Statement by the IMF Staff Representative on the Republic of Moldova, December 8, 2014

This paper presents Second Post-Program Monitoring Discussions focusing on Moldova. Governance in the banking system remains poor and the condition of some large banks is fragile. The budget faces a tight financing situation, and—without corrective measures—the deficit is projected to widen significantly in 2015. Russia’s new restrictions on imports from Moldova are exacerbating the ongoing slowdown in activity, easing inflationary pressures, and weakening export performance. Discussions mainly focused on policies to address the significant risks in the banking sector, return to a path of fiscal consolidation, and boost potential growth and preserve external stability.

Abstract

This paper presents Second Post-Program Monitoring Discussions focusing on Moldova. Governance in the banking system remains poor and the condition of some large banks is fragile. The budget faces a tight financing situation, and—without corrective measures—the deficit is projected to widen significantly in 2015. Russia’s new restrictions on imports from Moldova are exacerbating the ongoing slowdown in activity, easing inflationary pressures, and weakening export performance. Discussions mainly focused on policies to address the significant risks in the banking sector, return to a path of fiscal consolidation, and boost potential growth and preserve external stability.

1. This statement reports on key developments since the staff report was finalized. Developments in the banking sector underscore the importance of steadfast actions to stem the governance problems in the banking sector and to adopt a sound strategy to deal with weak banks. The information does not alter the thrust of the staff appraisal.

2. In the November 30 elections, the Liberal, Democrat, and Liberal Democrat parties combined secured the majority of seats in parliament. Negotiations are ongoing and it is unclear whether a coalition will be formed only by these parties or a broader coalition will be formed.

3. On November 28–30, the National Bank of Moldova (NBM) introduced special administration in Banca de Economii (BEM) and Banca Sociala (BS), a bank believed to be affiliated with BEM. The intervention was prompted by these banks failing to provide required information to the NBM and a series of suspicious transactions. The NBM has provided emergency loans to these banks in an amount equivalent to 3½ percent of GDP. The banks will honor deposits of individuals up to Lei 500,000 (about US$33,000) and of public entities, and domestic interbank claims. The latter implies support to other banks outside the BEM group that would have faced difficulties given their large exposures to the intervened banks. Staff is monitoring closely the developments in the banking system.

4. Since end-October the NBM sold US$324 million of international reserves, about two-thirds of which occurred following the intervention in BEM and BS. The nominal exchange rate remained broadly stable against the US dollar, and despite recent sales, reserve coverage remains adequate.