The Executive Board of the International Monetary Fund (IMF) today approved a new three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) for an amount equivalent to SDR 80.08 million (about US$118.2 million) for Moldova. The approval of the arrangement enables Moldova to draw the equivalent of SDR 11.44 million ( about US$16.9 million ) immediately.
Following the Executive Board discussion, Mr. Takatoshi Kato, Deputy Managing Director
And Acting Chair, said:
"Moldova's macroeconomic performance in the past year has been encouraging. Growth remained robust and inflation was brought down to near single-digit levels. The fiscal position remained strong and the external debt position improved. Emerging risks to the balance of payments outlook-stemming primarily from energy import price increases-have been contained thus far. The outlook for growth remains encouraging, but this requires continued polices to safeguard macroeconomic stability and make progress in improving the investment climate and modernizing its economic infrastructure.
"The authorities' Economic Growth and Poverty Reduction Strategy Paper and the Moldova-EU Action plan provide a solid basis for the medium-term policy framework that will support conditions for durable, private sector-led, and pro-poor growth.
"The macroeconomic framework which underpins the authorities' program is appropriately ambitious, aiming for further gradual disinflation in the coming years. To achieve this objective, monetary policy will need to accommodate greater exchange rate flexibility to minimize risks to the disinflation path and to provide a buffer against external shocks. The authorities' decision to amend the National Bank law to establish price stability as its key objective is a welcome step and will support a forward-looking monetary policy implementation. The fiscal program strikes the appropriate balance between the objective of supporting disinflation and meeting the country's extensive developmental needs. Moreover, it will be important to maintain a disciplined path of public sector wage increases in line with the medium-term expenditure framework.
"The program envisages ambitious structural reforms. Public sector management will be strengthened through improved corporate governance of state enterprises, privatization and public administration reform, while the business environment will be enhanced through the modernization of bankruptcy procedures, the streamlining of regulations, and the removal of restrictions on grain exports. The financial sector will be strengthened by improvements in transparency, a reduction in government interference, and the promotion of greater competition, including through the support of market access for reputable foreign banks. Strict implementation of the measures should facilitate renewed inflows of external assistance to the Republic of Moldova, and thus contribute to stronger economic growth and poverty reduction, " Mr. Kato said.
Recent Economic Developments
Higher energy prices complicated the macroeconomic picture in 2005. Although overall GDP growth remained strong at 7 percent, its composition shifted further away from the traded sector, which was particularly affected by the rise in petroleum prices. Despite the higher energy prices inflation performance improved, falling to 10 percent (year-on-year) in December 2005.
Fiscal and monetary policy were tightened. Substantial over performance on the value added tax translated into a stronger fiscal policy stance (a surplus of 1.7 percent of GDP).
Since mid-2004, downward pressure on the currency has been accommodated but upward pressure was absorbed by the national Bank of Moldova through purchases of foreign exchange. International reserves have grown as well, though as a share of imports they remain modest.
The current account deficit deteriorated significantly in 2005, owing in large part to the impact of higher energy prices. Energy (particularly fuel oil) imports rose in value terms by about 50 percent in 2005 (about 3.5 percent of GDP), while export growth slowed modestly.
The external debt outlook continued to improve, although arrears were accumulated to Paris Club creditors. External debt fell as share of GDP from over 100 percent in 2001 to about 55 percent by 2005, owing largely to strong growth and real exchange rate appreciation, as well prudent debt management and several favorable restructuring arrangements.
The program is designed to address the following main objectives: support growth and poverty reduction by maintaining macroeconomic stability, particularly in the face of strong inflows of remittances and sharply higher prices for imported energy; improve the performance of the financial sector, including by building on the lessons of last year's financial sector Assessment Program; and clarify the role of the government in the economy, thus advancing the transition process.
The program is consistent with the European Union-Moldova Action Plan, signed in February 2005 and the authorities' Economic Growth and Poverty Reduction Strategy Paper, which provide for advancing a broad agenda of measures designed to improve Moldova's long-run growth prospects.
Growth is expected to slow somewhat in 2006 and over the medium term, partly in response to higher oil process, as well as emerging labor shortages. Under the program, real GDP growth is projected to fall to 6 percent in 2006, and to 5 percent over the medium term. Achieving this outcome will depend on a continued recovery in investment, particularly of the private sector.
The program envisages an inflation objective of 9 percent (year-on-year) in 2006, falling to 7 percent by 2008, despite continued high and rising inflows of remittances (up to $1.3 billion a year by 2008) and foreign aid that may complicate achievement of this goal.
The underlying budget deficit (after grants) should be no more than 0.5 percent of GDP for the medium term. The 2006 budget foresees a slightly larger deficit (0.8 percent of GDP), owing to an advanced disbursement of an EU grant of about 0.3 percent of GDP in the last days of 2005, for which the corresponding spending was already included in the 2006 budget. With general government debt falling to about one third of GDP in 2006 (from over 80 percent in 2001), a slightly higher deficit would not jeopardize medium-term fiscal sustainability.