Moldova is a low–income country with a gross national income per capita of $1260 in 2007 (GNI, Atlas method). The country is small, landlocked, and densely populated. It has few natural resources and is entirely dependent upon imports for its primary energy requirements, as well as for inputs for its manufacturing industries.
Endowed with rich agricultural land and a temperate climate, Moldova has relied heavily on agriculture throughout its history. Currently, agriculture and agro-processing activities account for roughly 34 percent of the country’s GDP, and many people still make their livelihoods in this sector. Over half the population lives in rural areas.
Since 2000, Moldova's economic performance has been commendable, in contrast to its deteriorating performance through most of the 1990s. The country has successfully stabilized. It launched structural reforms to stimulate growth and started setting up an effective social protection system. Real GDP growth has been strong, averaging 6.6 percent since the recovery began in 2001. The economy showed remarkable resilience in 2006 and 2007, following a doubling of energy prices, a Russian ban on wine exports, and a severe drought. Growth in 2007 slowed to 3 percent, but reached 7.2% in 2008.
A significant reform agenda remains. While Moldova achieved independence in 1991 as a middle–income country, it is now one of the poorest countries in Europe, with GDP per capita significantly below the average for the Central European countries. With economic recovery, the national poverty rate has dropped from 73 percent in 1999 to under 26.5 percent in 2004. Since then, however, the poverty rate has not declined despite further economic growth. The updated 2006 survey confirms that the poverty rate is highest in small towns and Villages (30.1 and 34.1 percent respectively), while it is lowest in large cities (20.6 percent). Nearly 66 percent of the poor live in rural areas.
Moldova joined the World Bank in 1992. Two years later it joined the International Development Association (IDA)—the soft lending arm of the World Bank. Since then, World Bank lending has consistently supported the country's economic reform program by working to reduce poverty and raise living standards.
Economy
Recent Economic Performance
After falling by more than 60 percent between independence and 1999, cumulative growth of more than 50 percent has been recorded since 2000 in Moldova. Despite external shocks experienced in 2006, 2007 and 2008, growth has averaged 5 percent for these past three years.
The following factors have contributed to Moldova's stable economic situation:
A marked increase in real wages and pensions, combined with a massive inflow of workers’ remittances, has fueled domestic consumption and the remonetization of the financial sector. Massive remittance inflows have also allowed the Government to boost budget expenditures and increase National Bank reserves prior to the global financial crisis. Remittances have diminished the impact of the financial and economic turmoil Moldova’s economy in after September 2008.
The prolonged economic recession of the early ‘90s resulted in excess capacity for many domestic enterprises, allowing them to expand production with little additional investment. In recent years, investment, including FDI, has picked up considerably.
Important structural reforms in the late 1990s have begun to have a positive impact on the economy. These included pension reform and the privatization of two-thirds of the electricity distribution systems. More recently, efforts to reduce administrative and regulatory barriers are beginning to pay dividends.
While a ban of Moldovan wine exports, and an unprecedented drought in 2007, were a severe blow to Moldova’s economy, these have pushed the country to diversify its export markets and recapture markets lost after the breakup of the Soviet Union.
Although investment has been picking up, Moldova’s impressive growth performance still remains largely consumption-led, driven mainly by the inflow of workers’ remittances. The recent global financial and economic crisis has had a serious negative impact on remittances, exports, imports and budget revenues since the beginning of 2009. The financial sector is still resilient to these effects, but its capacity to credit the economy, in the current circumstances, is seriously affected. The government is aware of this problem and is eager to change the situation with support from the International Monetary Fund (IMF) and budget support from the World Bank and other donors. Structural reforms focus on improving the investment climate, increasing the efficiency and management of public resources, and strengthening of social protection systems. The government’s external and domestic debt continued as share of the GDP continued to decrease in 2008, contributing to a favorable external debt outlook.
Challenges Ahead
Moldova faces a number of challenges, including:
The global economic crisis has significantly clouded Moldova’s immediate economic outlook. Although Moldova’s economy has been resilient to previous shocks, these do not compare with the impact of the ongoing crisis in light of the substantial economic downturn affecting Moldova’s trade partners. Already there are signs that the recent growth in investment is being derailed. Exports and remittance flows will be severely affected by the regional recession. Reduced demand for exports and a slowdown in remittances, in turn, will directly impact the domestic economy.
Potential poverty increase in 2009 as a result of global financial crisis. Between 1999 and 2004, Moldova’s economic recovery moved 40 percent of the population out of poverty, the largest absolute decline in poverty in all of Europe. Poverty reduction appeared to stall between 2004 and 2005, but poverty has since continued to decline through 2007, according to the most recent data available. Such gains now risk being reversed, as remittances are falling and economic growth slows down. Many of those who recently moved out of poverty are just above the poverty line and are vulnerable to an economic downturn.
The global crisis will complicate fiscal policy in Moldova. The weaker domestic demand (reflecting, in part, a reduction in remittance flows and construction activity) has resulted in reduced demand for imports and, hence, will most likely contribute to lower fiscal revenue collection. On top of the expected decline in revenues, the crisis will likely contribute to increased demands on social safety net expenditures.
