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Limba romana
Donors’ Conference for
Moldova
Brussels, December
12, 2006
Statement by the Staff of the International Monetary Fund
Introduction
1.
On May 5, the IMF Executive Board approved a new PRGF-supported
program
for Moldova.
After four years without an active program, the PRGF arrangement—which has
broad
political support—reflected Moldova’s goal of deeper integration into European
structures, and helped Moldova secure a debt restructuring by Paris Club
creditors on May 12, 2006.
2.
Since May, however, Moldova has suffered two serious external shocks.
Natural gas prices have risen more rapidly than previously expected, and Russia
has banned imports of Moldovan wine, citing phytosanitary concerns. These shocks
have significantly altered the macroeconomic assumptions that were the basis for
the original program.
3.
The authorities have worked to identify an appropriate strategy to
deal with the macroeconomic and social impact of the shocks. This strategy
envisages a combination of adjustment and financing to maintain macroeconomic
stability and address emerging balance of payments gaps. IMF staff supports this
strategy, and on Friday, December 15, the IMF Executive Board will consider
Moldova’s request to complete the first review and augment access (i.e.,
increase the size of the loan) under the PRGF arrangement. Donors’ commitment to
provide further financial assistance will be essential to support the
authorities’ program.
Size of the external shocks
4.
The two external shocks experienced since the start of the program are
serious and long-lasting:
·
After two steep jumps in 2006, IMF staff projects natural gas
import prices to move permanently to European levels in early 2007. Gazprom
raised prices for Moldova to $110/tcm in January 2006, and to $160/tcm in July,
and IMF staff forecasts a price of $220/tcm from January 2007. Compared to the
baseline in the May staff report, the BoP impact of the gas price shocks is
about 3 percent of GDP in 2007-08, falling to 2½ percent by 2009.
·
The wine ban has thus far had an even larger effect. Russia
has traditionally absorbed 80-90 percent of Moldovan wine exports, or about
10 percent of GDP, and prospects for an early resumption of wine exports are
uncertain. Current IMF staff projections for wine exports do not envisage a
recovery to 2005 value levels until 2009, meaning that—relative to the baseline
projection in the May IMF staff report—the BoP impact of the wine ban would be
about 6½ percent of GDP in 2006 and 2007, falling to about 5 percent by 2009.
Even if, as has been reported, an agreement has been reached to lift the wine
ban, lingering reputational effects and increased competition from other
suppliers who have established a foothold on the Russian market are likely to
limit Moldova’s ability to recapture its previous market share.
5.
The shocks are expected to have major negative effects on the external
position, growth, and inflation:
·
Taken together, the impact on the BoP of these shocks is very
large; IMF staff forecasts the direct effect on the BoP to rise from
6½ percent of GDP in 2006 to 9½ percent of GDP in 2007, falling gradually
thereafter.
·
IMF staff expects a deceleration in growth to 3 percent per
annum in 2006-07, relative to growth of 5-6 percent projected in the
program.
·
The first round effect of higher gas prices on headline
inflation will be 1½ percentage points, and this effect comes on top of
underlying inflationary pressure that by mid-summer was already exceeding
program expectations (before the shocks). Thus, headline inflation in 2006 is
expected to be 12 percent (December-to-December), falling to 10 percent in 2007
(as opposed to 9 percent and 8 percent, respectively, in the original program).
6.
The authorities understand that, since the shocks will have
long-lasting effects, Moldova will need to adjust, with financing designed to
smooth the transition. Importantly, the private sector has already begun to
adjust, as higher natural gas prices are being passed through to consumers. IMF
staff projects that the financing gap can be closed through monetary and
exchange rate policies combined with additional financing with an unchanged
fiscal position. The program budget deficit of ½ percent of GDP builds in
significant fiscal adjustment, as it freezes planned public sector wage
increases. Moreover, the authorities have committed to take additional measures
if the macroeconomic situation calls for it. In particular, moderate nominal
exchange rate depreciation is expected to lead to nonenergy import compression
of 2–3 percent of GDP over 2007-09—compared to the estimates in the original
program—while tighter monetary policies should return underlying (non-energy,
non-food) inflation to the single-digit path envisaged in the original program.
7.
The IMF supports the authorities’ program and adjustment efforts. The
program presents a residual gap that needs to be financed externally, which we
envisage will take three forms:
·
First, an increase in the size of the IMF loan. IMF staff
supports the authorities’ request to augment access to IMF resources by about
$45 million, with most of the additional resources available upon Board
approval.
·
Second, stepped-up assistance by donors, preferably in the form
of grants, to close the residual financing gap, building on the amounts that
have already been received. The Netherlands has recently provided a grant of
€2.5 million, while the World Bank is expected to disburse a $10 million Poverty
Reduction Strategy Credit in early 2007. The authorities are hopeful that the EU
will provide significant grants under their Macro-Financial Assistance program
and the European Neighborhood and Partnership Instrument. Notably, the US
Millennium Challenge Corporation has recently approved a request for Compact
status that makes Moldova eligible for sizable grants over several years.
·
Finally, reduced reserve accumulation, relative to the program.
Increased exchange rate flexibility underpins the authorities’ adjustment
strategy, reducing somewhat the urgency of reserve accumulation. After the
shocks of 2006, Moldova would now be in a position to attain the targeted three
months of import cover in 2009, rather than 2008 as originally programmed.
Structural reform agenda
8.
The authorities’ structural reform agenda emphasizes growth-enhancing
measures as the appropriate policy response to the external shocks. In the
first instance, these measures aim to clarify (and eventually reduce) the role
of the state in the economy—thus improving the business environment to promote
exports and FDI. The authorities have developed a comprehensive investment and
export promotion strategy that centers on regulatory reform, and which dovetails
with their ongoing public administration reform. Public finance management
reforms are meant to improve cash management and enhance the effectiveness of
monetary policy, while a tax administration reform strategy has been approved
that aims to lower the cost of compliance with tax law (though it will require
some donor financing to bring it to fruition). The authorities also intend to
accelerate the privatization process, including in the financial sector.
9.
The authorities have passed natural gas price increases through to
consumers, and are moving to eliminate implicit subsidies for heat and
water. Tariff setting responsibility for heat and water has rested with the
municipalities since the late 1990s, and tariffs have not been increased
since 1999. Thus, the authorities have proposed legislation to locate tariff
setting responsibility for heat and water with ANRE, the national agency for
energy regulation.
10.
Increasing energy tariffs highlights the importance of reforming the social
assistance system. International partners, including the recent IMF poverty
and social impact assessment (PSIA) mission, have noted that the existing system
of categorical social assistance is poorly targeted, making large errors of
inclusion and exclusion. Although a better-targeted system is in preparation
(with assistance from DfID and other donors), the authorities do not expect it
to be in place before 2008. Thus, in addition to the categorical social
assistance program, as a short term measure the government has introduced a
lifeline tariff system for increases in natural gas tariffs this winter. A
follow-up PSIA mission later this month will—in cooperation with other
organizations—seek to help identify other short term measures to address the
most serious poverty implications of higher tariffs.
Conclusion
11.
The authorities have shown impressive ownership of their economic reform
program. They have undertaken strong adjustment efforts in the face of very
serious external shocks during 2006. The IMF staff supports these efforts and
has recommended an augmentation of the PRGF to the Executive Board. Additional
financing from the international community would complement these efforts.
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