Statement by Luc Dresse, Alternate Executive Director for the Republic of Moldova and Stijn Verhelst, Advisor to Executive Director May 11, 2022

In December 2021, the IMF approved an Extended Credit Facility and Extended Fund Facility (ECF–EFF), which provided welcome support for Moldova’s reform momentum amid energy price shocks and the COVID-19 pandemic. The macroeconomic framework underpinning the IMF program already took account of important risks to the Moldovan economy. Regrettably, many of these risks have materialized beyond expectations due to the Russian invasion of Ukraine on February 24. The ensuing crisis has strongly exacerbated multiple pressure points of the Moldovan economy, with a marked deterioration of economic and financial conditions, sharply increased food and energy prices, and a massive inflow of refugees. As a result, additional and more frontloaded balance of payments assistance is needed to bridge the crisis period and to make it possible to continue pursuing the country’s reform and developmental agenda. Given this context, and as explained in their Letter of Intent, Moldovan authorities have requested an ad-hoc review under the ECF arrangement and an augmentation and rephasing of access under the ECF-EFF arrangements.

Abstract

In December 2021, the IMF approved an Extended Credit Facility and Extended Fund Facility (ECF–EFF), which provided welcome support for Moldova’s reform momentum amid energy price shocks and the COVID-19 pandemic. The macroeconomic framework underpinning the IMF program already took account of important risks to the Moldovan economy. Regrettably, many of these risks have materialized beyond expectations due to the Russian invasion of Ukraine on February 24. The ensuing crisis has strongly exacerbated multiple pressure points of the Moldovan economy, with a marked deterioration of economic and financial conditions, sharply increased food and energy prices, and a massive inflow of refugees. As a result, additional and more frontloaded balance of payments assistance is needed to bridge the crisis period and to make it possible to continue pursuing the country’s reform and developmental agenda. Given this context, and as explained in their Letter of Intent, Moldovan authorities have requested an ad-hoc review under the ECF arrangement and an augmentation and rephasing of access under the ECF-EFF arrangements.

In December 2021, the IMF approved an Extended Credit Facility and Extended Fund Facility (ECF–EFF), which provided welcome support for Moldova’s reform momentum amid energy price shocks and the COVID-19 pandemic. The macroeconomic framework underpinning the IMF program already took account of important risks to the Moldovan economy. Regrettably, many of these risks have materialized beyond expectations due to the Russian invasion of Ukraine on February 24. The ensuing crisis has strongly exacerbated multiple pressure points of the Moldovan economy, with a marked deterioration of economic and financial conditions, sharply increased food and energy prices, and a massive inflow of refugees. As a result, additional and more frontloaded balance of payments assistance is needed to bridge the crisis period and to make it possible to continue pursuing the country’s reform and developmental agenda. Given this context, and as explained in their Letter of Intent, Moldovan authorities have requested an ad-hoc review under the ECF arrangement and an augmentation and rephasing of access under the ECF-EFF arrangements.

The Moldovan authorities wish to thank Mr. Atoyan, Mission Chief, Mr. Chawani, Resident Representative, and the entire team for the in-depth and constructive engagement. They thank the IMF in particular for its quick response in difficult circumstances, with a staff visit taking place only a couple of weeks after the start of the war in Ukraine. The authorities subscribe to the thrust of the Staff Report and reconfirm their strong commitment to sound policies and the objectives of the ECF-EFF program.

Context

The request by the authorities is to be seen in light of the war in Ukraine, which has come in addition to an already complex macroeconomic situation. High, volatile energy prices and the lingering pandemic seriously complicated the policy environment and led to accelerated inflation throughout 2021 and early 2022. The spillovers of the war in Ukraine have added to significant pressures in Moldova, due to the country’s economic ties and proximity to Ukraine, Russia and Belarus.

