Moldova has experienced rapid growth in 2006-08 spurred by booming remittances and FDI. These trends reversed sharply in 2009 with the global downturn, driving real GDP down by 6½ percent and giving rise to large fiscal and external imbalances. Since January 2010, the authorities’ efforts to restore fiscal, external, and financial sustainability and reignite growth are being supported by two arrangements with the IMF: the Extended Credit Facility and the Extended Fund Facility, amounting in total to SDR 369.6 million (US$546 million at present).
The economy is steadily recovering, with GDP growing by 4.7 percent in Q1 2010 relative to a year ago. Economic activity is bolstered by a pick-up in industrial production and trade, supported by the removal of many restrictions on exports and imports and exchange rate depreciation, and growth is projected to reach 2.5 percent in 2010. Twelve-month inflation reached 7.9 percent in May owing to necessary increases in energy tariffs, exchange rate depreciation, and increases in excise taxes. However, core inflation remains contained close to 5 percent.
Fiscal adjustment has been strong and focused on restraining current spending. The 2009 deficit came well below expectations as a result of an upsurge in tax revenue and expenditure savings, and the pace of fiscal adjustment has been maintained so far in 2010.
Monetary policy was significantly eased in the second half of 2009 to inject liquidity in financial markets. Early in 2010 the monetary stance was slightly tightened to curb second-round effects from energy tariff increases, but it remains accommodative to shore up the still subdued credit growth and fragile recovery. The National Bank of Moldova has also announced inflation targets in support of its objective to maintain price stability. Further development of the new monetary policy framework would help strengthen policy effectiveness.
The financial sector has been relatively sound. Banks have remained liquid and well-capitalized, and exposure to foreign assets and institutions in distress is minimal. However, nonperforming loans remain high at over 17 percent in April 2010––although this ratio seems to have stabilized––warranting vigilant monitoring of bank stability.
Executive Board Assessment
Moldova’s economy is recovering after the deep recession triggered by the global economic crisis. In the context of the Fund-supported program, the authorities have made encouraging progress in reestablishing economic stability and rekindling growth.
Fiscal policy has embarked on an adjustment path. Taking advantage of the faster than expected recovery, the amended budget for 2010 appropriately saves the bulk of the extra revenue while allocating more funds for public investment and social protection. The new system of targeted social assistance has helped reduce extreme poverty. To sustain the pace of fiscal consolidation going forward, the focus should remain on restraining current spending and curtailing the oversized public sector.
The moderately accommodative monetary policy stance has been supporting the growth recovery without losing sight of the inflation targets. After the transitory impact of external upward pressures on prices and much-needed adjustment of energy tariffs in early 2010, inflationary pressures have subsided. The central bank closely monitors financial indicators of the banking sector, which appears liquid and well-capitalized. The gradual shift of the monetary policy framework towards inflation targeting should continue, while interventions in the foreign exchange market should aim only at smoothing erratic fluctuations without resisting sustained trends.
The ongoing and envisaged structural reforms are
appropriately focused on stepping up liberalization and
deregulation and creating a business environment conducive to
investments and exports. Building up export potential and
expanding access to the vast markets of Moldova’s major trading
partners in the East and West should provide a strong and
sustainable boost to growth. Implementation of government plans
to divest state enterprises should help improve their efficiency
and attract additional foreign investments.