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

The economy is recovering after a severe economic recession in 2020 that was due to the COVID-19 pandemic and a drought. Real GDP growth is expected to rebound by 7.5% in 2021, driven by dynamic domestic demand, supported by robust credit and wage growth as well as strong inflows of funds. Inflation accelerated, driven by the recovery in demand and soaring energy and food prices. The budget deficit is expected to reach 5% of GDP in 2021 due to increased spending related to the crisis. Public debt reached 34% of GDP and the external position deteriorated due to the rise in world commodity prices and the resumption of national economic activity.

The hard-won progress in ensuring shareholder transparency, proper and appropriate ownership and strong governance in Moldovan banks have strengthened the resilience of the financial sector in the face of the current crisis. Measures to safeguard the independence, financial autonomy and strong governance of the National Bank of Moldova have promoted macro-financial stability, while recent improvements in financial integrity have helped protect the financial sector from financial flows illicit.

Despite significant progress, general governance and structural weaknesses continue to hamper sustainable improvement in the standard of living of Moldovan citizens. The rule of law and anti-corruption frameworks remain weak. Public spending is inefficient and poorly targeted, with poor quality and inaccessible infrastructure. High emigration, especially among the most educated Moldovans, continues to hamper the accumulation of human capital. A weak business environment limits private investment and productivity.

Downside risks continue to weigh on the outlook. External risks include more severe or prolonged fallout from the global energy crisis, a weaker-than-expected global recovery, and fallout from geopolitical tensions that could negatively impact trade, capital and remittance flows, and complicate prudent policy development. Nationally, risks include new waves of Covid-19 infections and scars on balance sheets due to renewed unemployment and business closures. In addition, a resurgence of political instability, shrinking vested interests, or reform fatigue could erode confidence, limit external funding options, and exacerbate the loss of professional expertise of key government agencies, further degrading the capacity. already weak implementation of Moldova.

Board assessment [2]

Directors welcomed the new authorities’ strong commitment to tackle long-standing governance vulnerabilities and to mobilize broad support from international partners to advance development goals. Noting the difficult economic environment, precipitated by the 2020 drought, pandemic and energy crisis, administrators urged the authorities to build on the hard-won gains from the previous agreement with the IMF and undertake the necessary reforms to support post-pandemic recovery, respond to urgent development needs and strengthen Moldova’s governance and institutional frameworks.

Directors agreed on 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 for the health system, social assistance programs and business activity, as well as the measures taken to deal with the energy crisis. Directors also underscored that the under-execution of approved Covid-related crisis measures emphasizes the need to address long-standing capacity constraints and called for continued CD support by international partners.

As the recovery takes hold, efforts should focus on improving domestic revenue mobilization, increasing the efficiency of public spending, decisively addressing fiscal risks emanating from state-owned enterprises, and pursuing efforts to improve the quality and transparency of the budget. 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 that inflation expectations are firmly anchored. They also stressed the need to intensify efforts to improve the credibility and effectiveness of the NBM’s policy, strengthen the monetary transmission mechanism and continue to promote exchange rate flexibility to cope with the vulnerability of the Bank. Moldova to external shocks. Directors also called for decisive action to address significant vulnerabilities in the non-bank financial sector, strengthen the AML / CFT regime and follow up on the recommendations of the latest MONEYVAL report. Of particular importance is decisive progress in asset recovery.

Directors commended the authorities ‘continued efforts to strengthen the independence, governance, transparency and accountability of the National Bank, as well as the authorities’ plans to strengthen financial sector supervision, financial crisis management and financial crisis management. Macroprudential frameworks in accordance with the recommendations of the 2021 financial report. Sector stability review.

Directors stressed that decisive implementation of the structural reform agenda to improve governance and address long-standing and widespread institutional vulnerabilities remains essential. In addition to continued efforts to address weaknesses in fiscal and central bank governance and financial sector supervision, administrators called for reforms in market regulations, particularly in the energy sector, the rule of law and the fight against corruption. Such measures would promote inclusive, private sector-supported and sustainable growth and accelerate the convergence of Moldova’s income with its European peers.