Moldova strategy overview

Full strategy  (0.4Mb) Approved 4  Sep 2007

Strategia pentru Moldova  (0.7Mb)

Summary of public comments  (0.1Mb)

Moldova is committed to and is making progress in applying the principles of multiparty democracy, pluralism and market economics in accordance with Article 1 of the Agreement Establishing the Bank.

The ruling Communist Party of Moldova (CPM) secured a second governing mandate in March 2005 and subsequently reinforced its commitment to European integration. However, the record on democratic and market reform over the past strategy period has been uneven. The March 2005 national elections and June 2007 local elections generally conformed to international standards for democratic elections according to the Organisation for Security and Co-operation in Europe (OSCE). However, they fell short in some areas that are central to a genuinely competitive election process, such as media balance and access. Little progress has been made with regard to the breakaway territory of Transnistria. Despite the inclusion of the European Union (EU) and the United States as observers in the OSCE-brokered ‘5+2’ negotiating framework, talks have stalled since early 2006.

Economic growth

Moldova’s economy grew by an average of 7% from 2000 to 2005. However, Russia's ban on Moldovan wine imports and Gazprom's doubling of gas prices in 2006 slashed economic growth to just 4 per cent. Industrial production, in turn, declined by 6.9 per cent. Over-reliance on the Russian market for exports of Moldovan agricultural products and high external energy dependence underscore the risks inherent to the current economic growth model. Remittances from Moldovans working abroad, officially estimated at $1.17 billion in 2006 (approximately 35 per cent of gross domestic product (GDP), have been the engine for economic growth in the past few years. Remittances will continue to provide substantial support to the economy in the years to come. The trade deficit has surged to 47 per cent of GDP in 2006 from an average of 25 per cent earlier in the decade, driven by a strong surge in remittance-financed imports, higher energy prices and barriers to Moldovan exports in the past two years.

Monetary and fiscal policy

Monetary policy was broadly adequate, but driven by conflicting objectives of price and exchange rate stability. Consumer price inflation remained above 12 per cent during the previous strategy period, reflecting the gas price increases, a weak supply response in light of growing aggregate demand, periods of weak monetary policy responses and adjustments of administrative prices. Moldova has pursued a prudent fiscal policy. The consolidated national budget recorded a surplus of 1.6 per cent of GDP in 2005, but reversed in 2006 to a modest deficit of 0.3 per cent of GDP. The Medium Term Expenditure Framework provides for a similar deficit target of 0.5 per cent of GDP in 2007 and 2008. A prudent borrowing policy and a new IMF programme followed by a Paris Club debt rescheduling in 2006 reduced the current external debt servicing burden. External debt stock increased to $2.5 billion (74 per cent of GDP) in 2006 from $2.08 billion (70 per cent of GDP) in 2005.

Structural reforms

Moldova embarked on an ambitious reform programme with the adoption of the Economic Growth and Poverty Reduction Strategy Paper (EGPRSP) in May 2004 and the EU-Moldova Action Plan in February 2005. In May 2006 Moldova also signed a three-year programme with the IMF under its Poverty Reduction and Growth Facility (PRGF). Pursuant to these programmes Moldova undertook to implement wide-ranging structural reforms regarding among others public administration and finance, rule of law and investment climate. In the implementation of its reform programme, Moldova can count on substantial financial and technical support from the donor community, in particular the EU under its European Neighbourhood Policy (ENP) and the United States through USAID and the Millennium Challenge Corporation.

Investment climate

Although progress has been made, Moldova's investment climate remains challenging. Implementation in key areas has lagged. Corruption, barriers to entry and competition and government interference in business are still widespread and hinder economic development. Reform in the energy and municipal infrastructure sectors has advanced slowly. In the banking sector, two western banks have entered the market and the legal framework for banking supervision has improved. Several weaknesses nevertheless remain to be addressed, including non-transparent bank ownership, poor corporate governance and the lack of uniform application of "fit and proper" standards.
Following its earlier transition achievements, Moldova would benefit from deepening structural reforms to consolidate the conditions for long-term development. In particular Moldova will need to address the following transition challenges:

