Having registered 5.6 percent in real GDP growth in the first half of 2010, Moldova's economy is gradually recovering from recession. The global crisis of 2008 – 2009 undermined all of the main sources of growth in previous years - remittances, private consumption, exports, and private investment, resulting in weaker domestic and external demand, fiscal imbalance, limited financial intermediation, and an increase in poverty.
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.
These gains are now being reversed, as remittances and GDP fell as a result of the global financial crisis.
In October 2009, the new Government launched their “Economic Stabilization and Recovery Plan for 2009-2011”. The Plan includes a sequence of measures which aim to cut inefficient, low-priority public spending, help businesses to withstand the economic slow-down and protect vulnerable households from a drop in consumption due to the recession and fiscal contraction.
A Consultative Group Meeting: Moldova Partnership Forum to support government actions was held in Brussels on March 24, 2010. As much as 52 percent of the US$ 2.6 billion (1,936.49 billion Euros) pledged by bilateral and multi-lateral development partners represent grants, and about 48 percent is money which Moldova will access in concession installments, with a 5-10-year grace period and a 0-1.2-percent interest rate. Financial assistance provided by the donors will be used to implement concrete projects in critical sectors such as: roads rehabilitation, agriculture, water and sewerage supply, health, energy, efficient public service, regional development, etc.
The World Bank has been actively supporting Moldova in areas as diverse as rural business development, competitiveness enhancement, energy efficiency, better targeting of social assistance and investment in community initiatives.
The World Bank is supporting Moldova as it increases connectivity to water and improves the quality. Approximately 20 percent of those living in cities lack access to clean water and 37 percent lack access to sewerage. In areas where the World Bank has supported pilot programs, water supply per day in the pilot areas is now 18-24 hours.
Water losses due to leaks and decaying infrastructure have been reduced, and water consumption per capita has almost doubled. Another important improvement in pilot areas is evident in the quality of the water - 100 percent of microbiological water quality samples in pilot areas passed inspection, whereas previously 10 percent of samples were contaminated with coliforms.
Education The Bank is supporting the rehabilitation of 33 kindergartens and 15 alternative community based centers – repairing buildings that were damaged or aging. Teaching quality is set to improve as well, with training completed for 2,600 managers and pre-school teachers. Their efforts are bolstered by new teaching materials and equipment that was delivered in early 2008.
The Environment Moldova has had great success in protecting the environment. Eleven biomass boilers were installed in demonstration sites under the Renewable Energy from Agricultural Waste Project to act as catalysts for the introduction and promotion of the use of agricultural waste. Soil conservation projects will lead to a reduction of CO2 emissions of 4.3 million tons over the next 10 years. Further, 100 percent of Persistent Organic Pollutants (chemicals used as pesticides or for industrial purposes) have been managed or destroyed entirely, a total of 1,272 tons of pesticides and 17,300 capacitators of PCBs.
Business Reforms To make it easier to do business, as part of the Competitiveness Enhancement Project the Government completed a review of relevant legislation and proposed amendments to some 80 laws affecting business operations. Because of its capacity to cut red tape, the law was named Guillotine II. In addition, business owners will also be able to voice their views through a committee set up to address new policies affecting the business environment.
The Rural Investment and Services Project has overseen 194 new businesses created in rural areas from 2006-2007, and 149 loans have been provided to rural beneficiaries in 2006-2007 through the same project.
ECONOMY
Recent Economic Performance
Prior to the crisis, economic growth in Moldova had averaged 6 percent between 2004 and 2008, on the back of strong domestic and external demand. The massive inflow of migrant workers’ remittances (averaging about 31 percent of GDP between 2004 and 2008) fuelled a rapid increase in consumption and an even larger increase in the private investment share of GDP, with most of this coming as construction of residential property.
The following factors contributed to Moldova's stable economic situation before the global financial crisis:
A marked increase in real wages and pensions, combined with a massive inflow of workers’ remittances, has fueled domestic consumption and the re-monetization of the financial sector. Massive remittance inflows 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 in Moldova’s economy 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 on 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.
