IMF Policy Paper: Republic Of Moldova; Fourth And Fifth Reviews Under The Extended Credit Facility And Extended Fund Facility Arrangements, Completion Of The Inflation Consultation, And Request For Extension Of The Arrangements And Rephasing Of Access

Fourth and Fifth Reviews Under the Extended Credit Facility and Extended Fund Facility Arrangements, Completion of the Inflation Consultation, and Request for Extension of the Arrangements and Rephasing of Access-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Moldova


Fourth and Fifth Reviews Under the Extended Credit Facility and Extended Fund Facility Arrangements, Completion of the Inflation Consultation, and Request for Extension of the Arrangements and Rephasing of Access-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Moldova

Context And Recent Developments

1. In mid-2018, Moldova’s ECF/EFF blended arrangement was broadly on track to achieve its key objectives. Substantive progress had been made in addressing governance and stability issues in the banking sector, and fiscal policy was broadly balanced and aimed at tackling pressing social and infrastructure needs. Some advances had been made in improving the business climate and energy policy.

2. Policy setbacks, however, emerged ahead of the February 2019 parliamentary elections. The pre-election capital and tax amnesty and other fiscal initiatives undermined key program objectives and raised governance and tax administration concerns. While some corrective actions were implemented, no reviews were completed after June 2018 as efforts were insufficient to restore policy credibility. The EU paused its macro-financial assistance (MFA) to Moldova over concerns about deteriorating democratic standards and a poor anti-graft track record.

3. The political instability that emerged in the aftermath of the parliamentary elections has subsided and the new government is committed to continue reforms. Inconclusive parliamentary elections led to a three-month political stalemate which ended when two opposition parties—the pro-Russian Socialists and pro-EU ACUM—agreed to form a coalition. The new authorities requested a resumption of the Fund-supported program and agreed to implementing bold measures to reverse policy slippages by the previous government and complete financial sector reforms.

4. Growth remains robust. Real GDP grew 4 percent in 2018, driven by infrastructure and private investments, while rising real incomes and recovering bank lending supported consumption. Growth picked up to 4.4 percent in 2019Q1, driven by agricultural exports. The labor market improved significantly in 201 8, with higher labor force participation, record employment growth in the formal sector, and a drop in the unemployment rate to 3 percent.


Contributions to GDP Growth

(Percentage points)

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A001

Sources: Moldovan authorities; IMF staff calculations and estimates.


(Percent, y-o-y growth)

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A001

Sources: Moldovan authorities and IMF staff calculations.

5. Inflation temporarily slipped below the NBM’s band in 2018, but pressures are now building. Inflation slowed in 2018 due to downward adjustments to energy tariffs, lower food price inflation, and exchange rate appreciation (see MEFP 1114). It has picked up sharply in 2019, as these effects dissipated, and pressures mounted from an expansionary fiscal stance and a bout of leu depreciation in response to the political uncertainty. The National Bank of Moldova (NBM) responded by raising the policy interest rate in June, for the first time since December 2017, and again in July.

6. Financial conditions are improving. Bank credit is expanding in real terms for the first time in 5 years, in tandem with growth in deposits. Banks are well capitalized and liquid, with adequate profitability ratios, while NPL ratios continue to fall.

7. Public finances overperformed strongly last year but deteriorated sharply in 2019. The augmented general government deficit was 1.1 percent of GDP in 2018, significantly lower than the 3.5 percent of GDP envisaged in the third review.1 Public debt, at about 30 percent of GDP, also undershot program projections due to fiscal overperformance, non-disbursement of external loans, and favorable exchange rate valuation effects. During 2019H1, however, the augmented general government deficit widened sharply driven by shortfalls in EU grants, under-performance of CIT and excises, and wage bill overruns.


Cumulative Overall Balance

(Million lei)

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A001

Sources: Moldovan authorities and IMF staff calculations.

Fiscal Performance Against Program and Budget

article image

Staff projection based on budget execution rates in 2017-18 applied to the amended 2019 budget.


Includes externally financed net on-lending to SOEs.


Jan-Dec 2018 debt ratio rebased using revised GDP level for comparison.

8. The external position has weakened. The current account deficit deteriorated to over 10 percent of GDP in 2018 on the back of strong domestic demand and real exchange rate appreciation. Robust private financial inflows, however, led to a moderate buildup of reserves that remain adequate at about 170 percent of the IMF composite reserve adequacy metric. The leu appreciated in nominal terms last year but lost some of its strength in 2019H1, in the run-up to the elections and the political uncertainty that followed.


Current Account and Real Effective Exchange Rate

(Million U.S. dollar)

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A001

Sources: IMF WEO and IMF staff calculations.

