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IMF Concludes 2002 Article
IV Consultation with the Republic of Moldova
| Public Information
Notices (PINs) are issued, (i) at the request of a
member country, following the conclusion of the Article IV
consultation for countries seeking to make known the views of
the IMF to the public. This action is intended to strengthen IMF
surveillance over the economic policies of member countries by
increasing the transparency of the IMF's assessment of these
policies; and (ii) following policy discussions in the Executive
Board at the decision of the Board. The
staff report (use the free
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view this pdf file) for the 2002 Article IV consultation with
Moldova is also available. |
On July 10, 2002 the Executive Board of the International
Monetary Fund (IMF) concluded the Article IV consultation with
Moldova.1
Background
After many years of decline, economic activity has turned around.
Boosted by a good harvest and continued industrial growth, real GDP
increased by 6 percent in 2001, up from 2 percent in 2000. At the
same time, end-of-period inflation was cut to 6½ percent in 2001
from 18½ percent in 2000. These developments, which continued
through the first quarter of 2002, reflected sound financial
policies and a revival in external demand for exports. Nevertheless,
Moldova remains one of the poorest countries in the region.
Fiscal policy was tightened markedly following the 1998 Russian
crisis. The general government commitments deficit (excluding
project loans) was cut to 2½ percent of GDP in 1999 from 8½ in 1998,
and narrowed further to less than 1 percent in 2000. A surplus of
½ percent of GDP was achieved in 2001 mainly through a sharp
compression of expenditures, and domestic arrears were not cleared
as fast as expected. Low foreign financing led to budget
sequestration and accumulation of new external arrears during the
second half of the year. The budget continued to record a small
surplus in the first quarter of 2002, but unbudgeted wages for
social sector employees contributed to weaken the fiscal program.
With inflation receding, money demand recovered steadily in
2000-01. Broad money (including foreign currency deposits) grew by
40 percent in 2000 and 36 percent in 2001, resulting in some
financial deepening. The rapid growth of deposits allowed a sharp
expansion in bank credit to the economy. For the first time in
several years, credit grew by 18 percent in real terms in 2000, and
27 percent in 2001. Although the average lending rate stood as high
as 25 percent in April 2002, banks apparently had difficulties in
finding additional lending opportunities with an acceptable
risk-return profile. Ample liquidity in commercial banks enabled the
government to lengthen the average maturity of newly issued treasury
bills at interest rates as low as 4 percent in May 2002.
From end-2000 to end-March 2002, the Moldovan leu depreciated by
9 percent in real terms relative to Moldova's trading partners. The
recent strong performance of exports suggests that the level of the
real exchange rate has been broadly adequate for maintaining
competitiveness. At end-March 2002, the National Band of Moldova's (NBM)
gross international reserves stood at US$223 million (2½ months of
imports), broadly unchanged from the end-2000 level, despite
dwindling external financing flows, lower-than-expected
privatization proceeds, and sizable external debt service payments.
A sharp increase in earnings of Moldovans working abroad to about
US$221 million allowed the NBM to purchase substantial amounts of
foreign exchange without putting pressure on the exchange rate and
contributed to a narrowing of the current account deficit to 7½
percent in 2001 from 8½ percent of GDP in 2000. Exports also
increased in 2001 by around 19 percent in dollar terms. Moldova
joined the World Trade Organization in mid-2001.
Moldova's public and publicly-guaranteed external debt contracted
to $940 million in 2001, reflecting a drop in new disbursements,
including by IFIs. In terms of GDP, the external debt burden eased
to 58 percent, from 69 percent in 2000. Negotiations for more
favorable terms on Moldova's commercial debt (outstanding amounts of
the 1997 Eurobond and Gazprom notes) are under way.
Progress on structural reforms was slow in 2001, partly due to
the change in government early in the year. In early 2002, however,
structural reforms received a major impetus with the agreement
between the authorities and the World Bank on a structural
adjustment credit (SAC-III). The government has begun to implement a
wide range of measures aiming at reducing poverty and improving the
business environment, including through agricultural reforms and
privatization.
In late 2001, Moldova adopted two laws to combat money laundering
and the financing of terrorism.
Executive Board Assessment
Executive Directors noted that monetary and fiscal policies have
remained sound since the 1998 crisis, and that it is now crucial to
promote structural reforms more vigorously to achieve sustainable
growth. They therefore welcomed the regained momentum of structural
reforms that has occurred in the context of the SAC III negotiations
with the World Bank.
Directors noted that the budgetary position remains vulnerable,
although fiscal policy has been prudent. They urged the authorities
to keep policy tight, and undertake the fiscal reforms necessary to
put the budget position on a sustainable footing. Directors
cautioned that improvements in tax collection, in addition to lower
domestic interest payments, will be needed to support the projected
level of non-interest expenditures in 2002. They called on the
authorities to refrain from tax rate cuts without prior
identification of offsetting measures. Directors expressed concern
that expenditure arrears have again started to edge up since late
2001, although these arrears declined during the first five months
of 2002. They also stressed that the unbudgeted wage hikes for
social sector workers would need to be accommodated within the
programmed spending envelope.
Directors supported the NBM's continued tight monetary policy in
support of price and exchange rate stability. They noted that the
exchange rate has been broadly stable and money demand has
strengthened—reflecting lower inflation, the resumption of growth,
and some financial deepening. They agreed that a floating exchange
rate regime continues to be appropriate for Moldova, given the
country's vulnerability to external shocks, and they recommended
that the NBM limit its interventions in the foreign exchange market
to smoothing sharp exchange rate fluctuations. Directors commended
the NBM for its resolve in enforcing prudential regulations and
ensuring a sound banking system, especially through raising capital
requirement standards and addressing the issue of non-performing
loans.
Directors noted that exports still have not regained their
pre-1998 level, in spite of the recent recovery. They were
particularly concerned that trade diversification remains limited,
and that access to key export markets is constrained. Directors
encouraged the authorities to resist incipient pressure for
protectionist measures and maintain the current liberal trade
regime; they underscored that any contingent protection should be
strictly in line with WTO provisions.
Directors were concerned about Moldova's heavy external debt
burden and emphasized that financial support from the international
community—including the private sector—is essential for the success
of Moldova's economic program and the sustainability of its external
position. In this regard, they were encouraged that the authorities
are negotiating actively with holders of the Eurobond and Gazprom
notes to reach a mutually satisfactory agreement on the rescheduling
of these instruments. Nevertheless, given the structure of Moldova's
external debt, Directors stressed that the main impetus toward
achieving external sustainability—and fully normalizing relations
with creditors—should come from strengthening the fiscal accounts
and improving debt management and economic performance in general.
Directors welcomed the recent adoption of several laws that would
strengthen the institutional infrastructure for a market-based
economy, including the insolvency law and the civil code. They urged
the authorities to persevere with structural reforms in other key
areas, including privatization, and to improve the business
environment for foreign as well as domestic investors. Directors
welcomed the recent strengthening of the legal basis for combating
money laundering and the financing of terrorism. |