  "In a challenging global environment, the Republic of Moldova has set of courses to modernize its economyand build a prosperous European future,"-said Melanie Marlett, World Bank Country manager for Moldova. "The new Country Partnership Strategy aims to build on our previous success and provides a flexibale famerowk to help Moldova waether global risks"
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 has been seriously affected by the current global economic environment. Going forward, structural reforms need to 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 as a share of GDP increased in 2009. The budget deficit substantially increased because of the economic crisis and its financing started to increasingly rely on external support anchored in an IMF program launched in February 2010.
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 trading partners. Already there is evidence that the growth in investment is being derailed. Exports, imports and remittance flows are severely affected by the regional recession.
Potential poverty increase in 2009 as a result of the 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. The poverty level increased in 2008 even before the full impact of the crisis was felt by the Moldovan economy, according to the most recent data available. It is expected to further increase in 2010 as remittances fell by 29 percent in 2009 and GDP registered a decline of 6.5 percent.
The recession widened the fiscal deficit. The fall in remittance-financed consumption and imports led to a serious drop in VAT receipts, import duties and non-tax revenues, causing fiscal revenue to fall by 9 percent in 2009 from a year earlier. Against this loss in revenues, wage and pension spending increases and social payments caused recurrent public expenditure to rise by over 11 percent by December 2009. Consequently the fiscal deficit increased from 1 percent of GDP in 2008 to an unprecedented 6.4 percent of GDP by the end of 2009.
Moldova is experiencing a credit crunch. Banks have responded to higher credit risks and falling but ample liquidity by curtailing credit to the economy. While credit growth peaked around January 2008, prior to the onset of the crisis, growth in credit to households and private firms fell into negative territory for the first time in 2009. Risk-averse banks have kept lending rates high in spite of falling inflation. Interest rates on local currency loans fell 400 basis points from a year earlier to around 18.6 percent in December 2009, whereas annual inflation dropped 900 basis points to -0.6 percent within the same period. The real cost of borrowing has therefore increased, making access to loans for working capital and investment expensive for firms, compressing demand and prolonging the “credit crunch” which present significant risks to economic recovery.
In spite of the recent downturn, medium-term economic growth is expected at 5 percent per annum. With the gradual recovery of external demand and remittances, investment is expected to grow in 2010 and in subsequent years. GDP growth is projected at 2.5 per cent in 2010, recovering to an average of 5 percent per annum by 2012.
Budget consolidation and a tighter fiscal policy are expected in the coming years and are the cornerstones of IMF and World Bank-supported program. Expenditure restraint is central to the Economic Stabilization and Recovery Program and to the IMF-supported program.
Social Assistance Programs will need to be improved. More than 25 percent of the economically active population has left the country in search of 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. Thus, improvements in the social assistance programs and labor market policies are necessary.
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 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, including improving economic competitiveness to support sustainable economic growth, minimizing social and environmental risks, building human capital and promoting social inclusion, and improving public sector governance.
Within this broad agenda, the World Bank aims to improve 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. Since the start of its operations in Moldova in 1993, some three quarters of World Bank lending has 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 Stabilization and Recovery Plan. In fiscal year 2009, the World Bank committed $25 million in lending to Moldova. Total commitments reached US$184.3 million, of which about 61 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$94 million trust fund portfolio of 31 activities – the largest in the Europe and Central Asia region. Trust fund resources support sustainable development, human development, public sector reform and competitiveness.
World Bank Commitments (US$ millions)
NB: Lending is per fiscal year, July 1-June 30
Active Portfolio by Sector as of October, 2010 (US$ millions)
  "In a challenging global environment, the Republic of Moldova has set of courses to modernize its economyand build a prosperous European future,"-said Melanie Marlett, World Bank Country manager for Moldova. "The new Country Partnership Strategy aims to build on our previous success and provides a flexibale famerowk to help Moldova waether global risks"
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