Abstract
This paper analyzes the recent economic developments in Moldova by reviewing the real, fiscal, and external sectors developments; money banking; and structural policies. The study provides a statistical analysis on the composition of fiscal adjustments in the country, and describes the recent trends in social spending and social indicators in Moldova and in other transition economies in the 1990s, the methodology for estimating efficiency in public spending on education and health care, and assesses the current account determination in the country.
Moldova: Basic Data, 1995-991/
Data exclude Transnistria.
GDP data include a staff-estimated allowance for the shadow economy.
Based on share of value added at current prices.
On a cash basis; includes the Social Fund and extrabudgetary funds, and project loan spending.
At actual exchange rates.
Preliminary data for 1999.
Moldova: Basic Data, 1995-991/
| I. Social and demographic indicators (1999) | |||
| Area (including Transnistria) | 33,800 | sq. km. | |
| Population | 3.6 | million | |
| Share of urban population | 42 | percent | |
| Rate of population growth | −2.8 | percent | |
| Life expectancy at birth (1995) | 67.8 | years | |
| Infant mortality rate (per 1,000 live births) | 18.2 | ||
| Hospital beds (per 10,000 people) | 82.0 | ||
| GDP per capita, 1999 (in US$) | 318 | ||
| 1995 | 1996 | 1997 | 1998 | 1999 | ||||
|---|---|---|---|---|---|---|---|---|
| II. Economic Indicators | ||||||||
| Real sector | ||||||||
| Nominal GDP2/ 6/ | 7,545 | 8,828 | 10,118 | 10,366 | 13,713 | |||
| Real GDP (percent change)6/ | −1.4 | −5.9 | 1.6 | −6.5 | −4.4 | |||
| Sectoral distribution of GDP (in percent of total)3/ 6/ | ||||||||
| Agriculture and fishing | 29 | 27 | 26 | 26 | 22 | |||
| Manufacturing, energy, and processing | 25 | 23 | 20 | 17 | 16 | |||
| Construction, services and other | 46 | 50 | 54 | 57 | 62 | |||
| Consumer prices (percent change) | ||||||||
| Period average | 30.2 | 23.5 | 11.8 | 7.7 | 39.0 | |||
| End-of-period | 23.8 | 15.1 | 11.2 | 18.3 | 43.7 | |||
| Average nominal wage (percent change) | 32.1 | 30.7 | 17.5 | 13.9 | 21.6 | |||
| External sector | ||||||||
| Exports of goods (in millions of U.S. dollars) | 739 | 823 | 890 | 644 | 469 | |||
| (In percent of GDP) | 44.0 | 42.9 | 40.7 | 33.4 | 36.0 | |||
| Imports of goods (in millions of U.S. dollars) | 794 | 1,075 | 1,237 | 1,023 | 597 | |||
| (In percent of GDP) | 47.3 | 56.1 | 56.5 | 53.4 | 45.8 | |||
| Current account (in percent of GDP) | −6.8 | −9.8 | −12.5 | −16.7 | −2.6 | |||
| General government finances4/ | ||||||||
| Total revenue | 2,556 | 2,797 | 3,431 | 3,428 | 3,745 | |||
| (In percent of GDP) | 33.9 | 31.7 | 33.9 | 33.1 | 27.3 | |||
| Total expenditure and net lending | 2,993 | 3,418 | 4,371 | 4,015 | 4,491 | |||
| (In percent of GDP) | 39.7 | 38.7 | 43.2 | 38.7 | 32.7 | |||
| Overall balance (cash) | −437 | −621 | −940 | −588 | −746 | |||
| (In percent of GDP) | −5.8 | −7.0 | −9.3 | −5.7 | −5.4 | |||
| Money and credit (end-of-period) | ||||||||
| Net foreign assets5/ | 233 | 271 | 484 | −620 | 163 | |||
| Domestic credit | 1,523 | 1,804 | 2,305 | 3,297 | 3,414 | |||
| Claims on general government (net) | 489 | 469 | 804 | 1,536 | 1,778 | |||
| Broad money (M3) | 1,244 | 1,434 | 1,922 | 1,765 | 2,504 | |||
| Memorandum items: | ||||||||
| Exchange rate, leu/U.S. dollar | ||||||||
| Period average | 4.5 | 4.6 | 4.6 | 5.4 | 10.5 | |||
| End-of-period | 4.5 | 4.7 | 4.7 | 8.3 | 11.6 | |||
Data exclude Transnistria.
