Despite having legal and institutional frameworks largely in place, Moldova continues to suffer from significant corruption and governance vulnerabilities. These are fairly pronounced in the areas of rule of law, anti-corruption, anti-money laundering and combatting the financing of terrorism (AML/CFT), and SOE governance, while other areas assessed for purposes of this report (PFM, tax administration, central bank governance and financial sector oversight) presented some good progress in mitigating such vulnerabilities.
KEY ISSUES Background: Romania has in large part reduced internal and external imbalances through sound macroeconomic policies. However, income convergence with the EU has been slow and weak public infrastructure has emerged as a bottleneck for faster growth. At the same time, Romania remains vulnerable to external shocks and the repair of balance sheets is not yet complete. Policy recommendations: Going forward, sustainable macroeconomic policies need to be combined with measures that boost the efficiency of public spending, reinvigorate delayed state-owned enterprise (SOE) reforms, and resolve crisis legacies in the financial sector. • Fiscal policy. Maintain the fiscal adjustment achievements, put public debt on a firm downward path, ensure provision of higher quality public infrastructure, and improve revenue administration and public expenditure management including through higher absorption of EU funds. • Monetary policy. Keep the easing bias as inflation has fallen below the target band and support a private credit rebound. Improve the policy framework by gradually moving to full-fledged inflation targeting. • Financial sector. Maintain the intense watch on the banking system focused on asset quality and non-performing loans reduction, further strengthen non-bank supervision, develop capital markets, and create effective insolvency frameworks. • Structural reforms. Improve financial performance and generate resources for investment of SOEs by implementing good governance principles, restructuring and increased private ownership; further deregulate energy markets. Outlook and risks: Staff expects sustained growth supported by strong domestic demand. Better EU funds absorption could boost the growth potential by about ½ percent annually. However, increased volatility in the external environment and failure to implement a much needed infrastructure upgrade present downside risks.
Further technical assistance is needed. Implementing modern risk-based methods in the LTO will require follow up FAD technical assistance to progress the advice provided in this report. This technical assistance should include translation of key risk-based compliance management documents to help the broader dissemination and acceptance of the approach. Translation of key documents provided during this TA mission (see Appendix IX) would greatly assist the dissemination of modern risk-based concepts and understanding to a larger group of LTO and NAFA officials
This mission was tasked with reviewing the performance of the LTO of NAFA. The government envisages that NAFA?and in particular its LTO?will deliver improved taxpayer compliance to provide additional tax revenue for the government’s economic program. However, this will not happen without radical changes to the LTO’s mandate and operations. For many reasons, which are described in this report, its activities are not strongly focused on the major compliance risks that make up the bulk of the tax gap. This report recommends a comprehensive change plan. Strong government support, including to legislation changes, are required to enable the reform. Main