In Russian language

As prepared for delivery

MOLDOVA AND THE IMF: EVOLUTION OF A PARTNERSHIP

Presentation to Parliamentarians

March 1, 2007 

Thomas Richardson
Mission Chief for Moldova
European Department, IMF 

1. Thank you Chairman Lupu and respected colleagues for inviting the IMF to take part in this session. The relationship between the IMF and the Republic of Moldova is an extremely healthy and dynamic one, and it has changed much in the years since Moldova joined the Fund in 1992. Indeed, that is the theme of my brief presentation to you today: the changing relationship between the IMF and Moldova. 

2. I will structure my remarks as follows. First, I would like to discuss briefly how the IMF itself has changed and adapted over the past 15 years—because it is not only Moldova that has undergone reforms in that time. The IMF, too, has sought to learn from its experiences in 185 member countries to better serve their needs. Second, and in that context, I plan to outline our view of the evolving relationship between Moldova and the IMF.

Finally, I will close with a few remarks about the role of Parliament in ensuring that the relationship between Moldova and the IMF is successful in contributing to poverty reduction and growth in your country.  
 

The Changing Global Role of the IMF  

3. First, some background. Since the IMF was founded in 1944, it has sought to promote global financial stability, without which economic growth and poverty reduction are impossible. In that time, the IMF has faced a wide variety of challenges:  

• The breakdown of the Bretton Woods system of fixed exchange rates;

• The oil crises of the 1970s;

• The debt crises of the 1980s;

• The emerging markets crises of the 1990s; and

• The breakup of the USSR, which meant that the Fund would need to support a number of newly independent countries, including Moldova. 

4. To meet these challenges, the IMF’s main activities have been the following:  

• Bilateral consultations on economic policies with all member countries.

Article IV of the IMF’s charter mandates that all countries get a “check up” about once per year;

• Lending programs – both concessional, as in the case of Moldova, and nonconcessional. Concessional IMF loans carry an interest rate of 0.5 percent, and a maturity of 10 years with 5 ½ years of grace before principal repayment begins;

• Research and monitoring of the global monetary system; and

• Training and technical advice in the Fund’s areas of expertise, most of which is provided free of charge to member countries. 

5. During the last 5 years, for example, Moldova has received considerable IMF technical advice in areas like: tax administration, budgetary management, financial sector supervision, monetary and exchange rate policy and statistical systems. Similarly, during that time, about 120 Moldovans have received training in macroeconomic management or related topics—mostly at the Joint Vienna Institute where some members of this Parliament participated in a seminar last summer. 

6. The IMF began to undergo reforms in the 1990s. Most visibly, we began to make significant efforts to be more open and transparent. When I joined the Fund 14 years ago, almost no IMF country documents were available to the public (or parliament, for that matter). Now, almost everything is available on our internet web site.[1]  

7. By the first part of this decade, rapid globalization and a strong world economy led to a decline in IMF lending and gave many economists reason to believe that the role of the IMF should be more fundamentally rethought. Thus, shortly after coming to the Fund in mid- 2004, the new Managing Director launched a thorough review of the IMF’s role in the interdependent global economy. In September 2005, he presented this medium-term strategy for the IMF to the Governors who oversee the Fund—including Governor Talmaci of the National Bank of Moldova. 

8. The medium term strategy emphasizes several themes:  

• First, the IMF is trying to be more effective in promoting global stability by modernizing its crisis prevention toolkit. This includes looking more carefully at exchange rate policies, and by holding multilateral consultations with key, interdependent countries (US, China, Japan, Euro area, Saudi Arabia). 

• Second, an important element of the medium term strategy is to address obvious disproportions in the IMF’s quota system of share holding. In part, it is clear that the IMF’s legitimacy and therefore effectiveness would be enhanced by giving greater voting power to fast-growing countries like China and Korea. At the same time, the IMF’s member countries are committed to ensure that smaller, poorer countries do not lose their voice in the process. 

• Third, we are strengthening our work on the financial sector, because we recognize its crucial role in promoting economic growth, and because we have learned— particularly in East Asia in the late 1990s—that financial sector crises can have enormous social consequences. 

• Fourth, in low income countries, we are working with the authorities and donors to assist member countries to reach the millennium development goals, and to ensure that aid inflows are consistent with macroeconomic stability. 
 

The Changing Role of the IMF in Moldova  

9. Having described the changing role of the IMF in the world, I would now like to turn to the evolution of the Fund’s work in Moldova. 

10. Moldova joined the IMF in 1992, and since that time the Fund has provided considerable financial assistance—about $360 million, much of which has been on concessional terms. These IMF-supported programs have aimed to help ease Moldova’s transition from central planning, and to set the stage for rapid economic growth over the medium term by promoting macroeconomic stability—that is, low inflation, sustainable budget deficits, stable exchange rate policies and supportive structural reforms. 

