Republic of Moldova
Selected Issues
Author: International Monetary Fund. European Dept.
Publication Date:
22 Oct 2012
eISBN:
9781475527292
ISBN:
9781475527292
Language:
English
Keywords:
ISCR; CR; Moldova; GDP; FDI; asset; bank; potential GDP; VAT reform; education wage bill; retirement age; revenue enhancement; Pension spending
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This Selected Issues paper on the Republic of Moldova was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on September 17, 2012. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of the Republic of Moldova or the Executive Board of the IMF.

Abstract

This Selected Issues paper on the Republic of Moldova was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on September 17, 2012. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of the Republic of Moldova or the Executive Board of the IMF.

I. Fiscal Imbalances and Road to Sustainability1

A. Introduction

1. Reaching and sustaining fiscal sustainability is a key priority in Moldova. While fiscal adjustment in 2010–11 has significantly reduced the large post-crisis deficit, the budget remains heavily dependent on exceptional external assistance and vulnerable to macroeconomic shocks. The ongoing adjustment in 2012 is expected to lead to a stronger fiscal position, reducing the budget’s dependency on exceptional foreign financing and increasing its resilience to shocks.

2. Progress has been made toward fiscal sustainability but challenges remain. Staying the course on fiscal adjustment is expected to bring the budget back to fiscal sustainability by end-2012. The main challenge, however, will be to maintain it in face of increasing pressures, stemming mainly from the declining external assistance and the crucial need to enhance infrastructure and service social insurance commitments. With the recent comprehensive tax policy reform, further expenditure rationalization is the key element. The rationalization measures however need to be embedded in structural reforms to have long-lasting impacts. Structural reforms are also needed because of the still high structural fiscal balance that is expected by end-2012.2

3. The structure of the paper is as follows. Section II analyzes the main fiscal imbalances before the crisis as well as the impact of the crisis. Section III summarizes recent achievements in tax and expenditures policies on the road to fiscal sustainability. Section IV describes the remaining challenges to maintain fiscal sustainability. This section focuses on three critical expenditure rationalization areas that are key for medium to long-term fiscal and social sustainability. In this regard, the first part of Section IV analyzes the pension reform, specifically how to limit the drop of pension benefits without undermining its fiscal sustainability. The second part of the section investigates a reform of the local public administration to reduce costs and improve the efficiency of public service delivery. The last part of the section analyzes the second stage of the education reform, aiming− as the first stage −at generating fiscal savings and improving quality.

B. Fiscal Imbalances Entering the Crisis

4. Moldova entered the crisis with a structurally weak fiscal position. The structural fiscal deficit deteriorated after the mid-2000s. From zero in 2001, the structural budget deficit excluding grants increased to 5.1 percent of potential GDP in 2008 as a result of large tax cuts and steady expenditure increases (Figure 1 and table 1). The CIT rate was lowered from 28 percent in 2001 to 15 percent in 2006 and zero in 2008, along with numerous tax exemptions. Reduced rates for a number of products were also introduced in the VAT system and the top PIT rate was reduced to 18 percent. Current budgetary spending steadily increased from 26 percent of GDP in 2001 to 34½ percent of GDP in 2008 (Figure 2).

Figure 1.
Figure 1.

General Government Fiscal Balance, 2001–12

(In percent of GDP 1/)

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A001

Sources: Moldovan authorities; and IMF staff estimates.1/ Structural fiscal balance is expressed in percent of potential GDP.
Table 1.

Headline and Structural Fiscal Balances of the General Government, 2001-12

(Percent of GDP, unless otherwise indicated)

article image
Source: IMF staff estimates.

Structural fiscal balances are expressed in percent of potential GDP.

Figure 2.
Figure 2.

General Government Current Expenditures, 2001–12

(In percent of GDP)

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A001

5. The crisis exposed the structural fiscal imbalances and exacerbated an already deteriorating fiscal position. The demand boom in 2006–08 that fuelled cyclically strong revenue and temporarily masked the weak structural fiscal position was reversed with the 2009 economic recession, exposing substantial fiscal imbalances. Revenue declined substantially, while expenditure kept rising, fueled by election-motivated hikes in wages and pensions. The headline deficit moved from 1 percent of GDP in 2008 to 6.3 percent of GDP in 2009, while the structural deficit deteriorated further, to 7.5 percent of GDP. These imbalances required sizeable adjustments and extraordinary financial assistance from the international community.

