Moldova - Concluding Statement of the IMF Mission
Chişinău, September 22,
presents the conclusions of an IMF mission that visited Moldova during
September 13-21, 2011 to discuss with the authorities the macroeconomic
performance and outlook, the 2011 budget execution, the draft 2012 budget,
and other program-related issues. The mission would like to thank the
authorities for their warm hospitality, close cooperation, and candid and
productive policy discussions.
Moldova’s economy has performed strongly so far in 2011 on the back of
robust domestic demand and booming exports, although a gradual moderation is
on the horizon. Private consumption has been boosted by solid growth of
remittances and wages, while strong investment reflected improved sentiment
about business prospects and rising corporate profitability. Exports in
January-July 2011 rose by 63 percent relative to the same period last year,
aided by robust external demand, new production capacity, and favorable
international prices. As a result, by mid-2011 GDP growth reached 7½ percent
and unemployment declined to 6.2 percent. However, the ongoing slowdown in
global economic activity is likely to weigh on Moldova’s economic
performance in the period ahead. We therefore expect real GDP growth to
settle at 6 percent in 2011 and 4½ percent in 2012. Headline CPI inflation
will peak in late 2011 before declining to 6½ percent by end-2012 as the
lagged effects of the energy and food price hikes wear out. Despite fast
export and remittances growth, the current account deficit would remain
elevated as the strong domestic demand is drawing in large imports of
consumer and investment goods.
2011 budget execution has been uneven, and will require strong efforts to
achieve the program targets by end-year. Marked slowdown in revenue
collection relative to the booming economy, notably the VAT and social
security contributions, and acceleration in current expenditure have led to
overshooting of the fiscal deficit target in June. Tax collection appears to
have since improved owing to measures to boost VAT compliance, while
strengthened spending controls have curbed expenditure overruns.
Nevertheless, even if this momentum is sustained, earlier slippages and new
budget pressures put the annual deficit target at risk. In particular, the
budget allocation for subsidies to agriculture has already been exhausted
and the mission welcomes the authorities’ plans to prevent accumulation of
unfunded commitments in this area in line with established procedure.
Assuming this is done quickly, the general government’s revenue and
expenditure for the full 2011 should fall broadly in line with the approved
budget. On this basis, the mission can support the authorities’ intention to
rebalance the budget by providing additional resources for social spending
while continuing to target a budget deficit of MDL 1,596 million. That said,
the mission urges the authorities to strengthen control over tax and social
security contribution compliance further and close a number of legislative
loopholes that erode the VAT base.
draft 2012 budget appropriately aims to further the structural fiscal
adjustment and moderate the strong domestic demand. The mission supports
the targeted general government deficit of 0.8 percent of GDP. This target
would keep the budget on the programmed structural adjustment path, further
reversing the deterioration that occurred in 2008-09. It will also
contribute to a countercyclical moderation of domestic demand, which is
essential to keep inflation and the current account deficit under control.
Revenue will be strengthened by the proposed major tax policy reform,
including the re-introduction of the corporate income tax at the competitive
rate of 12 percent coupled with accelerated asset amortization, adjustments
in excise rates, and the extension of cash VAT refunds for purchases of
investment goods to the whole country. Planned reform-supported
rationalization in current expenditure, based on timely passage of the
necessary legislative and administrative measures, would allow a significant
expansion of public investment to raise medium-term GDP growth.
Progress in other program-related policies has been mixed. The mission
welcomes the recent adoption of a government decision aimed at improving
service quality and payment discipline in the Chişinău district heating
sector. Alongside, a permanent arrangement for payment of current bills in
the heating sector, taking into account seasonal lags in Termocom’s
revenue collections, should be put in place before the new heating season.
While being encouraged by the progress in the implementation of the
education reform, we would advise timely passage of the delayed legal
amendments needed to move the reform further. Furthermore, we are concerned
about the delay in adopting the package of legal amendments to facilitate
bank mortgage restructuring, collateral execution, and resolution of debtor
insolvency, a reform outstanding from 2010. A swift government approval of
the drafted amendments and their speedy consideration by parliament would
greatly facilitate a reduction in banks’ bad loans and a concomitant
increase in new lending. Similarly, parliamentary passage of the draft
package of laws to resolve the difficult situation in Banca de Economii
stemming from its involvement in the resolution of the failed
Investprivatbank should proceed without further delay.
An IMF review mission will return to Chişinău in late October to conduct
discussions on the fourth review under the ECF/EFF-supported program.
Provided understandings on policies to further the program objectives are
reached, the IMF’s Executive Board is expected to consider the review in