Republic of Moldova: Staff Report for the 2010 Article IV Consultation, First Reviews Under the Extended Arrangement and Under the Three–Year Arrangement Under the Extended Credit Facility, and Request for Modification of a Performance Criterion—Informational Annex

The Moldovan economy is recovering steadily following the recession triggered by the global crisis. The key challenge is to ensure fiscal, financial, and external sustainability while igniting new engines of growth. Monetary policy strikes the right balance between keeping inflation low and supporting the recovery. The monetary policy framework could benefit from more flexibility. Stepping up exports is a key to achieving high and sustainable growth over the medium term. Bringing the energy sector to financial sustainability should remain high on the government’s agenda.


The Moldovan economy is recovering steadily following the recession triggered by the global crisis. The key challenge is to ensure fiscal, financial, and external sustainability while igniting new engines of growth. Monetary policy strikes the right balance between keeping inflation low and supporting the recovery. The monetary policy framework could benefit from more flexibility. Stepping up exports is a key to achieving high and sustainable growth over the medium term. Bringing the energy sector to financial sustainability should remain high on the government’s agenda.

Annex I: Moldova—Fund Relations

(As of May 31, 2010)

I. Membership Status: Joined August 12, 1992; Article VIII

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and loans:

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V. Latest Financial Arrangements:

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Currently ECF.

VI. Projected Obligations to Fund: (SDR million; based on existing use of resources and present holdlings of SDRs):

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VII. Safeguards Assessments:

Under the Fund’s safeguards assessment policy, the National Bank of Moldova (NBM) is subject to an assessment with respect to the ECF/EFF arrangements approved on January 29, 2010. The assessment completed on June 3, 2010 updated the findings of the 2006 safeguards assessment. It concluded that recommendations of the 2006 safeguards assessment have been implemented. However, recent developments of the NBM operations have strengthened the need for an independent oversight of the bank and legal framework for lending to local banks. The updated safeguards assessment provided a set of recommendations focused on mitigating new risks and further strengthening the NBM safeguards framework.

VIII. Exchange Arrangements:

Moldova has accepted the obligations of Article VIII, Sections 2, 3 and 4, of the Fund’s Articles of Agreement. Its exchange system remains free of restrictions on payments and transfers for current international transactions.

Moldova’s exchange rate regime was reclassified from a de facto peg (to the U.S. dollar) to a managed float in April 2006. Due to the revision of the classification methodology, effective February 2, 2009, the classification has been changed to floating, retroactively to April 30, 2008. The NBM intervenes in the domestic foreign exchange interbank market in order to smooth out sharp exchange rate fluctuations of the Moldovan leu against the dollar. At the same time, the NBM interventions are not aimed at changing the trend of the exchange rate determined by the market. The NBM publishes the information on its interventions.

The official exchange rate of the Moldovan leu to the U.S. dollar announced by the NBM is determined as the weighted average of daily noncash market transactions performed on the interbank and intrabank market. The NBM quotes exchange rates of the leu for other currencies on the basis of the leu-U.S. dollar rate and the cross-rate between the U.S. dollar and these currencies.

IX. Article IV Consultation:

The last Article IV consultation was concluded on March 12, 2008 (Country Report No. 08/139). Timing of the next Article IV consultation will be set in accordance with the decision on consultation cycles approved on July 15, 2002.

X. FSAP Participation:

Moldova received an FSAP mission in May 2004; the FSSA (Country Report No. 05/64) was presented to the Board at the time of the 2004 Article IV discussions. An FSAP update mission visited in October 2007; the FSSA update (Country Report No. 08/274) was presented to the Board with the 2007 Article IV Consultation report.

XI. Resident Representative:

Mr. Tokhir Mirzoev assumed his duties as Resident Representative in December 2009.

XII. Technical Assistance Provided by the Fund, 2007–10:

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Annex II: Moldova—Relations with the World Bank Group

(As of May 27, 2010)

A. The World Bank Group Strategy

1. The World Bank Group Country Partnership Strategy (CPS) for Moldova for FY09- FY12 was approved on December 23, 2008. The CPS aims at assisting the country in improving competitiveness and laying the foundations for inclusive economic growth. The Bank works closely with the Government and other development partners in support of two pillars of the National Development Strategy (NDS) 2008-2011: (i) enhancing economic competitiveness; and (ii) developing human resources, enhancing employment, and promoting social inclusion. To effectively support these two pillars, the Bank’s strategy includes a third pillar and crosscutting priority: (iii) improving governance and addressing corruption, including improved public sector efficiency and effectiveness. The choice of pillars has been guided by the Government’s own development strategy, client perspectives, the lessons learned from the previous CAS, and the Bank understanding of Moldova’s development challenges. Analytic and advisory work is a core element of the Bank’s program.

