Chisinau, November 30, 2000

Mr. Horst Köhler
Managing Director
International Monetary Fund
700 19th Street NW
Washington, D.C. 20431

Dear Mr. Köhler:

We are pleased to convey to you the attached Memorandum of Economic and Financial Policies (MEFP), describing our economic program for the coming three years and for which we request your support. In this memorandum, the government of Moldova and the National Bank of Moldova (NBM) report on the implementation of policies during 2000. Despite a difficult economic environment and the absence of a program supported by the IMF for most of the year, the government and the NBM continued to work closely with IMF staff and successfully implemented policies in line with staff recommendations. The MEFP describes our objectives and policies for the coming three years and, in particular, our stabilization and reform policies for the first year of our program. In support of our program, we request a three-year arrangement under the IMF's Poverty Reduction and Growth Facility (PRGF) in an amount equivalent to SDR 110.88 million. We request that the Executive Board of the IMF consider our request for an arrangement under the PRGF after the prior actions specified in paragraph 36 of the attached MEFP have been implemented.

The government and the NBM are aware that disbursements under the PRGF arrangement are subject to observance of quarterly performance criteria and the completion of semi-annual program reviews, as specified in paragraph 37 of the attached MEFP and in the technical memorandum of understanding attached to the MEFP. We understand that the phasing of disbursements for the second and third year and the establishment of associated conditionality will be established in the context of the second and fourth reviews, respectively.

We believe that the policies set out in the MEFP are adequate to achieve the objectives of the program. The Government and the NBM, however, are ready to take any additional measures appropriate for this purpose and will consult with the IMF on such matters in accordance with the policies of the IMF. The Government and the NBM will provide the IMF with all the information needed for the IMF to assess progress in implementing the policies and reaching the objectives of our program.

In addition to the MEFP, we are pleased to also send you our Interim Poverty Reduction Strategy Paper (I-PRSP) that has been prepared by the Government as a first and important step to prepare our Poverty Reduction Strategy. We are convinced of the need to make our policies known to the international community and we have already published the I-PRSP on the Government's internet site. We would also request that the IMF make the MEFP and the I-PRSP available on its internet site.

Attachments

REPUBLIC OF MOLDOVA

Memorandum of Economic and Financial Policies
of the Government and National Bank of Moldova

2. The government reduced the fiscal deficit (on a commitment basis) by about 6 percentage points of GDP in 1999, to 2.6 percent.1 The budget remained tight in the first three quarters of 2000, with a commitment deficit of 0.4 percent of GDP (on an annual basis). On a cash basis, the deficit was reduced from about 3 1/2 percent of GDP in 1998 to 1.2 percent of GDP in the first three quarters of 2000 (on an annual basis), with domestic budgetary arrears (including wages and pensions) falling by Mdl 147 million (or 13 percent of the stock at end-1999). Revenues have been slightly higher than budgeted, partly because of improved tax collection. Netting operations of the consolidated budget have been reduced and VAT exemptions to the agricultural sector were eliminated in the 2000 budget. A surcharge of US$4/1000 cubic meters on gas consumption has also been introduced in the 2000 budget in combination with the issuance of bonds for arrears to our main gas supplier. Importantly, wide-ranging, non-targeted energy privileges were eliminated in the 2000 budget and replaced by a better targeted scheme with the introduction of the Law on Nominal Compensation that limits energy privileges to 9 categories.