The war in Ukraine has confronted Moldova with multiple shocks. Sizable trade and supply disruptions have occurred, which notably caused soaring food and energy prices. Financial conditions have deteriorated significantly because of the crisis, including substantial deposit withdrawals at its onset. There has been a cumulative influx of refugees the size of about 17 percent of the Moldovan population, which— in per capita terms—represents the largest influx of Ukrainian refugees into any country in Europe. The authorities and the people of Moldova have shown extraordinary solidarity with the refugees, offering food, shelter and other necessities. The country will continue to support refugees crossing into or remaining in the country. The escalation of these multiple shocks generates significant financing needs for Moldova and challenges social cohesion. The authorities project a balance-of-payment financing requirement of US$1.7 billion in the period 2022-2024.

While Moldova has entered the current crisis with good buffers, the multifaceted shocks will impact the country considerably going forward. The economy posted an impressive 13.9 percent growth in 2021. The general government deficit narrowed to 2.6 percent of GDP in 2021, while public debt remained low. The banking sector displayed robust governance and had large buffers in terms of capital and liquidity adequacy. The external position was supported by comfortable levels of international reserves. However, the crisis will significantly weaken near-term economic prospects. The economy is expected to stagnate in 2022, with growth projected at 0.3 percent compared to the pre-war forecast of 4.5 percent. Authorities agree with staff that the steep rises in energy prices and further increases in food inflation are expected to worsen the near-term inflation outlook. Inflation has reached 22.2 percent YoY in March 2022 and will accelerate further above the central bank’s target band. High inflation is projected to persist into the third quarter of 2022, easing gradually thereafter. As a result of the war and the other challenges, Moldova has experienced a deterioration of its external and fiscal accounts and an erosion of its reserve buffers.

Authorities agree with staff that adverse risks to the outlook remain significant. A sharper-than-anticipated increase in energy prices or disruptions in energy supply could further impair public and private balance sheets, while also causing additional inflationary pressure. Escalation of the war in Ukraine could hurt confidence, exert pressure on the Moldovan lei, undermine domestic securities markets, and could even culminate into system-wide deposit runs.

Under these complicated circumstances, the authorities request additional assistance to ensure macroeconomic stability and to allow them to continue their reform agenda. Additional resources from the IMF, other multilateral and bilateral partners and donors should help anchor confidence in the face of the negative shocks. The authorities share staff’s stance on the importance of catalyzing additional financing commitments from external partners ahead of 2023 to support higher spending needs.

The authorities agree to set up reviews for end-June, end-September and end-December 2022, as the heightened uncertainty and pressing financing needs call for frequent monitoring of the IMF program.

Authorities’ responses to the crisis

In response to the crisis from the Russian invasion of Ukraine, Moldova has approved a supplementary budget (prior action) in line with the macroeconomic framework and policy recommendations agreed with the IMF staff. The supplementary budget brings the general budget deficit to 7.2 percent of GDP subject to financing availability. The authorities restate their strong commitment to preserving debt sustainability, which remains a key anchor of the program. They also firmly commit to transparent budgeting, alongside the prioritization of the spending review and the strengthening of fiscal responsibility. The authorities will continue to provide social assistance support to protect the most vulnerable from increased domestic prices. At the same time, they will work to put in place a new modernized social assistance program with better-targeted support, thus addressing the past insufficient social spending issues.

The National Bank of Moldova (NBM) has moved swiftly with tightening measures to counter rising inflation and external pressures. After three consecutive 200 basis point increases since the beginning of the year, the base rate has reached 12.5 percent in April 2022. In early May 2022, the base rate was increased further to 15.5 percentage points. The reserve requirement ratio was also adjusted upwards. As a result of an increase in early May 2022, the reserve requirement will stand at 30 percent for Moldovan lei and non-convertible foreign currency assets, and at 33 percent for foreign currency. Given the exceptionally challenging market conditions, sizable interventions on the FX markets were furthermore made to limit excessive exchange rate volatility.

The NBM stands ready to continue tightening in order to contain potential spiraling inflationary pressures. In addition, a contingency package has been developed in case a materialization of severe downside risks threatens macroeconomic and financial stability. These measures would be used in combination with a broader macroeconomic adjustment package and in close consultation with IMF staff.

Continuous commitment to reforms

The authorities in Moldova wish to emphasize their strong and continued commitment to the program. Their adherence to the reform strategy anchored by the program remains unwavering, despite the current challenging environment. The authorities’ first line of defense against the difficult outlook remains the steadfast implementation of the Fund-supported reforms, which benefits from broad political support, in line with the mandate received in last year’s elections.