• Establishing a level playing field and improving the business climate. Moldova needs to reinforce the rule of law, reduce government interference in the economy and step up its fight against corruption. Strengthening the independence and institutional capacity of the judiciary, the regulatory authorities and the newly established competition agency should be a key government priority.
• Supporting economic diversification in terms of sectors and markets. Moldova’s overwhelming dependence on agribusiness as well as excessive reliance on CIS markets (in particular Russia) increase the economy’s vulnerability to adverse shocks and pose substantial risks to development. To achieve long-term sustainable growth, Moldova needs to decrease this dependence by expanding the productive base of its economy and diversifying its export markets including through capitalising on its newfound status as an EU neighbour.
• Advancing energy and municipal sector reform. Both sectors require further efforts to reinforce the independence of the regulator, promote transparency and ensure full cost-recovery-based tariffs with adequate support for the poorest consumers. State-owned utilities in both sectors should be substantially restructured and encouraged to operate on commercial principles. Energy efficiency remains a key challenge in light of the country’s dependence on energy imports and associated rising costs. Adherence to the Energy Community Treaty (ECT) and the Union for the Co-ordination of Transmission of Electricity (UCTE) would improve energy security and provide additional momentum for reforms.
• Redressing the balance between the capital city and the regions. Regionally balanced economic development throughout the country will require increased investment in regional infrastructure and adequate support for the local economy, particularly the development of non-agricultural MSEs and SMEs in rural areas.

Operational objectives

Moldova is currently preparing a National Development Plan (NDP) to succeed to the EGPRSP, which is due to expire by the end of 2007. The NDP together with the EU-Moldova Action Plan will provide Moldova and its development partners with a roadmap to meet the aforementioned challenges. The Bank will - within the limits of its mandate - assist Moldova to implement its reform programme by drawing among others on the instruments and grant financing available to the Bank in the context of its Early Transition Countries (ETC) initiative. In particular, the Bank will pursue the following operational objectives:

• Private Enterprise. The Bank will continue to pursue investment opportunities in all enterprise sectors including, without limitation, the food processing, manufacturing, information and communication technology (ICT), retail and property sectors. Well performing companies will be provided with direct financing including through ETC instruments. The Bank will facilitate foreign investment either by investing alongside foreign strategic investors or by assisting the development of local companies which in due course may attract foreign investment. Working capital may be provided to agribusinesses under the recently established warehouse receipt system. The Bank will continue to provide non-financial support to private enterprises through its Turn Around Management (TAM) and Business Advisory Services (BAS) programmes.
  
  
• Financial Institutions. The Bank will provide its local partner banks with access to its SME and MSE credit lines, its Trade Facilitation Programme (TFP) as well as its Medium-sized Co-financing Facility (MCFF). The Bank will seek to extend its cooperation to new partner banks and will assist in the development and promotion of new financial instruments such as mortgage financing, leasing and energy efficiency credit lines. On the equity side, the Bank may consider further investment in banks, leasing companies and mortgage providers. The Bank will further enhance its support for the development of microfinance particularly (but not exclusively) in Moldova’s regions. The Bank will explore opportunities to support the emergence of the non-banking financial sector.
  
  
• Infrastructure. Given Moldova's sovereign debt capacity constraints and the IMF's concessionality requirements, the Bank will - to the extent possible - co-finance public infrastructure projects with other IFIs and donors to ensure maximum leverage of grant and concessional financing. To enable Moldova to take full advantage of its new EU neighbourhood status, the Bank will give priority to infrastructure projects that promote regional integration and interconnection with neighbouring countries. The Bank is also committed to resume its municipal infrastructure lending provided sufficient grant financing can be attracted to address affordability constraints. The Bank will continue to support private infrastructure investments.

Dialogue and co-operation

The Bank will underpin the aforementioned operational objectives by an ongoing policy dialogue on investment climate issues in consultation with other IFIs and bilateral donors. The Bank will ensure that all operations in Moldova are subject to the Bank’s Environmental Policies and Procedures as well as ILO and national labour standards. In the context of the ETC initiative, the Bank will seek increased donor grant financing to fund project preparation and implementation, support legal transition work, institution building and policy dialogue and leverage the Bank’s financial support to key sectors.