Potential return of migrants. More than 25 percent of the economically active population has left the country in search for better economic opportunities abroad. A significant portion of these migrants are young, highly educated, and skilled. Since the beginning of the crisis it has been more difficult for them to retain a job in receiving countries and continue to send money home. Moreover, current economic conditions in receiving countries may force them to come back to Moldova. Thus, improvements in the social assistance programs and labor market policies are necessary.
Since the start of its operations in Moldova, in 1993, some three quarters of World Bank lending have historically been provided to two main areas: policy–based lending (46 percent) and industry and infrastructure (20 percent). The remaining lending has been provided for the rural development sector (14 percent), human development (11 percent), and the financial and private sector (8 percent).
Currently, the industry and infrastructure sector dominates World Bank financing, receiving over 40 percent of investment funds, followed closely by human development (33 percent), and agriculture and the environment (15 percent). The finance and private sector, and the public finance management sector currently receive comparable shares of Bank funds—6 and 5 percent respectively. The transition from policy–based lending to investment lending has occurred in the last three years, due to slow implementation of structural reforms.
Given a more favorable policy environment, improvement in economic management, progress toward satisfying the Country Partnership Strategy (CPS) triggers, and the resumed program with the IMF, the Bank and a number of bilateral donors are providing budget support to assist in the implementation of policy reforms under the Economic Growth and Poverty Reduction Strategy (EGPRSP) during fiscal years 2006–09.In fiscal year 2008, the World Bank committed $30 million in lending to Moldova. As of December 2008, IDA lending operations include a Poverty Reduction Support Credit and 10 investment operations (with an additional 3 GEF projects). Total commitments reached US$159.3 million, of which about 63 percent is undisbursed. The ongoing IDA portfolio is broad ranging covering almost every sector, but with a higher concentration of operations in the infrastructure sectors and in human and rural development. The World Bank also administers a substantial US$76.5 million trust fund portfolio of 23 activities – the largest in the Europe and Central Asia region. Trust fund resources support sustainable development (46%), human development (26%), public sector reform (22%) and competitiveness (6%).
Going Forward
Adopting international quality standards is helping Moldovan businesses enter new markets.
The World Bank's Country Partnership Strategy (CPS) for Moldova for 2009-2012, prepared in partnership with the Government of Moldova and in consultation with the business community, civil society and non-governmental organizations (NGOs), and donors, was endorsed by the World Bank's Board in January 2009. It focuses on three strategic priorities, aligned with the country's National Development Strategy for 2008-2011, which was adopted by the Government in December 2007 and endorsed by the World Bank and IMF in March 2008. The three CPS pillars are:
Improving economic competitiveness to support sustainable economic growth. To reduce poverty in Moldova, the World Bank will help the country generate income and employment through improvements in the economy and in the country's business environment. This involves simplifying bureaucratic controls and time–consuming approval procedures. It also means improving corporate governance and upgrading the maintenance of basic infrastructure. The program will place special emphasis on removing the internal barriers that limit the country's export capacity. It will additionally support the development of the rural economy for the benefit of the country's poor.
Minimizing social and environmental risks, building human capital, and promoting social inclusion. Human and social capital is critical for economic growth and the reduction of poverty. World Bank assistance therefore focuses on better targeting of social assistance to reach the poor. It also focuses on facilitating their access to quality health, education, and social protection services, and on upgrading services such as housing, utilities, and transportation. Priority areas will include secondary cities and rural areas where poverty rates are the highest. The Bank program will also seek to mitigate the significant health risks that arise from groundwater pollution.
Improving public sector governance. Within this broad agenda, the World Bank aims at improving transparency and accountability in the management of public funds, introducing public expenditure programming, and promoting better evaluation practices. Civil society involvement is a powerful tool for enforcing accountability among public officials and in the delivery of public services. Accordingly, the program will focus on promoting communities' involvement in development, as well as stronger ownership and leadership from local government officials. This will be supported by reform of the public sector and the civil service.
The existing Country Partnership Strategy for Moldova foresees a lending program of two to three operations per year – at least one of which would be budget support. Commitments will total approximately US$45-$50 million per annum, with the specific country allocation being determined annually through IDA’s performance based-allocation. The Bank will consider additional financing to existing operations with the current portfolio and support for projects with regional or global goods components. Investment operations will build on the Bank’s track record and comparative advantage vis-Ã -vis other partners and focus in those areas where other funding can be highly leveraged.
In addition to its lending operations, the World Bank Group will provide a range of analytical and advisory services in support of Moldova’s development agenda set forth in the National Development Strategy (NDS). These efforts will be complemented by an ongoing commitment to promote and provide investments and guarantees, through Bank Group institutions (IFC and MIGA), to strengthen and expand financial and private sector growth.
World Bank Commitments (US$ millions)
NB: Lending is per fiscal year, July 1-June 30
Active Portfolio by Sector as of April, 2009 (US$ millions)
RSS