2. The Bank Group’s program of support for Moldova capitalizes on those areas where the Bank has a comparative advantage for optimal impact and it tries to be strategic in its engagement, not only in terms of where to direct IDA resources but also in terms of how to best leverage its own internal partnerships. IFC plays a critical role in ensuring that the Bank’s program appropriately addresses the needs of the private sector within the results framework set forth by the CPS. IFC is well-positioned to provide an integrated package of advisory support in removing the investment climate constraints to agribusiness development. IFC will continue to provide trade finance, credit lines and advisory services to financial intermediaries for lending to MSMEs, as well as support to regional private equity funds that would help support the competitiveness of Moldovan companies.

3. At least one single-tranche budget-support operation within the period was envisaged to support economic recovery. In addition to these broad objectives, the CPS, which was prepared at the onset of the crisis and political uncertainty, emphasized the need for flexibility in the lending program of US$45-50 million per annum during FY09-FY12 (depending on IDA’s performance-based allocation system) in response to the impact of the global financial crisis and political uncertainty. With IDA commitments in FY09 backloaded, IDA has been positioned to respond strongly to assist the authorities in mitigating the impact of the crisis in FY10, with overall IDA commitments, including a current Development Policy Operation (DPO), reaching US$69 million. Specifically, over this CPS period, the Bank scaled up financing for five on-going, successful projects: Energy 2, Moldova Social Investment Fund 2, Rural Investment Support Project 2, Health and Social Assistance, and the Competitiveness Enhancement Project.

B. IMF-World Bank Collaboration in Specific Areas

4. IDA’s partnership with the IMF in Moldova’s development strategy has been strong over the past few years. Bank and IMF staffs have executed joint work and have continued to carry out joint missions at least twice a year for macroeconomic policy dialogue with the Government. The IMF is taking the lead on macroeconomic issues while IDA takes the lead on structural and social issues. In a number of areas where the mandates of the two institutions overlap, such as public finance, the work is being closely coordinated to ensure that consistent advice is provided to the authorities. The existence of an IMF program has been an important input for the determination of the adequacy of the macroeconomic policy framework.

Areas in which the World Bank leads

5. The Bank’s dialogue post-crisis has stressed the importance of achieving an orderly fiscal balance and hastening economic recovery. Our budget support operation seeks to ensure that social assistance spending is better targeted at the poorest, that road maintenance is increased and small-scale social investments are preserved, and that declining agricultural support is increasingly channeled towards investments. To kick start a more sustainable recovery, the Bank is encouraging Government to liberalize export sectors, and to seek to attract new private investment in ICT and energy sectors. In addition to budgetary support, the World Bank scaled-up financing to a series of existing and successful operations in order to mitigate the impact of the economic downturn and help a speedier recovery.

6. In the social and health areas: the Moldova Social Investment Fund 2 (MSIF2) was scaled up to prepare a public works program, which will provide job opportunities to the unemployed, while also building desperately needed community infrastructure. Also, during the economic crisis, the Global Food Crisis Response helped to protect and improve the health and nutritional status of vulnerable populations. This was achieved through interventions to decrease the nutritional vulnerability of pregnant women, lactating mothers and young children, and provision of temporary cash transfers to social institutions for the elderly, children and people with mental and physical disabilities. A results-based Social Protection Project is currently under preparation to help strengthen the effectiveness of the social safety net.

7. In education, the Quality Education in Rural Areas Project supports the Government’s education program to enhance the quality of teaching and learning, increase access and equity, improve the efficiency in public spending for education, and strengthen education planning and monitoring.

8. In the area of competitiveness, additional financing was added to the Competitiveness Enhancement Project (CEP) to facilitate the growth of an export-oriented real sector with: (i) a line of credit through qualified commercial banks to support investment and working capital needs of exporting enterprises; and (ii) expanded matching grant scheme to assist enterprises with upgrading their labor skills and management practices, and introducing new products.

