Background

Moldova has taken decisive steps including the introduction of its national currency in November 1993, towards financial stabilization and structural transformation, supported by a concerted program of external assistance, which included stand-by and systemic transformation facility (STF)¹ credits from the IMF, as well as additional financing from other multilateral and bilateral sources. Implementation of financial policies under IMF-supported programs resulted in a broadly stable exchange rate, a reduction in inflationary pressures, and lower interest rates during 1994. However, output continued to decline as a result of the collapse of central planning, and drought and other weather-induced damage to the agricultural sector. On the structural side, the Government implemented an ambitious schedule for the auction of state enterprises; however financial discipline in the sector remained weak, threatening to undermine the stabilization gains. The balance of payments remained under severe pressure throughout 1994 as a result of the move to world prices for imported energy and the effects of weather-related disasters.

The 1995 Program  

The overall economic objectives of the 1995 program remain those of consolidating financial stabilization and implementing structural transformation measures to restore economic growth and improve living standards for Moldova's population. The program aims at economic growth of 1.5 percent, led by a recovery in the agricultural sector with the return of normal weather conditions, a reduction in the annual rate of inflation to about 10 percent from 116 percent in 1994, and containment of the deficit in the current account of the balance of payments.

To these ends, fiscal policy is centered on sharply reducing the budgetary deficit to the equivalent of 3.5 percent of GDP from 8.1 percent of GDP in 1994. This will be achieved mainly through adjustments to tax rates and the strengthening of tax administration and arrears collection. Overall expenditure levels will be reduced, but outlays will be maintained in high-priority areas such as health care and education. Monetary policy will remain tight to support the inflation and balance of payments objectives, and will rely increasingly on indirect, market-based instruments of monetary control.

Structural Reform Policies

The Government has adopted an accelerated privatization program under which 1,500 enterprises will be sold in 1995/96 at market prices. The main objective of structural reforms under the program is to establish an environment conducive to private investment by reducing direct government intervention in the economy and by enhancing the role of market forces in the allocation of resources. In this context, key legislation will be reviewed to meet the requirements of a market economy, including the need to establish the legal basis for bankruptcy proceedings against insolvent state enterprises. In order to improve the efficiency of the financial sector, the program envisages the development of indirect, market-based monetary controls, following the introduction of treasury bill auctions and other market instruments. Further measures will also be adopted to strengthen the capital base of the banking system and facilitate the entry of new foreign and domestic banks.

The Challenge Ahead

The Challenge Ahead Structural reforms are crucial to the ultimate success of Moldova's transition to financial stabilization and a market economy. The delays experienced in early 1994 were costly in terms of eroding public support for financial stabilization and the restoration of growth. The acceleration of structural reforms in late 1994 will need to be sustained in 1995 and over the medium term for economic transformation to succeed.

The Republic of Moldova became a member of the IMF on August 12, 1992; its quota² is SDR 90.0 million (about $138 million), and its outstanding use of IMF credit³ currently totals SDR 122 million (about $188 million).