Moldova largely achieved the main objectives of the economic program supported by a combined Extended Credit Facility/Extended Fund Facility (ECF/EFF that expired on April 30, 2013). The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation and First Post-Program Monitoring (PPM) with the Republic of Moldova, IPN reports, quoting a press release of the Fund.
According to the press release, the Moldovan economy recovered strongly from the drought-related contraction of 2012, but activity will significantly slow in 2014 due to a moderation in agriculture production and related industries and weaker economic activity in main trading partners.
Inflation is projected to remain within the National Bank of Moldova’s (NBM) inflation target range of 5 percent ± 1.5 percentage points. The external accounts temporarily improved in 2013 but will deteriorate in 2014. The current account deficit is projected to widen to about 7.5 percent of GDP resulting from a slowdown in export growth and a decline in remittances.
Moldova achieved an impressive degree of fiscal consolidation under the program, but the gains have since eroded. The overall budget balance was reduced in 2013 to 1.8 percent of GDP compared 6.3 percent in 2009, but on current policies is projected to widen to 2.6 percent in 2014 and 4.6 percent in 2015. As a result, public and publicly-guaranteed debt that reached 30 percent of GDP in 2014 is projected to be on an upward trend over the medium term.
Risks to systemic financial stability have built up due to severe governance problems in the banking system. The ability of regulators to take action is constrained by Constitutional Court rulings that reduced the powers of the NBM and limited the independence and effective operation of the National Commission for Financial Markets (NCFM).
Executive Directors welcomed Moldova’s strong economic performance and progress on poverty reduction in recent years underpinned by sound policies. To consolidate these gains against the backdrop of significant downside risks, Directors encouraged the authorities to avoid a weakening of policies, reduce vulnerabilities, and deepen structural reforms. They urged the authorities to build consensus and act on the recommendations of the Financial Sector Assessment Program (FSAP), including to swiftly pass legislation fully restoring the regulatory and supervisory powers of the National Bank of Moldova (NBM) and the National Commission for Financial Markets.
The legal protection of their board members and staff needs to be strengthened. Directors also recommended resolutely enforcing compliance with prudential requirements and strengthening governance in the banking sector, including by ensuring the disclosure of the ownership structure.
Directors commended the authorities’ fiscal consolidation in recent years. Nonetheless, they cautioned that the significant wage and pension increases and ad hoc tax benefits being planned risk reversing the gains. They encouraged the authorities to pursue a gradual reduction in the budget deficit to a level compatible with projected official assistance over the medium term.
They commended the success of NBM in keeping inflation within the target range in the past two years. They considered the current monetary stance to be appropriate but recommended vigilance to any inflation risks.
Directors underscored that steady implementation of structural reforms is critical to boost potential growth and reduce poverty. To increase productivity and improve competitiveness, priority should be given to improving the business environment, investing in infrastructure, and strengthening human resource development.