Outlook And Risks

9. The economic outlook remains broadly positive, provided that the reform momentum is decisively sustained:

  • Growth is projected to moderate to 3.5 percent in 2019, driven by lower than originally planned infrastructure spending and tighter monetary policy. Medium-term growth is projected at about 4 percent.

  • Inflation is projected to peak at around 7.5 percent by end-2019 and stabilize close to the 5 percent target by mid-2020.

  • The current account deficit is expected to moderate to 9.5 percent of GDP in 2019—while the resumption of donor financing will help maintain reserve adequacy—and adjust to below 7 percent of GDP over the medium term, supported by a tighter monetary and fiscal policy mix and financed by strong capital and investment flows as confidence improves. 2

  • Public and external debt to GDP ratios are estimated to preserve Moldova’s low risk of debt distress (DSA supplement).

10. The outlook is vulnerable to significant downside risks. Domestically, a renewed escalation of political tensions, new policy slippages, and complacency or reform fatigue by the temporary coalition government could hurt confidence and resurrect uncertainty about external official financing. Regional and global spillovers from geopolitical and trade tensions also cannot be ruled out. On the upside, resolute progress in tackling outstanding governance concerns would strengthen public trust in state institutions and popular support for the reform agenda.

Program Performance

11. Program performance, despite outdated program targets, was broadly adequate based on end-June and end-December 2018 PCs, while all continuous PCs were observed (MEFP Table 1).

Table 1.

Moldova: Selected Economic Indicators, 2015–2024 1/

article image
Sources: Moldovan authorities; and IMF staff estimates.

Data exclude Transnistria.

Includes externally financed on-lending to SOEs as of 2016.

Includes net on-lending to SOEs.

Includes private and public and publicly guaranteed debt.

  • End-June and end-December 2018: fiscal performance criteria on the ceiling on the augmented general government deficit were met by large margins (about 0.4 and 2 percent of GDP, respectively) on account of large revenue over performance (CIT, VAT, SSC, and non-tax revenue) and significant under-execution of current and capital spending. The indicative target on the ceiling on the general government wage bill was also met. However, the indicative ceiling on the stock of accumulated domestic government arrears and floor on priority social spending were marginally missed; while the indicative floor on project spending funded from external sources were missed by 0.2 and 1 percent of GDP, respectively. Performance criteria on the NIR floor were observed.

  • End-March 2019 indicative targets: the augmented general government deficit target was met by a large margin (0.8 percent of GDP) as revenues exceeded program projections, despite overruns on the general government wage bill and underperformance of excises and CIT relative to the amended budget targets. While the floor on priority social spending was met, the ceiling on the stock of accumulated domestic government arrears and the floor on project spending funded from external sources were missed. The indicative NIR floor was missed (by about $158 million) due to FX sales to counter depreciation pressures ahead of the elections.

  • Inflation consultation band: inflation dropped temporarily below the outer consultation band in December 2018, triggering an inflation consultation with the IMF Executive Board. Whereas the slowdown had been expected, its magnitude surprised on account of lower-than-expected international food prices, further exchange rate appreciation, and larger-than-expected cuts to energy tariffs. Inflation returned within the band the next month and has remained within it since then.

  • Structural conditionality: Three of five SBs have been implemented, albeit one with a delay, and one remains outstanding. The authorities met end-June and end-July 2018 SBs on the new electricity tariffs and the action plans for unwinding related-party exposures. In January 2019, they finalized onsite inspections in banks that are part of foreign groups (end-May 2018 SB). Notwithstanding substantive progress, a systemic bank’s exit from temporary administration remains delayed (end-October 2018 SB).

Policy Discussions

A. Fiscal Policy: Addressing Fiscal Pressures and Policy Reversals


12. A package of pre-election fiscal initiatives and a capital and tax amnesty introduced in July 2018 undermined program objectives and raised fiscal risks.

  • A tax package narrowed the tax base, reduced tax efficiency, and reversed some hard-earned gains from the recent pension system reform.

These included: (i) an introduction of a flat-rate PIT system, undermining income tax progressivity (revenue loss of 0.5 percent of GDP); (ii) a cut in private employers’ social security contribution rates (0.8 percent of GDP), widening the pension fund deficit; (iii) a reduction in the taxable share of capital gains; (iv) a reduced VAT rate applied to hotels and restaurants (HORECA, Box 1); and (v) an elimination of excises on petrol at border crossing points.

Hotels, Restaurants, and Cafes (HORECA) - Trends and Policy Considerations

Moldova’s HORECA industry is growing but remains relatively underdeveloped. It accounts for about 1 percent of formal employment (of which about 80 percent is in restaurants), much smaller than in Romania where it accounts for about 4 percent. Within the industry, the restaurant sector is experiencing an expansion, with annual employment growth averaging about 4.5 percent in 2017-19, underpinned by robust domestic demand. Moreover, average wage in the sector has grown by almost a half since 2016, outpacing economy-wide wage growth by 20 percentage points. The sector’s average wage reached about 70 percent of the economy-wide level, compared to 60 percent ratio in Romania.


