Upside risks to inflation remain, IMF experts say

High inflation remains the main concern in Moldova, the assessors of the International Monetary Fund say. A renewed effort will be needed to ensure inflation is brought down to single digits in 2008, these are the conclusions of the IMF mission that visited Moldova at the end of last year to conduct the third assessment of the country’s performance under the Poverty Reduction and Growth Facility (PRGF) arrangement with the IMF. According to IMF experts, fiscal policy will need to remain prudent to support the disinflation effort. The 2008 budget deficit target of 0.5 percent of GDP is appropriate, even though the budget has been squeezed by the reduction in corporate and personal income taxes. The focus of spending should be shifted from current spending to investment. The role of fiscal policy is limited due to Moldova’s low income and high development needs. At the same time, the ability of monetary policy to offset the impact of strong capital inflows and ensure disinflation is constrained by weak transmission channels and underdeveloped financial markets, the IMF mission’s Concluding Statement reads. According to the same source, monetary policy bears the brunt of the disinflation effort. Strong appreciation pressures and a weak transmission process complicate the task of the National Bank of Moldova. Upside risks to inflation remain, despite the welcome recent monetary tightening, with possible second round effects from the drought. Real interest rates on sterilization operations will need to remain substantially positive until monetary pressures are eased and further tightening may be needed to ensure disinflation is fully entrenched, the IMF experts said. The third review of Moldova’s progress under PGRF is on track for an IMF Executive Board discussion early this year.