Ara Stepanyan, Agustin Roitman, Gohar Minasyan, Ms. Dragana Ostojic, and Mr. Natan P. Epstein
In the face of sharply lower oil prices and geopolitical tensions and sanctions, economic activity in Russia decelerated in late 2014, resulting in negative spillovers on Commonwealth of Independent States (CIS) and, to a lesser extent, on Baltic countries. The spillovers to eastern Europe have been limited. The degree of impact is commensurate with the level of these countries’ trade, remittances, and foreign direct investment (FDI) links with Russia. So far, policy action by the affected countries has focused on mitigating the immediate consequences of spillovers.
After solid growth in 2015, the Central, Eastern and Southeastern Europe (CESEE) region is now heading into choppy waters. Lower euro area and U.S. growth, tighter global financial conditions, and continued weakness in many emerging economies are creating headwinds. Nonetheless, near-term growth is expected to remain robust in most CESEE countries outside the Commonwealth of Independent States (CIS), thanks to strong domestic demand. At the same time, output contraction is projected to moderate in the CIS, as the shocks that hit the Russian and Ukrainian economies gradually reverberate less and activity stabilizes. While downside risks are now more pronounced than in the fall of 2015, policies in most economies will need to rebuild room for maneuver.
Despite the strong cyclical rebound, growth in CESEE remains well below precrisis levels. If lower potential growth in CESEE turns out to be the “new normal,” this would imply a much slower pace of income convergence with advanced Europe. This chapter explores the reasons behind the postcrisis growth slowdown by looking at labor, capital and productivity trends across the region. It also aims to identify the key gaps between CESEE and advanced Europe – with regard to capital deepening and productivity – as well as the specific institutional and structural features of CESEE economies that might explain these gaps. While there is no magic formula for fast convergence, the hope is that this chapter will provide some insights for ongoing policy discussions in the region on how to get back on a fast convergence track.
In the baseline, supportive monetary policy and medium-term fiscal consolidation remain valid for many economies in the region. In the event of a negative growth shock, monetary policy should be the first line of defense, while automatic fiscal stabilizers should be allowed to play freely, provided there is enough fiscal policy room to do so. In case of a major shock and depending on the nature of the shock, fiscal policy should ease within the medium-term adjustment plans that dispel concerns about sustainability. Against the backdrop of mediocre global growth prospects, structural reforms are critical to lift potential growth and re-accelerate convergence.
Staff Report for the 2020 Article IV Consultation and Sixth Reviews Under the Extended Credit Facility and Extended Fund Facility Arrangements-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Moldova
Two possible tax policy strategies for the NIS are: (1) an optimal nondistortionary tax structure as a one-shot action; and (2) a structure with identifiable and clearly understood distortionary elements as a temporary phenomenon to close the fiscal gap. An assessment of NIS tax structures reveals that they conform to neither. They are rapidly acquiring complex features comprising multiple rates, exemptions, and other difficult-to administer properties, with uncertain ramifications for efficiency, equity, and the fiscal deficit. Steady--and perhaps prolonged--effort needs to be made if simple, broad-based, and revenue-productive tax structures are to be achieved. This is a Paper on Policy Analysis and Assessment and the author(s) would welcome any comments on the present text. Citations should refer to a Paper on Policy Analysis and Assessment of the International Monetary Fund, mentioning the author(s) and the date of issuance. The views expressed are those of the author(s) and do not necessarily represent those of the Fund.
Fourth and Fifth Reviews Under the Extended Credit Facility and Extended Fund Facility Arrangements, Completion of the Inflation Consultation, and Request for Extension of the Arrangements and Rephasing of Access-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Moldova
This paper discusses key findings of the Second Review Under the Poverty Reduction and Growth Facility (PRGF). Program performance has been generally satisfactory. The quantitative performance criteria were observed, as was most of the structural conditionality. One structural performance criterion was missed at end-December: the increase in tariffs for district heat and water was briefly delayed in Chisinau. IMF staff supports completion of the review and granting a waiver for nonobservance of the structural performance criterion. The authorities’ commitment to implement supplementary measures provides assurance that the program’s objectives remain attainable.
This paper highlights the case of Moldova including public investment, efficiency, and growth. The scale up of public investment in Moldova should account for absorption capacity constraints and high reliance on external financing, to ensure a positive impact on growth. It should also be accompanied by efforts to build capacity and strengthen institutions. Public investment in Moldova relies significantly on external loans and grants to finance capital spending. The share of foreign financing varies across sectors, with agriculture and health relying significantly on donor support and education financed mostly domestically. Critical infrastructure needs in Moldova broadly correspond to the priority sectors identified in the National Development Strategy Moldova 2020: energy, transport, agriculture, health, and education. In general, infrastructure in Moldova ranks better regarding coverage than quality. Moldova has a relatively high index of public investment efficiency; nonetheless there are a number of dimensions to improve investment process.