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

Public Debt Coverage

1. Moldova’s public debt includes obligations of the public sector (central government, local authorities, and public entities). Debt data includes external and domestic obligations of the central government, including arrears to suppliers and guaranteed debt. Domestic debt data also includes debt of state and municipal enterprises, companies with full or majority public ownership, and of local public authorities with maturity of a year and above, as stipulated in Law No. 419 (2006) on Public Sector Debt, State Guarantees and State On-lending.1 The debt coverage is on the residency basis.

Text Table 1.

Moldova: Public Debt Coverage

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The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%.

Background On Debt

2. Public debt increased substantially during 2013-15 as a result of the banking crisis but moderated by 2018 to about 30 percent of GDP (see Text Table 2). Public and publicly guaranteed debt reached 39.5 percent of GDP in 2015, up from about 26.9 percent of GDP in 2010. A key driver of the increase in public debt was the issuance of a state guarantee to the National Bank of Moldova (NBM) to provide emergency liquidity to the banking sector. Public debt was on a downward path since 2016, returning to the level seen in 2009. In 2018, the EU and other donors temporarily paused financial assistance to Moldova over concerns about governance and deteriorating democratic standards during the pre-election campaign. Currently, 30 percent of PPG domestic marketable debt are long-term debt securities (government securities with maturity longer than 12 months). Other domestic marketable debt is mainly short-term and held by the banking system2. In addition, the stock of domestic arrears to suppliers amounting to MDL 54.7 million (0.03 percent of GDP) by end-2018 is included in domestic debt.

Text Table 2.

Moldova: Composition of Public and Publicly-Guaranteed Debt, 2018

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3. Moldova’s total external debt reached 79.4 percent of GDP by end-2015 but moderated since then to 64.9 by the end of 2018. The reduction largely reflects the strong appreciation of the nominal exchange rate during 2017 (by an estimated 11.3 percent) amid renewed capital inflows. Private external debt is relatively high for a low-income country and amounts to 47.4 percent of GDP. The recent decline in private sector debt is explained by the decrease in overseas borrowing by the banking sector, reflecting the impact of the banking crisis. 3 Similar to other Central and Eastern European countries, while gross private external debt in Moldova is sizable about 35 percent of it are liabilities to direct investors (Moldova foreign-owned companies borrowing from their parent companies abroad). Short-term debt of the non-bank sector is high as well, about one third of nonbank debt, and consists of trade credits, arrears, and other debt liabilities, mostly for the import of natural resources. Foreign assets of the nonbank sector have shrunk in recent years but remain sizable (about 40 percent of gross nonbank external liabilities) and mainly held in the form of currency, deposits, and short-term loans (trade credits). Public and publicly guaranteed (PPG) external debt (17.5 percent of GDP) is held mainly by multilateral and bilateral donors, and is mostly medium and long term, and on concessional terms. High private external debt in Moldova poses risks to external debt sustainability, nevertheless, overall risk of total external debt distress is assessed as low due to the mitigating factors discussed above.

Background On Macro Forecasts

4. The baseline macroeconomic assumptions for the DSA reflect recent economic developments and policies underpinning the ECF/EFF-supported program. The baseline scenario relies on full implementation of fiscal adjustment, as well as financial and structural reforms envisaged under the program. Economic performance is expected to remain solid over the medium term, with steady growth, moderate inflation, and a gradual narrowing of the current account deficit. The baseline scenario includes the most recent IMF global assumptions and the latest available information on Moldova’s debt:

  • a. Real GDP. Moldova has experienced a period of relatively strong growth during 2016-2017, as the recovery from the banking crisis continued. Real GDP grew by 4 percent in 2018, supported by infrastructure and private investments.4 Robust growth continued in 2019Q1, driven by agricultural exports. Notwithstanding considerable uncertainty, staff assesses the output gap to be broadly closed in the forecasted period. Over the medium-term, growth is expected to average about 3.8 percent (see Text Table 3).

Text Table 3.

Moldova: Key Macroeconomic Assumptions

(DSA September 2019 vs DSA December 2017)

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Source: Moldova authorities and Staff calculations.

Total revenue, inlcuding grants.

