IMF Concludes 2021 Article IV Consultation with Moldova

WASHINGTON, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Republic of Moldova on December 20, 2021. The Board also approved the authorities' requests for arrangements under the Extended Fund Facility (EFF) and the Extended Credit Facility (ECF). A related press release was issued separately.

The economy is recovering after a sharp economic downturn in 2020 that was due to the COVID-19 pandemic and a drought. Real GDP growth is projected to rebound by 7.5 percent in 2021 driven by buoyant domestic demand, supported by robust credit and wage growth as well as strong remittance inflows. Inflation accelerated, driven by the recovery in demand and surging energy and food prices. The fiscal deficit is projected to reach 5 percent of GDP in 2021 owing to higher crisis-related spending. Public debt has edged up to 34 percent of GDP and the external position has deteriorated due to rising global commodity prices and the pickup in domestic economic activity.

The hard-earned progress in ensuring shareholder transparency, fit-and-proper ownership, and strong governance in Moldovan banks has boosted the resilience of the financial sector in the face of the ongoing crisis. Steps to safeguard the independence, financial autonomy, and strong governance of the National Bank of Moldova have promoted macro-financial stability, while recent improvements to financial integrity have helped safeguard the financial sector against illicit financial flows.

Despite significant progress, broad governance and structural weaknesses continue to impede sustained improvement in the living standard of Moldovan citizens. Rule of law and anti-corruption frameworks remain weak. Public spending is inefficient and poorly targeted, with low-quality and inaccessible infrastructure. High emigration, particularly among the better-educated Moldovans, continues to hold back human capital accumulation. A weak business environment constrains private investment and productivity.

Downside risks continue to beset the outlook. External risks include a more severe or protracted fallout from the global energy crisis, a weaker than anticipated global recovery, and spillovers from geopolitical tensions that could have negative spillovers for trade, capital, and remittance flows, and complicate prudent policymaking. Domestically, risks include new waves of Covid-19 infections and scarring of balance sheets from renewed unemployment and business closures. Moreover, a re-emergence of political instability, pushback from vested interests, or reform fatigue could hurt confidence, limit external financing options, and exacerbate the loss of professional expertise from key governmental bodies, further degrading Moldova's already weak implementation capacity.

Executive Board Assessment [2]

The Executive Directors welcomed the strong commitment of the new authorities to tackle long-standing governance vulnerabilities and leverage broad support from international partners to advance development objectives. Noting the challenging economic environment, precipitated by the 2020 drought, the pandemic, and the energy crisis, Directors urged the authorities to build on the hard-won gains from the previous Fund arrangement and undertake the needed reforms to sustain the post-pandemic recovery, address pressing developmental needs, and strengthen Moldova's governance and institutional frameworks.

Directors agreed with the need for a sound policy mix to support the recovery and the development agenda, while ensuring fiscal and debt sustainability. They welcomed the new budget with targeted support on the healthcare system, social assistance programs, and business activity, as well as measures undertaken to address the energy crisis. Directors also stressed that the under-execution of approved Covid-related crisis measures emphasizes the need to address longstanding capacity constraints and called for continued CD support by international partners.

As the recovery takes hold, efforts should focus at improving domestic revenue mobilization, increasing public spending efficiency, decisively addressing fiscal risks emanating from state-owned enterprises, and continuing efforts to improve budget quality and transparency. Such measures would be vital to ensure fiscal and debt sustainability and achieve the development agenda.

Noting that the inflation targeting regime remains appropriate, Directors encouraged the National Bank of Moldova (NBM) to continue to act proactively to ensure inflation expectations are firmly anchored. They also emphasized the need to step up efforts to improve the NBM's policy credibility and effectiveness, strengthen the monetary transmission mechanism, and continue promoting exchange rate flexibility to address Moldova's vulnerability to external shocks. Directors also called for decisive actions to respond to significant vulnerabilities in the non-bank financial sector, strengthen the AML/CFT regime and follow up on the recommendations of the latest MONEYVAL report. Decisive progress on asset recovery is particularly important.

Directors commended continued efforts by the authorities to strengthen the National Bank's independence, governance, transparency, and accountability as well as the authorities' plans to bolster the financial sector supervisory, financial crisis management, and macroprudential frameworks in line with the recommendations in the 2021 Financial Sector Stability Review.

Directors underscored that decisive program implementation of structural reforms to enhance governance and address longstanding and widespread institutional vulnerabilities remains critical. In addition to continued efforts to address weaknesses in fiscal and central bank governance and in financial sector oversight, Directors called for reforms in market regulation, especially in the energy sector, rule of law, and anti-corruption. Such measures would foster inclusive, private sector-led and sustainable growth and accelerate Moldova's income convergence with its European peers.