3. Monetary policy was tightened in 2000, with reserve money growing by 8 percent in the first half of 2000. Money growth accelerated, however, in the third quarter, reflecting strong inflows of foreign exchange, including from workers remittances, and an increase in the demand for lei. After some pressure on the exchange rate in late 1999, largely associated with political uncertainties, the exchange rate of the leu stabilized in early 2000, while the strong inflows in the summer months, aided by the increase in minimum capital requirements for banks, caused the leu to appreciate vis-à-vis the U.S. dollar. These events allowed the National Bank of Moldova (NBM) to purchase foreign exchange; gross international reserves increased to US$189 million at end-September (program definition), up from US$181 million at end-1999. Meanwhile, the NBM has been increasing its use of open market operations (both with repos and outright sales and purchases of treasury bills) to manage bank liquidity, returning to the situation prevailing before the Russian crisis: the remuneration of reserve requirements was raised to 100 percent of the NBM's base rate; the level of required reserves was reduced from 15 percent to 13 percent, with required reserves now being held in banks' correspondent accounts (with reserve averaging permitted) instead of on separate blocked accounts; and the liquid asset ratio requiring banks to invest 5 percent of their assets in treasury bills was eliminated. The NBM continued to implement its policy aimed at banking sector consolidation through a step-wise increase in the minimum capital requirements.

4. Progress in structural reforms, which had been uneven in the years before, markedly improved in 2000. In the energy sector, three electricity distribution companies were sold to a strategic investor, and the sale of two additional distribution companies and the power generation companies is underway. In agriculture, progress continued to be made in liquidating state farms and in distributing land to individual farmers. Bankruptcy or restructuring procedures have been initiated against 57 firms with arrears to the state and social fund budgets (including on credits from the Ministry of Finance) exceeding Mdl 1 million. Moreover, in October, Parliament approved a law allowing for the privatization of five wineries and six tobacco companies through an open tender process. A first important step was also made in strengthening the legal framework with the first reading in parliament of a market-oriented civil code.

	1998 Actual	1999 Actual	2000 Estimate	2001 Projection
GDP growth (in percent)	-6.5	-4.4	0.0	5.0
Inflation (eop, in percent)	18.2	43.8	21.0	10.0
End-period gross official   Reserves (in millions of dollars)	140	181	207	257
End-period gross official   Reserves (in months of imports)	1.4	2.9	2.7	3.1
External current account balance   (in percent of GDP)	-16.7	-2.6	-7.9	-6.8
General government balance   (in percent of GDP; commitment basis)	-8.6	-2.6	-1.5	-1.5

II. The Objectives for 2001-2003

5. Over the next three years, the government will continue to implement policies based on the objective of high and sustainable economic growth which is an important prerequisite for poverty reduction. We are aware that to achieve this objective we have to preserve macroeconomic stability, deepen the process of structural reforms, improve governance, and strengthen efforts to attract foreign investment. The remainder of this memorandum details the macroeconomic and structural policies for the period ahead. We believe that these policies will be sufficient to achieve the program objectives listed below, but will take additional measures and seek new understandings with the IMF should the program diverge from its specified targets.

6. The government considers that the poverty reduction goal can be achieved only in the context of financial stability accompanied by high and sustainable growth. The medium-term objectives are: annual growth rates of 5 percent or even higher (which requires an increase in non-government investment); a lowering of the public debt burden (including domestic expenditure arrears) to around 70 percent of GDP in 2003 from 92 percent of GDP in 2000 (including a reduction in the stock of external public and publicly guaranteed debt from 75 percent of GDP in 2000 to around 60 percent of GDP in 2003); a further reduction in the annual inflation rate to about 10 percent (end of period); and containing the external current account deficit to around 6 percent of GDP.

7. To achieve the medium-term objectives, the government will continue to implement a prudent fiscal policy. In particular, it will be important to aim at a primary budget surplus of at least 2 percent of GDP over the medium-term to reduce the debt burden and avoid crowding-out private investments. This implies an overall fiscal deficit of less than 2 percent of GDP. At the same time, the budget allocation for the social sectors will be consistent with the poverty reduction strategy. The government will also give a further impetus to the structural reform programs through more vigorous efforts to strengthen the legal framework, restructure/liquidate firms with large debt to the budget, complete the privatization program (including wineries, energy and telecommunication companies), strengthen the market for agricultural land, achieve additional public administration reform and further deregulation. We will also be working closely with the World Bank in these areas in order to attain our growth objectives.