  • b. Inflation. Headline inflation slowed in 2018, temporarily sliding below the NBM’s band. Food and fuel inflation decelerated significantly in 2018, while prices of regulated items fell due to downward adjustments of energy tariffs. With these effects gradually fading out, inflationary pressures have started to build up since early 2019, against the background of the expansionary fiscal stance and pass-through from the leu’s depreciation. The policy rate was increased in June 2019, for the first time since December 2017, and again in July. Over the medium-term, inflation is expected to remain anchored at 5 percent—the authorities’ inflation target. These projections are broadly in line with those in the previous DSA.

  • c. Fiscal. The fiscal position deteriorated sharply in 2019. During 2019, the government deficit widened sharply driven by shortfalls in EU grants, under-performance of the corporate income tax (CIT) and excises, and wage bill overruns. Nonetheless, the fiscal deterioration is projected to be fully reversed, supported by the authorities’ robust measures (to strengthen tax administration and improve tax compliance; to revise/remove certain tax exemptions and streamline subsidies; to mobilize resources for developmental and social spending; and to strengthen the unified public wage system and improve control over the wage bill) to bring the fiscal performance back on track. Over the medium term, revenues are expected to stabilize, while strengthened fiscal frameworks will help to discipline expenditures5.

  • d. External sector. The current account deficit (CAD) deteriorated to over 10 percent of GDP in 2018 on the back of strong domestic demand and real exchange rate appreciation. The CAD is expected to moderate to 9.5 percent of GDP in 2019 and adjust to below 7 percent of GDP throughout the medium term, financed by strong capital and investment flows. Robust private financial inflows (including remittances) led to a moderate buildup of reserves that remain adequate at about 170 percent of the IMF composite reserve adequacy metric in 2018. The leu appreciated in nominal terms in 2018 but has lost some of its strength in 2019.

  • e. External borrowing. The DSA assumes that all contracted-but-undisbursed concessional loans will be fully disbursed over the coming years, as planned by the authorities. New borrowings (including concessional) are projected to rise over the longer term to finance the country’s high development needs. This plays a key role in the DSA and explains to some extent the upward slope in debt burden indicators, including for total external debt level indicators.6 Moldova will continue to benefit from significant grant financing in the medium-term, leaving the grant element of new borrowing at about 36.4 percent. In the short-term, the external financing need—estimated at US$171 million in 20197—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). 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 (DPO) (US$40 million), with the residual gap closed via a disbursement equivalent to SDR 14.4 million (US$20 million) under the ECF/EFF.

  • f. Domestic borrowing. Domestic borrowing is assumed to remain limited over the medium-term. Domestic borrowing is expected to remain about 10 percent of GDP in 2039, reflecting only a gradual deepening of domestic financial markets.

5. The debt sustainability framework’s newly-added realism tools suggest that the baseline projections are reasonable (Figures 3 and 4). The evolution of the projection of external and PPG debt to GDP ratios are broadly consistent for the current and previous DSA vintages, while they reflect major deviations from the DSA from 5 years past. This is because the public debt ratio increased significantly after 2013 and reached its highest level in 2015. In terms of projections, the ECF/EFF program, which also aims at a sustainable debt path, is the main reason why the current and recent DSA vintages deviate from the DSA prepared in 2013. For external public debt, projected debt levels remain about constant, while the projected debt creating flows deviate from the five-year historical change because of projected higher current account deficits. For total public debt, the slight decline in the projected debt levels in the medium-to-long term is driven mainly by the real GDP growth which offsets negative contributions from the widening primary balance in the short-term, whereas the five-year historic surge in debt was due to significant increase in other debt creating flows attributed to government financing related to the recapitalization of banks. The difference over 2019-20 between the baseline growth projections and growth projections implied by standard fiscal multipliers reflects the impact of political uncertainty in 2019H1. Growth is expected to rebound in 2020. The 3-year adjustment in the fiscal primary balance based on the realism tool is credible, as it does not fall in the upper quartile of the distribution of past adjustments relative to peers.

Figure 3.
Figure 3.

Moldova: Drivers of Debt Dynamics - Baseline Scenario

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A003

1/ Difference between anticipated and actual contributions on debt ratios.2/ Dstribution across LICs for w hich LC DSAs w ere produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.
Figure 4.
Figure 4.

Moldova: Realism Tools

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A003

6. Public investment and growth. The ongoing program aims at augmenting public investment with growth-enhancing structural reforms, including SOE reform, and an improvement of the business environment, which are expected to enhance domestic and foreign private investments (Figure 2).