C. The Adjustment So Far

6. The government embarked on an ambitious fiscal adjustment in 2010. The government adopted a set of fiscal consolidation measures under the three-year Fund-supported program approved in January 2010. The program’s objective is to restore fiscal sustainability, operationalized by a return to the pre-2008 structural fiscal balance. The fiscal adjustment measures combine a comprehensive tax policy reform to promote investment and raise revenues as well as a reform-based rationalization of current expenditures while expanding public investments and targeted social spending.3

7. Successful expenditure restraint in 2010 was followed by reform-based-rationalization in 2011 to lock in the gains from consolidation. Overall, current expenditure declines by 6.3 percent of GDP between 2009 and 2011. Wage and employment restraint reduced the wage bill by 2.2 percentage points of GDP, while various rationalization measures substantially reduced other current expenditures by 4.1 percentage points of GDP over this period. As a result, the structural deficit dropped from 7.5 percent of GDP in 2009 to 4.8 percent of potential GDP in 2011 (Table 1). To lock in the gains from the consolidation and prevent deterioration in the quality of public services, structural expenditure reforms have been implemented since 2011. These reforms include phasing out early retirement privileges, moving toward a more incentive compatible sick-leave benefits system, expanding the mean-tested Ajutor Social along with scaling down the nominative compensation scheme, and reforming the oversized education sector.

8. A comprehensive tax policy reform has been implemented in 2012. The government adopted a comprehensive tax policy package to stimulate investment and sustain the consolidation effort. The tax policy package includes the extension of VAT cash refunds for investment good purchases to the entire country, the re-introduction of the CIT with a single rate of 12 percent along with a sizeable reduction of tax exemptions and accelerated amortization of fixed assets, and gradual alignment of excise rates with EU minimum requirements. These reforms are expected to yield a permanent net revenue gain of 0.8 percent of GDP after accounting for the sizable loss associated with the expansion of the VAT refunds.

9. The expenditure and tax reforms are expected to lead to a sustainable fiscal position by end-2012. After three years of adjustment and structural reforms, the structural deficit (excluding grants) is projected to reverse its post-2007 deterioration by falling to 3.8 percent of potential GDP by end-2012, which translates into a headline budget deficit of 1¼ percent of GDP. This level is deemed sustainable as it can be financed without exceptional foreign assistance. While fiscal sustainability is expected to be reached by end-2012, maintaining it will be a challenge.

D. Tackling Challenges to Maintain Fiscal Sustainability

10. Fiscal sustainability is fragile and remains vulnerable to even moderate shocks. The projected structural budget deficit of 3.8 percent of potential GDP in 2012 remains high by international standards, and challenges to maintain even the current level of revenue and expenditure are emerging. On the revenue side, VAT, the main source of tax revenue, has been lagging the dynamics in import and retail sales since early 2011 (Box 1). The steady projected decline of developmental assistance, particularly grants, over the medium term will need to be offset. Genuine economic trends (e.g., labor force and employment dynamics) as well as tax evasion are eroding the payroll taxes and pressures from special interests are putting CIT and PIT revenue at risk. On the expenditure side, the need to increase public investment and expand targeted social assistance requires additional fiscal space.

11. Further reform-based rationalization of current spending should remain the priority. After the comprehensive tax policy reform in 2012, a growth-friendly strategy to tackle the challenge of maintaining fiscal sustainability should rely mainly on further reform-based rationalization of current spending, given their still high level in Moldova (Figure 2), particularly when compared to peer countries (Karam, 2010). The main challenges on the current expenditure front include the pension reform, the local public administration reform, and the extension of the ongoing education reform to the whole sector.