8. To better focus our policies toward poverty alleviation, we are preparing a comprehensive poverty reduction strategy, which will be incorporated in a Poverty Reduction Strategy Paper (PRSP) to be approved by the government by early 2002. This strategy will build upon the work already done in this area--undertaken in the context of policies developed with the assistance from the World Bank, UNDP, and other international organizations and bilateral donors. To strengthen the effectiveness and public support of our poverty-alleviating policies, we will organize a broad consultative process that will include representatives of civil society groups, local communities, and foreign donors.

9. The steps for arriving at a full-fledged PRSP are described in our interim PRSP, approved by the government in November 2000. This document describes Moldova's poverty profile, reviews policies implemented over the past few years to strengthen the economy and reduce poverty, sets out the medium-term economic scenario on which the program is based, and indicates the key elements of a poverty reduction strategy. The interim paper also specifies the institutional framework and consultative process that will be used to prepare the strategy, the poverty reduction targets, and a timetable for its preparation. A matrix of objectives and measures that the government intends to implement in the next three years has also been prepared.

III. The Program for 2001

A. Objectives

10. Macroeconomic policies for 2001 will aim at supporting a turnaround in GDP as well as reducing inflation and maintaining a prudent level of official reserves. To achieve the growth target of about 5 percent, we intend to proceed rapidly with structural reforms, improve governance, and implement the privatization process as described below. While there are downside risks for the targeted growth rate in 2001, the implementation of structural reforms, including the privatization program, a post privatization plan for agriculture, the initiation of public administration reform, and a strengthening of the legal framework, as well as an improvement in the external environment, are expected to contribute to the turnaround in GDP in 2001. Inflation is targeted to further decline to about 10 percent (end of year basis) in line with the tight financial policies. External reserves are expected to increase to over 3 months of imports of goods and nonfactor services.

B. Fiscal policy

11. The 2001 budget, passed by parliament by early December (prior action), aims at stabilizing Moldova's total stock of public and publicly guaranteed debt at around 74 percent of GDP through achieving a sizeable primary surplus of 4 percent of GDP. The overall cash deficit for the consolidated government is budgeted at Mdl 400 million (1.9 percent of GDP) with domestic budgetary arrears (including wages and pensions) budgeted to further decline by Mdl 100 million, resulting in an expected deficit on a commitment basis of Mdl 300 million (1.5 percent of GDP). The deficit target shows our commitment to fiscal prudence and our determination to further strengthen public finances and reduce the debt burden. The budget features measures to increase tax revenues to 22 percent of GDP. Expenditures will decline slightly as a share of GDP despite the large interest payments and the further reduction of domestic expenditure arrears. At the same time, the share of expenditure on education and health care is budgeted to increase. As a result of our ambitious, large-scale privatization program, involving the energy, and telecommunication sectors, we expect sizeable, but as yet unquantifiable, proceeds to be available to the budget. Accordingly, the budget assumes for a low amount of privatization proceeds. All privatization proceeds will be allocated to the budget and any privatization proceeds received during the year in addition to the amounts included in the 2001 budget will be used to reduce domestic budgetary expenditure arrears (including on wages and pensions) and public external and domestic debt, including credit to the government from the NBM, or reserved for debt service in later years, in proportions to be determined in consultation with Fund staff.