GDP data include a staff-estimated allowance for the shadow economy.
Based on share of value added at current prices.
On a cash basis; includes the Social Fund and extrabudgetary funds, and project loan spending.
At actual exchange rates.
Preliminary data for 1999.
Moldova: Basic Data, 1995-991/
| I. Social and demographic indicators (1999) | |||
| Area (including Transnistria) | 33,800 | sq. km. | |
| Population | 3.6 | million | |
| Share of urban population | 42 | percent | |
| Rate of population growth | −2.8 | percent | |
| Life expectancy at birth (1995) | 67.8 | years | |
| Infant mortality rate (per 1,000 live births) | 18.2 | ||
| Hospital beds (per 10,000 people) | 82.0 | ||
| GDP per capita, 1999 (in US$) | 318 | ||
| 1995 | 1996 | 1997 | 1998 | 1999 | ||||
|---|---|---|---|---|---|---|---|---|
| II. Economic Indicators | ||||||||
| Real sector | ||||||||
| Nominal GDP2/ 6/ | 7,545 | 8,828 | 10,118 | 10,366 | 13,713 | |||
| Real GDP (percent change)6/ | −1.4 | −5.9 | 1.6 | −6.5 | −4.4 | |||
| Sectoral distribution of GDP (in percent of total)3/ 6/ | ||||||||
| Agriculture and fishing | 29 | 27 | 26 | 26 | 22 | |||
| Manufacturing, energy, and processing | 25 | 23 | 20 | 17 | 16 | |||
| Construction, services and other | 46 | 50 | 54 | 57 | 62 | |||
| Consumer prices (percent change) | ||||||||
| Period average | 30.2 | 23.5 | 11.8 | 7.7 | 39.0 | |||
| End-of-period | 23.8 | 15.1 | 11.2 | 18.3 | 43.7 | |||
| Average nominal wage (percent change) | 32.1 | 30.7 | 17.5 | 13.9 | 21.6 | |||
| External sector | ||||||||
| Exports of goods (in millions of U.S. dollars) | 739 | 823 | 890 | 644 | 469 | |||
| (In percent of GDP) | 44.0 | 42.9 | 40.7 | 33.4 | 36.0 | |||
| Imports of goods (in millions of U.S. dollars) | 794 | 1,075 | 1,237 | 1,023 | 597 | |||
| (In percent of GDP) | 47.3 | 56.1 | 56.5 | 53.4 | 45.8 | |||
| Current account (in percent of GDP) | −6.8 | −9.8 | −12.5 | −16.7 | −2.6 | |||
| General government finances4/ | ||||||||
| Total revenue | 2,556 | 2,797 | 3,431 | 3,428 | 3,745 | |||
| (In percent of GDP) | 33.9 | 31.7 | 33.9 | 33.1 | 27.3 | |||
| Total expenditure and net lending | 2,993 | 3,418 | 4,371 | 4,015 | 4,491 | |||
| (In percent of GDP) | 39.7 | 38.7 | 43.2 | 38.7 | 32.7 | |||
| Overall balance (cash) | −437 | −621 | −940 | −588 | −746 | |||
| (In percent of GDP) | −5.8 | −7.0 | −9.3 | −5.7 | −5.4 | |||
| Money and credit (end-of-period) | ||||||||
| Net foreign assets5/ | 233 | 271 | 484 | −620 | 163 | |||
| Domestic credit | 1,523 | 1,804 | 2,305 | 3,297 | 3,414 | |||
| Claims on general government (net) | 489 | 469 | 804 | 1,536 | 1,778 | |||
| Broad money (M3) | 1,244 | 1,434 | 1,922 | 1,765 | 2,504 | |||
| Memorandum items: | ||||||||
| Exchange rate, leu/U.S. dollar | ||||||||
| Period average | 4.5 | 4.6 | 4.6 | 5.4 | 10.5 | |||
| End-of-period | 4.5 | 4.7 | 4.7 | 8.3 | 11.6 | |||
Data exclude Transnistria.