Moldova: Employment and Earnings in Restaurant Industry

(Y-o-y percent change)

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A001

The October 2018 tax changes have not produced expected outcomes. Undertaken with a view to primarily de-shadow the economy, the VAT rate applicable to HORECA industries was halved to 10 percent from the standard rate. The industry also benefitted from the economy-wide PIT and SSC rates cuts. Nonetheless, the wage-related tax policy measures did not lead to a material de-shadowing of labor in the industry. Specifically, growth of the Health Fund contributions—unaffected by policy changes—indicates no level or trend shift in the tax base. Moreover, de-shadowing of sales has not paid off considering VAT revenue loss. Post-reform weighted average VAT rate on sales declined from about 19 to 13 percent, while average VAT rate on inputs remained at about 19 percent. Despite a strong growth of sales, VAT due to the budget has dropped by 60 percent, while the stock of VAT input tax credit has surged from the average of about 5 percent of turnover to almost 20 percent. For businesses that operate under relatively thin margins, carrying a large stock of tax credits is costly in terms of profitability and can also encourage the rise of informality.


Restaurant Industry: Labor-Related Taxes

(Y-o-y percent change)

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A001


Restaurant Industry: Sales and VAT Collections

(Y-o-y percent change)

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A001

Moldova’s Unified Salary System

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Source: Moldovan authorities.
  • A reform of the unified public wage system added to fiscal pressures. While the original draft law was supported by Fund staff, the enacted legislation (effective December 1, 2018) inflated the wage bill (by 0.6 percent of GDP) amid the lack of a proper staff register. Also, as a political compromise, the system introduced ten different reference values for calculating salaries, undermining the reform objective of simplifying a complex wage ladder and improving wage compression.

  • A new capital and tax amnesty—the third in a decade—weakened tax administration and undermined tax compliance. The amnesty legalized undeclared wealth from tax evasion subject to a fee, allowed writing off accumulated interest and penalties for settling tax arrears, and banned tax audits prior to 2018. To address staff’s concerns, the authorities amended the law to (i) narrow the list of individuals who can take advantage of the voluntary declaration by excluding public sector officials and related persons; (ii) increase the tax on cash disclosures from 3 to 6 percent, but short of the 1 2 percent recommended; (iii) withdraw all benefits in cases of incomplete declaration; and (iv) oblige taxpayers to provide evidence that expenses in excess of future reported income are financed out of voluntarily declared monetary assets. These amendments effectively neutralized the amnesty, as few declarations (and of insignificant amounts) were submitted. However, recurrent tax amnesties undermine compliance and encourage delinquency, particularly given that the restriction on tax audits impedes enforcement.


13. To contain fiscal risks, the authorities adopted in August amendments to the 2019 budget consistent with the augmented general government deficit of 3 percent of GDP (prior action). This deficit target—tighter than 3.3 percent of G DP envisaged in the approved budget—is appropriate given financing constraints, while adequately protecting priority social spending. The amended budget updated for 2019H1 revenue trends and introduced new measures:


2019 Fiscal Deficits: Approved and Amended Budgets

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A001

  • On the expenditure side (0.6 percent of GDP): (i) redistributed gains from savings on employee vacancies in the budget sector to cover higher wage bill needs from local governments; (ii) reduced net on-lending to SOEs in line with expected project disbursements; and (iii) rationalized capital spending to reflect lower execution during 2019H1;

  • On the revenue side (0.1 percent of GDP): (i) increased excises for heat-not-burn and fine-cut tobacco products; (ii) reduced exemptions on income from lotteries and sports betting; (iii) limited tax-free sales at duty-free shops to travelers leaving Moldova by sea or air; and (iv) removed tax exemptions on petroleum products sold in the customs control area.

14. The authorities also took steps to mobilize resources for development and social spending in 2020. Towards this objective, amendments to the Tax and Customs Codes were adopted in August (prior action) to raise revenue on CIT, PIT, VAT, excises, and property taxes and rationalize tax expenditures. Specifically, the amendments—effective January 1, 2020—have: (i) broadened the capital gains tax base; (ii) increased the VAT rate for HORECA; (iii) phased out the personal allowance for higher incomes; (iv) removed tax exemptions applied to meal vouchers provided by employers; (v) removed VAT exemptions on goods imported by PPPs; (vi) unified excise duty rates for cigarettes with and without filter; (vii) consolidated environmental taxes; (viii) increased PIT rates on tax withheld in advance; and (ix) reduced tax-free personal exemptions on merchandise shipped by mail. These measures are expected to yield about 0.3-0.6 percent of GDP in revenue, not presently included into staff’s projections due to the costing ambiguity. An agreement on the 2020 budget, inclusive of these measures and consistent with program objectives, will be a key precondition for the final program review.

