Output growth is projected to decelerate to about 2 percent in 2014, reflecting a moderation in agriculture production, weaker economic activity in main trading partners, and the impact of Russia’s restrictions on imports of Moldovan products, found the Executive Board of the International Monetary Fund (IMF), after concluding the second post-program monitoring discussions with the Republic of Moldova.
In 2015, growth is projected to recover to 3½ percent as recently negotiated free trade agreements enter into effect and domestic demand recovers with the dissipation of election-related uncertainties.
Inflation is projected to remain within the National Bank of Moldova’s (NBM) inflation target range. After narrowing for three consecutive years, the current account deficit is projected to widen in 2015 as a consequence of a recovery in imports, and a projected decline in remittances growth.
According to the IMF, fiscal discipline has weakened ahead of the elections. Following a substantial adjustment in 2010-13, Moldova’s fiscal position is projected to deteriorate significantly, with the budget deficit excluding grants projected to widen from 3.8 percent of GDP in 2013 to 5.4 percent in 2014 and, in the absence of measures, to 7.1 percent in 2015. This reflects significant pre-election increases in wages and pensions, some ad hoc tax benefits, weaker economic activity, and measures to compensate those affected by trade restrictions.
The IMF has also found that severe governance problems in the banking system continue to represent a risk to financial stability. Legislation restoring the NBM’s powers was recently enacted but enforcement of regulatory requirements on banks remains weak. Legislation to restore the regulatory powers of the National Commission for Financial Markets (NCFM) still needs to be enacted.
Executive Directors noted that weaker economic activity in trading partners, trade restrictions, and uncertainties related to the elections have exacerbated the economic slowdown, and that risks are to the downside. They urged the authorities to pursue prudent macroeconomic and financial sector policies as well as deep structural reforms to reduce vulnerabilities and boost potential output growth.
Directors underscored the urgency of addressing vulnerabilities in the banking sector, and strengthening the financial sector regulatory framework and its enforcement. Regretting limited progress, they stressed the importance of swiftly implementing recent FSAP recommendations. The regulatory and supervisory powers of the National Bank of Moldova (NBM) and the National Commission for Financial Markets should be fully restored, and the legal protection of their staff should be strengthened. Directors also recommended enhancing governance in the banking sector, including by improving the transparency of banks’ ultimate beneficial owners. They called on the authorities to maintain a high level of scrutiny over weak and vulnerable banks, to enhance the bank resolution and crisis management framework, and to rapidly resolve the banks recently intervened.
Directors commended the National Bank of Moldova for achieving its price stability objective, and considered the current monetary policy stance to be appropriate in light of the ongoing slowdown in economic activity. They called on the NBM to remain vigilant and to adjust policies as needed. Directors supported the NBM’s approach to intervene to prevent disorderly exchange rate adjustments without resisting movements driven by fundamentals.
Directors encouraged the authorities to accelerate the pace of structural reforms. They noted that improving competitiveness and diversifying the production and export structure would place Moldova in a better position to benefit from recently signed free trade agreements. Consistent with the National Development Strategy Moldova 2020, special attention should be given to the business environment, physical infrastructure development, human resource development, and public administration and social security reform. Refocusing the education system to match labor market needs would also play an important role.
Post-Program Monitoring provides for more frequent consultations between the Fund and members whose arrangement has expired but that continue to have Fund credit outstanding, with a particular focus on policies that have a bearing on external viability. There is a presumption that members whose credit outstanding exceeds 200 percent of quota would engage in Post-Program Monitoring.
