Mission Concluding Statement 

IMF Staff Completes the 2020 Article IV and Program Review Mission to Moldova

February 5, 2020

• IMF staff and the Moldovan authorities reached staff-level agreement on policies to complete the sixth and final Extended Credit Facility and Extended Fund Facility (ECF/EFF) review, subject to approval by the IMF Management and the Executive Board.
• The three-year program has been broadly successful in achieving its objectives. Comprehensive reforms have rehabilitated the banking system and strengthened financial sector governance, entrenching macro-financial stability.
• Prudent and well-coordinated policies are needed to safeguard the progress achieved. Decisive governance and institutional reforms are necessary for faster, sustainable, and inclusive growth.

An International Monetary Fund (IMF) team, led by Mr. Ruben Atoyan, visited Chișinău from January 22 to February 5 to conduct the 2020 Article IV consultation and the sixth and final review of Moldova’s economic program supported by the IMF’s Extended Credit Facility (ECF) and Extended Fund Facility (EFF) arrangements.

The team reached staff-level agreement on policies needed to complete the sixth review under the program and held constructive discussions on the 2020 Article IV Consultation with the authorities. Program performance is assessed to be strong, with all end-December 2019 performance criteria met. Most structural benchmarks are on track to be implemented prior to the completion of the review, although some with delays. The agreement is subject to approval by the IMF Management and the Executive Board. Consideration by the Executive Board is tentatively scheduled for March 16, 2020. The completion of the review will make available SDR 14.4 million (about $20 million).

The program has been broadly successful in achieving its objectives. Comprehensive reforms have rehabilitated the banking system and strengthened financial sector governance, entrenching macro-financial stability. This progress is commendable given a volatile political landscape, with the course of the program stretching over tenures of three different governments. This has been made possible by broad support for the reforms ultimately aimed at strengthening governance and improving living standards of Moldova’s people.

Reforms under the program helped improve confidence and supported a turnaround in the economy. Real GDP growth is estimated at 4.2 percent in 2019 and is expected to remain close to 4 percent over the medium term. Inflation accelerated to 7.5 percent in December 2019 due to rising food prices and robust aggregate demand, but it is projected to revert towards the 5 percent target later this year. The 2019 fiscal deficit, at 1.5 percent of GDP, overperformed the program target as a weaker than projected revenue outturn was more than offset by under-execution of spending. Public debt remained low at around 30 percent of GDP. Well capitalized, liquid, and profitable banks helped support double-digit credit growth to the economy. Notwithstanding a sizable current account deficit, it remained comfortably financed by strong private and official inflows. The leu remained broadly stable in 2019.

The outlook is cautiously positive but subject to risks. The resurfacing of political instability, policy reversals, or reform fatigue could hurt confidence and limit external financing options. At the same time, regional and global spillovers from a protracted slowdown in major trading partners cannot be ruled out. Prudent and well-coordinated policies are needed to mitigate these risks and improve resilience.

The 2020 budget envisages a growth-friendly fiscal expansion to help address large infrastructure needs, but implementation and financing risks remain significant. Moldova’s subpar track record in executing budgeted capital spending reflects significant weaknesses in public investment management that need to be urgently addressed. Also, securing financing from external development partners, as envisaged in the budget, requires a strong reform momentum. Meanwhile, contingency plans need to be developed in the event that external inflows fall short of expectations.

We forecast inflation to decelerate and support the direction of the NBM’s monetary policy decision. In our view, its timing was premature given risks of inflationary pressures stemming from a looser fiscal policy stance and a weaker exchange rate. The NBM should stand ready to adjust its monetary policy stance should risks to the inflation outlook materialize. Moldova’s vulnerability to external shocks requires having a flexible exchange rate as an effective shock absorber. Towards this objective, the NBM has appropriately reduced its footprint in the foreign exchange market, limiting its interventions to smoothing excessive market volatility.

Despite successful stabilization efforts, widespread and significant governance and institutional vulnerabilities are major impediments to boosting living standards of Moldovan people. Perceptions of corruption and weak rule of law are entrenched, the regulatory framework is not properly enforced, informality is high, and a large SOE sector poses fiscal risks and undermines competition and productivity. While significant progress has been made on banking sector supervision, weak oversight of the non-bank financial sector, gaps in Moldova’s AML/CFT framework, and lack of progress on asset recovery are a recurring source of concern. Addressing these vulnerabilities could have significant growth dividends through faster capital accumulation, reduced labor and human capital headwinds from extensive emigration, and higher productivity.

The mission is grateful to the authorities and to other interlocutors for their cooperation, candid discussions, and generous hospitality.