Moldova has a strong track record that demonstrates its commitment to make the arrangements with the IMF a success. Since the approval of the program in December 2021, they have maintained close engagement with the Fund on policy developments on the ground. The authorities note their steady progress made on a wide range of commitments under the program, despite the recent adverse circumstances. The mixed performance against the indicative targets is attributable mainly to the impact of the war in Ukraine. As a result of the multiple shocks, inflation accelerated above the outer consultation band in March 2022, thus triggering a consultation with the IMF Executive Board.

Despite the complicated environment, the structural reform agenda is progressing apace, with all end-March structural benchmarks implemented. Moldovan authorities were able to complete the solvency assessment for insurance companies to support the migration to the Solvency II framework. They also successfully issued guidelines to all central government State-Owned Enterprises (SOEs) to submit standardized quarterly financial statements for 2019–2021 by end-April. The authorities have prepared a draft report on the execution of investment projects undertaken by extrabudgetary funds in 2021. They have successfully strengthened the law on prosecution service, albeit with a slight delay due to additional consultation needs with the Fund experts.

Looking forward, the authorities remain committed to a structural reform agenda that supports sustainable development. They are advancing with the implementation of several end-June structural benchmarks, including by developing an integrated taxpayers’ register, performing a detailed tax expenditure analysis, enhancing the NBM autonomy and improving the macroprudential tools to address the borrowing risks. They also reaffirm the program objectives, pursuing a realistic timeframe to reach them. Beyond the immediate crisis, authorities’ efforts will be directed towards a set of macro-critical policies and ambitious structural reforms that aim to bolster the rule of law, reduce corruption, strengthen fiscal and financial governance, facilitate external financing, and create a solid foundation for strong and inclusive growth. Furthermore, the authorities commit to implementing the two new structural benchmarks, i.e., the review of bank recovery and resolution legislation and the appointment of the new head of the Anti-Corruption Prosecution Office, leveraging the robust appointment framework based on the amended law on prosecution service.

The authorities will undertake a series of measures to further strengthen financial stability, also incorporating FSSR recommendations. These measures will aim at bolstering the country’s financial crisis management and macroprudential frameworks, improving oversight of the non-bank sector, strengthening the regulatory framework for capital markets, developing a comprehensive national financial inclusion strategy and protecting the financial sector from illicit financial flows.

Reforming the State-Owned Enterprise sector remains a priority for the authorities. They are committed to improve SOEs’ efficiency and to contain their fiscal risks. They will develop a state-ownership strategy to identify public enterprises that are to undergo reorganization, privatization or liquidation, as well as plans to strengthen SOEs’ governance.

Strengthening the rule of law and addressing corruption remain critical priorities. Authorities will continue to modernize the judicial system in line with recommendations by international bodies. They are committed to enhancing the capacity and integrity of the prosecution service and tackling entrenched corruption.

Conclusion

The Moldovan authorities are convinced that the policies and measures outlined in the Memorandum of Economic and Financial Policies are appropriate to achieve the program objectives. Combined with additional financing from the IMF and other multilateral and bilateral financing sources, these policies and measures will be instrumental to face the current challenges. In line with the authorities’ commitment to transparency, they authorize the IMF to publish the Letter of Intent, the Memorandum of Economic and Financial Policies, including attachments, and the staff report.

Authorities are committed to the program objectives despite the difficult environment. The authorities stand ready to take measures, as appropriate and in consultation with IMF staff, to achieve these objectives. They are mindful that additional responses will be needed if severe downside risks materialize, for which they have designed contingency measures.

The authorities thank the IMF for its continued support, together with other international partners. They look forward to close cooperation with the IMF throughout the program, including through technical assistance.

Republic of Moldova: Ad Hoc Review Under the Extended Credit Facility; Request for Augmentation and Rephasing of Access, Modification of Performance Criteria, and Completion of the Inflation Consultation Under the Extended Credit Facility and Extended Fund Facility Arrangements-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Moldova
Author: International Monetary Fund. European Dept.