev. All key development partners were represented .

Overall Conclusions and Expectations  

3.               The meeting offered the Moldovan authorities an opportunity to present to the international community an update on their economic and social reform progress, the impact of the external shocks Moldova currently faces, and their vision for medium term development and convergence towards European norms and standards. There was a broad consensus that Moldova has achieved considerable progress in economic and social reforms during the past year, and that medium-term prospects are bright if the impact of the external shocks can be managed successfully. In this context, the discussion focused on three broad areas: political reform and the rule of law, structural and socio-economic reforms, and macroeconomic policies and financing needs.

Political reform and the rule of law 

4.               Government expressed awareness about considerable efforts needed in order to achieve the complex changes within Moldova required to carry out political reforms and to strengthen the rule of law. Government stressed the importance of deeper integration with Europe as an important incentive for reform and underlined the obstacle imposed by the unresolved Transnistria issue. Government and Partners agreed that existing legislation and reforms already introduced need to be fully implemented. Partners stressed the need for a clear focus and strong political will to carry out reforms. Government confirmed its strong political commitment to a wide range of ambitious political reforms and to strengthen the rule of law in Moldova.

5.               Partners noted the need for further strengthening the independence of the Judiciary and stressed importance in this regard of fully implementing the recent laws on the Judicial System, the Supreme Council of the Magistracy and the BAR association. Partners underlined the need to fully implement the Moldovan Anti-Corruption Strategy and Action Plan. Partners invited Moldova to bring the operation of the Centre for Combating Economic Crimes and Corruption fully in line with its purpose. Partners noted also the need to tackle abuses by law enforcement bodies and ill-treatment of persons in custody and to further strengthen the fight against organised crime. Partners welcomed cooperation established by the Moldovan border and customs authorities with the EU Border Assistance Mission to Moldovan and Ukraine and encouraged Moldova to fully implement EUBAM’s recommendations.

Structural and socio-economic reform 

6.               Government recognized and expressed concern that despite continued strong economic growth, poverty reduction has stalled in recent years and in rural areas poverty has actually increased. Government and partners alike acknowledged that improving the quality and pace of growth in Moldova will be critical to ensure further poverty reduction. Partners commended the reform efforts to reduce administrative and regulatory barriers to private sector activities. They emphasized, however, that further efforts should be made to encourage private sector and foreign investment by enhancing the business environment, increasing domestic competitiveness and addressing the binding constraints to growth. In this regard, partners stressed the need to pursue stalled agricultural sector reforms and, in the light of the recent energy price shocks, improve the efficiency and effectiveness of social service delivery. In the area of social assistance partners stressed the need to accelerate efforts to better target these programmes to address the needs of vulnerable groups.

7.               Partners noted that the deterioration of infrastructure and scarcity of public investment remained a barrier to long-term growth in Moldova. While significantly more public sector investment in physical and human capital is called for, partners emphasized the need to avoid undermining macroeconomic stability and crowding out private sector activity. In this regard, partners cautioned against increasing the already large size of government. Instead, partners emphasized the importance of better prioritizing expenditure needs and stressed the importance of improving the allocation and efficiency of existing government programs. Progress under the ambitious effort to reform public administration was acknowledged. On this issue, partners noted the remaining challenges, underscoring the importance of developing in-house technical capacity for policy coordination and civil service management.

Macroeconomic policies and financing needs 

8.               Partners commended the authorities for their successful macroeconomic management, which has contributed to strong economic growth and, until recently, a significant reduction in poverty over the past seven years. However, government noted that—notwithstanding recent progress in resolving barriers to wine exports to Russia—the twin external shocks (higher natural gas prices and disruptions in wine exports to Russia) would have a significant effect on the Moldovan economy going forward. Reputation effects may limit wine exports to Russia for some time, while the other shock—higher natural gas prices—is of a permanent nature. These shocks have slowed economic growth, contributed to higher inflation, and led to a lower level of international reserves than would be desirable. Partners and government agreed that it was appropriate for Moldova to bring inflation down to single digit levels, though it was noted that energy prices rises could complicate this goal. Public finances have been affected, and government noted that–without additional financial resources from the international community—it may be necessary to cut priority expenditures needed for development and poverty reduction. 

9.               Partners recognized that the shocks had opened a financing gap that would need to be addressed through higher financing. They assessed that Moldova was making good progress in addressing the shocks, and broadly supported the mixture of adjustment and financing that underlies the government’s strategy. Partners emphasized that exchange rate flexibility would be important to allow the tradable goods sector to adjust to new prices. They also stressed that higher imported energy prices should be passed through to consumers, because only in that way can conservation be accomplished. However, both government and partners noted that weaknesses in Moldova’s social assistance program could limit the pace at which some utility tariffs could be increased to cost-recovery levels.  

10.           Partners expressed their support for the authorities’ strategy and indicated financial support totalling more than US$ 1.2 billion (almost 1 billion €) over the next three years, of which 25% is in budgetary and balance of payment support. About 50% of the total is expected to be provided as grants. Partners and government expressed satisfaction that this level of support would cover Moldova’s near-term financings needs, in particular the balance of payments financing gaps in 2007-08 that have emerged as a result of the external shocks. However, all parties recognize the need to maintain the reform momentum necessary to attain Moldova’s medium term objectives.

Conclusion 

11.           Partners and government agreed that the further economic and social development of Moldova as well as the close relationship between the country and the international community hinges on a continued strong will in Moldova to implement political, social and economic reforms. Partners indicated their willingness to align the large level of external funding, including substantial budget support, project financing and technical assistance, closely with the authorities’ strategic priorities. Donors and partner organizations also agreed to continue strengthening coordination and harmonization. The Government reiterated its commitment to address the issues raised at the CG.     

/signed/                                                                       /signed/

Hugues Mingarelli                                                        Paul Bermingham
Director                                                                       Country Director
DG External Relations                                                  World Bank    
European Commission