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IMF Reaches Provisional Agreement with Moldova

A 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 market.  

In 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
Chisinau, Moldova