This week the International Monetary Fund (IMF) approved two large loans to neighbouring Moldova. They are intended to help the government led by PM Natalia Gavrilița and her Party for Action and Solidarity (PAS) to fight corruption and reform the judiciary. PAS, the party established by President Maia Sandu, won a majority of the seats in Parliament in the July elections and has set out on an ambitious agenda for change. Romanian Dispatch spoke in Chișinău with Rodgers Chawani, the IMF’s Resident Representative, about the significance of having access to these funds, the guarantees and conditions of the loan facilities, the envisioned reforms in the financial and banking sector, and possible long-term impact.
There’s about US$ 560 million made available to Moldova. Perhaps you can provide a little more detail and maybe even the background on why this request by the government of Moldova was honoured by the IMF?
Rodgers Chawani (RC): We started negotiations with the authorities in July 2020. Eventually, we did not proceed because of some policy slippages: before the previous government resigned, they approved in parliament three things that were problematic. First of all, they repealed the securitisation Law, which facilitated the normalisation of the losses of the banking sector that happened in 2016. Second, they undermined the procedures for the asset declaration regime. And, third, they also repealed the Law and reduced the pension age.
But then things changed after the parliamentary elections?
RC: With the coming in of the new government in August, we received a request for a new programme and the authorities undertook upfront measures to address the three problems I mentioned. The reform-minded government, led by President Sandu and Prime Minister Gavrilița, is very determined to implement reforms. Hence we had very good discussions with them and reached what we call staff level agreement. And yesterday, our executive board approved the programme.
It’s a blended programme, meaning there are two facilities: the Extended Credit Facility and the Extended Fund Facility. The full amount of the programme is around 400 million special drawing rights (SDR’s), which would be an equivalent of around US$ 558 million. That amount is going to be disbursed in six reviews. Typically, we have semi-annual reviews. Each mission checks on compliance with what has been agreed upon in terms of the macroeconomic outcomes and conditionality, and adjust for the next cycle if necessary. Once a review has been completed, the amounts that have been planned will be disbursed. We expect that there will be two missions every year.
The authorities embarked on a very ambitious agenda and we have aligned the agenda with the priorities that we see. The programme has three main objectives. First, to support the authorities to sustain the economic recovery, which is already underway. The second objective is to help the authorities embark on the ambitious and strong governance reforms. And the third objective is that Moldova must now focus on pursuing development objectives. Ultimately, the idea is that by implementing these reforms Moldova will be converging with its European peers.
These two facilities are loans, they are not grants, I assume?
RC: Yes, they are long term obligations, at concessional or very low interest rates. This is the largest disbursement under a programme by the IMF. While they may not address all the burdens for Moldova, they are a very useful basis for other development partners to build on. A common feature of our programmes is that they open up support from other partners and I need to mention here that the programme is also co-funded or financed by the World Bank as well as the European Union.
That was actually a follow-up question I had: to what extent have you coordinated with other partners, other international partners that are trying to support the Moldovan government with implementing reforms and also with the economic recovery from pandemic?
RC: Throughout the design, review, consultations and missions, we work very closely with other international institutions. The reason why we work closely is that we need them because they provide support us in terms of financing and capacity building. But the most important reason is the nature of the problem that we face; the primary focus on governance means there are other areas where the IMF is not a leader. We rely on the expertise and joint efforts with other partners to work with the Moldovan authorities to achieve those objectives. For example, the World Bank are very big on issues of pensions. We work with them to take a lead in that particular area. Another example: the European Union is very much invested in the justice reforms. So we leverage their expertise. The setup has very good collaboration and interplay of the international (financial) institutions.
In terms of the size of facilities you usually offer to countries the size of Moldova: is this a larger facility? How does it compare to other countries in the region, say, Georgia or neighbouring Romania?
RC: As I indicated earlier, this is one of the biggest compared to all the previous disbursements to Moldova. The reason why we are giving out more this time around is because of the strength of the programme and commitments by the government made. This is a programme that is not only addressing immediate balance of payment needs, but also has a strong core structural and development component. Hence it is a big programme and designed as such because of the nature of the issues that Moldova faces. These are long term issues; we need to make sure that they are supported throughout. The only difference about this programme is that it is more focused on development. In terms of access, this depends on how much your quota is with the IMF; that’s what determines whether you can get more or less money. In terms of magnitude, you cannot compare this with some of the programmes we have elsewhere because the quota of Moldova is different; it remains a sizeable package, however.
You mentioned in a recent interview that Moldova could be like the Baltic states in 15 to 20 years. What did you have in mind for Moldova, which of course is still recovering from this incredible, unimaginable crisis in 2014, when a huge amount of money was stolen from the national banks.
RC: The issue is not so much to compare Moldova, but to look at what worked for the Baltics and what could be replicated here. The main point I wanted to convey was that when the Baltics in the 1990s decided to take very strong and ambitious reforms, it might have looked impossible given the starting point. But looking back, you can tell that by making upfront, very difficult reforms, it ended up paying dividends further down the line. And I think Moldova is also the right place to replicate that kind of momentum. The package of reforms is very difficult. These reforms are not only difficult because of their scale and ambition, they’re also difficult because there are still some vested interests who can oppose them. But we see more value in what can be achieved, as difficult as it may be to move forward with these reforms. That was the point I was trying to make.