15. The authorities and staff agreed on robust measures to strengthen tax administration and improve tax compliance. First, the Tax Code was amended (prior action) to: (i) withdraw provisions that provided for the deduction of up to MDL 500,000 from the indirect method assessment of estimated taxable income; and (ii) sunset the carryover provision from the 2012 “capital liberalization scheme”. Second, the capital and tax amnesty law was amended (prior action) to allow the State Tax Service (STS) to perform audits and exercise its investigative functions prior to January 1, 2018. Third, the authorities will formally propose a date for the automatic exchange of information with the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes (new end-December SB), with a view to start the automatic exchange of information with other countries by end-2022.

16. The authorities recognize the need to strengthen the unified wage system in the budgetary sector and improve control over the wage bill. In line with staff advice, they will (i) adopt a time-bound plan to phase out multiple reference values with a view to improve budgetary process and medium-term planning; and (ii) develop and operationalize a comprehensive IT-based staff registry.

17. Staff recommended strengthening institutional fiscal frameworks to support medium-term policy and prioritize growth-enhancing spending. To this end, findings from spending reviews (education and agriculture sectors) need to be integrated into the medium-term budget framework and annual budget processes. The fiscal risk statement should be expanded to improve coverage, monitoring, and reporting of risks emanating from SOEs and PPPs. Finally, a comprehensive strategy to strengthen public investment management needs to be developed, supported by forthcoming IMF technical assistance, to improve the efficiency of public investment and scale up public infrastructure.

B. Financial Sector: Completing Banking Reforms and Mitigating Non-Bank Risks


18. Efforts to ensure fitness and probity of banks’ ultimate beneficiary owners are paying off, supporting credit recovery. The sale by a non-transparent shareholder of shares in VictoriaBank (third largest bank) to a Romanian banking group in January 2018 represented a reform milestone. In October 2018, a stake in MAIB (largest bank) was sold to an EBRD-led consortium. In March 2019, majority shares of MICB (second largest bank) were sold to a Bulgarian non-bank investor. In January 2019, the NBM also suspended the legal rights of shareholders acting in concert in two non-systemic banks and appointed a temporary administrator in one of the banks. These changes in the ownership structure contributed to the revival of credit, with total lending registering double-digit growth for the first time since 2016.


Total Lending Growth

(Contributions to yoy credit growth)

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A001

Sources: NBM and IMF staff calculations.

19. The implementation of unwinding of (previous) related-party exposures is proceeding as planned. Time-bound action plans for unwinding these exposures were approved (end-July 2018 SB). By end-April, four out of seven banks had aligned exposures with prudential limits, and remaining banks continue to reduce their gross exposures as planned. Regulations on banks’ transactions with related parties have been updated to calculate such exposures net of loan-loss provisions.


Foreign Ownership of Banks

(Percent of banking sector assets)

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A001

Source: NBM and IMF staff calculations.1/ 41 percent acquired by EBRD-led consortium (October 2018).2/ 63.8 percent acquired by Bulgarian Doverie Fund (March 2019).3/ Majority stakeacquired by Banca Transyvanía and EBRD (January 2018).4/ In process of acquisition by OTP, from Societe Generale (Februaty 2019).5/ Acquired by Intesa Sanpaolo (Ju ne 2017).6/ 100 percent foreign-owned (96 pct German; 3.8 pct Netherlands).

Unwinding of Banks’ Related Party Exposures


Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A001

Sources: NBM and IMF staff calculations.

20. The Central Securities Depository (CSD) is fully operational. The single CSD was designed to support increased investments in the local capital market and develop new financial instruments. It is responsible for the registration, safekeeping (as custodian of ownership records of government and corporate securities), and settlement of securities issued by Moldovan entities. The legal records of shares of banks and insurance companies were transferred to the CSD in May. Records of joint-stock companies traded at the exchange and all other joint stock companies will be transferred by end-2019 and 2020, respectively.

21. The authorities continue to strengthen Moldova’s financial safety net, crisis prevention, and contingency planning frameworks. Towards this objective, the governance structure and coverage of the Deposit Guarantee Fund were strengthened by appointing all supervisory board members, raising its coverage limit to MDL 50 thousand (about 31 percent and 97 percent of total deposits and depositors, respectively), and expanding its coverage to legal entities (effective January 1, 2020). Also, the National Financial Stability Committee—established to coordinate the implementation of macro-prudential policy and activities to prevent and remedy financial crises—held its inaugural meeting in January 2019.