12. Despite the recent improvements in tax performance, we are aware that further progress is required to meet the ambitious revenue target for 2001. Accordingly, netting-out operations will be reduced to 3 percent of total revenues of the combined state and local governments, down from 5 percent in 2000 and 10 percent in 1999 (except for those involving debt clearing operations with the Social Fund). Moreover, we will resist all calls for new laws to provide for tax exemptions, holidays, amnesties, or deferrals of any kind. As regards the Free Economic Zones (FEZs), we will draft a new law with technical assistance from the Fund that will restrict the zones to export-oriented production and trans-shipment. The intention will be to strictly limit privileges and, ultimately, to phase out the FEZs. We will submit such a draft, together with other necessary legislative changes, to parliament by end-February, 2001 (structural benchmark). We will also analyze the appropriateness of a presumptive tax on small enterprises to draw new private business into the tax net, with a view to introducing a presumptive tax in 2003. As regards personal income taxation, while the monthly exemption threshold will be maintained at Mdl 210, the taxable income brackets will be raised in line with inflation. A 10 percent tax will be levied on annual income up to Mdl 12,180, a 15 percent tax will be levied on annual income between Mdl 12,180 and Mdl 16,200, and a 28 percent tax will be levied on annual income greater than Mdl 16,200. Corporate income tax rates are budgeted to remain unchanged in 2001. An excise of Mdl 1200 per MT will continue to be levied on gasoline imports and an excise of Mdl 500 per MT will be levied on diesel imports. Excises on alcohol will be adjusted annually in line with inflation. Excise rates on tobacco products, which are low by international standards, will be increased gradually up to the levels prevailing in other transition countries with comparable economic conditions. Cigarette excise stamps will be required as of April 1, 2001. The excise tax on exported non-fermented tobacco has been eliminated in the 2001 budget. To avoid the corrosion of non-tax revenues such as user charges and fees by inflation, a number of those that generate the most revenues will be raised in nominal terms (including fees on patents, land improvement, licenses and fines applied by the State Tax Inspectorate). Measures will also be taken to tax enterprises that are currently outside the tax net. We intend to discuss our tax policy during the mid-term review to assess the possibility of lowering tax and excise rates if the fiscal position permits.

13. In the area of tax administration, the following measures will be implemented:

With the assistance of USAID, we have been working on introducing a modern tax administration system that conforms to best international practices and should significantly improve tax compliance. Parliament has already approved Title 4 (excise chapter) and Title 6 (local property tax chapter). By end March 2001, we expect it to approve Title 5 (tax administration chapter), a structural benchmark, and, by end-2001, we expect it to approve the chapter on local taxes and fees as well as the law on valuation of real estate property and the property valuation method.

The large taxpayer unit (LTU) will be reorganized in order to make it a full fledged unit in line with technical assistance advise provided by the IMF. A pilot project on the LTU has been established in the Chisinau municipality as a first step towards the implementation of a fully-fledged LTU for all regions (prior action). A decree for this purpose was issued on July 24, 2000 and the pilot LTU became operational on December 1, 2000.

We will develop a comprehensive collection enforcement program and a reporting system for the State Tax Inspectorate (STI) to monitor the collection of arrears at all levels of the tax administration. We will also develop an audit strategy for the STI that includes improved coverage of taxpayers, automation and audit selection techniques, as well as more comprehensive audit methods.

We will amend the tax code to incorporate all VAT measures that are in force and avoid annual VAT legislation changes through the budget laws and we will increase the VAT registration threshold to Mdl 100,000 in 2002 in order to reduce the number of small tax payers and improve the administration of VAT.

14. We will also improve customs administration. In this regard,

a new customs code was approved by parliament which was developed with the assistance of the EU and US Customs Service. The new code, based on EU standards, will provide the basis for improved revenue collection, better service to the trading sector, and more effective enforcement; and

a pre-shipment inspection (PSI) program, in line with Fund technical assistance recommendations, is being implemented, while resources are being redeployed to vulnerable areas that were not strengthened by the PSI.

15. As regards expenditures, public sector salaries, which had been kept unchanged in nominal terms from 1995 through 1999, are budgeted to increase by Mdl 83 million in 2001 (after increasing by 30 percent in 2000) as a result of the increase in the minimum wage to Mdl 100 per month, from Mdl 65 in 2000. This has been made possible in part by the large cuts in public sector employment which fell from 309,000 in 1999 to nearly 285,000 in 2000. Further reorganization of the public administration is expected in 2001 and beyond in line with the World Bank's Public Sector Reform project. We will refrain from securitizing the outstanding stock of wage and pension arrears.