And then there is corruption…?
RC: When you read through the programme documents, you will find that they focus on corruption. Now, traditionally, the IMF has a framework, which we use as a reference, and we published it when the board took interest in corruption. We have a general governance framework, which we use as a reference to engage with the authorities. But this is an area where the Moldovan authorities already had some strong homegrown policies. What goes into the programme is basically a convergence of ideas, and then trying to find a realistic way for them to move forward and make sure they do not default on the reforms. As you are aware, there is very deep and entrenched corruption. There is also a strong perception that the institutions are captured, especially the judicial system, which lacks independence. What you see in the programme, is first of all efforts to make these institutions move towards independence. The second focus in the programme are measures that are specifically designed to help tackle the perceptions of corruption. There have been some instruments that have been present in the system, but they haven’t been as effective to move forward. Hence the programme also tries to make sure that we tackle corruption directly. One of the things we did, which was part of the efforts undertaken even before the programme was approved, was to ask for authorities to make sure that corruption offences are taken as serious offences in the law. So that is one of the things that we build into the new programme. Of course, there are so many efforts to make sure that, for example, people also internalise the fact that these are serious offices. Make sure anti-corruption institutions are independent and not captured. We are also supporting the efforts to vet the judges in the system. These are some of the measures that can help stem corruption going forward. We are working together with the European Union and other partners to make sure that we make progress. You’ll also see an increased focus on money laundering — ensuring that these issues are taken more seriously in the banking and finance sector.
I know asset recovery is a very complicated process and usually a matter of national authorities. International requests for asset recovery are not very easily honoured. In what way is the IMF involved?
RC: I’ll be very candid with you. You know what happened: 12% of the GDP was stolen. We have seen efforts to recover some of the proceeds domestically. But to be frank, this has been one of the most disappointing areas. It has been disappointing because there has been an understanding that most of the money was taken out of the country. Now, it is difficult to deal with jurisdictions beyond Moldova’s control as domestic rules may not facilitate easy access to the assets elsewhere. We have emphasised the need to recover the assets as the way forward under programme, rather than selective prosecution of different individuals. Progress in asset recovery is part of the programme. Our understanding is that an action group has been formed that is working in coordination with the presidency and pursuing this issue. This is the kind of direction that we want. It’s a difficult undertaking, but I can assure you that this has been one of the strategic issues we have discussed with the authorities. In the last Board meetings we’ve had at the IMF, this has also been a topical issue and we hope to see progress.
Thank you for explaining. Which brings us to the financial sector.
RC: Independence of the central bank is a key issue. We believe a central bank that is well capitalised is positioned to realise its objectives of price stability efficiently. We need to make sure that the central bank is ready to avoid what happened last time. Strengthening the independence of the central bank has two elements. First, the legal framework. In the past years, they’ve been dragged to court several times. The legal framework has recently been amended to ensure that their decisions are final, which is going to help foster discipline. he second element is governance. The central bank for more than a year operated without a full board. At present we can confidently say they have a full board, which means they will be positioned to operate effectively. Moving on from the central bank to the commercial banks. Our previous programme exclusively had a strong interest to strengthen the sector. We have been working on shareholder transparency, cleaning up the system, and we made much progress in that regard. But going forward, we also support the central bank to strengthen its crisis and liquidity management frameworks. As the sector is advancing, they should be focused on building strong macro prudential indicators and enhance the capacity to conduct their own stress testing of the resilience of the banking system. The programme also envisages the transfer some of the regulatory powers, including for the insurance companies and credit institutions, for example, to the central bank, to ensure that they are well supervised and to manage the risks in a better way. The programme also facilitated a comprehensive assessment of insurance companies as there have been some serious governance lapses.
To what extent is Moldova ready to hit the international financial markets?
RC: There has been a huge investment in the financial sector, in terms of cleaning up legacy issues, as well as strengthening regulation and supervision of the sector. I can assure you that the state of the commercial banks is completely different from where it was a few years ago. And most importantly, banks are well-capitalised, liquid, and are making profits. Risk management practices have also been upgraded. Moldova currently has a strong and well-regulated banking system. With the conducive political environment, which is also focusing on improving the investment climate, there wouldn’t be a better time for investors to move into the sector. This is indeed the right time to move forward in international markets, although a bit more is needed in terms of strengthening the environment before they can take the risk. So it’s not an issue of not being able to do it, but just making sure that the timing of such a huge undertaking is appropriate.
So overall you are positive about what can be accomplished?
RC: We are cautiously optimistic that there is a strong opportunity to move forward. But, of course, we flagged some of the risks in the programme negotiations. Yet I think we couldn’t have asked for better authorities to be the champions of this reform programme. We hope that they will be given the space to implement it.
[This interview has been shortened and edited for clarity.]