Press Release No. 14/463

Press Release: IMF Staff Concludes Second Post-Program Monitoring Discussions in the Republic of Moldova

October 7, 2014

An International Monetary Fund (IMF) team headed by Mr. Max Alier conducted post-program monitoring (PPM) discussions with the Moldovan authorities in Chișinău during September 25–October 7, 2014. The PPM process is intended for member countries that have substantial IMF credit outstanding following the expiration of their programs.

At the conclusion of the visit, Mr. Alier made the following statement:

“Output is projected to recover next year, but risks are on the downside. Following the strong rebound in economic activity last year, growth will decelerate to about 2 percent in 2014 owing to a moderation in agriculture production, weaker economic activity in main trading partners, and restrictions on imports of Moldovan products. A recovery is projected next year as recently negotiated free trade agreements enter into effect and domestic demand recovers as election-related uncertainties dissipate. High international reserves and low public debt are important buffers but need to be combined with prudent macroeconomic and financial policies to mitigate the impact of risks.

“In 2014, the general government deficit will widen less than initially projected. However, this partly reflects large one-off nontax revenues and donor grants brought forward from 2015-17 that will, for now, more than offset significant wage and pension increases granted this year. Going forward, fiscal policy should aim at narrowing the deficit to 1½ percent of GDP (about 2½ percent excluding grants) by 2018, as required by the Fiscal Responsibility Law. This level of deficit would put public debt as a share of GDP on a downward trend and be consistent with projected financing availability. As a first step, the 2015 budget should aim to maintain the general government budget deficit below 3 percent of GDP, while protecting public investment and targeted social spending. In view of the country’s infrastructure needs, a small relaxation of the medium-term fiscal objective is in principle possible to accommodate productivity-enhancing investment projects if financing on reasonable terms is secured, and the additional investment is consistent with the economy’s absorption capacity.

“For fiscal decentralization to achieve its objective of improving the quality and delivery of public services it is imperative to ensure that local public finances remain healthy. Achieving this goal requires strengthening the framework regulating local governments’ spending and borrowing. It is important to monitor and rationalize local public enterprises.

“The National Bank of Moldova (NBM) has successfully achieved its price stability objectives in the context of an inflation targeting framework and a flexible exchange rate regime that has helped mitigate the impact of external pressures. The NBM’s current monetary policy stance is appropriate in light of the ongoing slowdown in economic activity and deflationary pressures. Going forward, the NBM needs to remain vigilant and ready to adjust policies when necessary.

“Strengthening the regulatory framework and decisive enforcement are critical to ensure the stability and soundness of the banking sector.  Priority should be given to implementing the recommendations of the recently completed Financial Sector Assessment Program. The NBM and National Commission for Financial Markets (NCFM) must be empowered to take effective regulatory and supervisory actions, including by having in place adequate procedures for court suspension of regulatory and supervisory decisions and strengthening the legal protections of NBM staff. The NBM and NCFM should resolutely and effectively implement adequate fit-and-proper requirements of ultimate beneficial owners and controllers in banks, and enhance the monitoring of related-party transactions and overall risk management framework of banks. The enforcement of the anti-money laundering framework also needs to be strengthened.

“Structural reforms are critical to boost potential output growth and reduce vulnerabilities. They would help create the conditions for the economy to grow faster, improve its competitiveness, and diversify its production and export structure. Reinvigorating the structural reform agenda would place Moldova in a better position to benefit from recently signed free trade agreements. Special attention should be given to the following areas: (i) business environment; (ii) physical infrastructure development; (iii) human resource development; and (iv) public administration and social security reform. Refocusing the education system to labor market needs would play an important role in raising productivity, creating jobs and reversing migration trends.

“We thank the authorities for candid and constructive discussions.”