Staff Report for the 2020 Request for Disbursement Under the Rapid Credit Facility and Purchase Under the Rapid Financing Instrument-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Moldova
The COVID-19 pandemic deeply affects the Moldovan economy. The crisis resulted in an urgent external financing need and an increased demand for budgetary resources to fight the pandemic and mitigate its social and economic consequences. The Moldovan authorities request access to a blended RCF/RFI arrangement under the exogenous shock window for an amount of SDR 172.5 million (100 percent of quota). The requested arrangement will be crucial to help close the external and fiscal financing gaps.
On behalf of the Moldovan authorities, we would like to express our appreciation to Mission Chief Mr. Ruben Atoyan and his team for their efforts to bring this program to the Board in a short timeframe. The authorities wish to thank staff for the insightful report and for the very helpful policy dialogue during the virtual mission.
COVID-19 in Moldova
Just over a month ago, on March 11, Moldova successfully completed the sixth and final review of the ECF and EFF arrangements. Four days earlier, on March 7, the first COVID-19 case was reported in Moldova. The number of confirmed cases currently exceeds 1,900 on a population of 3.5 million.
The Government of Moldova responded swiftly to contain the outbreak by declaring a State of Emergency on March 17. All stores (other than grocery stores, pharmacies, gas stations and limited agricultural supply stores), schools and public venues are closed. Flights to Chisinau Airport, international train and bus routes are all suspended.
The pandemic has inflicted enormous economic and social costs on Moldova.
The health system is under severe pressure. Hospitals urgently need essential medical gear, equipment and testing supplies to fight COVID-19.
Domestic and external demand has come to a halt. The lockdown led to a sharp decline in domestic demand, while the global nature of the pandemic resulted in a decline in exports. Real GDP is expected to decline by -3 percent, almost 7 percentage points below the pre-COVID baseline.
Remittances fell sharply. The secondary income balance is expected to decline by 4.8 percent of GDP relative to the pre-COVID baseline as Moldovans employed abroad are losing income. Substantial import compression compensated for the combined effect of the decline in exports and remittances. As a result, the current account slightly improves in dollar terms.
Financial inflows are stalling. Staff estimates a decline in the inflow on the capital and financial balance, which contributes to external financing needs of 7.7 percent of GDP.
The RCF/RFI would provide much needed budget support and help to close the external financing gap.
The RCF/RFI will help to close the external financing gap. Other contributions to closing the external financing gap are the careful use of existing reserves, which stood at 169 percent of the ARA metric prior to the crisis, official bilateral financing from Russia, emergency financing under the World Bank’s Fast-Track Facility for health and social needs, and a loan from the Council of Europe Development Bank. Given the need for budgetary resources to mitigate the impact of COVID-19, the authorities intend to use the support for budgetary financing based on the modalities of the Memorandum of Understanding between the Ministry of Finance and the NBM.
The government is taking targeted fiscal measures to address the crisis.
The fiscal balance is expected to deteriorate by 3.3 percent relative to the pre-COVID baseline due to a decline in revenues, resulting in an estimated budget deficit of 6.9 percent. Reprioritization of government spending yields savings of 2.0 percent of GDP which are used for targeted measures, for which the government adopted an amended budget:
The authorities plan to increase health care spending by 0.6 percent of GDP for much needed investments in medical equipment.
The authorities are taking measures to support people and businesses, including through extended access to unemployment benefits, strengthening targeted social assistance, temporary labor tax reimbursement subsidies and tax deferral. These measures jointly amount to 1.4 percent of GDP.
The NBM works to preserve financial sector stability and support the economy.
The ECF/EFF arrangements involved a successful rehabilitation of the banking sector, which is currently well-capitalized and liquid. The NBM will take the following measures to stabilize the financial sector and the economy:
The NBM lowered the policy rate by 1.0 percentage points on March 4 and by another 1.25 percentage points on March 20 to a level of 3.25 percent to support the economy.
The NBM adjusted reserve requirements to stem dollarization and ease liquidity conditions. They decreased the required reserve ratio in local currency cumulatively by 7 percentage points at the extraordinary meetings on monetary policy on March 20 and April 3, and increased the FX required reserve ratio by 1.0 percentage points.
The flexible exchange rate serves as first line of defense, but the NBM stands ready to intervene to counter excessive exchange rate volatility if needed.
The NBM approved decisions by which it provides flexibility to banks to offer loan service holidays to individuals or postpone/renegotiate payment schedules. More targeted exemptions are applied to corporations. The NBM will enhance monitoring of bank solvency and liquidity, including prudential compliance, related-party exposures, cross-border transactions and ML/TF suspicious transactions.
The NBM recommended banks to refrain from distribution of dividends to shareholders and share buybacks, at least until September 30, 2020, and to consider limiting variable remuneration schemes and bonuses payouts, as well as real estate investments, in order to maintain a strong level of capitalization and liquidity. In addition, the NBM has allowed banks to use the previously accumulated capital conservation buffer of 2.5%, as needed, to counter the potential decline in portfolio quality and preserve on-lending activities.
In addition, the National Commission for Financial Markets recommended nonbank credit organizations to voluntarily lower interest rates and allow payment deferrals, as well as to refrain from dividend payouts.
The authorities make specific commitments to ensure crisis-related expenditures are subject to strong budgetary procedures. The independent Court of Accounts Chamber will perform an audit of all crisis-mitigation spending, which will be made public. The authorities will also publish information on associated public procurement and beneficial owners of companies contracting with the government. They commit to subject their crisis response to strong control, audit, reporting and transparency requirements.
The authorities intend to continue their engagement with the IMF. The current crisis requires their full attention, but the authorities recognize that deep structural challenges persist in the Moldovan economy. Once the crisis subsides, they will continue discussions on a new arrangement focusing on strengthening the rule of law and improving governance frameworks.