22. While not yet systemic, risks in the non-bank financial sector are rising. In particular, lending by microfinance organizations has increased sharply as they exploited regulatory arbitrage (given tighter banking sector supervision) and filled the void created as banks recovered from the 2014 fraud. Weak supervisory capacity, absence of mandatory credit history checks and ineffective consumer protection mechanisms, non-transparent UBOs, and opaque non-resident funding raise concerns about the potential for household overleveraging, predatory lending practices, and money laundering risks. Spillovers to the banking sector could occur through confidence and funding channels.


Moldova: Non-bank Financial Sector Developments

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A001


23. The authorities continue advancing efforts to rehabilitate the banking system:

  • MICB’s exit from temporary administration in an orderly manner. The temporary administration regime, in place since October 2016, is expected to be withdrawn once adequate governance structures are in place (end-December SB, reset from end-October 2018). Priority must be given to ensure prudent management of the bank and avoid conflicts of interest or reputational hazards. In this context, the NBM should stand ready to ensure rigorous professional standards for the bank’s new management team and enhanced monitoring of its related party exposures and cross-border transactions.

  • Removing unfit shareholders in domestic non-systemic banks (end-March SB). With an objective to safeguard the banks’ capital and ensure fit and proper ownership structures, and fully in line with the shareholder removal legal framework, the NBM rejected in July a request to further extend the deadline for sale of shares held by unfit shareholders of two banks, thereby triggering the process of cancellation of problem shares (prior action). While the unfit shareholders of one of these banks have challenged the NBM’s concerted action decision in court, the NBM should stand ready to appeal any decision that undermines the irreversibility of its supervisory decisions.

24. The NBM’s operational framework for emergency liquidity assistance (ELA) has been significantly strengthened. Amendments to the NBM Act and other relevant legislations were approved in August (prior action) with a view to ensure that ELA can be extended only to solvent and viable banks. The modified ELA framework is expected to be implemented before end-2019.

25. The authorities and staff agreed on measures to mitigate risks from non-banks.

Specifically, legislation governing activities of non-bank credit organizations will be amended (new end-October SB) to: (i) prohibit them from accepting deposits from the public, per provisions of the Law on Bank Activity; (ii) oblige them to report new credit activity to credit bureaus; (iii) introduce limits on total cost of consumer credits; and (iv) introduce an effective, proportionate, and dissuasive sanctioning regime. Staff also urged the authorities to implement risk-based supervision and to strengthen ownership transparency, governing bodies, asset classification, risk management, and internal control frameworks. The National Commission for Financial Markets (NCFM) capacity to implement reforms should be reviewed, with a view to strengthen the regulatory framework and supervisory capacity.

C. Monetary and Exchange Rate Policy: Keeping Inflation Under Control and Strengthening NBM’s Operational Framework


26. The NBM tightened monetary policy in June, for the first time since December 2017, and again in July. The policy rate was raised by 100 basis points to 7.5 percent, with the NBM citing inflationary pressures from higher wages, credit growth and a positive fiscal impulse. This decision was broadly in line with staff advice to keep inflation within the band around the target. The required reserve ratio on bank’s convertible currencies was raised by 3 percentage points to 17 percent while that on nonconvertible currencies was unchanged at 42.5 percent. Following an appreciation cycle throughout 2018, the leu oscillated substantially in 2019 and, in recent months, the NBM appropriately reduced its footprint in the foreign exchange market.


Monetary Policy

(Percent, million of U.S. dollar)

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A001

Source: National Bank of Moldova.


27. The NBM should stand ready to adjust its policy rate further, as needed, to maintain inflation within the corridor. A less accommodative monetary policy stance is appropriate given expected inflationary pressures from the expansionary fiscal impulse, nominal currency fluctuations, and adjustments to regulated prices. This should be supported by greater exchange rate flexibility, with FX interventions limited to smoothing excessive volatility in the foreign exchange market and maintaining adequate reserve coverage.

28. The NBM and staff agreed on the need to strengthen its inflation-targeting operational framework. In line with recent MCM advice, the NBM will enhance its liquidity management and the transmission of monetary policy by (i) adhering to the policy rate as its primary tool; (ii) gradually recalibrating the reserve requirement ratios on domestic and foreign currency requirements to disincentivize foreign currency intermediation, while carefully monitoring liquidity considerations; and (iii) adopting an FX intervention strategy consistent with the inflation targeting regime to facilitate two-way exchange rate flexibility and reduce the NBM’s market footprint, consistent with IMF technical assistance (new end-December SB). Staff also recommended that the NBM strengthens its public communication to improve market signaling of policy intentions and ascertain policy awareness and credibility.