16. Spending on health and education is budgeted to increase in real terms in 2001. But, at the same time, we recognize the need to streamline and rationalize expenditure on social outlays. In education, the key measures include raising the student-teacher ratio closer to international norms, reducing the teaching week to five days in schools and other educational institutions, reducing the number of non-teaching staff, and introducing partial user charges for meals and accommodation. Expenditure on health are also being rationalized, without a loss of essential services, by eliminating underutilized hospital beds, improving the calculation method for allocating budget funds, improving medical services to provide a minimum standard of basic services, and continuing the partial hiring freeze. This much needed rationalization of education and health follows recommendations made by a Fund technical assistance mission in mid-1998 as well as efforts under the World Bank Public Sector Reform project and Education and Health Reform projects.

17. To improve the effectiveness of public spending, we remain committed to limiting subsidies in the budget. Direct subsidies to the agricultural sector in 2001 will be limited to the spending amount allocated in the 2000 budget for the Agricultural Support Fund (ASF). Funds available within the spending limit will be targeted to rural entrepreneurs and farmers through a matching grant credit fund developed in agreement with the World Bank. In addition, we have already taken measures to better target energy compensations. In 2000, parliament and the president passed legislation eliminating various privileges and introducing targeted benefits that will cost Mdl 225 million in 2001. For the current winter season, if grant funds become available, resources additional to those committed by the Law on Nominal Compensations will be allocated for heating compensations to a new category of pensioners: those whose pensions do not exceed Mdl 150 per month. Any remaining funds will be used to increase the discount, for the current heating season, for the categories already covered under the Law on Nominal Compensations.

18. We recognize that the structural imbalances of the payments made through the Social Fund remain large, and further work is needed to improve the efficiency of its operations. We are working with the World Bank to rationalize targeting of social spending (including on social assistance expenditure) and to design adequate social safety net measures. The administrative costs of the National Insurance House will also be reduced and there will be no increase in social security contributions (employer or employee) in 2001. The minimum contribution rate applied in the case of the self-employed and farmers will be increased in real terms while maintaining the existing system based on plot size for the latter. In the event of significantly higher-than-expected revenue collection from the Social Fund become available, we will decide, in consultation with Fund staff, on its allocation for social purposes.

19. The Laws on Public and Private Pensions are being actively implemented with a view to strengthening the financial position of the Social Fund and improving the actuarial balance of the National Pension Fund. We are continuing to work with the World Bank to implement these changes and to improve the targeting and efficiency of social protection services under the Social Protection Management and the Public Sector Reform Credits. Since 1997, all cash collection operations of the Social Fund have been undertaken by the State Tax Inspectorate of the Ministry of Finance. This has materially improved compliance and cash revenue performance. As of the adoption of the 2001 budget, in-kind payments to the Social Fund are accepted only for clearance of historic debts incurred before January 1, 2000, up to a maximum of 50 percent. These in-kind receipts will be sold at market prices. The Social Fund will not accept real estate as in-kind collection in 2001 for the purpose of debt settlement, except in connection with the restructuring of agricultural enterprises until end-June 2001 in accordance with the Law on Bankruptcy; in-kind collections will be restricted to agricultural products, foodstuffs, and communal services. We are also cognizant of the need to improve transparency in Social Fund operations. To this end, monthly cash flow reports will be issued in 2001 and the Social Fund will explicitly include the arrears of the State budget.

20. We are also continuing our program to improve the management of public finances. All existing extra-budgetary funds will be consolidated for presentational purposes for Fund use beginning in 2001 and we will study further possible ways to improve fiscal transparency and to provide a comprehensive assessment of fiscal policy. In 2000, we extended the coverage of the treasury system to local government revenues. In 2001, we will extend the treasury system to cover all local government spending as well, starting with 2 regions by end-March 2001 and all remaining regions by end-July 2001 (structural benchmark). Also in 2001, to improve the forecasting of cash flows and operational cash management and with technical assistance from the World Bank, we will establish a Cash Management Unit in the Treasury. Furthermore, we will continue to strengthen public expenditure management and control with technical assistance from the World Bank by registering all expenditure commitments (including contracts for the supply of goods and services) and by establishing cash spending ceilings for the spending units. These ceilings will be reviewed and adjusted as necessary.