12. While there is room for further revenue enhancements, they could represent a secondary pillar of the medium-term fiscal strategy. In line with the EU integration agenda, excise rates need to increase gradually over the medium-term to reach the EU requirements. There is also room to raise additional real estate taxes through adequate property valuation and tax rates adjustments. Given the number of reduced and zero rates, however, closing VAT loopholes has the highest revenue enhancement potential. Strengthening tax administration, particularly for VAT and payroll taxes, is a key challenge to prevent a decline in collection due to higher evasion. Some changes in the tax structure could be tailored to improve the economy’s competitiveness (Box 2).

VAT Revenue Shortfall and Risks

VAT revenue has been lagging behind economic activity since early 2011. VAT revenue has continued to underperform relative to growth in retail sales and imports (Chart). This is mainly explained by the sharp increase in the proportion of reduced rate and zero-rated supplies to total output between 2009 and 2011.

This development calls for further improvement of VAT administration and a broadening of the VAT base. To preserve the contribution of VAT as the main source of tax revenue, particularly with the expansion of VAT cash refunds for purchases of investment goods, VAT compliance and control need to be strengthened, with a particular attention to high-risk taxpayers. Efforts to strengthen tax compliance have reduced domestic VAT shortfall but the gap between potential VAT revenue and actual collection is nevertheless widening because of the sharply rising volume of reduced-rate and zero- rated supplies, a sign of evasion. This calls for further improvement in VAT administration, particularly automatic cross-checking of VAT returns (from the State Tax Inspectorate) against information on import VAT and zero-rated exports (from customs) to identify potential anomalies. Broadening the VAT tax base, by reducing the number of reduced and zero rates on non-standard goods (electricity, natural gas, sugar, automobiles) will also unleash the potential of the VAT to raise additional fiscal revenue.

Determinants of Total Real VAT Revenue

(net of VAT Refunds)

article image
Robust t-statistics in parentheses.**significant at 5%; ***significant at 1%.
A01ufig01

VAT Revenue Collection Shortfall: Model III

(In constant millions of lei)

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A001

Import is the value of imports in constant lei. R. sales and I. prod are respectively the retail and industrial production indexes in real terms. Trend represents the time trend and Gov. exp captures general government expenditures in constant lei. Red. rates represents the number of VAT reduced rates.

Tax Rebalancing for Better Competitiveness

The current level of social and health contributions creates a large tax wedge. The combined rate of social security and health contributions amount to a total tax burden of 36 percent, associated with underreporting of wages and salaries. The wage bill growth in 2011 fell short of nominal GDP growth by 7 percentage points, leading to an underperformance of payroll taxes.

During the crisis, many countries have reduced social contributions paid by the employers to improve their competitiveness. The OECD Employment Outlook 2010 reports that eight countries reduced their social contributions rates to lower their labor costs. To offset the subsequent revenue lost, cut in social contributions can be combined with higher VAT, often referred to as “fiscal devaluation” (Ruud and Keen, 2012).

Given its high tax wedge and number of reduced and zero VAT rates, such a tax shift could be considered in Moldova. In their attempt to reduce the tax burden on businesses to improve compliance, the authorities could offset the revenue loss of lower social contributions by implementing a VAT reform that includes (i) an increase of the VAT rate on sugar from 8 percent to the normal 20 percent VAT rate; (ii) an increase of the reduced rate on natural gas from 6 to 10 percent; (iii) an increase of the reduced rates on other goods (food products, medical equipment, and pharmaceuticals) from 8 to 10 percent; and (iv) an introduction of a 10 percent VAT rate on electricity and automobiles. Assuming that the reduction of social contributions is fully passed on to producer prices, this tax shift could reduce firms’ incentive to remain in the informal sector, improve compliance, and foster competitiveness in the short-run. Simple simulations suggest that the above mentioned VAT reform would increase VAT revenue by about 1.1 percent of GDP. This higher VAT revenue would allow a reduction of social contributions rate by 4 percentage points, from 29 to 25 percent, without endangering fiscal revenue. Alternatively, part of the revenue gain from the VAT reform could be used to reduce social contributions rate by 3 percentage points and the remaining (0.3 percent of GDP) saved.

E. Pension Reform

13. A sharp increase in pension expenditures in 2009 has raised concerns about the medium-term sustainability of the pension system. A 20 percent increase of pension expenditures has led to a sharp increase of the pension system deficit in 2009, questioning its medium-term sustainability. While pension expenditures decreased in the following years as a share of GDP, declining contributions continue to threaten the fiscal balance of the system (Table 2).