29. The NBM’s policy and institutional independence is vital to achieving its mandate.

Operational independence of the NBM plays a pivotal role in sustaining confidence in—and recovery of—the banking system, enhancing the credibility of the inflation-targeting regime, and safeguarding macro-financial stability. In this context, several recent incidents of political pressure on the National Bank of Moldova pose serious concerns. Against this background, staff engaged new political decision makers to stress the utmost importance of safeguarding the NBM’s independence.

D. Structural Reforms


30. Energy sector policies were broadly in line with program commitments last year, but 2019 tariffs were delayed. Electricity tariffs were set by the energy regulator in line with the new methodology and published in the official gazette on June 29, 2018 (end-June 2018 SB). Disputes between the regulator and the major electricity provider over past financial deviations were settled through an agreement on 2018-19 tariffs and investments. However, the regulator failed to promptly approve 2019 gas tariffs, against the background of higher-than-expected import costs for natural gas, turbulent political developments, and changes to the regulator’s top management.


Moldova: Gas Price Developments

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A001

31. Recovery of stolen assets from the 2014 banking fraud has been slow. By end-March 2019, the total value of recovered assets in the form of proceeds from bank liquidation (BEM, BS and UB) and confiscation of assets of convicted persons (MAIB and MICB shares) was significantly below the value of criminal cases under investigation (MDL 3.1 billion vs. MDL 8.7 billion). The scope for recovering proceeds becomes increasingly difficult as time elapses.


Progress with Asset Recovery

(Billions of Moldovan lei)

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A001

Sources: NBM and IMF staff calculations.1/ Represents the total value of state securities issued for the securitization of ELA loans granted by the NBM to three banks as per government decisions (ram November 13, 3014 and March 30. 2015.

32. Further efforts are needed to strengthen the effectiveness of Moldova’s AML/CFT framework. The authorities should ensure that AML/CFT supervision of financial institutions (including on-site inspections) is effectively risk-based and sanctions for AML/CFT violations are effective, proportionate and dissuasive. The quality of suspicious transaction reports (STR) filed by reporting entities (such as banks) need to be improved. Enhanced capacities and resources for the Service for Prevention and Fight against Money Laundering in analyzing STRs will contribute to developing financial intelligence for criminal investigations. The authorities are also encouraged to address deficiencies and implement recommendations in relation to MONEYVAL’s 2019 comprehensive AML/CFT assessment, which is expected to be published following the July Plenary.


33. The authorities reiterated their commitment to regular reviews of energy tariffs.

Towards this objective, the regulator will conduct regular reviews to promote transparency and predictability in the sector, minimize contingent liabilities and, by end-October, adopt (i) new electricity tariffs based on the February 2018 methodology, and (ii) gas tariffs based on the existing methodology and purchase price of natural gas (new end-October SB). Regular updates of the eligibility and benefit parameters of targeted social assistance programs, such as Ajutor Social and Heating Allowance, will enhance the targeting and effective coverage of social assistance programs, while also mitigating adverse effects of tariff increases on vulnerable households.

34. The new government signaled strong commitment to investigating the 2014 bank fraud and making tangible progress on asset recovery. The authorities plan to initiate an international investigation to prosecute the perpetrators. By end-October, they intend to evaluate appropriate modalities to recover stolen proceeds, including through engaging independent international legal and forensic experts. Staff urged to step up coordination among all relevant stakeholders, including the NBM, the Prosecutor’s office, the National Anticorruption Center, Criminal Asset Recovery Agency, and the AML agency.

35. The authorities are committed to strengthening Moldova’s AML/CFT framework, including by implementing the 2018 AML Law and MONEYVAL recommendations. By end-2019, they plan to adopt the Law on Sanctions for violations of ML/TF rules, developed in coordination with the Council of Europe and European Union. They also plan to engage international partners to initiate a new National ML/TF Risks Assessment. Finally, they are developing new guidelines for exchange of AML/CFT information among all relevant stakeholders and a new IT system for reporting suspicious transactions for all types of reporting entities.

36. Efforts to enhance governance and anti-corruption measures will contribute to improving the business climate and levelling the playing field. The independence and capacities of anti-corruption institutions including the National Integrity Authority should continue to be enhanced. Strengthening the asset declaration system (including with respect to the scope of ownership information and timely and credible verification) should be prioritized. AML tools such as enhanced due diligence for politically exposed persons should also be leveraged to detect and deter corruption.

