The economy is expected to continue to grow by 4% on average in 2018-2020, supported by remittances and real wage growth induced private consumption. With economic growth driven by consumption, deep structural reforms are needed to enable new drivers of growth. The conclusions were formulated in an event held to present the World Bank’s economic update for Moldova on November 1, IPN reports.
In the first half of 2018, real GDP increased by 4.5% and 2018 growth is expected to reach 4.8%. Economist of the World Bank Office in Moldova Marcel Chistruga said the economic growth is mainly driven by private consumption and capital formation. Underpinned by lower inflation, strong growth of remittances and wages drove private consumption growth (+3.8%, y/y).
Despite robust exports (+12.5%, y/y), supported by the good harvest and foreign demand, imports increased by 10.4%, resulting in a negative contribution from net exports to growth.
Consumer inflation has been below the lower target of the corridor since April. In 2018 the Leu appreciation, alongside weaker external inflationary pressures, and declines in administered prices resulted in more pronounced deflationary pressures.
The Central Bank has maintained the policy rate at 6.5% since the beginning of the year, after the large cut during 2017. Yet financial intermediation remains subdued. The latter, combined with a recovery in deposits, is contributing to persistent excess liquidity. To address the excess liquidity, the reserve requirement ratio was raised to a record high of 42.5%. Favorable exchange rate developments allowed further accumulation of foreign reserves, which now exceed 6 months of imports.
External debt remained the main source of current account deficit financing. Due to Leu appreciation and new GDP accounting, external debt decreased by 10.7 p.p. to 62.1% of GDP.
In January-September 2018, underpinned by robust growth and higher employment, government fiscal revenues registered strong nominal y/y increase (+11%). As a result, fiscal surplus registered 0.9 percent of GDP. Current expenditures in the first nine months of 2018 rose rapidly (+9.7%). The largest increases were marked in subsidies and wages. In the first half of 2018, on account of stronger growth, public debt and guarantees decreased by 3.3 p.p. of GDP, as compared to end-2017, reaching 29.7% of GDP.
The World Bank estimates strong revenue performance in 2018 is expected to offset higher public spending. By 2020 growth will moderate at 3.5% supported by improved consumer and business confidence, and a continued, albeit slow, normalization of financial conditions which should stimulate growth in private investments after the elections. The fiscal deficit is forecasted to remain below the planned 2.5% of GDP.