Table 2.

Moldova: Pension Contributions and Expenditures 1/

(Percent of GDP)

article image
Source: Government of Moldova, Ministry of Labor, Social Protection, and Family.

First pillar pension.

14. The current pension scheme is moving towards a fiscally sustainable but socially unsustainable system over the medium and long-term. The 1998 pension reform linked pensions to lifetime contributions, established a minimum contribution period of 30 years for full benefits, gradually raised retirement ages from 60 to 62 years for men and 55 to 57 years for women, and eliminated some special pension schemes. However, the abrupt halt of the reform in 2003, coupled with various ad-hoc patches, set the gross replacement rate on a path of gradual reduction, from 35 percent in 1999 to less than 20 percent by 2030.4 This pronounced and sustained decline of the replacement rate will keep pension expenditures under control but seriously undermine key objectives of pension system such as income replacement and poverty reduction (IMF, 2011). Compared to countries in the region, the replacement rate in Moldova is low and projected to decline further in the long-term (Table 3).

Table 3.

Moldova and Selected Countries: Replacement Rates.

article image
Source: IMF, 2011.

Excluding Moldova.

15. Statutory retirement age is relatively low in Moldova, particularly for women. The current retirement age of 62 years for men in Moldova is below the average of advanced economies (IMF, 2011) but not far from men’s life expectancy at retirement. Women’s retirement age is, however, below the average of comparable countries, and this gap is expected to increase over time (Table 4). At retirement, women are expected to live and draw a pension for 20½ years compared to only 12 years for men. Moreover, the lower retirement age for women results in a lower pension and raises old-age poverty.

Table 4.

Moldova and Selected Countries: Pensionable Ages, 2010–30 1/

article image
Source: IMF (2011) and Moldovan Authorities.

Age at which individuals can draw full benefits.

Excluding Moldova.

16. The reform of the pension system should aim at achieving social sustainability while preserving fiscal sustainability in the medium and long-run. The key elements of the reform should include (i) systematic valorization of past earnings to halt the drop of the replacement rate, (ii) no further ad-hoc pension increases, and (iii) a necessary increase of retirement age for women to make any increase in benefits affordable.

17. Pension reform simulations highlight the challenge of raising the replacement rate while maintaining affordable fiscal balance. Two reform scenarios are compared to the baseline (Table 5). Under the baseline, the sharp drop in the replacement rate leads to a fiscally sustainable pension system in the long-term. However, such a sizeable drop in the replacement rate is socially undesirable. Reform scenario 1 assumes valorization of past earnings with inflation, reduction of accrual rates by 20 percent, an increase of women retirement age to 62 years over 10 years, and the indexation of self-employed and farmers contributions with nominal wage.5 This scenario allows medium to long-term fiscal sustainability with a higher replacement rate than under the baseline (Figure 3 and 4). Reform scenario 2, which assumes a valorization of past wages with a 50-50 wage-inflation formula and a slightly different contribution for self-employed and farmers, yields an even higher replacement rate than reform 1 but at the cost of deteriorating long-term fiscal sustainability. While both scenarios would lead to initial moderate fiscal savings, they do point to the need of even bolder reforms in the long run to counter unfavorable demographics after 2030 and improve the social insurance function of the pension system without imposing an unaffordable fiscal burden.

Table 5.

Moldova: Pension Reform Scenarios Simulated with the Pension Model

article image
Source: Government of Moldova, Ministry of Labor, Social Protection, and Family and IMF staff.Note: Parameters different from Baseline in the reform scenarios are in bold.
Figure 3.
Figure 3.

Moldova: First Pillar Pension Fiscal Balance

(In percent of GDP)

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A001

Sources: Government of Moldova, Ministry of Labor, Social Protection, and Family; and IMF staff.
Figure 4.
Figure 4.