11. There have been ups and downs in this relationship. There have been periods where program conditions were met with ease and our Board was able to complete reviews very smoothly. But there have been other times when the relationship was strained. Happily, this is one of the good times, as relations between the IMF and Moldova are proceeding very smoothly at present. 

12. The IMF Executive Board approved the current loan, what we call a Poverty Reduction and Growth Facility, in May of last year. This is a three year concessional loan of about $118 million to support international reserves of the National Bank of Moldova, and it is structured to be disbursed following formal reviews that take place every six months. After Board approval in May, the Paris Club of official creditors approved a restructuring of Moldova’s bilateral debt, and on December 12, Moldova’s international development partners announced that, taken together, their assistance to the country could total as much as $1.2 billion over the coming years. As part of that effort, and to help Moldova deal with the twin external shocks in the form of higher prices for imported natural gas and difficulties in exporting wine to traditional markets, the IMF Board approved the first review under the program on December 15, while increasing the total size of the loan to $163 million, $47 million of which was disbursed in December. 

13. But that’s just the money. What about the objectives of the program? What does the Government hope it will help them to achieve? The program is based on the Economic Growth and Poverty Reduction Strategy Paper and the EU-Moldova Action Plan, and it was written by the authorities, not by the IMF. This is an important point, because it is the Government that “holds the pen,” as it were. They are the authors of the program, which has three broad themes:  

• The first priority is preserving macroeconomic stability. In practice, this entails ensuring debt sustainability and aiming for inflation that is reliably below 10 percent per year, because we have seen that inflation rates above that level are associated with slower growth and higher poverty. It bears remembering that inflation is a tax and that it is paid disproportionately by the poor—who usually do not have financial assets, and who thus cannot protect themselves against inflation as well as the rich. 

• Second, the program aims to support financial sector development as well as stability.

Expanding the financial sector, including by promoting entry of foreign banks, is welcome, because we have learned that a vibrant, competitive financial sector supports growth, and thereby contributes to poverty reduction. Robust growth is unlikely to be sustained if private sector fixed capital investment has to be financed almost entirely from retained earnings of businesses. But it is also essential to ensure stability of the financial system, as well as development—a lesson we learned in the Asian financial crisis. 

• Finally, the program is an opportunity to re-assess the appropriate role of Government in the economy. In our view, there is scope for the Government to reduce its role, to limit its interventions, in order to make room for the private sector to grow. With general government expenditures of well over 40 percent of GDP, the size of government is high for a country at Moldova’s level of per capita income. This suggests that there could be a large payoff to finding savings that make government expenditures more efficient. For this reason, we are very supportive of the so-called guillotine process, which aims to eliminate unnecessary regulations. Similarly, we welcome the Government’s public administration reform, as it aims to rationalize the activities of government institutions. Further, the Fund and other international partners have provided considerable support to improve public sector accounting, budget management, auditing and fiscal transparency—specifically to ensure that public monies, both from donors and from Moldovan taxpayers—are spent as parliament intends. 

14. Looking forward, what will be the role of the IMF in Moldova in 10 or 15 years? As I mentioned at the outset, the IMF is a strange financial institution. We are successful when no one borrows from us, when the international financial system and the countries in it run smoothly. Just as we have seen other countries in Europe “graduate” from needing to borrow from the IMF, we hope and expect that economic growth in Moldova will continue to be robust, and that your country will soon be doing well enough to cease needing to borrow from the IMF at all! At that point, our relationship will become like it is in many other countries in Europe. IMF bilateral annual (Article IV) and technical consultation missions will visit once every year or so, and our teams will prepare candid reports on the health of the economy. 
 

The Role of Parliament in This Relationship  

15. This is particularly important, as it occasionally happens that measures are included in the program which require action by Parliament. However, to some extent it is inevitable, since it is the Republic of Moldova, the state, that is a member of the IMF, not any one level of government or party in power. In every country we work with the government of the day and the central bank in order to improve economic policies. The fact that Moldova is a parliamentary republic makes it imperative that we deepen our dialog with parliamentary deputies and factions, to meet with you frequently and to listen carefully, to ensure that you and we—and the government—have a common vision of the economic policies and reforms that are best for the country. 

16. Hence, I would like to close by asking that—when we periodically visit Chişinău— you continue to take the time to share with us your views on economic developments in Moldova. Doing so will help us to give the best possible advice to the Government, and in that way will ensure that, eventually, we will put ourselves out of the lending business. Your advice and perspective will help to improve our understanding of the social and political context in which decisions are taken. Similarly, we hope that, by giving you our view of economic policies in Moldova, we can contribute to better economic results for the benefit of all Moldovans. Thank you for your attention today.