21. The Administrative and Territorial Reform Law has been implemented. The number of local administrations have been reduced from 38 to 12 and the number of public sector employees has been cut by almost 10,000. Savings are also being utilized in non-wage expenditures as the new structures are progressively being put in place. We remain firmly committed to refrain from directing credits through the NBM or commercial banks, or instruct banks to extend credits on non-commercial terms, including to local administrations and the Social Fund. The STI management of debtors has also been strengthened and we are implementing a strategy to recover funds from defaulters on government guarantees and firms with large arrears to the state through bankruptcy and restructuring procedures (see below).

C. Monetary Policies and financial sector reforms

22. Monetary policy of the NBM will continue to be directed at achieving low inflation. Monetary policy will be aimed at limiting inflation to about 20 percent in 2000 (year-end) and a further reduction in inflation to 10 percent by end-2001. Within the context of a floating exchange rate regime, the NBM has adopted reserve money as its intermediate policy target for the conduct of monetary policy. The NBM's monetary program aims at limiting reserve money growth to 31 percent in 2000 and to 17 percent in 2001. The monetary program furthermore aims at maintaining a level of gross international reserves equivalent to over 2½ months of imports by end-2000 and to increase reserves to over 3 months of import coverage by end-2001. The program for 2001 envisages a modest increase in (net) central bank credit to the government by Mdl 50 million, and is consistent with an increase in real credit to the economy.

23. The NBM will further increase its use of market based instruments in the conduct of monetary policy. The NBM intends to gradually reduce reserve requirements if and when price and monetary developments permit, in close consultation with Fund staff. The NBM also intends to conduct a more active interest rate policy to signal its policy intentions. In this context, the Lombard facility will be adjusted to provide very-short-term credit only, with rates at a sufficiently high penalty level. To facilitate a greater use of open market operations in treasury bills, the stock of central bank credits to the government that has not yet been converted into treasury bills will be steadily converted. In 2001, an additional Mdl 39.3 million of government credits will be converted into treasury bills. The NBM will continue to refrain from extending direct or directed credits to enterprises.

24. The government is aware of the danger of decapitalizing the NBM through excessive profit transfers and the 2001 Budget Law provides for the continuation of an ex-post profit transfer mechanism. In particular, interim profit transfers will be made at most once per quarter and will be based on a conservative calculation of realized net profits of the NBM. Thus, quarterly profit transfers for the first three quarters of a year will be limited to 90 percent of net realized profits, that is, after deduction of operational expenses, reserve fund and loan provisioning and unrealized losses due to movements in exchange rates and prices of securities. The profit transfer for the fourth quarter will be limited to 50 percent of realized net profits, and a final profit transfer for the year will be made only after the completion of an external audit of the NBM's books and in accordance with the NBM law. External audits by a reputable international accounting firm will continue to be conducted annually.

25. The NBM will continue to support the consolidation of the banking system, which is expected as consequence of the further increase in the minimal capital requirement effective December 31, 2000. The NBM will also continue to strengthen banking supervision and enforcement of prudential regulations, including removal of management, bank license withdrawals, and the encouragement of mergers of banks not in compliance with minimum capital requirements. In this regard, we have revoked the license of 8 insolvent banks since 1996. The commercial bank(s) that will deal with all treasury operations of the state (including local governments) will continue to be chosen in a competitive, transparent way and in accordance with the law on the National Bank of Moldova.

26. The situation at the Savings Bank is under careful continuous review following the government's take-over of the bank and the installation of new management in March 1999. The rehabilitation plan is being actively implemented and the bank has achieved a positive net worth. It is expected that the bank can be largely recapitalized by a further recovery of assets and efficiency gains in 2001 without any government capital injections. The government will prepare a plan for the privatization of the Savings Bank.

27. While a properly financed and structured deposit insurance scheme can build confidence in the banking system, we believe that the present environment is not conducive to the introduction of deposit insurance and we will not introduce such a scheme in the near future until a sufficient degree of bank consolidation in the sector and higher capitalization has been achieved, and after consulting with Fund staff.

