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.
V. Energy Sector Issues45
118. Perhaps, the Achilles heel of the Moldovan economy is the energy sector, particularly gas.46 Moldova’s external energy debt has historically grown on average by US$60 million annually (excluding penalty interest), (see Figure 15). At the same time, the country seems to always be hostage to threats of gas (and electricity) cut-offs in the winter for non-payment of its debts.
Moldova: Evolution of Energy Debt, 1994-1999
(In millions of U.S. dollars)
Citation: IMF Staff Country Reports 2001, 022; 10.5089/9781451824957.002.A005
Sources: Moldovan authorities; and Fund staff estimates.Note: The stock of debt declined in 1997 on account of the US$140 million Gazprom bond deal.119. The energy sector is a major source of both internal and external imbalances in the Moldovan economy. The quasi-fiscal deficit of the sector is estimated at about MdI 730 million in 1999.47 This constitutes 5 percent of GDP and compares to the fiscal deficit of MdI 238 million.48 Moreover, a large share of energy revenues is collected in-kind. If in-kind revenues are excluded, the amount of the deficit triples. The highest deficits are recorded in the electricity and gas sectors (see Figure 16).
Moldova: Energy Sector, Deficit, 1999
(In percent of total)
Citation: IMF Staff Country Reports 2001, 022; 10.5089/9781451824957.002.A005
Source: Moldovan authorities; and Fond staff calculations.120. At the outset, it is worth noting that a consistent set of data and information on the gas sector are difficult to obtain. There are gas meters to measure gas consumption and transit, but these are located in Ukraine (2-100 kilometers from the Moldovan border), and at the left bank of the river (i.e. in the self declared republic of Transnistria). It is conventional wisdom, however, that about 23 billion cubic meters of gas go through Moldova’s territory annually, of which about 2 billion are consumed locally, about 1 billion is consumed by Transnistria, and the remainder is transit, going to the Balkan countries and to Turkey.49
121. Moldova pays about US$80 per one-thousand cubic meters for gas (US$60 if the transit fee is subtracted). Interestingly, the transit fee is tied to the amount of gas consumed by Moldova and not the amount and/or conditions of gas transit. Had the transit fee with the main gas supplier been based on the actual amount of gas transiting through Moldova (and based on an arrangement similar to the one that exists with Ukraine), Moldova could receive an additional US$30-50 million in transit fees. Moldova has recently expressed interest in renegotiating its gas agreement with its main foreign supplier.
122. Moldovan enterprises and consumers have had difficulties servicing their gas debt. However, any reform of the gas sector must first start with reforms in the power (and thermal) sectors; the linkages between these sectors are strong. Indeed, it is the power sector that is the primary non-payer of gas debt, contributing to 80 percent of the debt to Moldovagas, the joint stock distribution company owned by RAO Gazprom, Moldova, and Transnistria. In turn, the heating companies do not pay their debt to the power generation companies.
123. Figure 17 shows the various linkages in the energy sector. As shown, there are a number of intermediaries between RAO Gazprom and the final consumers of energy in Moldova. The main links, however, are simple enough. Gas is used by three power generation companies to produce electricity that is distributed by 5 companies. The gas is also used by the boiler houses of Termocom and Termocomenergo to produce heat.
Moldova: Sources of Energy
Citation: IMF Staff Country Reports 2001, 022; 10.5089/9781451824957.002.A005
124. Interestingly, as you go up the chain, from the final consumers to the various producers of energy, the payments record deteriorates (Figure 18).50 Thus, households pay 88 percent (58 percent in cash) of their energy bill to the electricity distribution companies;51 Termocom pays 62 percent (47 percent in cash) of its energy bill to these companies; Termocomenergo pays 50 percent (0.4 percent in cash) of its energy bills; the power distribution companies pay about 30 percent (less than 10 percent in cash) of its energy bill to the generation companies; and the generation companies pay about 25 percent (around 5 percent in cash) of their bill to Moldovagas. Thus, Moldova pays for gas through a number of intermediary firms each, in turn, reduce the cash component of its payment. This inevitably raises the transaction costs, and hence, the foreign supplier overcharges for its gas deliveries to Moldova.
