Statement by the IMF Staff Representative on the Republic of Moldova

This paper discusses Moldova’s request for a Three-Year Arrangement under the Extended Credit Facility and request for an Extended Arrangement. The economy remained overregulated and hampered by relative price distortions. High barriers to entry and low competition in telecommunications, trade, and food processing have kept domestic prices significantly above international prices of many consumer products. In contrast, utility tariffs generally remained well below cost-recovery levels, leading to substantial arrears and underinvestment. The crisis and pre-election spending hikes resulted in a large increase in the fiscal deficit.

Abstract

This paper discusses Moldova’s request for a Three-Year Arrangement under the Extended Credit Facility and request for an Extended Arrangement. The economy remained overregulated and hampered by relative price distortions. High barriers to entry and low competition in telecommunications, trade, and food processing have kept domestic prices significantly above international prices of many consumer products. In contrast, utility tariffs generally remained well below cost-recovery levels, leading to substantial arrears and underinvestment. The crisis and pre-election spending hikes resulted in a large increase in the fiscal deficit.

21. This statement provides additional information on the implementation of the prior actions and presents new data on economic developments in Moldova that became available since the issuance of the staff report. The additional information does not change the thrust of the staff appraisal.

22. All prior actions for the Board consideration of the program have been carried out (MEFP Table 3). In December Parliament passed a 2010 budget in line with the Memorandum of Economic and Financial Policies (MEFP). Parliament also amended the 2009 Budget and the law on wages of budgetary sector employees in line with the MEFP. The National Bank of Moldova raised its net international reserves to US$1341 million as of end-2009. Finally, Parliament transferred the authority for setting heating tariffs to the independent energy regulator (ANRE), which subsequently increased the tariffs by 29 percent, thus covering amortization and all variable costs.

23. The latest available data are broadly in line with staff’s projections. The economy registered a 7¾ percent year-on-year GDP decline in the third quarter of 2009, essentially unchanged from the January-June average, suggesting that output decline for the full 2009 could be limited to 8–8½ percent. End-2009 CPI inflation came at 0.4 percent, owing mainly to slower than anticipated effect of exchange rate depreciation on consumer prices. Inflation is however expected to pick up pace in the first quarter of 2010. The current account deficit in Q3 was 8.3 percent of period GDP, with some pick up in workers’ remittances in the third quarter likely to limit the current account deficit for the full year to slightly below staff’s projection of 8.9 percent of GDP. The fiscal data for November confirmed that the 2009 budget remained on track to keep the overall deficit below 9 percent of GDP. The banking system’s capital adequacy ratio remained virtually unchanged in December at 32.3 percent, while the NPL ratio declined slightly to 16.3 percent.

24. The authorities have consented to the publication of the staff report, the MEFP, and the TMU for 2010–12.

Republic of Moldova: Request for a Three-Year Arrangement Under the Extended Credit Facility and Request for an Extended Arrangement
Author: International Monetary Fund