9. In the area of rural and agricultural development, the Rural Investment and Services Project 2 (RISP2) was scaled up primarily to add financing to the existing and well-performing line of credit to rural entrepreneurs for farm and off-farm activities. Access to credit is an important constraint to economic activity in Moldova and the situation has worsened due to the global crisis. The RISP2 line of credit will help to mitigate the impact of the crisis.

10. In Public Sector Management, the World Bank manages a multi-donor Trust Fund to support the Government’s efforts to reform the Central Public Administration. The Bank also supports the development of the Government’s Public Finance Management System through a new information system as well as technical assistance in support of internal controls and audit

11. With regard to infrastructure development, the Bank is concentrating on upgrading basic utility services impacting the population at large and the poor in particular. The Energy 2 Project was scaled up to provide heating systems to public institutions, reduce losses in electricity transmission and distribution networks. The National Water Supply and Sanitation Project is aimed at (i) improving the coverage, quality, efficiency, and sustainability of water and sanitation services in selected urban and rural communities; and (ii) enhancing the capacity of Ministry for Construction and Territorial Development (MCTD) to prepare and supervise the implementation of investment program and to provide technical assistance to the operating Apa Canals. The Moldova Road Sector Program Support Project is aimed at reducing road transport costs for road users in Moldova by improving the condition and quality of its road network and the way it is managed. The Bank is preparing an E-Transformation for Governance Project focused on using ICT as a tool for improving governance and tackling corruption (e.g. e-government, e-procurement).

12. The Bank has supported a number of environmental projects. The Environmental Infrastructure Project was approved by the Board in FY07. The objectives of the project are to improve the quality of sanitary services in Northern Moldova and reduce the discharge of pollutants, including nutrients into the Nistru River and demonstrate and disseminate costeffective nutrient reduction strategies and technologies for municipal wastewater sources. Climate change is high on the Bank’s agenda with a proposed new operation – Disaster and Climate Management Project.

Areas of shared responsibility

13. Macroeconomic Development. The Bank’s team cooperates closely with the IMF in the process of finalization of the 2010 Country Economic Memorandum (CEM). The Bank and the IMF jointly prepared a high level retreat in October 2009 to discuss current economic situation and the best options of crisis response with the whole cabinet of Ministers of the Republic of Moldova. These eventually led to new financing programs of both institutions concluded with the government and a very successful Consultative Group meeting of Development partners held on March 24, 2010 in Brussels. Development partners expressed their strong support for the Government’s strategies elaborated based on the consultations with the IMF and the WB and indicated financial support totaling US$2.6 billion over the next four years, of which 30 percent is in budgetary and balance of payments support. The dialogue between the IMF, WB and the key government officials on the drivers of economic growth and growth strategy of Moldova in general was continued during the last IMF and WB team visits on May 6, 2010.

14. Public Expenditure Management. The Bank is going to support the dialogue between the IMF and the Government on 2011 budget. In this context, a policy note is under preparation by the World Bank Staff that will analyze public expenditures in more detail and provide some advice on the areas where efficiency savings can be achieved.

15. Debt Management. The Joint IMF/WB team provided the Ministry of Finance of Moldova with technical assistance on the Medium-Term Debt Strategy elaboration in October 2009. The Ministry of Finance is now considering the follow up technical assistance request to the Bank and the Fund with the aim of preparing Debt Management Reform Plan.

Moldova: Bank and Fund Planned Activities in Macro-critical Structural Reform Areas July 2010-June 2011

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Annex III: Moldova—Statistical Issues

As of June 9, 2010

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Moldova: Table of Common Indicators Required for Surveillance

(As of June 9, 2010)

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

3/ Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), weekly (W), monthly (M), quarterly (Q), annually (A), irregular (I); and not available (NA).

Reflects the assessment provided in the data ROSC or the Substantive Update (published 03/2006, and based on the findings of the mission that took place during July 17-19, 2005) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O); largely observed (LO); largely not observed (LNO); not observed (NO); and not available (NA).

Same as footnote 7, except referring to international standards concerning source data, statistical techniques, assessment and validation of source data, assessment, and revision studies.

Republic of Moldova: 2010 Article IV Consultation and Staff Report for the 2010 Article IV Consultation, First Reviews Under the Extended Arrangement and Under the Three-Year Arrangement Under the Extended Credit Facility, and Request for Modification of a Performance Criterion: Staff Report; Staff Statement and Supplement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Moldova.
Author: International Monetary Fund