Moldova: Average Old-age Pension Relative to Average Gross Wage

(Percent)

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A001

F. Public Administration Reform

18. Public sector employment in Moldova expanded relatively to its labor force.6 Over the period 2000–10, public sector employment as a share of total labor force decreased in many CEE and CIS countries but increased in Moldova. From 21 percent of the labor force between 2000 and 2002, public sector employment in Moldova expanded to 26 percent in 2010, the highest in a broad sample of CEE and CIS countries (Table 6).

Table 6.

Moldova and Selected Countries: Public Sector Employment, 2000-10

(In percent of Labor Force)

article image
Source: ILO Statistics.

Excluding Moldova.

19. This increase mainly reflects a substantial decline in the labor force, not matched by a proportional decline in public sector employment. From 1.7 million in 2000, the total labor force in Moldova declined by 25 percent over the following decade, driven by sizeable labor migration. During the same period, the total employment in the public sector declined by only 8 percent, from 348,000 in 2000 to 312,000 in 2010.

20. Public employment in Moldova is relatively high in a number of sectors. The education sector stands out, placing Moldova as the country with the highest public employment in the sector (Table 7).7 Public employment in health is also relatively high, but this compensates for the scarcity of private health care. The relatively large public employment in transport and financial services reflects the unfinished privatization agenda. Employment in public administration (including defense and compulsory social security) represents the third largest source of public employment, about 4.4 percent of the total labor force in 2010. While this is a comparable level to peers in CEE and CIS, a close look reveals a lot of room for rationalization.

Table 7.

Moldova and Selected Countries: Public Employment by Sector, 2010 1/

(In percent of Labor Force)

article image
Source: ILO Statistics.Agriculture also includes forestry, fishing, mining, and quarrying. Manufact. (manufacturing) includes construction. Electricity includes gas, steam, air conditioning supply, water supply, sewerage, and waste management.

or latest available.

Excluding Moldova.

21. The current administrative-territorial system is very fragmented, increasing operational costs. The average size of municipalities in the country is considerably below the average of CEE countries (Figure 5). While the average size of a municipality is almost 15,000 inhabitants in CEE countries, municipalities in Moldova have on average five times less inhabitants. This leads to a relatively higher number of municipalities and larger operational costs.

Figure 5.
Figure 5.

Moldova and Selected Countries: Average size of municipalities, 2010/2011

(Inhabitants)

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A001

Sources: Dexia; EU sub-national governments, 2011/2012. edition; and National Bureau of Statistics of Moldova.1/ Excluding Moldova.2/ 2009 data.

22. There is a long lasting and general trend towards reducing the number of municipalities in European countries. Since the 1950s, most of the European countries have been reducing the number of their municipalities, creating larger administrative units. Between 1950 and 1992, Denmark reduced the number of its municipalities by 80 percent. This first round was followed by a second reduction by 64 percent between 1992 and 2011. Other Western European countries such as Belgium and Sweden also implemented sizeable reductions in the number of their municipalities between 1950 and the early 1990s. Among CEE countries, Lithuania significantly reduced the number of its municipalities by 90 percent during the last two decades, and Latvia reduced by 78 percent the number of its municipalities over the last decade (Table 8).

Table 8.

Moldova and Selected Countries: Change in the Number of Municipalities, 1945-2011

article image
Source: World Bank, 2003; Dexia, EU sub-national governments: 2009/2010 and 2011/2012 editions.

Includes Transnitria.

Note: Shaded areas refer to Eastern and Central European Countries.

23. The number of municipalities increased in only few countries, including Moldova. The Czech Republic experienced a sizeable 52 percent increase of the number of its municipalities during the last decade. While this trend is uncommon, the number of municipalities in Moldova also increased by 11 percent between 1988 and 2011 (Table 8).

24. The large number of municipalities in Moldova is associated with a very low population density and large operational cost. Out of 896 municipalities in 2008, excluding Transnistria, only 11 or 1 percent have more 20,000 inhabitants and just 12 percent have more than 5,000 inhabitants while the average size of municipalities in CEE countries is almost 15,000 inhabitants (Table 9). About 67 percent of Moldovan’s municipalities have less than 3,000 inhabitants, and 40 percent have less than 1500 inhabitants. Small municipalities, with less than 3,000 inhabitants have an average operational cost per resident that is double or triple that of larger municipalities with more than 3,000 residents (Osoian et al. 2010).