GDP data include a staff-estimated allowance for the shadow economy.
Based on share of value added at current prices.
On a cash basis; includes the Social Fund and extrabudgetary funds, and project loan spending.
At actual exchange rates.
Preliminary data for 1999.
I. Introduction and Background
1. Moldova is a small landlocked country in the northeastern Balkans, bordering Ukraine in the north, east, and south and Romania in the west. A moderate continental climate with mild winters and rich, fertile soils have favored agricultural production and processing, which currently account for about 40 percent of GDP. Following the collapse of the Soviet Union and Moldova’s independence in 1991, output dropped sharply and inflation soared, but, through mid-1998, substantial progress was made in financial and macroeconomic stabilization, as part of Moldova’s transformation to a market economy. Further productivity gains were sought through increased emphasis on structural reform in the main productive sectors that would restore investor’s confidence, growth and increase the ability to withstand external shocks.
2. When the Russian crisis hit in August 1998, output declined further, macroeconomic imbalances surged and the financial situation became fragile. In 1999, an unprecedented fiscal adjustment and tight monetary policy attempted, with some success, to contain the external shock. As a result, the external current account deficit contracted considerably. Output also bore some of the adjustment and fell by close to 4.5 percent in real terms. As prudent policies continued in 2000, a slight rebound of output emerged in the first half of the year, despite new shocks in the form of a drought and increased energy prices.
3. The 1999 fiscal adjustment was approximately 6 percent of GDP; it came largely through rationalization of public expenditures, notably by reducing inefficiency in the social sectors. The fiscal stance was consolidated in 2000, by another one-and-a half percent of GDP. Despite the retrenchment, a redirection of expenditures to targeted social compensation, clearance of domestic and external payment arrears, and a long-awaited wage increase were accomplished.
4. The external adjustment involved an initial narrowing—and subsequent widening—of the trade deficit in 1999 and 2000, respectively, as exports collapsed and imports started to recover in 2000 due to increased demand. With the buy-back on extremely favorable terms of some debt instruments and little new borrowing, Moldova’s external public and publicly guaranteed debt declined by about US$ 150 million in 1999, although new energy payment arrears were accumulated. Debt indicators deteriorated, however, with the depreciation of the exchange rate and a continued drop in output and exports. The stock of energy arrears was reduced markedly in 2000 with an equity swap involving Moldovagas shares and the issuance of promissory notes to Russia’s Gazprom. Furthermore, agreements were reached on the rescheduling of arrears on public and publicly guaranteed debt. At the end of September 2000, the total stock of public and publicly guaranteed debt stood at about US$ 1 billion or 72 percent of GDP, while energy arrears added an estimated US$ 300 million, or 21 percent of GDP.
5. Monetary policy has remained conservative throughout the period. Inflation shot up in the wake of the Russian crisis when the leu depreciated sharply, with twelve-month inflation peaking at 54 percent in October 1999. By December 1999, inflation had decreased to 40 percent (on end-year basis). In 2000 inflation was much lower, reflecting further monetary tightening. Twelve-month inflation fell to 29 percent by end-September 2000. International reserve levels reached a low of US$ 140 million by end-1998. Since then the National Bank of Moldova has rebuilt the reserves to US$ 190 million as of end-September 2000, while paying large amounts in foreign debt service (US$ 67 million in the first three quarters of 2000). Throughout the period the NBM has allowed the exchange rate of the leu to float freely. In real terms, by end-September 2000, the leu had depreciated by roughly 35 percent vis-à-vis the U.S. dollar compared to its pre-August 1998 level.
6. Progress in structural reforms had been uneven and slowed down further in mid-1999 due to political tensions. Renewed efforts on the structural front were made in 2000, when parliament finally approved the privatization plan for five major wineries and the tobacco sector, three electricity distributing companies were sold to a strategic foreign investor, the land privatization program was successfully concluded, and the civil code was passed in its first reading by parliament.