Program Modalities

37. To ensure that program objectives can be met, staff supports the authorities’ request for the completion of the inflation consultation, an extension of the current arrangements, and a rephasing of access. Staff supports (i) the extension of the ECF/EFF arrangements to March 20, 2020; (ii) the addition of a sixth program review based on end-December 2019 quantitative performance criteria (MEFP Table 1) and new structural benchmarks; and (iii) the rephasing of the outstanding program purchases with SDR 33.6 million and SDR 14.4 million to be disbursed at the time of the combined fourth/fifth and sixth reviews, respectively. This reprofiling reflects mainly changes in the Moldova’s BOP needs due to the expected timing of disbursement of the World Bank Development Policy Operation.

38. Staff proposes updated program conditionality (MEFP Table 2):

  • Six prior actions for the completion of the fourth/fifth reviews were set on: (i) the adoption of amendments to the 2019 budget consistent with the augmented general government deficit ceiling; (ii) the approval of amendments to the Tax and Customs Codes (effective January 1, 2020) to rationalize tax expenditures and raise revenues; (iii) the approval of amendments to the Tax Code to remove provisions for the deduction of up to MDL 500,000 from the indirect method assessment of estimated taxable income, and to sunset by 2022 the carryover provision from the 2012 capital liberalization scheme; (iv) the approval of amendments to the 2018 Capital and Tax Amnesty Law to remove the provision that STS cannot perform audits prior to January 1, 2018; (v) the approval of amendments to the NBM Act and other laws to ensure that ELA is extended only to solvent banks; and (vi) the removal of unfit shareholders in two domestic non-systemic banks.

  • One SB is proposed to be reset. The systemic bank (MICB) is expected to exit temporary administration in an orderly manner by end-December.

  • Four new SBs are proposed with a view to support the structural reform focus of the new government in 2019: (i) for end-October on the adoption of 2019 gas tariffs; (ii) for end-October on the amendment of the legislation governing activities of non-bank credit organizations; (iii) for end-December on the proposal of a date and adoption of an action plan for the automatic exchange of information with the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes; and (iv) for end-December on the adoption of an FX intervention strategy to facilitate two-way exchange rate flexibility and reduce the NBM’s market footprint, consistent with IMF technical assistance.

39. The program remains fully financed, with firm financing assurances in place for the remainder of the program period and the next 12 months. The size of the external financing gap—estimated at US$171 million in 2019—will be fully covered by the resumption of disbursement of EU’s MFA and budget grants (US$124 million, of which up to US$71 million set aside for MFA budget support grants and loans), and Fund disbursement of SDR 33.6 million (US$ 46.5 million), of which SDR 20.1 million (US$27.9 million) disbursed for budget support (ECF: SDR 6.7 million and EFF: SDR 13.4 million). External financing would allow reserves to reach the top of the Fund’s ARA metric by end-2019 (165 percent of the metric). In 2020, the smaller external financing gap, at US$132 million, will be financed mainly by EU funds (US$72 million) and the World Bank’s Development Policy Operation (US$40 million), with the residual gap closed via a disbursement equivalent to SDR 14.4 million (US$20 million) under the ECF/EFF.

40. Moldova is expected to meet its repayment obligations to the Fund and remains at low risk of debt distress. Obligations to the Fund peaked at 0.9 percent of GDP in 2017 and are projected to decline to 0.2 percent by 2024 (Table 5). Payments to the Fund are estimated at 2.1 percent of exports of goods and services in 201 9 and are projected to decline gradually to below 1 percent by 2024.

Table 5.

Moldova: Indicators of Fund Credit, 2011–2024 1/

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Sources: IMF staff estimates and projections.

Assume repurchases are made on obligations schedule.

2/ Total debt service includes IMF repurchases and repayments.3/ In 2009, does not include Moldova use of the SDR allocation of SDR 117.71 million.

41. Risks to the program remain high but are mitigated by the new government’s commitment to strong prior actions, adequate buffers, and the normalization of relations with donors. The authorities are committed to program objectives, and cognizant of potential risks from reform fatigue or resurgence of domestic political instability. Moldova’s external reserve buffer remains adequate, safeguarding against abrupt external adjustment in the event of intensification of spillovers from regional geopolitical and global trade tensions. Fiscal slippages have been addressed, the monetary policy framework is being strengthened, and the financial sector is on a stronger footing. Normalization of relations with the EU and other donors should help sustain the reform momentum and catalyze external financing.

Staff Appraisal

42. Pre-election policy reversals have been addressed and the program is back on track to achieve its objectives. Despite delays in completing program reviews, the new authorities have taken important actions, affirming their strong commitment to the program amid a complex domestic political environment. However, macro-financial vulnerabilities and important structural impediments remain significant, thereby clouding the outlook for strong and sustainable growth and raising living standards. Also, previous policy slippages show that progress is not irreversible. It is therefore critical that prudent and well-coordinated macroeconomic policies are pursued, and reforms continue, notably to complete the cleansing of the financial sector, improve governance, strengthen institutional frameworks, and ensure transparency and predictability in the energy sector.

