Central Banking Technical Assistance to Countries in Transition

Statement on Monetary Operations

Susana Almuina, Ian McCarthy, Gabriel Sensenbrenner, and Justin Zulu
Published Date:
December 1995
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Since the Republic of Moldova became an independent and sovereign state, the authorities have undertaken a sustained program of economic reforms in order to develop a market-oriented economy. These efforts have been greatly assisted by the cooperation with the international financial organizations. Under the programs supported by the IMF and the World Bank, a number of decisive steps have been taken in order to tighten monetary and fiscal policies, attract foreign investment, and widen Moldova’s economic relations with countries from all over the world. The National Bank of Moldova is working out the modalities to regulate the monetary circulation, payments, and the circulation of securities and payment documents in national and foreign currency.

The most important step that was taken by Moldova in order to stabilize and strengthen the monetary system was the introduction of the national currency. This operation was expected to allow Moldova to reduce its inflation rate and to keep it at a reasonable level. We understood the fact that this monetary reform was a complicated undertaking, which might have a number of unpredictable consequences, and that it should be adapted to the concrete economic situation of the country. We concentrated our attention on the technical aspect of the planned conversion, as well as on the macroeconomic policies that would be needed to stabilize the value of the new currency.

In accordance with the Republic of Moldova President’s Decree, the leu and the ban became the sole legal tender in the territory of the Republic of Moldova on November 29, 1993. The conversion took place at the rate of leu 1 = 1,000 Moldovan rubles (or coupons). There was no limit for the amount exchanged. The exchange rate of the leu against the U.S. dollar (and other foreign currencies) is determined at the fixing sessions of the Moldovan Interbank Foreign Currency Exchange (IFCE) three times a week. The initial exchange rate was US$1 = lei 3.85. Nonresidents are entitled to convert Moldovan lei into foreign currencies at the IFCE, provided that the lei were received from a current international transaction.

The refinance rate of the National Bank is no longer fixed administratively. Since January 1, 1994, it has been determined in regular credit auctions held at the Bank and by the market. On July 14, 1994, the auctioned credit rate was 6.36 percent per month or 110 percent per annum (the monthly inflation rate in June was 2.7 percent). According to an agreement with the IMF in February 1994, about 80 percent of central bank credits should be allocated to the commercial banks through auctions. Preferential credits are no longer granted.

The size of credit auctions is determined so as to achieve targeted levels of the central bank’s net domestic assets, taking into account indicative targets for reserve money and broad money. These targets are consistent with the performance criteria in the stand-by arrangement with the IMF.

A stock exchange has been established, but it is not operating yet. Along with privatization of state-owned enterprises and their conversion into joint-stock companies, the stocks of these companies will be traded at the stock exchange.

The first steps in implementing the new monetary policy have begun to show positive results. The level of inflation has fallen from over 50 percent in December 1993 to 2.7 percent in May and June 1994. The interest rate on National Bank credit has been positive in real terms since the beginning of 1994. The exchange rate of the leu against the U.S. dollar has remained relatively stable, without sharp fluctuations. The exchange rate from April through July 1994 has remained close to US$1 = MDL 4.1.

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