Moldova’s economic growth remained solid in the first three quarters of 2019, with output expanding nearly 5 percent, supported by strong domestic demand. External demand remained favorable but net trade continued to be a drag on growth, says a press release issued by the IMF Permanent Representative Office in Moldova that is quoted by IPN. The Executive Board of the IMF concluded the Article IV consultation with the Republic of Moldova on March 11, 2020. The Board also completed the sixth and final review of Moldova’s economic performance under the Extended Credit Facility (ECF) and Extended Fund Facility (EFF) arrangements.
According to the IMF, unemployment remained low by historical standards, at around 4 percent. Inflation breached the upper bound of the band around the National Bank of Moldova (NBM)’s target in late 2019, reaching 7.5 percent, largely driven by food prices and a turnaround in regulated prices—as the effect of previous tariff cuts dissipated—and by the impact of robust aggregate demand on core inflation. The fiscal deficit significantly overperformed the program target, despite widening to 1.5 percent of GDP in 2019.
Public debt declined and remains low, below 30 percent of GDP. The current account deficit likely narrowed slightly to 9.5 percent but remains large as remittance inflows fell short of compensating for the structural trade deficit. Despite heightened political uncertainty, the leu remained relatively stable, and foreign exchange reserves remained adequate.
The macroeconomic outlook is subject to risks. Growth is forecast to slow to 3.8 percent in 2020, driven by weaker external demand and more modest agricultural output. Inflation is projected to return to the 5 percent target in 2020, largely driven by fading food price pressures.
With the output gap broadly closed and in the absence of structural reforms, medium-term growth is projected to remain near 4 percent. Risks, however, are on the rise. The recent global outbreak of the coronavirus disease (COVID-19) could slow economic growth in 2020 further. Domestically, the resurfacing of political instability, policy reversals, or reform fatigue could hurt confidence and limit external financing options.
Despite successful stabilization efforts and significant progress made on banking sector supervision, weak oversight of the non-bank financial sector, gaps in Moldova’s AML/CFT framework, and lack of progress on asset recovery are recurring sources of concern.
In another development, the IMF said the Moldovan authorities have successfully completed the three-year Fund-supported arrangements despite a challenging political landscape. A key objective achieved was the rehabilitation of the banking sector, which—alongside other reforms—helped entrench macroeconomic and financial stability.
However, growth remains insufficient to significantly boost living standards of the Moldovan people. The growth-friendly 2020 budget is appropriate considering the significant infrastructure and developmental needs in Moldova. In this context, the authorities’ continuous engagement with external partners is vital to secure needed financing for urgent projects.
The National Bank of Moldova’s (NBM) inflation-targeting regime remains appropriate. Additional efforts to strengthen the NBM’s operational framework and capacity will further enhance its policy credibility in the context of a flexible exchange rate regime.
Looking ahead, addressing widespread governance and institutional vulnerabilities in Moldova will help boost the economy’s growth potential, and support an acceleration of its income convergence with the rest of Europe. Enforcing the rule of law and strengthening the supervisory and regulatory frameworks—particularly those governing the non-bank financial sector, SOEs, and AML/CFT—are expected to contribute significantly to growth dividends, helping to unlock Moldova’s untapped economic potential. Launching comprehensive reforms of Moldova’s large SOE sector is also a key priority.
