Republic of Moldova
Fourth Reviews Under the Extended Arrangement and Under the Three-Year Arrangement Under the Extended Credit Facility, and Requests for Waiver for Nonobservance of a Performance Criterion and for Modification of a Performance Criterion: Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Moldova.
Author: International Monetary Fund
Publication Date:
09 Feb 2012
eISBN:
9781463941017
Language:
English
Keywords:
ISCR; CR; government; program implementation; deficit target; program objective; data; IMF staff estimate; debt service; exchange rate; budget support; tax collection; Current spending
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Moldova’s near-term outlook is aimed at slowing growth and receding inflation, but the deteriorating external environment and the fragile political situation poses significant downside risks. The main drivers of growth are private consumption, investment, and exports, fuelled by remittances and rising credit, which is reflected in the improving business climate. Weak tax collection and expenditure overruns resulted in missing the performance criterion on the general government budget deficit by 0.4 percent of GDP. The indicative target on reducing general government expenditure arrears was missed marginally owing to underpayment of heating bills by the Chisinau municipality.

Abstract

Moldova’s near-term outlook is aimed at slowing growth and receding inflation, but the deteriorating external environment and the fragile political situation poses significant downside risks. The main drivers of growth are private consumption, investment, and exports, fuelled by remittances and rising credit, which is reflected in the improving business climate. Weak tax collection and expenditure overruns resulted in missing the performance criterion on the general government budget deficit by 0.4 percent of GDP. The indicative target on reducing general government expenditure arrears was missed marginally owing to underpayment of heating bills by the Chisinau municipality.

I. Recent Developments and Outlook

1. The economy continued its strong expansion in 2011, and inflation stabilized late in the year. GDP is projected to have expanded by 6 percent after a 7.1 percent growth in 2010, among the highest in the region (Figure 1). The main drivers of growth were private consumption, investment, and exports, fuelled by remittances and rising credit, and also reflecting the improving business climate. Exports increased by 52 percent in January-October 2011 relative to a year ago, aided by new production capacities, robust external demand, and expanding access to EU and CIS markets. Reflecting strong domestic demand and high import content of exports, imports also increased by 38 percent over the same period, and the trade balance deteriorated somewhat. Headline inflation stabilized at about 9 percent in the autumn, still sustained by the delayed pass-through of external food and energy price shocks; core inflation remained below 5 percent. Unemployment declined below its long-term average (Figures 1 and 2).

Figure 1.
Figure 1.

Moldova: Economic Developments, 2000-11

Citation: IMF Staff Country Reports 2012, 038; 10.5089/9781463941017.002.A001

Source: National Bureau of Statistics; Haver Analytics; IMF, WEO; and IMF staff estimates.
Figure 2.
Figure 2.

Moldova: Economic Developments and Outlook, 2002-12

Citation: IMF Staff Country Reports 2012, 038; 10.5089/9781463941017.002.A001

Sources: Moldova authorities; and IMF projections.1/ General government overall balance.

Medium-Term Outlook, 2008-17

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Sources: Moldovan authorities; and IMF staff estimates and projections.

2. However, the expected slowdown in the EU is likely to dampen growth next year (text table). Already evident adverse spillovers through exports, remittances, and FDI would be partly counterbalanced by resilient economic conditions in Russia and Ukraine. Banks’ limited international exposure would contain financial spillovers, but credit growth would slow nonetheless (Table 4). Conversely, the planned sizable increase in public investment would offset deceleration in private investment. On balance, staff expects GDP growth to moderate to 3½ percent in 2012 and gradually return to its potential level afterwards; the authorities were more sanguine but eventually concurred. Meanwhile, the expected decline in energy prices will help steer inflation toward the NBM’s targeted range of 5±1.5 percent by early 2013. Reflecting slowing domestic demand and expanded international market presence, the current account deficit is expected to narrow gradually toward 8 percent of GDP in the medium term, a level consistent with continuing investment expansion and declining external debt.

Table 1.

Moldova: Selected Indicators, 2008-17 1/

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Sources: Moldovan authorities; and IMF staff estimates.

Data exclude Transnistria.

Adjusted for changes in reserve requirement ratios.

Adjusted for exchange rate changes and write-offs.

Includes private and public and publicly guaranteed debt.

Table 2.

Moldova: Balance of Payments, 2008-17

(Millions of U.S. dollars, unless otherwise indicated)

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Sources: National Bank of Moldova; and IMF staff estimates.

Includes revaluation changes, which were not captured by changes of gross official reserves in the BOP.

The IMF composite measure is calculated as a weighted sum of short-term debt, other portfolio liabilities, broad money, and exports in percent of GDP. Official reserves are recommended to be in the range of 100-150 percent of this measure.

Table 3.

Moldova: General Government Budget, 2008-17

(Millions of Moldovan lei, unless otherwise indicated)

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Sources: Moldovan authorities; and IMF staff estimates and projections.

In 2009, an EU project grant of €15 million was reclassified as budget support given that no actual expenditure took place.

Includes internal grants and grants to other public institutions (such as public universities).

Projections include direct budget support from the IMF of about US$122 mln. (SDR 80 mln.) in 2010 and US$23 mln. (SDR 15 mln.) in 2011.

Includes mainly central bank liabilities to the IMF.

Table 3.

Moldova: General Government Budget, 2008–17

(Percent of GDP, unless otherwise indicated)

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Sources: Moldovan authorities; and IMF staff estimates and projections.

In 2009, an EU project grant of €15 million was reclassified as budget support given that no actual expenditure took place.

Includes internal grants and grants to other public institutions (such as public universities).

Projections include direct budget support from the IMF of about US$122 mln. (SDR 80 mln.) in 2010 and US$23 mln. (SDR 15 mln.) in 2011.

Includes mainly central bank liabilities to the IMF.