Country Classification And Determination Of Scenario Stress Tests

7. Moldova’s debt carrying capacity is strong. The composite indicator (CI), which captures the impact of several factors through a weighted average of an institutional indicator8, real GDP growth, remittances9, international reserves, and world growth, confirms that Moldova’s debt carrying capacity is classified to be ‘strong’, which is unchanged from the previous two DSA rounds (Text Table 4) 10. The debt carrying capacity, in turn, determines the PPG external debt thresholds and total public debt benchmarks.

Text Table 4.

Moldova: Debt Carrying Capacity and Applicable Thresholds

8. Stress tests follow standardized settings. Under standardized stress tests, all PPG external debt indicators remain below the policy relevant thresholds (Table 3 and Figure 1). Moldova does not have prominent economic features such as natural disasters, significant reliance on commodity exports, market financing, etc. that require additional tailored stress tests or other modules. Regarding the contingent liability stress test, a shock of 12 percent of GDP is used. The severity of the shock was calibrated to the most recent domestic banking crisis event.

Figure 1.
Figure 1.

Moldova: Indicators of Public Guaranteed External Debt under Alternatives Scenarios, 2019-2029

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.

External Debt Sustainability Analysis

9. Under the baseline scenario and alternative scenarios, all external debt indicators continue to remain below their policy-relevant thresholds (Table 1, Figure 1). Starting in 2020, after the conclusion of the ECF/EFF arrangement, new external loan financing will consist primarily of borrowing from multilateral and bilateral lenders by 2030, while commercial borrowing is expected to start playing a larger role in the long-term, reaching about 70 percent of total public sector borrowing by 2039. The present value of PPG external debt is projected at 12.1 percent of GDP in 2019 and is only increasing marginally to 13.4 percent by 2029. The ratio will remain below the 55 percent threshold under the baseline scenario throughout the projection period. Similarly, debt service indicators remain well below their respective thresholds and on a broadly downward trend. Improvements in debt-management practices envisaged under the authorities’ reforms will give further resilience to shocks affecting debt service needs. A tailored stress test for the contingent liability shock also does not cause any breach of relevant thresholds. Under the most extreme scenario, most PPG debt indicators show significant increase in their values coming closer to the indicative threshold, but, nevertheless, do not breach it. These outcomes highlight the importance of sound macroeconomic policies and prudent fiscal policy.

10. While the external risk rating is determined by the PPG external debt, large private external debt pose some potential roll-over risks.

Public Debt Sustainability Analysis

11. Under the baseline and alternative scenarios, indicators of the overall public debt burden (external plus domestic) lie comfortably below the benchmark. The PV of public debt-to-GDP in 2019 stands below the benchmark level of 70 percent. The authorities committed to undertake substantial fiscal measures to correct for fiscal slippages from 2018. Moldova’s PV of total public debt-to-GDP is expected to be stable round 26 percent in the medium-term, remaining below the benchmark in the medium-to-long term (Figure 2). However, under the most extreme shock scenario (growth shock), the PV of public debt-to-GDP shoots up significantly throughout all or most of the projection period as the country accumulates more debt to finance larger fiscal and current account deficits. Such scenario highlights the risks to debt sustainability faced by the authorities in the absence of needed policy reforms. A significant contingent liabilities shock (to state-owned enterprises) would increase debt levels notably, though such risks are difficult to quantify exactly due to lack of good data on SOEs and PPPs.

Figure 2.
Figure 2.

Moldova: Indicators of Public Debt Under Alternative Scenarios, 2019-2029

Citation: IMF Staff Country Reports 2019, 305; 10.5089/9781513515434.002.A003

Risk Rating And Vulnerabilities

12. Moldova remains at low risk of external and overall debt distress, in line with the previous DSA assessment.

  • External indicators for PPG debt remain well below the indicative debt thresholds, under the standardize and alternative stress tests. However, significant private external debt poses potential roll-over risks.

