Moldova’s economic growth will decelerate in the medium term, estimates the World Bank’s “Moldova Economic Update” presented today.
“Expansionary fiscal policy measures adopted in 2018 - tax cuts, an increase in wages and public transfers - and constantly increasing financial intermediation activity will underpin growth in 2019. At the same time, lower growth in remittances and higher inflation that erode the disposable income will decelerate growth to 3.4 percent, from 4 percent in 2018”, WB economist Marcel Chistruga told a press conference.
As the impact of fiscal stimuli fade away after elections, consumer and business confidence, together with a continued normalization of financial conditions, will continue to support private consumption and investment in the medium term. The economy is projected to grow by 3.6 percent in 2020 and as the growth of the main trade partners strengthens, growth in Moldova will reach 3.8 percent by 2021.
According to Marcel Chistruga, industry and non-tradable sectors will be the most dynamic in this period. At the same time, after three years of abundant harvests, contribution from agriculture is expected to be marginal.
The expansionary fiscal policy introduced before the elections combined with higher agricultural prices and adjustments in regulated prices will build up inflationary pressures, pushing the inflation out of the corridor in the second half of 2019. Nonetheless, in the medium term, the monetary stance is projected to remain adequate and consumer inflation is envisaged to stay in the National Bank’s target corridor of 5 + 1%
Risks are related to the fact that the fiscal space will be constrained, as a consequence of tax cuts, increases in social spending and wages before elections as well as lower external financing. In 2019, the fiscal deficit will spike to -2.7 percent of GDP due to the election cycle.
In the medium term, the fiscal deficit is projected to be higher than historical average, underlining the need for sound fiscal management. Albeit relatively robust exports mainly due to expansion of activities in free economic zones, the current account deficit is projected to steadily increase, but given the slowing growth it will remain below historical values.