As a small open economy in which agriculture has a significant role, Moldova’s growth performance has been strong but volatile. The economy recovered from the 2008-09 global economic crisis with average annual GDP growth exceeding 5 percent over 2010-2013. As a result, Moldova experienced the highest cumulative GDP growth, relative to the pre-crisis year of 2007, of all regional partners. However, growth has been volatile, reflecting vulnerability to climatic and global economic conditions. In 2010–11, remittances and investment fueled domestic demand, and growth in exports was strong. Real GDP grew by 7.1 percent in 2010 and 6.4 percent in 2011. In 2012, GDP contracted by 0.7 percent, as the economy was hit by a drought-induced contraction in agriculture (-22.3 percent) and weaker external demand due to the Eurozone crisis. Finally in 2013, growth rebounded, driven by a record harvest in agriculture, with GDP increasing by 8.9%.
Despite substantial macroeconomic risks, Moldova’s economic performance over the last few years has been relatively strong, aided by improved economic management, particularly in what regards fiscal, monetary and exchange rate policy. Overall in 2013, agriculture accounted for half the growth with 41 percent y/y increase. Food processing and machinery led manufacturing growth, which stood at 8.8 percent y/y. Private consumption was the main growth driver on the expenditure side (+6.5 percent), fueled by remittances and wage growth. The good harvest led to a buildup of inventories of 1.7 p.p. GDP, while fixed investment grew modestly at 3.3 percent y/y. Real exports increased almost two times faster than real imports (10.7 percent y/y vs. 5.5 percent y/y), but there was zero contribution of net exports to GDP because of a much higher share of imports in GDP.
In the base case, we expect the macroeconomic policies to remain adequate, but with significant risks rooted in volatile external environment, the financial sector and in domestic political cycle. The existing macroeconomic framework is considered adequate, even though macroeconomic risks associated with vulnerabilities to external and climatic shocks, institutional weaknesses and related slippages in the implementation of macroeconomic and structural reforms will continue to be substantial over the short and medium-term. European integration anchors the Government’s policy reform agenda, but periodic political tensions pose risks to reforms. Negotiations with the European Union (EU) on an Association Agreement and a Deep and Comprehensive Free Trade Area (DCFTA) were initialed in November 2013, and are expected to be signed by June 2014.
Moldova’s recent economic performance reduced poverty and promoted shared prosperity. The national poverty and extreme poverty rates fell from 30.2 percent and 4.5 percent in 2006 to 16.6 percent and 0.6 percent respectively in 2012, making Moldova one of the world’s top performers in terms of poverty reduction. Similarly, consumption growth among the bottom 40 percent of the population outpaced average consumption growth: estimates for 2006-11 suggest an annualized overall growth in consumption of 2.9 percent over the period, as compared to 5.8 percent for the bottom 40 percent. These developments were driven by economic growth and the associated growth in earnings, as well as by an increase in private transfers such as remittances. However, evidence suggests that the bottom 40 percent are particularly affected by weaknesses in the quality and efficiency of health and education services, and especially vulnerable to climate shocks. Despite a sharp decline in poverty, Moldova remains one of the poorest countries in Europe. Based on the Europe and Central Asia (ECA) standardized poverty lines of US$ 5/day and US$ 2.5/day at Purchasing Power Parity (PPP), 55 percent of the population was poor and 10 percent was extremely poor in 2011. The most vulnerable groups at risk of poverty in Moldova remain those with low education levels, households with three or more children, those in rural areas, families relying on self-employment, the elderly, and Roma. Moldova performs well in some areas of gender equality, yet disparities persist in education, health, economic opportunity, agency and violence against women. Human trafficking is an issue. Moldova is a source, and to a lesser extent a transit and destination country, for both sex trafficking and forced labor.
Moldova has made significant strides in its economic and political transition, but much remains to be done. Moldova lags far behind the rest of the region - a result of policies and history. Moldova has a small domestic market with limited competition and weak drive for innovation. Yet these challenges could be overcome by reducing the economic distance to larger regional markets and reaping the benefits of openness. Unfortunately, Moldova has high cross-border costs, and is not taking advantage of its proximity to wealthier regional markets due to its low endowment in institutional, human and natural capital. World Bank’s Country Partnership Strategy is helping to address the need for reform and supports Moldova to boost shared prosperity and reduce poverty by capturing the benefits of openness and integration with global economy. These are the development challenges that the WBG new Country Partnership Strategy is helping Moldova to address.
Moldova: Commitments by Fiscal Year (in millions of dollars)*
*Amounts include IBRD and IDA commitments
Moldova's National Development Strategy (NDS) Moldova 2020 sets seven strategic priorities. These are justice and fight against corruption; national education system aligned with labor market requirements; pensions; business environment; roads infrastructure; accessible and inexpensive finance; and energy efficiency. The NDS is intended to prioritize state interventions to deliver the overarching goal of bringing about qualitative economic development and poverty reduction. It was adopted by the Parliament as national law. The NDS and its consolidated action plan include some measures to reduce inequality and address key crosscutting themes, such as social inclusion and gender equality, environmental preservation, climate change and disaster events, and reintegration of localities from the left bank of the Nistru River (Transnistria).