  • Moldova’s overall public debt dynamics are also projected to remain on a sustainable path under the baseline and alternative scenarios. Total PPG debt is sensitive to the growth shock scenario, as the country accumulates significant debt to finance larger fiscal and current account deficits. Therefore, pursuing prudent fiscal policy, improving the quality of institutional frameworks, for which the World Bank’s 2018 Debt Management Performance Assessment (DeMPA) provides a sound diagnostic basis regarding debt management aspects, and advancing structural reforms remain key to ensuring debt sustainability, increasing the economy’s growth potential, and reducing vulnerability to shocks. Furthermore, development of the domestic debt market could further strengthen the outlook for debt sustainability, especially considering the country’s developmental needs and significant dependence on foreign assistance in the form of grants and concessional loans. Continuous efforts to lengthen the average maturity of domestic debt and deepen the secondary market would help reduce the PPG domestic debt roll-over and interest rate risks.

Authorities’ Views

13. The authorities broadly agreed with staff’s assessment of Moldova’s public debt situation and recommendations on debt management policy. They broadly concurred with the staff’s assessment of debt composition, projections, risk ratings and distress level. They recognize that preserving fiscal policy prudency is critical for keeping public debt at sustainable level. While they have been making progress on debt management, they highlighted the need for further improvement in debt statistics and debt management frameworks by making full use of IMF technical assistance and training resources.

Table 1.

Moldova: External Debt Sustainability Framework, Baseline Scenario, 2018-2039

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - p(1+g) + £α (1 + r)]/(1+g+p+gp) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, £=nominal appreciation of the local currency, and α= share of local currency-denominated external debt in total external debt.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Current-year interest payments divided by previous period debt stock.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Assumes that PV of private sector debt is equivalent to its face value.

Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

Table 2.

Moldova: Public Sector Debt Sustainability Framework, Baseline Scenario, 2018-2039

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Coverage of debt: The central, state, and local governments plus social security, central bank, government-guaranteed debt, spending arrears, non-guaranteed majority owned SOE debt. Definition of external debt is Residency-based.

The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.

Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows.

Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.

Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

Table 3.

Moldova: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019-2029

(In percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

Table 4.

Moldova: Sensitivity Analysis for Key Indicators of Public Debt 2019-2029

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the benchmark.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.


PPG debt covers gross debt of the general government. SOEs external debt is only included if it is explicitly guaranteed by the government. Both on-lending to the private sector (operationalized through commercial banks) and to SOEs are part of public guarantees and are included. Debt of SOEs (majority owned by the state) with maturity longer than a year accounts for 1 percent of GDP as of 2018. In line with the DSA guidelines, public debt includes liabilities towards the IMF. Staff and the authorities will continue working towards expanding debt coverage for local governments’ debt, SOEs and PPPs to include all existing debt obligations. Due to the lack of data, information on PPPs is currently limited. The change in coverage complicates intertemporal analysis of PPG debt The contingent liabilities shock from SOE debt is set at the default value of 2 percent of GDP to reflect risks associated with borrowing of SOEs majority owned by the state, while a contingent liability shock of 12 percent of GDP is meant to also capture risks from PPPs and SOEs that are partially owned by the state.


The breakdown of the total PPG domestic debt excludes the bonds related to the capitalization of banks.


NBM is working continuously on improving the coverage of private sector debt. This explains the changes in historical debt numbers from period to period.


In 2018, Moldova’s National Bureau of Statistics (NBS) published revised GDP series for 2016 and 2017, based on new methodology to reflect: a) implementation of the UN’s System of National Accounts 2008 (2008 SNA) and the European System of Accounts 2010 (ESA 2010); and b) statistical improvements regarding data sources and compilation methods. The changes were introduced with technical assistance from the Fund. As a result of the new methodology, the level of both nominal and real GDP was revised up by about 17 percent. The sizeable GDP revision implies a reduction in key macroeconomic ratios (including debt-to-GDP ratios).


Some fiscal measures for 2020 are not presently included into staff’s projections due to the costing ambiguity. These measures could potentially yield about 0.3-0.6 percent of GDP in revenue.


While this assumption is not based on concrete borrowing plans in the longer-term, it reflects the baseline assumptions, under which Moldova will continue to borrow into the future to finance productive infrastructure investments.


Exceptional financing.


The World Bank’s Country Policy and Institutional Assessment (CPIA).


Remittances for Moldova comprise of two Balance of Payments (BoP) accounts: compensation of employees and remittances.


Moldova’s Composite Indicator (Cl) is 3.34, which corresponds to a strong debt-carrying capacity as confirmed by the April 2019 WEO data and 2018 Country Policy and Institutional Assessment (CPIA).