D. Structural reforms and privatization

28. The structural reform agenda under the program will focus on measures that will contribute to the restoration of growth, an important prerequisite for poverty alleviation. In addition to public sector, agriculture, and energy sector reforms that will be implemented with the assistance of the World Bank under its prospective lending operations (PPSAC and PSRC), our structural reform agenda in the context of the PRGF supported program will focus on the following:

29. Privatization program. The privatization bill on five wineries and the tobacco sector was approved by Parliament in October 2000 (prior action). In the coming period, and according to a strategy to be agreed to with the World Bank, we will prepare the privatization of these wineries and tobacco companies. We expect to be able to announce a sales tender for at least two wineries by May 1, 2001. We also plan to proceed with the privatization of Moldtelecom, in consultation with the World Bank. In this regard, Parliament has already approved an independent regulatory agency for the telecommunication sector, appointed a board of directors and physically established the agency. Moldtelecom has not contracted any external debt since May 1999 and will not be permitted to contract debt pending its privatization, except for making necessary pre-privatization investments in agreement with the World Bank. We will launch a tender for selecting a financial advisor for the privatization of Moldtelecom by February 1, 2001 (structural benchmark).

30. Bankruptcy/reorganization procedures against 24 loss-making firms with arrears to the State and/or Social Fund budgets exceeding Mdl 3 million have already been initiated (prior action) (Table 2). Creditors have filed legal proceedings against these companies. We intend to put increased pressure on these and other enterprises undergoing reorganization through the creditor council's authority under the Law on Bankruptcy. However, the Law on Bankruptcy will need to be amended to accelerate the reorganization/liquidation process. We will submit an amended law to parliament by February 15, 2001 (structural benchmark) and expect its approval by May 1, 2001. This should contribute to financial discipline (i.e., through a demonstration effect), a reduction of tax arrears, and the promotion of efficiency and growth.

31. Strengthening legal and regulatory framework. We are continuing our efforts to establish a firm legal framework for a market economy, a key component to providing a business friendly environment and to improving transparency and good governance. In this regard, the first reading of the civil code--which is indispensable to regulate contractual relations--was approved by parliament in October; we expect the civil code to be approved by end-June 2001. We recognize that the liquidation of insolvent banks, after their license has been revoked, has placed a heavy burden on the NBM, absorbing a large number of staff and hampering the supervision of other banks. The NBM will submit by end-March 2001 amendments to the Law on Financial Institutions and other related laws to parliament to transfer the responsibility for appointing bank liquidators and monitoring progress of the liquidation process to the courts (structural benchmark). Moreover, the government will also submit an amended law on collateral and to parliament by end-March 2001, to allow for an easier enforcement of property rights and contractual obligations. In the area of improving governance and transparency, we intend to submit, with assistance from the Fund, a draft law on financial disclosure to parliament by end-June 2001 (structural benchmark), requiring regular reporting by senior elected and appointed government officials.

32. Moldova is an agricultural economy which exports much of its output unprocessed. In order to generate an increased level of exports, we think it is important to reduce the shadow economy, improve the business environment, and take all possible measures to foster foreign and domestic investment in agriculture and, in particular, agro-processing. Accordingly, we will work with the World Bank to reduce barriers to economic activity, and to identify technical assistance for the development of a strategy for foreign direct investment and export promotion.

E. External sector issues

33. Given Moldova's vulnerability to external shocks, we recognize that it is in the country's best interest to maintain a floating exchange rate regime. Interventions by the NBM in the foreign exchange market will continue to be limited to smoothing out short-term fluctuations and to meeting reserve targets. In addition, we will continue our liberal and transparent trade and exchange policies and maintain a relatively low level of tariff protection. In this context, we have eliminated the ban on the export of cereals that had been prompted by the drought earlier this year (prior action). We hope to complete the negotiations on WTO accessions in the coming months. Furthermore, we will not impose or intensify any exchange restrictions, introduce any multiple currency practices, or conclude any bilateral payment agreements that are inconsistent with Article VIII of the Fund's Articles of Agreement, or introduce or intensify any import restrictions for balance of payment purposes. In this regard, we will refrain from raising the average import tariff from the 1999 level and from introducing an import surcharge, and we will maintain the maximum import tariff rate at 15 percent (structural benchmark).