Aligned with the NDS, the World Bank Group (WBG) Country Partnership Strategy (CPS) for FY14–17, discussed by the Board on September 5, 2013, will provide Moldova with US$570 million over the next four years (US$450 million on IBRD&IDA [International Bank for Reconstruction and Development & International Development Association, together known as the World Bank] terms, plus US$120 million IFC [International Finance Corporation] commitments). It will support Moldova in reducing poverty and boosting shared prosperity by capturing the full benefits of openness and integration with the European Union and the broader global economy. Three pillars are proposed, which will help Moldova diversify and expand its endowment of institutional, human, and natural capital:
Increasing Competitiveness: continued institutional reforms for a business enabling environment and governance, access to finance, transparency in the financial sector, and targeted activities to help improve companies' competitiveness are needed to reduce barriers and to translate economic openness into concrete benefits of more jobs and higher income.
Enhancing Human Capital and Minimizing Social Risks: the widening gap with EU28 in education and health outcomes needs to be progressively closed. Demographic challenges need to be addressed, and vulnerabilities can be tackled by strengthening social protection systems.
Promoting a Green, Clean and Resilient Moldova: the debilitating effects of climatic events on agriculture and rural livelihoods need to be addressed, natural resource management improved, and energy security and efficiency achieved to ensure sustainable development.
The CPS has governance and gender lenses, and a calibrated engagement in localities from Transnistria will be considered in close consultation with the authorities of the Republic of Moldova.
This CPS continues to address governance issues at the country, sectorial and operational levels across the strategy. Interventions will be pursued to improve the business enabling environment; enhance public administration reform and quality of public service delivery; and improve public financial management and procurement systems. The CPS will use a governance filter to ensure that governance is systematically tackled in all operations (analytical and advisory activities and lending); it will also support enhanced involvement of Civil Society Organizations through the Global Partnership for Social Accountability to which Moldova has opted in. At the operational level, WBG will ensure the highest fiduciary standards in projects it supports while helping the Government to strengthen country systems. This CPS is informed by a gender assessment, the outcomes of which will be discussed at the concept stage of each relevant new operation (analytical and advisory activities and lending).
The World Bank’s current portfolio includes seven investment projects. Total commitments amount to US$162.2 million. The disbursement ratio for FY14 so far is 26.2 percent (as of April 7, 2014), and was 28.5 percent at the end of FY13. The ongoing IDA portfolio is broad ranging, with the highest concentration of operations in human development and agriculture and rural development, as well as in the financial and private sectors. Trust Funds (TFs) provide co-financing to IDA operations, finance carbon operations, and provide other forms of support, including for AAA. The size of the active TF portfolio is US$35.8 million.
Alongside IDA and IBRD resources, IFC operations in Moldova will continue to focus on investment and advisory activities that enable private sector growth and diversification. IFC plans an annual funding envelope of about US$30 million. IFC exposure as of June 30, 2013, is US$90.3 million in 18 clients across the financial, manufacturing, agriculture, telecommunications, water, and energy sectors. The net exposure of MIGA in Moldova at the end of 2012 amounted to US$17.8 million in four projects. All projects are in support of foreign banks' subsidiaries in the country, including micro-finance organizations and leasing operations. MIGA’s continuing support to these projects signals MIGA’s efforts to underwrite projects in Moldova, encourage inward foreign direct investment, and add to the WBG’s strategy of encouraging private sector development in the country.
With World Bank support, some of Moldova’s development results include:
The World Bank is actively engaged, , in supporting the authorities’ efforts to deepen the level of financial intermediation in Moldova, through technical assistance and investment/policy lending while making the sector more resilient to possible shocks. Over the past four years, the World Bank has built a strong dialogue with the Ministry of Finance, the NBM (add full name before abbreviation), and the National Commission of Financial Markets (NCFM). The World Bank provided support to these authorities in drafting amendments to the Capital Market Law, with the aim of enhancing the safety and efficiency of the corporate securities’ registration function. These legal amendments are pending parliamentary approval. Likewise, the World Bank started to work with financial sector authorities in order to provide technical assistance to review and strengthen legislation aimed at consolidating the enforcement powers of financial sector regulatory agencies. To complement those efforts, the World Bank is currently putting together a contingency planning and crisis simulation exercise, to be delivered by the World Bank Vienna Financial Sector Advisory Center (FinSAC). That exercise will be followed by technical assistance to reform the bank resolution framework.
