This Selected Issues paper analyzes the macroeconomic impact of workers’ remittances on Moldova. The paper focuses on Moldova’s labor emigration since the late-1990s using survey data designed to shed light on the economic and social consequences of migration. The survey results are broadly consistent both with the findings from balance-of-payments data and with the stylized facts in the labor migration literature. The paper also examines various indicators to assess the appropriateness of the current exchange rate level.


This Selected Issues paper analyzes the macroeconomic impact of workers’ remittances on Moldova. The paper focuses on Moldova’s labor emigration since the late-1990s using survey data designed to shed light on the economic and social consequences of migration. The survey results are broadly consistent both with the findings from balance-of-payments data and with the stylized facts in the labor migration literature. The paper also examines various indicators to assess the appropriateness of the current exchange rate level.

IV. Fiscal Reforms37

A. Introduction

116. Moldova started to implement fiscal reforms in earnest from the late 1990s. Important results have been achieved in the following areas: reorganization of the State Tax Inspectorate (STI); establishment of a treasury system; modernization of the budgetary system (both budgetary procedures and presentation); adoption of a medium-term expenditure framework (MTEF); and improvement in general government reporting. These reforms have been supported by Fund and World Bank technical assistance.

117. The experience with implementation of Fund advice has been mixed. Although a number of recommendations have been carried out, many others, of a more substantive and strategic nature—expected to bring long-term benefits—have not been put into practice. In particular, further steps are needed to strengthen tax administration and public finance management.

118. This chapter outlines the main characteristics of Moldova’s fiscal reforms (already implemented and under implementation), and the challenges ahead. Section B discusses tax administration reforms; Section C covers public finance management reforms; and Section D concludes.

B. Tax Administration Reforms

119. Tax administration reforms have contributed to improvements in the efficiency of tax administration. The STI has implemented a number of measures recommended by the Fiscal Affairs Department (FAD) of the IMF.38 Tax administration reform efforts have focused on reorganizing the STI, introducing a tax identification number (TIN) to uniquely identify taxpayers, establishing and developing the Large-Taxpayer Unit (LTU), developing the tax audit system, improving VAT administration, strengthening collection enforcement, and upgrading the STI’s database system.

120. While the STI’s organizational structure is generally in line with international practice, the tax administration system needs comprehensive reform. The STI has been appropriately reorganized along functional lines. However, it has yet to develop a comprehensive strategy, with clearly established guidelines, and structured and systematic approach in managing reforms. Many of the adopted reforms did not live up to their potential benefits because they were implemented without a modernization plan, clear and formal planning processes, management ownership, and adequate administrative capacity. Development and implementation of a modernization plan, a human resource strategy, and—in the long term—a full strategic management system, should make the STI more effective.39 Further development and modernization will critically depend on the political commitment and ownership of reforms.

121. The LTU, in charge of tax audits and enforcement collection measures, was established in 1998. Gradually it has been reorganized and new functions have been added in order to build a full-fledged organization—a unit responsible for all tax administration functions for large taxpayers. This way special emphasis is given to a limited number of taxpayers with an important share in tax revenues. However, the LTU needs further upgrade of its organizational structure, additional skilled personnel to provide better service for taxpayers, and specialized tax audits based on risk assessment. These improvements should allow for a more efficient use of its resources and better results in tax collection.40

122. The tax audit system has been partially revamped. To improve audit performance, a new division has been established, with responsibility for the audit program, methodologies, guidelines, and oversight. However, audit case selection is still not completely based on a computerized analysis of taxpayers financial indicators, negatively affecting audit efficiency and collection efforts. In order to strengthen tax compliance, the audit program should rely, as much as possible, on objective selection criteria, and audits should be better targeted to different types of taxpayers.