Table 9.

Moldova: Local Governments by Number of Inhabitants, 2008

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Source: Osoian et al. 2010.

25. There is room to reduce the operational cost of the current territorial system and improve its efficiency. Simply enforcing the existing legal provision requiring at least 1,500 inhabitants for a rural community to become a municipality (excluding exceptional cases) will significantly reduce the number of municipalities and their operational costs by at least 0.2 percent of GDP. Further reform to bring the average size of the municipalities in Moldova to the CEE countries’ average will reduce municipalities operational costs by at least 0.6 percent of GDP. This reform will particularly facilitate the expansion of the education reform, which could generate even higher savings.8

G. Further Education Reform

26. The education system is mostly public in Moldova and most funding is provided by the central and local governments. Administration responsibilities are split between the Ministry of Education and local governments. The latter cover schools’ operational and maintenance costs, helped by transfers from the state budget. The education system comprises pre-school, primary, secondary, and tertiary education, with a limited number of private and vocational schools and colleges.

27. Education spending in Moldova is higher than in other countries. Moldova’s public spending on education is almost double the average in peer countries (Figure 6). The sharp increase in education spending despite the rapidly falling number of students explains the large gap between Moldova and its peers. Indeed, while the number of students declined by 27 percent between 2000 and 2010, the number of schools and the number of teachers declined only marginally.9 Various salary increases for teachers have also led to a sizeable 25 percent increase of the education wage bill in five years, from 4.7 percent of GDP in 2006 to 5.8 percent in 2010. The ratio of non-teaching to total staff is also well above the EU average.

Figure 6.
Figure 6.

Moldova and Selected Countries: General Government Expenditure on Education, 2010

(Percent of GDP)

Citation: IMF Staff Country Reports 2012, 289; 10.5089/9781475527292.002.A001

Sources: Government Finance Statistics; and IMF staff calculations.

28. There is an ongoing reform in primary and secondary education, which represents about half of the sector. In close cooperation with the World Bank, the government launched in 2011 a comprehensive medium-term reform of the oversized education sector. This reform focuses on primary and secondary education, which account for about 60 percent of total public spending in education (Table 10). The reform aims at rationalizing the sector by raising efficiency and improving quality through class size and school network optimization. Total net savings of 0.5 percent of GDP a year is expected from the reform upon completion. The reform is already important in supporting the 2012 budget by enabling net savings worth 0.2 percent of GDP.

Table 10.

Moldova: Educational Expenditure as a Percent of Total Educational Expenditure.

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Source: UNESCO Institute for Statistics (UIS) Database.

Includes post-secondary non-tertiary.

29. Spending in the remaining education sector is also high. Moldova’s public spending in pre-primary and tertiary education, about 40 percent of the sector, is also significantly above the CEE countries’ average (Table 11).

Table 11.

Moldova and Selected Countries: Total public expenditure on educational institutions and administration, 2010 1/

(In percent of GDP)

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Source: UNESCO Institute for Statistics (UIS) Database.

Or latest available. Excludes spending of social nature such as school feeding programs.

Includes post-secondary non-tertiary.

Excluding Moldova.

30. Expanding the reform to pre-primary and tertiary education could generate significant savings. In collaboration with the World Bank, the education reform could be expanded to the remaining education sector. Potential gross savings from a reform based rationalization in the pre-primary and tertiary education that would bring Moldova in line with the average of CEE countries can easily exceed 1 percent of GDP.

H. Conclusion

31. This paper has analyzed pre-crisis fiscal imbalances and recent developments towards fiscal sustainability in Moldova. From a structurally weak fiscal position before the crisis, Moldova has been adjusting towards a sustainable position since 2010. The recent fiscal adjustment includes a comprehensive tax policy reform in 2012 with the re-introduction of the CIT, the extension of VAT refunds to the entire country, and excise increases in line with the EU integration agenda. It also includes expenditure rationalization measures such as wage and employment restraint, complemented by structural reforms in the education and social assistance sectors.