The World Bank has been working closely with the Government of Moldova to help improve the investment climate. To make it easier to do business, as part of the Competitiveness Enhancement Project (CEP), in 2008, the government introduced the Regulatory Impact Assessment methodology as mandatory for the development of all new laws and regulatory acts affecting business operations. In addition, business owners are now able to voice their views through a committee set up to address new legislation. In 2013, the CEP funded the development of the Regulatory Reform Strategy and action plan, and the World Bank report (Economic and Sector Work [ESW]) on “Policy Priorities for Private Sector Development” strongly informed the 2013–14 Roadmap developed by the government. Additional financing under the CEP provided US$22.5 million in loans to export-oriented enterprises, and the government has established a revolving fund from repayments of the original credit line, from which an additional US$7 million in loans has been made available. A matching grants scheme helped Moldovan businesses obtain international quality certifications, such as International Organization for Standardization (ISO) and Hazard Analysis Critical Control Point (HACCP), and acquire relevant business development services.
The World Bank-financed Quality Education in Rural Areas of Moldova Project (QERM) made a significant contribution by jump-starting education reforms; contributing to revisions of the lyceum curricula and the development of associated guides; providing teaching/learning materials; equipping 1,190 schools with equity school grants and 304 schools with quality grants, helping students in poor rural schools; and supporting participation in international assessments. Furthermore, the project supported the initiation of per student financing in the sector, initially in two pilot rayons (districts) and nationwide since January 2013, thereby promoting efficiency in the use of resources, education planning, and monitoring.
Moldova is on track to achieve a more cost-efficient spending mix of its social assistance programs, and World Bank support is instrumental to sustaining these efforts. The Government continues policy reforms and invests in improving benefits administration and management information systems. The reforms aim to integrate the overall social safety net into the platform provided by the expanded targeted Ajutor Social program. The World Bank is supporting these efforts via the Strengthening the Effectiveness of the Social Safety Net Project. Pursuing a results-based financing (RBF) approach, the US$37 million IDA credit cofinances the interim transitional costs of expanding the Ajutor Social program, while consolidating other benefits. The project is also investing in improving the administrative efficiency of the social safety net, as well as strengthening institutional roles and capacities, operating procedures and systems, and communications activities to reduce resistance and generate support for reforms. Another ongoing Bank operation, the Health Services and Social Assistance Project, supports the creation of a modern management information system to improve the administration of social assistance benefits. The two projects complement each other and closely coordinate activities to achieve tangible results.
The World Bank supports health care modernization through the implementation of the Health Services and Social Assistance Project (2007–13), which promotes capacity building in policy development, implementation, financing, and management and upgrading of health services. An additional US$10.2 million was approved under this project in December 2011 to strengthen primary health care quality and availability across the country. In 2013, the World Bank embarked on the preparation of a new program for results to support health transformation implementation for 2014-17. The new operation will support NCD risks reduction and health care efficiency enhancement.
The World Bank’s current support to the sector is comprised of five projects. The Moldova Agriculture Competitiveness Project (2012–17, total financing US$25.4 million) seeks to address the critical competitiveness agenda by promoting market access for farmers and supporting their integration into complex supply chains. To achieve this, project activities will support: (i) strengthening country capacity to manage the increasingly sophisticated food safety agenda; (ii) increasing the number of farmer organizations and improving the post-harvest infrastructure; (iii) promoting the adoption of sustainable land practices by farmers; and (iv) ensuring a strengthened response by the authorities to soil degradation challenges.
Support to the sector includes the Energy Sector Reform and Efficiency Improvements Technical Assistance project, funded by the Government of Sweden (€1.8 million grant), which supports Moldova in identifying the investments and measures needed to address : (i) the security and reliability of the energy supply, and (ii) the efficiency of both energy production and consumption. The World Bank is preparing the District Heating Efficiency Improvement Project for FY15 to support the above sector reforms. The project will finance: (i) priority investments in the district heating system to improve the energy efficiency, quality, and affordability of the heat supply (International Bank for Reconstruction and Development [IBRD] US$40 million), and (ii) debt restructuring and the financing of debt repayment (IBRD Partial Credit Guarantee US$80 million, IBRD allocation US$20 million). The World Bank is also conducting a Power Market Options Sector Note to provide the Government with guidance on power market options, the investments required to increase the security of Moldova’s electric power supply, and how to effectively integrate the electric power sector into the energy community market.
Moldova has made important progress in protecting the environment. It has successfully implemented projects aimed at stopping and reversing soil degradation, while also contributing to global objectives such as a planned reduction of CO2 emissions by 4.3 million tons over the next 10 years. It has also made progress in reducing the existing quantities of obsolete pesticides contaminated with persistent organic pollutants by liquidating 1,272 tons of such substances. Furthermore, close to 100 percent of the country’s stock of polychlorinated biphenyls (PCBs) has been accounted for, through a national inventory, while the country disposed some 17,300 contaminated capacitors. . Going forward, the Country Partnership Strategy (CPS) for FY14-17 has a dedicated pillar supporting a green, clean, and resilient Moldova. The pillar will aim to: (i) boost adaptation and resilience to climate change; (ii) improve natural resources management; and (iii) increase energy efficiency and security.