34. Moldova's external debt has risen sharply since the start of the transition process and debt service obligations have been very high in recent years and will remain so in the period ahead. Moldova has gone at great length, however, to remain current on its obligations (although there have been a few instances of (temporary) payment arrears) and to regularize our relations with our creditors, and we will continue to do so. In addition, we will continue to work with our creditors on the possibilities for rescheduling of our debts. In this context, we have requested the assistance of the Dutch government to organize, in cooperation with the World Bank, a Consultative Group meeting to be held in early 2001, to mobilize additional donor support. To prevent a further increase in our debt burden, the government and the NBM will refrain from contracting non-concessional debt and also refrain from issuing guarantees on non-concessional terms for commercial ventures, whether state-owned or private.

35. Privatization of the energy sector has resulted in a large stock of unresolved (external) debts, some of which may ultimately need to be assumed by the Republic of Moldova. We intend to address this problem in a systematic manner, using market-based mechanisms, and taking into account comparability of treatment principles. The energy debts will be audited by a reputable international accounting firm. To this end, we are requesting technical assistance from the Fund and the World Bank to help us define the problem and develop a strategy to solve it. In the meantime, the government and the NBM will not take upon themselves any debts of Moldovagas, Moldtranslectro, or any other commercial venture, whether state-owned or private.

F. Prior Actions

36. As noted above, we will take the following prior actions before the IMF Executive Board considers our request for an arrangement under the PRGF:

• A budget for 2001 will be adopted that is consistent with IMF recommendations.

• The draft chapters of the new Tax Code on excises and local property taxes will be promulgated into law.

• We will establish a pilot project for a full-fledged Large Taxpayer Unit for the Chisinau region.

• We will eliminate restrictions on grain exports.

• Legislation will be adopted that allows the effective privatization of five strategic wineries through an open tender process.

• We will initiate bankruptcy or reorganization procedures against at least 24 enterprises with arrears to the budget of more than Mdl 3 million.

G. Program monitoring and reporting requirements

37. Program monitoring will be carried out on the basis of quarterly quantitative performance criteria and structural benchmarks established for the period October 1, 2000-September 30, 2001, with semi-annual reviews based on performance as of end-March 2001 and end-September 2001. Quantitative performance criteria have been set for December 31, 2000 and March 31, 2001 and indicative targets for the remainder of the first year program; performance criteria for the remainder of the first year program will be set in the context of the first review. The quantitative performance criteria include (i) a floor on the net international reserves (NIR) of the NBM; (ii) a ceiling on reserve money of the NBM; (iii) a ceiling on net credit to the general government from the NBM; (iv) a ceiling on the contracting or guaranteeing by the government, the NBM or any other agency acting on behalf of the government of new non-concessional medium- and long-term external debt with original maturities longer than 1 year, with a sub-ceiling on the contracting or guaranteeing of new non-concessional external debt in the maturity range of 1-5 years; (v) a ceiling on the net disbursement of short-term external public and publicly guaranteed debt, with the exception of normal import-related credits; (vi) a ceiling on the cash deficit of the general government; and (vii) a ceiling on the stock of overall domestic expenditure arrears of the general government. In addition, there is also a continuous performance criterion on the non-accumulation of external payment arrears by the government and the NBM. Indicative targets have been set for: (i) the net domestic assets of the NBM; (ii) gross international reserves of the NBM; and (iii) general government arrears on wages and pensions. Details on the levels, definition, monitoring (and adjustors) of quantitative performance criteria and indicative targets are set in the Technical Memorandum of Understanding (attachment I to this Memorandum). The structural benchmarks under the program are summarized in Table 1. All data necessary for the effective monitoring of the program will be reported in a timely manner to the Fund by the Ministry of Finance and the NBM.