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.
1. This statement provides additional information on program implementation 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.
2. Program implementation has proceeded generally well, with all prior actions met. The last prior action for the Executive Board consideration of the authorities’ request to complete the fourth reviews of the program was completed in mid-January with the parliamentary passage of expenditure reforms supporting a 2012 budget in line with the program objectives (SMEFP Table 3). Moreover, the Government has reactivated its contract with the privatization advisor of Banca de Economii and has approved a new mechanism to bring commitments on agricultural subsidies in line with available funds, two structural benchmarks for end-January and end-March, respectively (SMEFP Table 3). The authorities’ efforts to improve tax collection and rein in current expenditure closed most of the gap with the program’s deficit target recorded in September and brought the annual deficit within 0.2 percent of GDP from its indicative target. All other indicative targets for December were essentially met. On January 26, the NBM cut its main policy rate by 200 bps, bringing the cumulative reduction since November to 350 bps.
3. The latest available data came broadly as expected. Inflation fell to 7.8 percent in December 2011 reflecting reversals of earlier food and gasoline price hikes and demand moderation. The banks’ nonperforming loan ratio reached 10.7 percent in December, raised mainly by weaknesses in the two banks discussed in the staff report (¶12).
4. The authorities have consented to the publication of the staff report, the Letter of Intent, SMEFP, and TMU dated January 12, 2012.