Statement by the IMF Staff Representative

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.

Abstract

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.

July 13, 2007

1. This statement summarizes developments in Moldova since the issuance of the staff report. The additional information does not change the thrust of the staff appraisal.

2. Recent economic data have been favorable and broadly in line with projections. Real GDP growth in the first quarter of 2007 surprised on the upside at 7.3 percent, led by construction and services. However, dry weather conditions have damaged the grain crop during the second quarter, suggesting that the full year projection of 5 percent remains appropriate. Twelve-month inflation continued to decline to 10.4 percent in June. Monetary targets under the program were observed at end-June, and the NBM’s stepped-up sterilization efforts have kept real interest rates on short-term paper in positive territory. Fiscal performance also appears to be broadly on track, with preliminary data showing a cash deficit for the general government of 0.1 percent of annual GDP during the first half, well under the program ceiling of 0.5 percent of GDP. Nevertheless, delays by the municipality of Chişinău in clearing arrears for district heating subsidies mean that expenditure arrears of about 0.3 percent of GDP remained at end-June, implying a continued breach of the indicative ceiling on expenditure arrears. Staff is discussing options for clearing these arrears with the authorities.

3. Preliminary balance of payments data for the first quarter of 2007 show a larger current account deficit than previously expected ($175 million, against a projected annual figure of $354 million). Compared with the first quarter of 2006, exports increased by 12 percent, although wine exports to Russia remain effectively blocked. Imports grew by 40 percent, reflecting robust inflows of capital and consumer goods, fuelled by higher FDI and strong remittances. The authorities also reported a large positive value for errors and omissions, suggesting that, as in the past, the preliminary quarterly balance of payments numbers could be revised significantly. Specifically, finalized data may well show a smaller current account deficit, as some remittance inflows are reclassified from errors and omissions to the current account.

4. The authorities are amending the AML law, seeking to address concerns raised by the capital amnesty. Key recommendations of recent LEG TA have been incorporated in the draft legislation, which was submitted to parliament on July 2, 2007. Final passage of the law is expected by end-July. Further, the authorities have sought to address AML concerns by consulting with LEG—as well as EU and US experts—in drafting regulations to implement the amnesty.

Republic of Moldova: Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Nonobservance of Performance Criterion: Staff Report; Staff Statement; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Moldova
Author: International Monetary Fund