Moldova country assessment

• Commercialisation of the transportation and communication infrastructure should be promoted. The authorities should proceed with privatisating the public telecommunications and airline incumbents and consider divesting the railways.
  
• The governance of locally-owned banks should be strengthened further. It is important to identify all the main beneficiary owners and ensure that they meet the fit-and-proper criteria. Reliable channels of communication with home-country supervisors of foreign-owned banks should be established, while privatisation of Banca de Economii to a quality investor would benefit the sector.
  
• Moldova’s dependence on energy imports highlights the need to focus on energy security. More investment in this sector is required to integrate Moldova into the EU energy market and reduce technical losses. This should be combined with regulations and tax policies to increase energy efficiency of end users.

The economy has recovered from the deep recession of 2008-09. Industrial output and trade turnover has increased, enterprises have pursued investments and restocked their inventories and households have increased consumption, supported by remittances (13 per cent of gross domestic product [GDP] in 2010). GDP growth in 2010 is estimated at 6.9 per cent. After registering a fall of 2.3 per cent in September 2009, consumer price inflation increased to 8.8 per cent in September 2011 as higher electricity and gas costs were passed on to consumers and global food prices increased. In response, the central bank has tightened monetary policy by raising the policy rate by 3 per cent since September 2010 and the reserve requirement ratios in the national and foreign currencies by 6 percentage points since 2010.
 

The authorities’ prudent fiscal and monetary policies have continued to be supported by a medium-term IMF arrangement. Budget sector consolidation remains on track, although revenue performance lags behind the economic recovery. The central bank is successfully implementing the transition to inflation targeting and a flexible exchange rate regime. The level of NPLs has been decreasing due to write-offs and credit growth. Bank capitalisation and liquidity are at high levels. However, the economy remains vulnerable to external shocks, and the current account deficit remains high. Since January 2011 the country has been paying European prices for natural gas supplies by Gazprom, with a resulting net impact of 1.5 per cent of GDP on the balance of payments. Private external debt remains elevated and contingent liabilities related to gas payment arrears in Transnistria are large.
 

Future economic prospects are very dependent on structural reforms. GDP growth is expected to reach 6 per cent in 2011 but decelerate to 4 per cent in 2012. However, the authorities’ efforts to improve the business environment and promote exports, including to the European Union, should raise potential growth over the medium term and make it more sustainable. The still high current account deficit, the economy’s dependence on volatile remittance inflows and foreign aid, and volatile commodity prices remain among the key sources of macroeconomic risk.  

The authorities have made efforts to improve the business climate and promote exports. Laws and regulations are being reviewed with a view to streamlining permit requirements and decreasing the constraints on doing business. A law on state inspection of entrepreneurial activities, which is intended to further simplify the regulatory regime, is expected to be adopted by the end of 2011. The authorities recently embarked on an education sector reform that should help improve labour force quality while reducing fiscal outlays. The export ban on wheat, introduced in early 2011, was short-lived, and the authorities have committed to avoiding export controls in the future. Meanwhile, the government is working on measures to strengthen food safety standards to increase agricultural exports to the European Union.
 

Reform of the loss-making energy sector is ongoing. The energy regulator ANRE has continued to maintain retail energy tariffs in line with costs. A new policy on bill collection was introduced in September 2011. The authorities and the energy companies have agreed a schedule for reducing the post-2008 stock of arrears. A new Memorandum of Understanding (MoU) agreed by the key consumers and suppliers should help improve payment discipline in the sector.
 

The privatisation of public entities is on the short-term agenda. Over the past year, the authorities privatised a number of small companies and land plots. However, the public sector continues to play a dominant role in telecommunications and air and rail transport and, to a more limited extent, the financial sector through its controlling majority ownership of Banca de Economii. The International Finance Corporation (IFC) has been contracted to prepare Moldtelecom for privatisation, and the list of state assets subject to privatisation via tenders was extended to large public companies. In addition, the government is in discussions with international financial institutions about options for the privatisation of Air Moldova in the near future. In September 2011 the Ministry of Economy approved a roadmap for the privatisation of Banca de Economii.
 

The central bank has continued its efforts to maintain price stability and strengthen the banking sector. Since the 2008-09 crisis the central bank has maintained greater exchange rate flexibility and has built the capacity to implement inflation targeting. The newly established financial crisis/stability committee should help strengthen the crisis management framework, and successful completion of bankruptcy procedures involving the failed Investprivatbank has raised confidence in the banking system. The central bank changed regulations on the execution of collateral, allowing creditors to execute collateral without going through the courts, thus creating incentives to restructure NPLs. Recent raider attacks on commercial banks have demonstrated weaknesses in the legal and judicial frameworks governing the financial sector.
 

The government adopted policies to revitalise the construction sector. The government resolved to nationalise a number of unfinished construction projects, primarily in the capital, Chisinau, in a two-year scheme. Projects are to be completed at the expense of the budget and various donor funds. There will also be a subsidised mortgage lending programme and a risk guarantee fund. While these policies should revitalise the sector, public support may undermine lending standards and burden the public balance sheet over the longer term.