32. Further reform-based rationalization of current expenditures remains the priority to maintain fiscal sustainability and improve social equity. This paper identifies the pension system, the local public administration, and the education sector as the main areas for reform. Reform of the pension system could allow valorization of past earnings to ameliorate the decline of the replacement rates and address old-age poverty. However, this reform needs to be accompanied by an increase in the retirement age to preserve the fiscal integrity of the system. Local public administration reform to reduce the large number of municipalities can lower costs and improve service delivery by generating synergies. It could also facilitate the expansion of the education reform to the pre-primary and tertiary levels, generating fiscal savings and improving quality. Potential savings of about 2-3 percent of GDP from these three reforms would allow increasing much needed public investment and expanding targeted social assistance to support growth and preserve fiscal sustainability.

References

  • IMF, 2011, “The Challenge of Public Pension Reform in Advanced and Emerging Economies,” IMF Board Paper (Washington: International Monetary Fund).

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  • Karam, Philippe, 2010: “Republic of Moldova: Selected Issues Paper: Fiscal Consolidation and Structural Reforms in Moldova,” IMF Country Report No. 10/232 (Washington: International Monetary Fund).

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  • Osoian I., Sirodoev I., Veverita E., and Prohnitschi V., 2010, “Analytical Study on Optimal Administrative-Territorial Structure for the Republic of Moldova,” Expert Grup Report.

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  • Qehaja, Driton, 2012, “Fiscal Policy Response to External Crises: The Case of Moldova 1998-2010,” IMF Working Paper 12/82 (Washington: International Monetary Fund).

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  • Ruud de Mooij and Michael Keen, 2012, “Fiscal Devaluation and Fiscal Consolidation: The VAT in Troubled Times,” IMF Working Paper 12/85 (Washington: International Monetary Fund).

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1

Prepared by Tidiane Kinda.

2

The structural fiscal balance is the cyclically adjusted balance corrected for one-off factors. It captures budgetary changes expected to persist over the medium-term.

3

See Qehaja (2012) for a summary of the main tax policy changes in Moldova.

4

The gross replacement rate is the average old age pension divided by the average gross wage.

5

Ad-hoc increases in accrual rates were used in the past to offset the lack of past earnings valorization.

6

The public sector in Moldova comprises central and local administrative units, health and social security funds, and state-owned enterprises.

7

Section C analyzes public employment and spending in the education sector.

8

The education sector represented 60 percent of the consolidated local governments total expenditures between 2009 and 2011.

9

The World Bank estimates the student-teacher ratio in Moldova to be only 2/3 of the EU average. See “Moldova: Policy Notes for the Government”, World Bank, October 2009.

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Cover IMF Staff Country Reports
Republic of Moldova: Selected Issues
Author: International Monetary Fund. European Dept.
Volume/Issue:
Volume 2012: Issue 289
Publisher:
International Monetary Fund
ISBN:
9781475527292
ISSN:
1934-7685
Pages:
60
DOI:
https://doi.org/10.5089/9781475527292.002
  • View in gallery

    General Government Fiscal Balance, 2001–12

    (In percent of GDP 1/)

  • View in gallery

    General Government Current Expenditures, 2001–12

    (In percent of GDP)

  • View in gallery

    VAT Revenue Collection Shortfall: Model III

    (In constant millions of lei)

  • View in gallery

    Moldova: First Pillar Pension Fiscal Balance

    (In percent of GDP)

  • View in gallery

    Moldova: Average Old-age Pension Relative to Average Gross Wage

    (Percent)

  • View in gallery

    Moldova and Selected Countries: Average size of municipalities, 2010/2011

    (Inhabitants)

  • View in gallery

    Moldova and Selected Countries: General Government Expenditure on Education, 2010

    (Percent of GDP)

General Government Fiscal Balance, 2001–12

(In percent of GDP 1/)

General Government Current Expenditures, 2001–12

(In percent of GDP)

VAT Revenue Collection Shortfall: Model III

(In constant millions of lei)

Moldova: First Pillar Pension Fiscal Balance

(In percent of GDP)

Moldova: Average Old-age Pension Relative to Average Gross Wage

(Percent)

Moldova and Selected Countries: Average size of municipalities, 2010/2011

(Inhabitants)

Moldova and Selected Countries: General Government Expenditure on Education, 2010

(Percent of GDP)