123. Limited progress has been achieved so far in VAT administration. Some enhancements were made in controlling refund claims, and the VAT registration threshold was increased, allowing the STI’s resources to be concentrated on a smaller number of taxpayers without jeopardizing revenue collection. Nevertheless, the VAT refund process remains cumbersome and lengthy, imposing an unnecessary burden on the private sector. Developing a more effective system at the lowest acceptable cost for the government and taxpayers will require simplifying and shortening the VAT refund procedure, discontinuing the practice of offsetting VAT refunds against arrears,41 and decentralizing VAT refund decisions.42

C. Public Finance Management Reforms

124. The authorities have made commendable progress in preparing the MTEF. The MTEF includes a macroeconomic framework, outlines medium-term general government policies, and provides a basis for a more efficient allocation of public resources, according to the priorities identified in the authorities’ Economic Growth and Poverty Reduction Paper (EGPRSP). The preparation of sector expenditure strategies and expenditure plans for education, health care, and social protection was an important step toward strategic planning and allocation of resources based on strategic priorities.43 The authorities can benefit from expanding expenditure strategies and plans to other sectors and from enforcing intra-sectoral and inter-sectoral expenditure prioritization. More realistic revenue projections, contingency plans, and better alignment of the budgetary process with the MTEF and EGPRSP, will further improve the use of available public resources.

125. While the budget preparation process for 2005 benefited markedly from the MTEF, budget efficiency and effectiveness still needs to be improved. The budget process still lacks strategic planning and analysis, as well as a more comprehensive expenditure prioritization. The authorities lack administrative capacity for developing comprehensive sectoral policies and priorities, and related expenditure ceilings. As a result, budget preparation is now input-oriented, instead of outcome-oriented. Budget institutions are mainly interested in how much they will get, and do not pay enough attention to the goals to be achieved with the allocated budget. With the adoption of the MTEF and the EGPRSP, the basis for future improvement has been established. The authorities have taken initial steps for program budgeting in a few sectors, but administrative capacity constraints in the Ministry of Finance and in other budgetary institutions have limited progress to date.

126. Budget presentation has improved. In line with the recommendations of a recent ROSC mission, the Ministry of Finance has made progress in presenting to the parliament a comprehensive 2005 general government budget, including extra-budgetary funds (EBFs), special revenues, and foreign-financed investment projects, organized by functional classification. The authorities should also make an effort to present to parliament a comprehensive general government budget by economic classification, to enhance government fiscal transparency and fiscal control. To ensure greater consistency of the overall fiscal framework, separate procedures for adopting the state budget and the budgets of the Social Insurance Fund and Health Insurance Fund should be avoided, as they complicate the general government budget presentation.

127. Budget reporting has been upgraded, but still it is not comprehensive. Monthly reports do not include data for the EBFs, special revenues, and foreign-financed projects. The Ministry of Finance intends to start preparing comprehensive budget execution reports on a regular basis by functional classification in 2005. Comprehensive reporting will increase fiscal transparency and the quality of the decision-making process.

128. The authorities have made significant headway in establishing and developing a treasury system. The treasury system consists of a central treasury, responsible for managing state revenues and expenditures, and the local treasuries, in charge of local government revenues and expenditures. The establishment of the treasury contributed to fiscal discipline, improved budget execution, reduced the stock of expenditure arrears, enhanced fiscal transparency and accountability, and improved fiscal monitoring and reporting. An important step toward strengthening fiscal discipline was the establishment of a system for registering procurement contracts concluded by central government institutions, and its gradual extension to local government institutions.44 This system provides the basis for expenditure monitoring at various stages of the expenditure process. However, the authorities need to further develop and improve the treasury functions by providing up-to-date treasury software, establishing direct computer links between the treasury and budget institutions, upgrading the system for contracts registration (for instance, to widen the coverage to all types of expenditures), and developing cash and debt management.

129. The introduction of a single treasury account (STA) established the foundation for improving cash management. The STA is a centralized account for collection of all state revenues and execution of all state expenditures (including extrabudgetary funds and special revenues). Through establishment of the STA, a major part of the public resources, previously spread on a number of bank accounts, was consolidated into one centralized account at the central bank. Although the STA is operational. The efficiency of cash management can be substantially improved. Currently the Ministry of Finance approves monthly spending plans for spending units, but does not manage to satisfy all cash needs on a daily basis. Therefore, the Ministry often resorts to cash rationing, with predefined expenditure priorities (wages and salaries, pensions, and scholarships). For greater consolidation and more efficient cash management, the authorities should integrate the resources of the Social Insurance Fund and the Health Insurance Fund, as well as foreign financed projects, into the STA.45 This integration will help secure the government’s cash resources, eliminating favoritism toward any commercial bank, and improving monitoring and reporting of general government financial operations. In addition to integration, the authorities should establish clear and transparent mechanisms for borrowing within the STA, strengthen the coordination between cash and debt management, consider using overdraft bank facilities, improve the coordination between the Ministry of Finance and spending units, and completely avoid idle balances on government accounts in commercial banks.46

