Press Release No. 23/70

IMF Staff Reach Staff-Level Agreement on Third Review for Moldova’s Extended Credit Facility and Extended Fund Facility Arrangements

March 14, 2023

• IMF staff and the Moldovan authorities have reached a staff-level agreement on policies for completion of the third review under the Extended Credit Facility and Extended Fund Facility arrangements.
• While the authorities have managed to safeguard energy security so far, the economy contracted significantly in the 2022, reflecting spillovers from the Russia’s war in Ukraine, a modest recovery is expected in 2023.
• Continued resolute program implementation remains critical for creating a solid foundation for strong, sustainable, and inclusive growth, catalyzing external financing, and entrenching reform momentum.

Chișinău, Moldova: An International Monetary Fund (IMF) mission, led by Mr. Ruben Atoyan, conducted discussions during March 1–14, 2023 for the third review of Moldova’s program under the IMF’s Extended Credit Facility (ECF) and Extended Fund Facility (EFF) arrangements. At the end of the discussions, Mr. Atoyan issued the following statement:

“The Moldovan authorities and the IMF team have reached a staff-level agreement on economic policies to complete the third review under the ECF/EFF arrangements. The agreement is subject to approval by the IMF’s Management and Executive Board; this is expected by the end of April. Completing the review will make SDR 70.95 million (about US$94.40 million) available to Moldova, bringing total disbursements under the program to nearly US$369.30 million (about SDR 277.55 million).

“Program implementation remains broadly strong despite the challenging circumstances and overlapping crises. The authorities met all the quantitative performance criteria. Structural reforms are gradually advancing, with work still needed to promote the integrity, capacity, and independence of key anti-corruption institutions and enhance the enforcement of the anti-corruption legal framework. Good progress has been made toward eliminating inefficiencies and inequities in the tax system, including by institutionalizing tax expenditure reviews as part of the annual state budget. The new government reaffirmed sustained ownership of the program and signaled strong determination to advance prudent fiscal policies in support of economic resilience. With risks skewed to the downside, strong policy momentum remains critical, including to secure budget financing from external partners.

“The economy contracted sharply in 2022, reflecting spillovers from Russia’s protracted war in Ukraine, depressed demand on the back of inflation and higher cost of living, and weaker-than-expected agricultural production. A modest recovery is expected in 2023 supported by a recovery of domestic demand and better growth prospects of trading partners. Inflation has decelerated as the National Bank of Moldova (NBM) reacted proactively to contain second-round effects and anchor inflation expectations. Fiscal indicators remained robust in 2022, reflecting higher revenue collection, grants, and a continuation of past trends of budget under-execution. International reserves continue to provide adequate safeguards against external shocks, while well-capitalized, liquid, and profitable banks have weathered well the initial impact of the war.

“The authorities’ fiscal policies continue to appropriately focus on mitigating the economic and social fallout of the war and the energy shock. The authorities recognize that risks around the baseline are high, particularly with increasing security threats and an uncertain energy outlook. Accordingly, they will continue to update contingency plans and policies to the evolving risk landscape. As pressures from the overlapping energy and cost-of-living crises subside, the authorities appropriately plan to gradually reorient their spending priorities towards supporting the economic recovery, including through increased infrastructure spending.

“The current monetary policy stance is appropriate. Since December 2022, the NBM has switched to a gradual monetary easing due to a faster-than-anticipated inflation deceleration owing to weak domestic demand and a tight overall policy mix. Further easing should be guided by firm and continuously declining trends of headline and core inflation. Given the uncertain external environment, the authorities remain committed to exchange rate flexibility, while limiting foreign exchange interventions to smoothing excessive volatility and preventing disorderly market conditions.

“Significant downside risks cloud the economic outlook. Prolonged or additional energy shocks could result in fiscal and balance of payments pressures, lower consumption, and output losses, possibly testing social cohesion. Policy trade-offs may become even more challenging if inflationary pressures increase, confidence deteriorates, or additional external shocks occur. Further escalation of the war could lead to new waves of refugees or a deterioration of security and economic conditions. However, upside risks to the outlook include a faster recovery in domestic demand, a strong rebound in trading partners’ economic activity, and larger-than-expected support from external partners. Moldova’s progress on the EU accession path will provide a critical anchor for strong implementation of reforms.

“The authorities are articulating an ambitious reform agenda to address the challenges posed by climate change and expressed interest in financing under the IMF’s Resilience and Sustainability Facility (RSF). The mission held preliminary discussions on policy priorities that could be supported by the RSF, while detailed negotiations are expected to take place in the context of the upcoming fourth ECF/EFF review in the Fall of 2023. RSF resources could help Moldova close adaptation gaps by supporting climate-related policy goals and sustainable long-term economic development, while catalyzing official and private financing for a range of green investments.

“We would like to thank the authorities and their technical teams for the candid and constructive discussions and look forward to continuing our engagement in support of Moldova and its people.”