43. Significant progress has been achieved in the financial sector’s reform agenda—a crucial pillar of the program, but remaining actions need to be completed. The authorities completed many of the measures to secure shareholder transparency, fitness, and probity of the domestic banking system. Also, good progress has been achieved in improving supervision, regulatory frameworks, unwinding bank related-party exposures, and strengthening financial safety nets. Critical next steps include exit of the second largest bank from temporary administration, addressing rising risks in the non-bank financial sector, and improving the AML/CFT framework. To regain public trust in state institutions, decisive progress needs to be demonstrated on the long-delayed process of asset recovery.

44. The amended 2019 budget and measures to rationalize tax expenditures and raise revenue help mitigate immediate fiscal pressures, but continued vigilance is imperative.

Strong implementation of the agreed budget envelope and continued monitoring of revenue performance following the adopted measures will be key in ensuring fiscal sustainability, while securing the needed fiscal space for priority social and development projects. Policy reversals need to be avoided, and new initiatives carefully costed. Continued efforts are needed to strengthen tax administration and tax compliance, streamline tax expenditures, and reduce risks from SOEs and PPPs. A comprehensive strategy to strengthen public investment management would help improve the efficiency of public investments and scale up public infrastructure.

45. Monetary policy should continue to focus on maintaining price stability, in the context of a flexible exchange rate regime, while the NBM’s operational framework needs to be strengthened. The NBM should continue monitoring the inflation outlook closely and stand ready to adjust its policy rate as needed. The policy rate should be reinstated as the primary signal of the stance of monetary policy, while the reserve requirement framework needs to be gradually recalibrated to favor intermediation in domestic currency. Intervention in the foreign exchange market should be limited to smoothing excess volatility. The NBM should also continue to improve its operational capacity, including by strengthening decision-making, improving coordination across agencies, and reinforcing internal and external communication.

46. Safeguarding the NBM’s independence is critical. Legal reforms enacted in the aftermath of the 2014 banking crisis and supported by the IMF have strengthened the NBM’s governance structure, balance sheet, and autonomy. To protect this hard-earned progress, political decision makers should refrain from any initiative to weaken the NBM’s operational independence or governance framework, as these would undermine its ability to fulfill its mandates of maintaining price and financial sector stability, which are fundamental for sustainable economic development.

47. Progress is needed to unlock Moldova’s economic potential. The new government’s commitment to improving governance and fighting corruption is welcome and critical for boosting long-term growth. Progress towards structural bottlenecks—including weak bank intermediation, non-transparent energy policy, and promoting a business-friendly environment—can boost growth potential and low incomes.

48. In light of progress so far and the authorities’ policy commitments, staff supports the completion of the fourth and fifth reviews under the ECF/EFF-supported program, completion of the inflation consultation, the extension of arrangements, and the rephasing of access. The program remains broadly on track, with strong ownership. While risks to the program remain, the firm commitment by the new government to sound economic management and ongoing reforms warrants continued Fund support.

Figure 1.
Figure 1.

Moldova: Real Sector Developments, 2010—19

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A001

Sources: Moldovan authorities; National Bureau of Statistics of the Republic of Moldova; and IMF staff calculations.
Figure 2.
Figure 2.

Moldova: Money, Prices, and Interest Rates, 2011—19

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A001

Sources: Moldovan authorities; and IMF staff calculations.
Figure 3.
Figure 3.

Moldova: Fiscal Developments, 2009–2018 1/

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A001

Sources: Moldovan authorities; and IMF staff calculations.1/ General government overall balance. Higher education institutions are excluded from the budget from 2013. This results in a sizeable reduction of nontax revenue, offset by lower cu rrent expenditure.2/ Targets are calculated as the absolute value in lei as a percent of current GDP.
Figure 4.
Figure 4.

Moldova: Banking Sector Developments, 2013–19

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A001

Sources: National Bank of Moldova; and IMF staff calculations.1/ The acquisition of EXIMBANK by Veneto Banca S.pA. in February 2018 required mandatory liquidation of NPLs and loan balances.
Figure 5.
Figure 5.

Moldova: External Sector Developments, 2009–2019

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A001

Sources: National Bank of Moldova; Moldovan Authorities; and IMF staff and calculations.1/ Short-term assets include portfolio investment, financial derivatives, trade credits and currency and deposits.2/ Short-term liabilities include portfolio investment, financial derivatives, trade credits, short-term loans by banks and other sectors, currency and deposits, short-term other liabilities by general government, banks and other sectors.
Table 2a.

Moldova: Balance of Payments, 2015–2024

(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 measures are 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.