Moldova: Payments for Energy
Citation: IMF Staff Country Reports 2001, 022; 10.5089/9781451824957.002.A005
125. Reform of the energy sector requires that all payments be effected in cash and that a hard budget constraint be strictly enforced. The argument that this is socially difficult to implement is largely not valid as the population pays a significant portion of their energy (at least, their electricity) bill, mostly in cash. The problem lies with the budgetary institutions, both at the state and local levels. Indeed, public institutions financed from the budget account for a quarter of the consumer debt to the power distribution network. Unless a hard budget constraint on the energy consumption of budgetary institutions is imposed (and the list of “vital” consumers that cannot be disconnected is limited), energy arrears will continue to increase.
126. Much progress has been made in reforming the energy sector in 2000. In February, three electricity distribution companies were sold to a strategic investor. The privatization of these distribution companies provided a stepping-stone to reforming the energy sector. In April, parliament passed a law replacing energy privileges (subsidies) to a wide group of the population with a more targeted program designed to help the most vulnerable segments of the population. Effectively, this saved the budget about MdI 500 million annually. In April, tender was launched for the sale of the remaining two power distribution companies and three generation companies, which are expected to be sold to strategic investors later in 2000.
127. The government has also made progress in decentralizing the district heating company, Termocomenergo, as a first step towards its privatization. Steps have also been taken to restructure the electricity company, Moldtranselectro (MTE). It is being divided into two companies, one that includes the stock of debt and the other that would operate MTE’s existing transmission network. This will provide breathing space to sort out the debts on the books of MTE.
128. Together with better government enforcement of cash collection, these measures have already started to improve the energy payments record. As an example, household payment to the remaining two non-privatized electricity companies has increased to 94 percent (of which nearly 65 percent is in cash) by June 2000. Moreover, there is a noticeable improvement in the payments record by Moldova to its foreign gas supplier. In the first half of 2000, the gas debt increased by about US$5 million.52
129. The restructuring/privatization of Termocom, Termocomenergo, and Moldtranselectro will require a resolution to the stock of debt problem. Moldtranselectro has external debt of nearly US$90 million, which are not considered government guaranteed.53 In addition, various energy companies owe Moldovagas about US$80 million in domestic debt.54 Without a resolution to the stock problem, strategic investors may be unwilling to invest in these companies. The World Bank is currently working with the authorities on a strategy to address this.
Prepared by Hassan Al-Atrash. The estimation of the quasi-fiscal deficit of the energy sector was done by Irina Dolinskaya.
Former Prime Minister Sturza claimed in an interview with a popular weekly magazine that Moldova’s energy sector “is dominated by strong corruptive interests and a big deal of money is laundered, with tens of millions of dollars paid for Ukrainian power to off-shore companies.” He went on to say that all attempts by his government “to make order in the payment system was met with tough resistance.” Premier Braghis has called the energy sector “a state in a state,” noting that “in this sector the Cabinet cannot learn even the strategic indicators at the first request.”
Staff estimates based on data of the Department of Energy and the Energy Regulatory Agency. The figure may still underestimate the actual deficit due to less than full cost recovery, under-estimation of technical losses, under-accounting of privileges and compensations.
Unlike the fiscal deficit that underwent a major downward correction between 1998 and 1999, the energy sector deficit remained virtually unchanged as percent of GDP during this period.
There are 4 gas pipelines that go through Moldova, one pipeline goes East-West through the Northern part of Moldova and three parallel pipelines go North-South (located along the south border with Ukraine). The annual capacity of the East-West pipeline is about 11 billion cubic meters (bcm) and the North-South pipelines are 27 bcm.
All figures relate to 1999.
The problems with thermal energy are more complicated, and the payment record of consumers of their heating bill (50 percent, of which 30 percent is in cash), is not as good. However, consumers seem to be overcharged for their heating bill: consumers that don’t have meters are charged a standard fee for 12 cubic meters (per household per month) while those that have meters are consuming about 5 cubic meters. Given that the majority of households do not have meters, most are overcharged. In turn, about 50 percent don’t pay.
In 1997, payment on gas to Gazprom represented 51 percent of total bill; in 1998, the payment record deteriorated to 48 percent of the total bill. In 1999, the payment record improved significantly to nearly 95 percent of the gas bill.
As of April 1, 2000, the stock of Moldtranselectro debt to Romania was US$32 million; to Ukraine was US$41 million; to Transnistria was US$10 million; and to others was US$6 million.
As of April 1, 2000, the stock of debt owed to Moldovagas by Termocom was US$9 million; by Termocomenergo was US$4 million; by CET-2 (power generation) was US$24 million; by CET-1 (power generation) was US$11 million; by CET-Nord (power distribution) was US$4 million; and by Moldtranselectro was US$29 million.
