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IMF Concludes 2003 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. |
On January 26, 2004, the Executive Board of the International Monetary
Fund (IMF) concluded the Article IV consultation with the Republic of
Moldova.1
Background
Real GDP grew by 7 percent in 2002 and 6.2 percent in the first three
quarters of 2003, driven by strong consumer spending, which in turn was
underpinned by a marked increase in real wages and workers' remittances.
Private sector investment seems to have recovered in 2003 but remains too
low to support strong medium-term growth. Consumer price inflation declined
to 4½ percent at end-2002, but picked-up in 2003, reaching 17 percent in the
12 months to October. The increase in inflation was driven by rapid money
growth, as well as higher food and administrative prices.
The external current account deficit was 6 percent of GDP in 2002. The
deficit widened in 2003, reflecting strong import growth, only partly offset
by higher exports and the recorded inflow of workers' remittances. The trade
deficit increased by almost 6 percentage points of annual GDP during the
first three quarters of the year, compared to the same period in 2002. While
foreign direct investments dropped sharply in the first three quarters, net
foreign exchange inflows were strong, suggesting large unrecorded inflows,
including workers' remittances. The National Bank of Moldova (NBM)
intervened in the foreign exchange market to avoid an appreciation of the
leu. Over the last two years, there has been no clear trend change in the
nominal exchange rate. The foreign exchange purchases in 2003 allowed the
NBM to keep international reserves at about two months of imports through
October.
The largely unsterilized purchases of foreign exchange fueled rapid money
and credit growth in 2002 and 2003. Broad money and credit to the economy
grew by 34 percent and 49 percent, respectively, in the 12 month to
September. To stem the inflationary pressure, the NBM tightened monetary
policy in 2003 by increasing reserve requirements and its main policy
interest rate. Although the REPO rate was gradually raised by a total of 3½
percent, this had little effect on NBM's net credit to banks. In September,
the NBM moderated its foreign exchange purchases, leading to appreciation of
the leu against the dollar.
Fiscal policy has remained reasonably tight, but external arrears started
to accumulate. The general government posted a cash deficit of 1.8 percent
of GDP in 2002, while net arrears of 0.9 percent were cleared. During the
first three quarters of 2003, a cash surplus of 0.5 percent of GDP was
recorded, reflecting robust collection of VAT and import duties, and
lower-than-anticipated interest expenditures, owing to accumulation of
external arrears.
With limited new external financing, external debt service continues to
be a fiscal challenge. Scheduled debt service on public and
publicly-guaranteed debt represents about 45 percent of projected central
government revenues in 2003. Moldova suspended debt service payments to
Gazprom at end-2001 and to some bilateral creditors in August 2003. The
authorities' requests for individual reschedulings have met with limited
success so far. Accumulated new external arrears during the first three
quarters of 2003 amounted to about US$26 million.
Progress in structural reforms remains slow. In particular, there has
been no significant improvement in the business climate, while corruption
remains widespread. Government interference in the private sector—including
formal and informal restrictions on exports of scrap metal and some
agriculture goods—casts doubt over the authorities' commitment to
market-oriented reforms. While the privatization of some wineries has been
completed, a number of large-scale privatizations have been postponed.
Executive Board Assessment
Executive Directors welcomed Moldova's robust economic growth in 2003,
but noted that the prospects for sustained economic growth are less
positive. They expressed concern about weak ownership and implementation of
structural reforms, and about the increasing signs of overheating—reflected
in sharply rising domestic demand, imports, and inflation. However, they
were encouraged by the authorities' recent decision to develop a medium-term
economic strategy focused on tight financial policies, private sector
development, public administration reform (including fighting corruption),
and rationalization of social policies. Directors urged the authorities to
develop a concrete set of measures to achieve these goals.
Directors stressed the need to adhere to prudent macroeconomic policies
and to embark on a structural reform program that could provide the basis
for renewed international financial support. To improve growth prospects,
Directors urged the authorities to reduce administrative intervention in the
economy and provide an enabling environment for business. At the same time,
tighter monetary and fiscal policies would be needed to curb inflation,
improve the debt dynamics, and allow a resumption of external debt service
payments.
Directors noted that fiscal policy in the recent past has been prudent
and that tax collection had strengthened, and encouraged the authorities to
press ahead with fiscal reform. At the same time, Directors regretted the
fiscal loosening implied by the 2004 budget and the increasing threats to
fiscal sustainability. They urged the authorities to take additional fiscal
measures to avoid further accumulation of arrears and to keep the public
finances on a sustainable path, including eliminating Value Added Tax
exemptions, delaying planned tax cuts, reducing non-essential current
spending, and improving budget planning and public expenditure management.
Directors agreed that monetary policy should focus on keeping inflation
low. They warned that the recent surge in inflation called for tighter
policies. They also expressed concern that the rapid credit growth could
lead to a deterioration in the quality of bank's portfolios. Directors
commended the NBM for recent improvements in banking supervision and the
resulting strengthening in the banking sector. Given the potential
vulnerabilities, the NBM should remain vigilant in assessing the banking
sector's exposure to shocks. They hoped that the upcoming Financial Sector
Assessment Program will help to address remaining banking sector
vulnerabilities.
Directors acknowledged that the managed float exchange rate regime has
served Moldova well. They observed, however, that a nominal appreciation
might be warranted if the inflow of workers' remittances continues to rise
rapidly. Ultimately, external competitiveness should be improved by
implementing appropriate structural policies, while maintaining a liberal
exchange and trade regime. In that context, Directors urged the authorities
to resist pressure for protectionist measures.
Directors expressed concern about the fiscal burden of Moldova's external
debt service, particularly during the next few years when the bulk of the
relatively short-term and non-concessional external debt falls due.
Directors remarked that a solution to the debt problem would require a
combination of further fiscal tightening, some form of debt restructuring,
and additional concessional external financing. They added that additional
financing is unlikely to materialize unless market-oriented reforms are
implemented. They also cautioned the authorities against continued arrears
accumulation, since this strategy is not likely to lead to a sustainable
resolution of the debt problem. At the same time, remaining current on
external debt obligations would help restore creditors' goodwill and foster
renewed financial support to Moldova.
Directors stressed that the slow progress in market-oriented reforms has
aggravated Moldova's vulnerability to external shocks and could undermine
medium-term economic prospects. Therefore, they urged the authorities to
accelerate the implementation of structural reforms in order to improve
growth and poverty reduction prospects. Directors supported the authorities'
intention to use the Economic Growth and Poverty Reduction Strategy Paper (EGPRSP)
as the main vehicle to develop their medium-term economic strategy. They
encouraged the authorities to include policies to improve the business
environment and governance and to implement these policies as soon as
possible. They considered that reforms should be properly timed and
sequenced, and that an effective safety net with well-targeted assistance
should be established.
Directors welcomed the opportunity to assess Moldova's program engagement
with the Fund. They thought the Ex Post Assessment contained a balanced
analysis of the country's performance under Fund programs and of the design
by the Fund of those programs. They emphasized that clear evidence of a
change in the direction of economic policy would be needed to facilitate
Moldova's re-engagement with the international community on discussions of
new programs. |