130. In recent years, the proliferation of extra-budgetary funds has complicated fiscal management. EBFs are earmarked funds created on the basis of specific taxes or fees with corresponding specific use in accordance with specific laws (e.g. export support fund, tourism support fund, ecology fund, text book fund). As earmarked funds, they are not subject to the same budgetary rules as regular budgetary items, in case expenditure cuts or budget reallocation within the approved annual budget are needed. This way they enjoy greater flexibility but hamper expenditure prioritization. To achieve sound fiscal management, the authorities need to start reducing and consolidating these funds with mainstream line ministry activities.

131. Special revenues represent a significant share in total general government revenues and should be closely monitored. Special revenues are those collected by budget institutions from services provided for a fee, and spent by budget institutions for their regular functions. In 2003 they reached 10.5 percent of total revenues, and the estimate for 2004 is 10 percent. A significant part of the special revenues is collected and spent in the education sector. Although managed by the Treasury, special revenues complicate fiscal management in at least two ways. Fist, they may encourage budget institutions to focus more on activities that generate special revenues instead of on their core function, as well as to treat some of budget revenues as special revenues to retain control over their use. Second, cash management may be less efficient if these revenues are not fully consolidated in the STA on a daily basis. A detailed analysis of the sources of these revenues, the nature of their expenditures, and their concentration in certain sectors or budget institutions, would help define proper government policies and actions. In any event, to the extent possible, they should be integrated into the budget.

132. The authorities are planning to step up monitoring of state-owned enterprises (SOEs). Following the recommendation of the ROSC mission, the Ministry of Finance has recently established a separate unit to monitor the financial operations of SOEs. To provide a better insight into their operations, procedures should be put in place to ensure approval of their financial plans, regular financial reporting, and external audits of their annual accounts.

D. Conclusions

133. Moldova has already implemented important fiscal reforms in the tax administration and public finance management area. These reforms contributed to improve tax administration and institutional fiscal management, notably in the treasury and budget system. The budgetary reforms benefited significantly from the preparation of a MTEF and from the strategic framework included as part of the EGPRSP.

134. Looking ahead, Moldova faces many fiscal challenges. Successful implementation of a comprehensive tax administration reform, further consolidation of public resources, and further development of the treasury and budget operations will all require strong commitment, as well as full awareness of the government about the need for reforms. Special emphasis should be placed on strategic management at the STI, VAT administration, collection enforcement, closure of EBFs, strengthening of cash management procedures, and closer alignment of the annual budget, MTEF, and the EGPRSP.


Prepared by Anita Angelovska-Bezoska.


FAD has provided substantial technical assistance in tax policy and tax administration in Moldova. FAD’s August 2004 Fiscal Strategy Brief highlights the main fiscal reform priority areas.


The STI has started drafting a modernization strategy. The Dutch government will finance a resident expert to support this process.


In terms of organizational structure and skilled personnel, the LTU is missing (i) a quality review team, to ensure objective and high standard audits; (ii) a risk and intelligence team; (iii) a specialized unit to deal with international tax issues; and (iv) an administrative support team.


About 95% of VAT refunds are offset against current and future tax liabilities.


Currently, besides regional committees for VAT refunds, there is also a national committee. The STI has prepared a regulation for abolishing the national VAT refund committee, pending approval from the Ministry of Finance.


Sector expenditure strategies and expenditure plans were prepared as part of the MTEF process.


Before registering contracts, the treasury checks the budget allocation, thus preventing accumulation of arrears.


Currently they operate outside the treasury system and their balances can not be used by the treasury to bridge short-term gaps between inflows and outflows.


There are still idle balances on the accounts of local treasuries in commercial banks.